Best Judgment; hybrid shop combining takeaway sales of hot food and grocer’s business; proportion of turnover attributable to zero rates supplies; whether assessment made to best judgment; whether assessment excessive; Value Added Tax Act 1994 section 73

EDINBURGH TRIBUNAL CENTRE

R W M McCULLOCH Appellant

- and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE

Respondents

Tribunal: J Gordon Reid, QC., FCIArb (Chairman)

Ian M P Condie, CA

Sitting in Edinburgh on 3 July, 21 August, and 21 October 2003.

For the Appellants Crawford Herald of Jeffrey Crawford & Co

For the RespondentsAndrew Scott of Shepherd & Wedderburn, WS

CROWN COPYRIGHT 2003.

DECISION

Introduction

This is an appeal under section 83(p) of the Value Added Tax Act 1994 against an assessment dated 8/1/01 in the sum of £20,183.00, pursuant to section 73(1) of the 1994 Act and reduced on review to £18,738 plus interest. Of that sum, £700 relates to fuel scale charges about which there is no dispute. The principal issue is the composition of the Appellant’s turnover and in particular the level of zero rated sales. The Hearing took place on 3rd July, 21st August and 21st October 2003. The Appellant was represented by Crawford Herald of Jeffrey Crawford & Co. He led the evidence ofDavid Wood, a chartered accountant; and Ronald McCulloch, his wife Margaret McCulloch, their daughter Donna, and Mrs MaryJaneHamilton. Andrew Scott, solicitor, Shepherd & Wedderburn, Solicitors, Edinburgh, appeared on behalf of the Respondents (“Customs”). He led the evidence of George Reid, a compliance officer with Customs’ and Russell Harrison, a member of Customs Reconsideration Team.

Both parties lodged bundles of productions. Mr Scott took objection to Appellant’s productions A/17-20, which bore to be copies of letters written by three individuals about the nature of the Appellant’s business, as none of these individuals was to be called as a witness. Mr Scott also indicated that he disputed the authenticity of certain photographs A/22-26. Mr Herald indicated that he would not refer to these letters. He did, eventually put some letters to Mr Harrison without objection. As for the photographs, it was agreed that their authenticity would have to be established by evidence. We accordingly made no formal ruling on the matters raised by Mr Scott.

Facts

  1. The Appellant is a partnership. The partners are Ronald WB McCulloch and his wife Margaret. They carried on business between at least 1985 when the partnership was registered for VAT, until about 2001 when they retired due to Mr McCulloch’s ill health. Between 1980 and 1985 Mr McCulloch carried on business as a licensed grocer from premises in Kilmarnock. He was registered for VAT during that period and traded under the name J H Browning & Son. His trade classification was that of a licensed grocer. The business was successful and he introduced a wide range of foods; the business sold a mixture of produce traditionally purchased from a grocer, a baker, a fishmonger and a delicatessen.
  2. Stewarton is a village in Ayrshire with a population in the order of about 9000. In 1985, Mr McCulloch moved to Stewarton and acquired business premises there. His wife became a partner and the partnership traded as The Chip Box. The partnership was registered for VAT in September 1985. The trade classification remained the same until 12/12/00 when an amended certificate was issued by Customs with the trade classification Take Away Food Shops.
  3. The Appellant sold a wide range of produce some of which would not be associated with a traditional Scottish fish and chip shop or hot food takeaway premises. They sold hot cooked fish and chips and hot cooked pizzas with whatever topping the customer wished, and the usual range of related hot food such as burgers, pies, sausages, black pudding, haggis etc for consumption off the premises.
  4. They also sold potatoes in bags, uncooked or wet fish by weight,cold filled salad and other rolls filled with items such as chicken, salami, pepperoni, smoked sausage; they sold cold pies, cold steak pies, gammon, cheese, tomato, onion, and sweetcorn, cold chicken portions, buttered rolls, dry rolls, pickles, pickled eggs, pickled onions, pitta bread salads, pitta roll salads, salad portions, garlic pizza bases for home cooking, pizzas prepared uncooked for home cooking with toppings as ordered, sachets of sauces and salad cream, bottles of sauce and vinegar, tubs of salt, jars of mussels, cockles, and beetroot tea bags, sugar, milk and flavoured milk and raw vegetables.
  5. The Appellant also sold cigarettes and alcohol, soup, pot noodles and dog food.
  6. The range of produce specified in paragraphs 3, 4 and 5was sold throughout the period between 1985 and 2001. Most of the range of salads were used in rolls and as toppings for pizzas. About half of the sales of pizzas were for cold uncooked pizzas.
  7. The potatoes sold were specially grown for use as chipping potatoes. They were sold in 56 lb bags. As these bags were heavy they were kept at the back of the premises and collected by customers from the backyard. The cold pizzas were made up from their own recipes for the dough and tomato puree. They prepared pizzas with different base thicknesses (thin and crispy or a thicker deep pan base).
  8. The Appellant’s shop at Stewarton was fitted out to enable the wide range of foods to be sold. In particular, the premises contained the usual facilities for cooking and dispensing hot takeaway food and also a microwave, a pizza oven, a large salad bar or refrigerated cabinet for the storage of cold fillings, scales for weighing produce and separate scales (purchased in 1987) for wet fish, and a refrigerator for raw fish. There were signs and boards on the walls inside the shop advertising most of the main items for sale. These were replaced from time to time over the years. A new till was purchased in December 2000. In relation to both the old till and the new till, staff were provided with information which enabled them accurately to record most sales or discrete items making up a sale as standard rated or zero rated as the case may be.
  9. The Appellant’s hours of business were Monday to Thursday 11.30am or 11.45am to 2pm or 2.30pm, and 3.30pm to 11pm. On Fridays and Saturdays they were open from 11.30am to 11pm. On Sundays they were open from 4.30pm to 11pm. These were not the traditional opening hours of a grocer’s shop or a fishmonger. They were more akin to a fish and chip shop.
  10. There were a number of businesses in Stewarton selling food of one description or another. There was a dairy, a bakery, two Chinese takeaways, two Indian takeaways, a mobile snack bar and ice cream van. There was no fishmonger in Stewarton There was, however, a Safeway Supermarket across the road from the Appellant’s shop. It had its own car park. Customers of the Appellant used the Safeways car park from time to time. The Appellant had a variety of regular customers ranging from families to factory workers. The Appellant had little or no trade from school children during the school lunchtime as the mobile vans sat at the school gates and the children were encouraged not to wander beyond the school gates at lunchtime. These other businesses did not sell the range of food which the Appellant sold. Thus, Safeways did not sell buttered rolls, salad rolls or pitta bread and did not have a salad bar or deli counter; nor did it sell wet fish. The Indian and Chinese takeaways did not sell rolls or sandwiches but the Chinese takeaway sold chips.
  11. Mrs McCulloch was responsible for maintaining the Appellant’s books and records. They were well kept. She operated a Simplex Cash Book and VAT Book, took figures from the till roll each night, reconciled cash once each week, and produced a weekly summary. She prepared the VAT returns. The records of the Appellant’s business were properly kept. Mrs McCulloch also served in the shop and made purchases at the Cash ’n Carry. Mrs Hamilton worked for the Appellant in the shop for many years between the eighties and 2001. She sliced rolls and prepared salads; she also served at the counter and operated the till. Donna McCulloch helped out in the shop from the age of about fourteen (1989) until about November 2000. She prepared food, carried out cleaning duties, served at the counter and operated the till.
  12. Customs carried out a routine control visit to the Appellant’s premises in 1987. It was not alleged by Customs at that stage that the Appellant’s returns were incorrect. The Customs Officer’s Report on the Visit to Trader form noted the very wide range of fast foods on offer to the general public.
  13. David Wood is a chartered accountant and carries on business under the name of Sinclair Wood & Coand is a partner in the firm of Sinclair Wood & Co, Chartered Accountants, Glasgow. His firm hasprepared the business accounts for Mr McCulloch and subsequently the Appellant partnership since the early 1980s. He visited the McCullochs once a year at their home above the shop at Stewarton. The business records were well kept by Mrs McCulloch. Mr Wood’s firm did not prepare or submit VAT returns on behalf of the Appellant. Mrs McCulloch did this.
  14. The Appellant’s income tax affairs were examined by the Inland Revenue under the self assessment regime between 1998 and 2000. During that period, the Inland Revenue retained many of the Appellant’s books and records and examined the sales figures in detail. They had meetings with Mr McCulloch. Their enquiries resulted in the investigation being closed without any adjustment to the return submitted to them by the Appellant. Mr Wood informed Customs of the outcome by letter dated 17/5/02.
  15. In 1999, Customs sought to examine the Appellant’s books. This proved difficult due to the Inland Revenue Investigation. Eventually, a meeting was arranged to take place at Mr Wood’s office. Customs normally preferred to visit the trader’s premises but Mr McCulloch was unwell. Before his visit Mr Reid had examined a printout of the Appellant’s VAT returns over the previous few years and sundry other documents relating to the Appellant. He had also examined the Report of Customs’ visit in 1987. He had also carried out checks on purchases and sales of what he then understood to be similar businesses. He held the preliminary view that the Appellant’s zero rated sales were very high for a fish and chip shop. This was based upon the preliminary checks he had carried out and his own extensive previous experience.
  16. On or about 8th October 2000, Mr Reid visited Mr Wood’s offices in Glasgow and examined certain of the Appellant’s books and records. These did not include the Simplex D books for the financial years 1999/2000 and 2000/2001 and the Simplex VAT records for the period 3/00 onwards. He did however, examine other books and records. He examined the Simplex D books for the financial years 1997/98, and 1998/99, Simplex VAT record books until the end of period 12/99, and purchase and expenses invoices for the periods 09/97-06/00. He also inspected the Appellant’s annual accounts for the year 30/4/98-99. Invoices collected in carrier bags were also available for inspection. In his report of the visit he recorded that the overall mark-up was consistent with the annual accounts. He examined purchases and sales for the period between 1/4/99 and 30/6/99 and carried out detailed calculations. He concluded in his report that from the records declared zero rated sales were around 33% of turnover. However he was of the view that most of the sales would have been of hot food and therefore standard rated and that having regard to the type of purchases zero rated sales should have been minimal.
  17. He based this view on the premise that zero rated sales would be of pickled eggs, pickled onions, and bottles and sachets of red and brown sauce.
  18. On 27th October 2000, Mr Reid contacted Mr Wood by telephone and requested further information relating to inter alia zero rated sales. On Sunday 29th October 2000 Mr Reid and his wife visited the Chip Box at about 5pm. They parked in Safeway’s car park. Mr Reidor his wife purchased fish suppers, a bottle of lemonade and a quarter of sweets. He and his wife were in the premises for about ten minutes at the most. Only one other customer entered or left when they were present. At the time it was not his intention to make observations with a view to preparing a sketch of the premises. He recorded in his report R2/2page 5 that there was no on premises consumption, that there were a variety of zero rated goods on display, namely pickled onions, pickled eggs, jars of mussels, bottles of flavoured milk and boxes of tea bags. He also noted that rolls were used for “rolls and chips” and “rolls and fritters”. He noted that takings were recorded in a “product” buttoned till. This was Mr Reid’s only visit to the Chip Box.
  19. In a letter to Mr Wood dated 3/11/00, Mr Reid observed that over the VAT periods checked the zero rated sales averaged about 35% of gross sales. He stated that as your client operates a fish and chip shop and the sale of hot food, cigarettes, soft drinks and confectionary he would have expected the zero rated sales to be a small percentage of the gross sales. In that letter he explained the basis of his calculation as follows:-

Selecting VAT period 6/99 (1/4/99-30/6/99) as a sample period I analysed the purchases for resale recorded in the Simplex VAT record book and identified purchases of jars of pickled onions, jars of mussels and bottles and sachets of sauce totalling £135.59 and purchases of milk and flavoured milk-totalling £72.36 which I would expect to constitute your client’s zero rated sales. Allowing for the mark up of these goods to retail selling price I would expect the zero rated sales to be less than £500 per quarter rather than nearly the £900 per week declared. There were no purchases of tinned foods or cartons of milk for resale and purchases of rolls totalled £250 during the quarter-used for rolls and chips, hamburgers etc. Details of the nature of your client’s zero rated sales are required.

  1. By letter to Mr Wood dated 1/12/00, Mr Reid enclosed what he described as preliminarycalculations which brought out an under declaration of £20,183 for the period between 12/97 and 09/00. He intimated that to avoid capping he proposed to issue an assessment. Further correspondence ensued and Sinclair Wood & Co disputed the figures pointing out that there were wet fish sales, potato sales and sales of uncooked pizzas.
  2. On 8/1/01 Customs issued an assessment for the period 1/10/97 to 30/9/00 in the sum of £20,183.00. The Appellant requested a reconsideration. The assessment was calculated by treating all declared zero rated sales as undeclared standard rated sales, deducting £500 per quarter and calculating the VAT element on the resulting figure. There was no basis in fact or law for such a calculation. It disregarded entirely the assertion made in Mr Wood’s letter. In order to avoid statutory time bar at that stage it would only have been necessary to issue an assessment in respect of the first period namely the quarter between 1/10/97 and 31/12/97.
  3. Mr McCulloch prepared an analysis from the Appellant’s books and records covering the period 3/1/01 to 31/1/01 [A/51]; it set out the daily sales and apportioned them between standard and zero rated sales. The average percentage of zero rated sales to total sales was 29.85%; the balance of 70.15% was attributable to standard rated sales. Till receipts, summarising each day’s takings for that period and showing the standard and zero rated sales, vouched that analysis. That analysis was reasonably accurate as an assessment of the respective proportions of standard and zero rated sales to total sales for the period to which it related. That period reflected generally the nature, extent and relationship of zero rated sales and standard rated sales which the Appellant made while they traded at Stewarton.
  4. A meeting took place at Mr Wood’s offices between him and Mr Reid on 8/2/01. Mr Wood was not familiar with the detail of the Appellant’s books and records. Mr Reid showed him some calculations he had made [R/26] which indicated that zero rated sales had been overstated. Mr Wood produced till rolls and a list of zero rated goods sold and a letter explaining the operation of the shop all handed in by his client. Mr Reid was not satisfied with this information because the till rolls only stated totals and the information did not identify the quantities of zero rated goods sold. Mr Wood undertook to obtain further information.
  5. A further meeting took place on 1/3/01 attended by Mr Wood, Mr McCulloch, Irene Parkes, a senior Customs official, and George Reid. One of the purposes of the meeting was to convince Customs that the Appellant’s premises were not a standard fish and chip shop. Mr Reid’s manuscript notes of the meeting on a Customs’ Report on Visit to Trader form [R2/10-12] record inter alia that Mr McCulloch stated that the Appellant sold a wide variety of zero rated sales including sauces, pickled onions , milk, pitta bread, pies, cold chicken portions, cold pizzas, wet fish, bags of potatoes, rolls and butter, salad rolls and salad portions. The notes also record that Mr McCulloch explained that Mr Reid had failed to understand that the business was not a fish and chip shop but had diversified into cold food. Mr McCulloch had carried out a further exercise [A/45-6; A/32 and A/27] covering the period between 1/4/99 and 30/6/99. He derived his figures from the Appellant’s Simplex Day Books and records. The result of this analysis showed that zero rated sales were 35.27% of total sales and standard rated sales 64.63%. However, the figures used for standard rated sales were VAT inclusive. Corrected, the percentages would show an even larger percentage for zero rated sales and a smaller percentage for standard rated sales. Mr Reid’s notes further record that Mr McCulloch had analysed and produced figures for the period 1/4/99 to 30/6/99, but that Mr Reid could not accept the zero rated sales figures as credible. Mr McCulloch’s analysis of zero rated sales for that period [A/27] showed sales of £12,112.55 which included in addition to the above items, mussels, vinegar, sugar, tea bags, pickled eggs and tubs of salt. The Appellant’s zero rated sales for that period as disclosed in their VAT return were £12,123.
  6. These figures are reasonably representative of the split between zero and standard rated sales over the period 1985 to 2001. The foregoing analysis was exhibited to Customs at the meeting on 1/3/01.
  7. By letter dated 28/3/01, Mr Wood sent Customs various notes prepared by Mr McCulloch. Included therein was a statement by Mr McCulloch in the following terms:-

When shop was in our ownership it was run as a HOT and COLD FOOD TAKEAWAY and was wrongly described as a standard Fish & Chip Shop solely selling hot food. I came originally from a grocery background where we sold grocery products wet fish, salad products andpotatoes. I had taken this knowledge into this business selling some of the same kind of products, example wet fish potatoes salad rolls. This made us more competitive which is required in a village with a population of 9000 people. Presently the village has six takeaways, a dairy and a hot food van which operates outside StewartonAcademy. With this total amount of competition to stay in business you have to diversify with your product range and the ways of selling the said products.