DISHONESTY Penalty Dishonesty Admitted Adjustment of Penalty to Reflect Adjustment of Assessment

18987

VALUE ADDED TAX — take-away pizza shop — admitted suppression of takings — assessment based on observations of customers — whether most appropriate approach — whether extrapolation of suppression at uniform rate over long period justified by evidence — appeal allowed in part

DISHONESTY — penalty — dishonesty admitted — adjustment of penalty to reflect adjustment of assessment to tax — mitigation

MANCHESTER TRIBUNAL CENTRE

MARK BREARLEY and MICHELLE BREARLEY

trading as Pizza BaseAppellants

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISERespondents

Tribunal:Colin Bishopp (Chairman)

Sitting in public in Manchester on 7 and 8 September 2004, 10, 11 and 12 January 2005

Richard Barlow, counsel, instructed by Levi & Co, solicitors, for the Appellant

Jonathan Cannan, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2005

1

DECISION

1. The Appellants, who are husband and wife, trade in partnership selling takeaway pizzas from premises in Otley, West Yorkshire. They have appealed against, first, an amended assessment, made in accordance with section 73(1) of the Value Added Tax Act 1994, of allegedly under-declared VAT of £124,575 and, second, a civil penalty for dishonest evasion imposed pursuant to section 60 of the Act in the total sum of £105,888.75. The assessment and the penalty cover each of the consecutive accounting periods from 1 August 1993 to 31 October 2000. The Appellants admit that there have been under-declarations and that they were due to dishonesty, but they contend that the amount of tax assessed is excessive, that the evasion occurred over a much shorter period than that assessed, and that the penalty should be mitigated to a greater extent than the 15 per cent which the Commissioners have allowed. Nothing turns on the amendment of the assessment, by which some minor clerical errors were corrected.
2. The Appellants were represented by Richard Barlow and the Respondents by Jonathan Cannan, both of counsel. I had two bundles of documents and heard evidence from six Customs officers, Sylvia Jones, Mary Sharpe, Dean Foster, Martin Mummery, Angela McCalmon and Anthony Johnson, from the director of a shop equipment supplier, Howard Parker, and from Mr Brearley. I did not hear from Mrs Brearley who, as I understood, had played little or no active role in the business for the latter part of the period with which I am concerned.
3. The Respondents’ enquiries into the Appellants’ business began in July 1998 when, in the course of a general investigation into pizza establishments, an officer made a test purchase from the Appellants’ shop. The till receipt bore a consecutive number. A second test purchase was made some two years later, in July 2000; on this occasion the receipt given to the officer did not bear a consecutive number. The Respondents considered that fact sufficient reason to warrant further investigations, and they undertook external observations of trade at the shop on 18 August and 26 October 2000, followed by an unannounced visit to observe the cashing up at close of business on 2 December 2000. Mr Brearley was then interviewed, on 23 January and 15 March 2001.
4. It was common ground that the Appellants had begun to trade on 17 July 1989, from the Otley shop, and that they had taken on a second shop in about April 1991. They had disposed of the second shop in 1993. Since the takings of the two shops had not been segregated in the Appellants’ records, it was not possible, the Respondents considered, to determine whether and, if so, to what extent there had been suppression in the period when the Appellants had two shops and for that reason the assessment extended back only to the time immediately following the disposal of the second shop.
5. The observations were carried out from premises on the opposite side of the road from the Appellants’ shop from a vantage point which, I am satisfied, afforded the officers a good view of the single door by which customers entered and left, even if it was occasionally obscured by passing traffic. By the time the officers came to give evidence, over four years had elapsed since the observations had been carried out and, not surprisingly, all had to rely on their notebooks and the observation records for the detail of what they saw, and some incidental details which had not been noted, particularly the nature and precise location of nearby premises, were remembered poorly, or not at all. Nevertheless, I accept that all had some, even if faded, recollection of having been present.
6. The purpose of the observations was to make a record of the number of sales made to customers, some of whom called into the shop to make a purchase, while the remainder placed an order by telephone, and had the food delivered to their homes. A few, Mr Brearley told me, called into the shop to place an order for later delivery. I accept that some customers might place orders in that way, though I think the number who did so, as a proportion of the whole, would be small. The officers did not merely count the people entering and leaving the shop, but attempted to match those going in to those coming out, to identify groups making a joint purchase, and to determine the number of deliveries made by the delivery drivers engaged by the Appellants.
7. Mr Barlow spent a good deal of time asking the observing officers questions about their observations and their records; his questions were designed to demonstrate that the observation records were not accurate, and that little reliance could be placed on them. They could not, he said, be used as the proper basis for an assessment extending over a period of some seven years. I do not propose to go through the sterile exercise of examining each officer’s evidence about the observations in detail. It is sufficient to say that I do not doubt that there are inaccuracies in the records; I would consider it remarkable if the officers had made no mistakes. Some of the mistakes Mr Barlow identified were trivial and of no real consequence in themselves, such as a person thought to be male when observed entering the shop, but recognised to be female when emerging. It is notorious that it is not always easy to distinguish male from female, particularly at a distance, and I am not persuaded that errors of this kind call the overall reliability of the observations into question. What is of more importance is whether the officers were able to determine accurately how many purchases had been made during each trading session by customers entering the shop, and how many deliveries had been made.
8. Here, Mr Barlow was able to point to some more significant errors, particularly of counting, and he made much of the manner in which the officers had counted delivery sales.
9. I am not persuaded that the observations of customers calling at the shop are likely to be materially inaccurate. I am satisfied that the officers were conscientious in their observations, that they recorded as faithfully as they could what they saw, and that their mistakes in counting people entering and leaving were few. Of course, it was necessary or them to observe not only how many people went into and out of the shop, but what they were carrying, and to come to a conclusion whether what was seen to be carried out had not been carried in, and so represented a purchase. That is a more difficult task, and I am sure that some of those entering and leaving the shop were thought to have been customers when in fact they had bought nothing; but I am equally sure that there were instances when the officers failed to observe a purchase. I accept, as Mr Barlow argued, that the officers may have thought two people had entered and left the shop separately, each making a purchase, when in fact they were together and had made a single purchase, but I think it just as likely they would have counted two people entering and leaving at the same time, or in close proximity to each other, as one party when in fact they were two. It is inevitable that the number of purchases thought to have been made will not be precisely right but overall, I think, the mistakes will, to a large extent, have cancelled each other out, and I am satisfied that the observation records give a fair and reliable impression both of the numbers of customers calling at the shop, and of the purchases they made.
10. Food to be delivered was placed in large red insulating pouches, and carried out of the shop by the drivers. The officers had assumed that each pouch represented one delivery sale and for this reason the officers attempted to count and to record the number of pouches the drivers carried. Mr Brearley’s evidence was that drivers would make two deliveries in a single journey only rarely. Each pouch could contain no more than four or five pizza boxes; thus a larger order would require more than one pouch. It was also his practice to put hot and cold food—such as salads—in separate pouches; that, in my view, is elementary common sense. I accept that making two deliveries in one trip would be practical only if two customers living within reasonable proximity to each other placed orders for delivery at much the same time, and that such occasions would be infrequent. The officers’ approach is therefore, I have concluded, likely to have led to an over-estimation of the number of delivery sales.
11. Mr Foster (who was in due course the assessing officer) and Mrs Jones made the unannounced visit on 2 December 2000, as the business was closing for the day just before midnight. Mr Brearley was asked to, and did, count the cash in the till, and took a Z-reading; the officers obtained some further readings from the till themselves. The Z-reading showed the takings for the day to be £911.05. The aggregate value of the cheques and cash found in or near the till amounted to £890.90, but Mr Brearley told the officers that an additional £25 had been paid to each of the two delivery drivers, bringing the total to £940.90. It was discovered that Mr Brearley had already entered the day’s takings, in his record of daily gross takings, as £530. He told the officers that the difference between that figure and the total found was accounted for by a main float of £200, a supplementary coin float of £60 (of which £40 had been used and replaced by notes to the same value) and £150 which he had retained from the preceding day’s takings in order to lend the money to the chef, who needed it to pay for a car repair.
12. His explanation of the Z-reading was that it was distorted by entries which had been made during the course of the evening as he trained the delivery drivers in its use. The cashier whom the Appellants employed had walked out early in the evening and, because of the shortage of staff, Mr Brearley had, he said, been required to show the drivers, for the first time, how they could take a telephone order and enter it into the till. Some of the entries on the till roll did not represent true sales, but the “dummy” training entries. However, their values had been included as if the sales were genuine, and the total takings for the day, as shown by the Z-reading, were higher than the true total.
13. It is convenient at this point to deal with the evidence I heard about the Appellants’ till. It was of a sophisticated modern kind, though not new in 2000 (it seems to have been acquired by the Appellants in about 1995). It was supplied by Mr Parker’s company; on installation it had been set up as the Appellants requested, by varying the standard settings as far as necessary. Mr Parker would not change those settings thereafter, he said, unless the owner asked him to do so. Some changes could be made by the user, though he might need guidance from a dealer. Mr Parker could not remember whether the Appellants had asked his company to remove the sequential numbering of the receipts, or had asked for guidance in how to do so; this was one of the changes the user could make himself.
14. The sophistication of the till was such that a new user would require some training. It was possible to use a training mode, which would not affect the Z-reading, but it was not usual to programme the till to allow the use of the training mode since it exposed the owner to cheating by his staff, and Mr Parker advised against it. It was possible to correct errors, either by cancelling the incorrect item immediately, or by voiding an earlier error once it had been detected. As sales were made, a key on the keypad corresponding to each item ordered was pressed and when the order was complete, the total button was pressed in order that the aggregate value of the order could be calculated. When a telephone order was placed, a separate button was pressed in order to display the aggregate value of the order, but that value, Mr Parker thought, was not then added to the cumulative total of the day’s takings—it appeared on the till roll, but only as a memorandum item. When the payment was received, the amount was keyed in as payment for a telephone sale and at that point it was added to the cumulative total.
15. Mr Brearley’s explanation of the removal of the consecutive numbering of the receipts, at his interviews, was that the till had required some repairs, with the implication that the removal of the numbering was an accidental consequence of the repair. In the Appellants’ defence it was claimed that there had been several changes to the appearance of the receipts, and that the numbers had been removed since there was no longer room to accommodate them. That explanation is, in my view, plainly untrue—the sequential number is printed on a line which also contains other information and I do not think its removal would result in any saving of space; on the contrary, it seems to me clear that the receipts can readily accommodate the sequential number without limiting the other material which may be printed on them. Finally, in his evidence, Mr Brearley conceded that he had asked Mr Parker for instructions about the removal of the numbers, and had made the change himself, for the purpose of concealing the number of sales made from the shop, should the till records be examined.
16. Mr Brearley also conceded in his evidence that the £530 he had recorded as the day’s takings was incorrect, and that he had lied to the officers about his float (which was £100 rather than the claimed £200) and the money kept in the till for the chef’s car repair (the correct amount was £100 rather than the claimed £150). The true takings, he said, were £680.90. I do not accept that evidence, and I do not accept his claim that the Z-reading was affected by his training the drivers.
17. The till roll for the day was made available to me, and I have examined it. It shows that 64 delivery sales (each is identified as “phone order” on the till roll) were made. In most cases, there appears, later on the till roll, an entry recording the payment for the sale; the entries can usually be married together as the amounts correspond, although there are a few duplications of values, and in some cases the payments cannot be matched with certainty to the orders as the drivers appear to have paid for several orders simultaneously. But in no case of a delivery sale does the payment immediately follow the taking of the order; there is always an interval, as one would expect when a telephone order has been taken, the food has been cooked and delivered to the customer and the driver has returned with the customer’s payment. That feature is, in my view, quite inconsistent with training, where one would expect the payment to appear immediately after the order. Even if (which I think most unlikely, particularly if, as he claimed, he was busy) Mr Brearley deliberately introduced an interval between recording an order invented for training purposes and the corresponding notional payment, there was no impediment to his using the facilities for cancelling and voiding entries. Mr Brearley struck me as an intelligent man, and I am quite sure that he was not ignorant of their existence, or of the manner in which they should be used, since there is evidence from the till roll itself that the cancel function was used. I reject the contention that training was undertaken on 2 December 2000—I am satisfied that the claim is merely one example of Mr Brearley’s efforts to minimise the scale of the suppression—and similarly reject the possibility that training affected the Z-reading for the day. Mr Foster, in his calculations, made an allowance for training but since, as will emerge, I propose to adopt my own approach to the calculation of the suppression, I do not intend to do so.
18. Rather to my surprise, examination of the till roll for 2 December 2000 reveals that Mr Parker is mistaken in his belief that the till accumulates payments received, and stores phone sales only as a memorandum; the aggregate of the cash actually shown to be received is £902.15, although the value of the orders placed (both for delivery and for collection from the shop) was the total recorded on the Z-reading for the day, namely £911.05, a difference of £8.90.