19200
Assessment; restaurant; suppression of takings; quantum of assessment; evidence of observations on one Wednesday and one Saturday; no suppression on Wednesday found; significant suppression on Saturday found; whether inference of suppression over whole period of trading could be drawn from one night’s observations; no; whether inference of suppression on Saturdays could be drawn; yes; assessment to be reduced in accordance with Findings of the Tribunal; Value Added Tax 1994 section 73(1).
EDINBURGH TRIBUNAL CENTRE
S K SOULIMAN & N HANNA
T/A BYZANTIUM RESTAURANTAppellants
- and -
HM REVENUE & CUSTOMS Respondents
Tribunal: (Chairman): J Gordon Reid, QC., F.C.I.Arb.,
(Members): Mrs Charlotte Barbour, CA., ATII
I R Welch, CA., JP
Sitting in Edinburgh on Tuesday 3 and Wednesday 4 May and Tuesday 28 June 2005
for the AppellantsMr Richard Yewdall
for the RespondentsMrs Joanna Clark, Shepherd & Wedderburn, WS
© CROWN COPYRIGHT 2005.
1
DECISION
Introduction
1.This is an appeal against an amended Notice of Assessment, dated 11/8/04 in the sum of £36,866 and relates to the period between 1/3/01 and 31/3/03. The appeal relates only to quantum, best judgment, not being in issue. The Appellants were represented by Richard Yewdall, director of Tax and Legal Services Ltd, Wolverley, Worcestershire. He led the evidence of one of the partners of the Appellants, Dr S K Souliman, and Lorna Strachan, the social partner of Dr Souliman’s business partner, N Hanna. The Respondents (“Customs”) were represented by Joanna Clark, Solicitor, Shepherd & Wedderburn, Solicitors, Edinburgh. She led the evidence of Douglas Wilkie, Grant Malloch and Janet Abeysundera (formerly Cain), Customs officers, all of whom had produced written witness statements to which objection was taken under the Tribunal’s Rules. Witness statements of two other Customs officers, AndrewWright and Alison Barclay, to which no objection was taken, were also lodged. At the end of the day, Mrs Clark did not rely on the statements of Wright or Barclay. A joint agreed bundle of documents was produced by the parties. A short joint Statement of Facts was also lodged agreeing the authenticity, transmission and receipt of the correspondence produced, the accuracy of notes of the interview or meeting on 14/10/03 (see paragraph 22 below and B/19). The Hearing took place at Edinburgh on 3rd and 4th May, and 28th June 2005 when we heard submissions; written submissions were also produced by both parties.
Facts
2.The Appellants are a partnership which carries on a restaurant business at 13 Hawkhill, Dundee, which is near but not within the city centre. The partners are Dr S K Souliman and N Hanna. They trade as The Byzantium Restaurant. The restaurant opened in about the Spring of 2001. The restaurant specialises in a blend of Mediterranean, Italian and Middle Eastern cuisine. It has become popular, receiving a favourable review in Scotland on Sunday [B/23]. The date of the review is unknown. Customers normally book in advance.
3.Dr Souliman has full-time employment at Ninewells Hospital, where he is a deputy head of department within the Radiotherapy Department there. He holds a BSc in Physics, a Master of Science degree in Medical Physics, and a PHd in Medical Physics. Mr Hanna also has other business interests in art, cuisine and other areas. Neither takes part in the day to day running or management of the restaurant business. They visit the restaurant at weekends. During those visits, they generally help out. This could involve greeting customers, working in the kitchen or cashing up at the end of the evening if they or either of them was still on the premises. They do not regard themselves as having formal duties, although one or other of them usually performed the cash banking on Mondays. The business is run by their manager Ernesto Lori who has been employed by the Appellants since the restaurant opened. He was and is responsible for all aspects of the restaurant. What happened when he went on holiday was not the subject of evidence.
4.The restaurant is open to customers between about 5.30pm and 10pm during Tuesday to Friday, and from about 5.30pm to 10.30pm on Saturdays and Sundays. It is thus not open at lunchtime. The restaurant is closed on Mondays. The number of staff employed at the restaurant on a regular basis either during the week or at the weekend was not the subject of evidence. Wages are paid partly in cash and partly by cheque.
5.The restaurant has a seating capacity of about 60 made up of about 18 tables, which could be amalgamated or separated as occasion required. It also has a small bar area. It does not provide a carry-out or take-away facility. There is only one entrance to the restaurant although there is a fire exit at the rear. That single entrance is used by customers, staff and those delivering goods. There is a car park across the road opposite the entrance to the restaurant.
6.Customers generally book in advance. An A4 diary was produced for the year 2003 to show various entries. The entries in the diary were generally, scrappy, and difficult to read. Overall, very little could be deduced from the bookings diary.
7.The restaurant has a modern till system. It records inter alia, the detail of each meal ordered, the time of order and the time of payment; it provides a Z reading i.e. the total takings recorded each day. The till also has the facility to void or cancel a transaction or entry so that it is not included in the daily total. The Appellants accept payment by cash, cheque or credit card. Total credit card payments are recorded electronically by a system known as Streamline. This system does not include payments by American Express which have to be added to the Streamline total to ascertain the total credit card payments for any particular day. A record of each individual credit card transaction is also available. Tips are generally given in cash. The Appellants discourage tips being added to credit card payments.
8.The Appellants’ cashing up system is rudimentary. It appears to have involved completion of Till Reconciliation Sheets. These pro forma sheets have rows for each day of the week (Monday was always blank). There are five columns for Bank Card Sales, Daily Cash and Cheque sales, total sales, Z reading, and Difference. On some forms the column headed Daily Cash and Cheque Sales was changed to Cash. For the period between 11/3/03 and 23/3/03 the style of form changed; the columns were headed Z reading, cash, credit card, cheque, total and balance. The balance or difference columns were seldom completed. These sheets which were mainly prepared by the manager, Mr Lori, were not always complete and had numerous scorings out. They were generally scrappy. We were not satisfied, for example, that they always showed a true record of cash takings.
9.The Appellants’ VAT returns are prepared by their accountants, Han & Co, Dundee. The Till Reconciliation Sheets and other documents, which included bills, credit card slips, till roll readings and a note of any cash payments to suppliers, are passed to the accountants on a weekly basis.
Suppliers delivered at various times during the week and at weekends, including the evenings. Deliveries have to be made through the front entrance. Sometimes deliveries are relatively small, containing specialist ingredients.
10.The Appellants are of Iraqi descent. There is an Iraqi community in Dundee. How big it is was not established. The Appellants have numerous friends from that community who occasionally visit the restaurant from time to time at weekends, not necessarily to have a meal but purely for social purposes. On such occasions a complimentary beverage might be provided. The approximate time spent by any such social visitors in the restaurant on such occasions was not established. We mention this as it has some bearing on the number of diners, the takings and the extent of any suppression.
11.The preceding paragraphs describe the nature and operation of the restaurant business throughout the period to which the disputed Assessment relates.
12.Customs carried out observations at the restaurant during the evening of Wednesday 30th October 2002, and during the evening of Saturday 15th March 2003. Officers Wilkie and Malloch, and Abeysundera (formerly Cain) and Wright took part on both occasions.
13.On 30th October 2002, officers Abeysundera and Wright observed the premises between about 5.14pm and 6pm. At about 6.05pm that day, officers Abeysundera and Wright entered the restaurant and ordered, and consumed a meal each, which was paid for in cash. When they entered the premises, there were no other customers present. The meal was recorded in a computerised till slip and the cash placed in the till. They left the restaurant at about 7.56pm. They resumed observations between about 8.10pm and 10.10pm. Officers Wilkie and Malloch observed the restaurant between about 6pm and 8.10pm, and again between 10.10pm and about 11.35pm. In the interim, they entered the restaurant together at about 8.15pm and ordered, and consumed a meal each, which was paid for in cash. The meal was recorded in a computerised till slip and the cash placed in the till. They left the restaurant about 9.52pm.
14.The observations of the officers revealed that 36 persons entered the restaurant. Their observations did not disclose the number dining at any particular time. The till roll receipts for that day disclosed 28 persons having been served with a meal. The test purchases were accounted for in a subsequent examination of the Appellants’ books and records. There were probably only 28 meals purchased in the course of that evening’s trade at the restaurant. There was no under-declaration or suppression of takings received on Wednesday 30th October 2002. Dr Souliman was not present at the restaurant on that evening.
15.Subsequent analysis of the Appellants’ records discloses that on 30/10/02 the total recorded takings amounted to £550.20, made up of 28 covers of which 14 were paid for in cash (£262.55), 2 by Visa (£41.35), 4 by Switch (£78.55) and 8 by American Express (£167.75). No till reconciliation sheet covering that day has been produced.
16.In or about the middle of February 2003, Lorna Strachan, an occupational therapist, and the social partner of Mr Hanna, sent out a number of invitations to friends and family to celebrate her birthday at the Byzantium Restaurant on Saturday 15th March 2003. Her birthday was 5th March. She hosted a table of about twelve persons from about 8.30pm on 15th March 2003 (although the invitation prepared by MsStrachan [B/30] stated 8pm) until late in the evening. MrHanna, who was working in the restaurant that evening, joined the party from time to time making the total number thirteen. No charge was made by the Appellants for the food or drinks consumed by this group. She and Mr Hanna were among the last to leave the restaurant that night. Dr Souliman was present at the restaurant but left earlier in the evening.
17.On the same evening, Saturday 15th March 2003, officers Wilkie and Malloch observed the premises between 4.45pm and 7pm. At 7.02pm they entered the restaurant and ordered, consumed and paid £43.85 in cash for a test purchase meal which was not recorded in the evening’s takings. They left the restaurant at about 8.16pm. Officers Abeysundera and Wright observed the premises between 7pm and 9pm. They entered the premises at about 9.03pm and ordered, consumed and paid £48 in cash for a test purchase meal which was recorded in the takings for that evening. They left the restaurant at about 10.57pm. Messrs Wilkie and Malloch observed the premises between about 9pm and 11.10pm.
18.The observations of the officers revealed that 98 persons entered the restaurant that evening. The precise number of staff on duty that night has not been established but it is likely to have been in the order of about ten. The till roll receipts for that day disclosed 48 persons having been served with a meal. One of the test purchases was not accounted for in a subsequent examination of the Appellants’ books and records. The restaurant was full for a substantial part of the evening. There were probably about 70 meals purchased in the course of that evening’s trade at the restaurant. There was therefore significant under-declaration or suppression of takings received on Saturday 15th March 2003. The takings from about 22 meals were suppressed. The average price of a meal on Saturdays was about £24.60 (calculated in accordance with Schedule 8 in B/21/9).
19.None of the officers noted that a birthday party was taking place within the restaurant that evening. There was however, no birthday cake at the table or party balloons or the like.
20.Subsequent analysis of the Appellants’ records discloses that on 15/3/03 the total recorded takings amounted to £1,226.35 made up of 48 covers of which were paid partly by cash (£193.95), and Credit Card (£1032.60 [£939.86 per the Streamline record and £92.75 by American Express - the discrepancy of 1p can be ignored]), there were no recorded payments by cheque. These sums are set forth in the Till Reconciliation Sheet for the period 11/3/03-16/3/03 [B/21/22]. There was a further credit card payment of £112 which was not included in these figures. This may have been because payment was not authorised by the credit card company at the time. It was, subsequently, processed and duly accounted for as declared takings for VAT purposes on or about 28/3/03 [B21/24 and B/27].
21.B/20 constitutes the contemporary records of officers Wilkie, Malloch, Abeysundera and Wright. While, on each occasion, none of the officers made notes when within the restaurant, they all wrote up their notes later that night on 30/10/02 and 15/3/03. These notes do not identify the precise times of persons entering or leaving the restaurant. Nor do the notes attempt to correlate all the persons entering with those leaving. There was no attempt, by the officers, to take a note of the number of customers dining within the restaurant, whilst they were present (apart from officer Abeysundera on 30October 2002).
22.By undated letter [B/5] sent in or about May 2003, Mr Wilkie, the assessing officer, requested that various books and records of the Appellants including their Balance Sheets and Profit and Loss Accounts be made available for inspection. He visited the Appellants’ premises on 25th June 2003. He met Dr Souliman and uplifted various business records. He did not, at that stage, mention any concern about under-declaration of takings. By letter dated 16/9/03 [B/6] Mr Wilkie informed the Appellants that there were grounds to believe that there were irregularities in their affairs and invited them to attend a meeting to discuss these matters. Although requested to do so by letter dated 29/9/03 from Han & Co. [B/7], Customs declined, in accordance with their policy (as set forth in their VAT Information Set 01/01 [B/6]) to reveal the queries they had in relation to the Appellants’ VAT records. Customs regarded the meeting as the Appellants’ opportunity to disclose any irregularities. A meeting duly took place on 14/10/03. At that meeting, in the presence of officers Wilkie and Barclay, the Appellants claimed no knowledge of any irregularities. The fruits of Customs’ investigations were revealed in detail in a letter dated 17/11/03 to the Appellants [B/9]. Accompanying that letter were ten schedules setting out Customs’ findings and their calculation of arrears of VAT. These calculations set forth suppressed sales of £305,842.44 and consequent estimated arrears of VAT of £45,551.00. Further correspondence ensued. A Notice of Assessment [B/3] for the period between 1/3/01 to 31/3/03 was issued in March 2004 in the sum of £45,547.00 plus interest. No dishonest penalty charge was imposed.
23.The Assessment was reconsidered by a senior Customs Official, Fiona Calder, who is a member of the Appeals and Reconsideration Team. Following discussion with the Appellants’ representative (by that stage Tax and Legal Services Ltd), Mrs Calder instructed that the figures be recalculated so as to exclude the test purchases. This was done and the alleged suppressed sales reduced to £247,548.83 and the estimated arrears of VAT reduced to £36,868.97 [B/15]. A Notice of Amendment of Assessment in that latter sum was issued in August 2004 [B4]. Thereafter further correspondence ensued between Customs and the Appellants’ representatives.
24.The Appellants’ annual accounts [B/33 & 34] disclose annual turnover and demonstrate gross profit percentage for the year ended (i) 30/9/01 to be £232,791 and 61%, (ii) 30/9/2 to be £213,787 and 56.3%, and (iii) 30/9/03 £209,473 and 63.6%. The normal range of gross profit percentage for such a business is 45-60% in relation to drinks, and 50-65% in relation to food.
25.If the Appellants had suppressed takings as contended for by Customs the gross profit percentage for the year ended 30/9/02 would have been 72.7%; and for the year ended 30/9/03, it would have been 70.24%. Customs did not investigate the question of suppression of purchases and there is no evidence to suggest that there has been any such suppression of purchases. They did not examine the annual accounts prior to issuing the above Assessments.
Discussion of the evidence
26.The main areas of dispute were the adequacy of Customs’ observations and the inferences, if any, that could be drawn therefrom. Mr Yewdall spent a great deal of time cross examining the witnesses for Customs on their observations on 30/10/02 and 15/3/03, and the contents of their contemporaneous notes. Essentially, what was in dispute was the accuracy of the observations and the conclusion as to the number of meals purchased. The methodology adopted by Customs and which is clearly set forth in Schedules in B/21/1-12 was not in dispute. It is necessary only to give a brief summary of that methodology. From the Appellants’ Till Reconciliation Sheets and other records made available, the average takings on a Friday night, a Saturday night and the weekly average have been calculated for the period between 24/11/02 and 30/3/03 (£1,066.73, £1,368.28 and £4,236.39 - Schedule 7); the average price per meal in March 2003 has been calculated to be £21.38 (Schedule 8). The average for Saturdays is £24.60. An estimate, based on observations, of what the takings should have been on Wednesday 30th October 2002 and Saturday 15th March 2003 is then made using the average price per meal ie £21.38 (£684.16 and £1,966.96 - Schedule 9). These figures are compared with the declared takings on those dates (£550.20 and £1,226.35) to establish, as a percentage, the extent of the estimated rate of suppression (approximately 24% and 60%); the ratio of Friday and Saturday night takings to takings over the rest of the week is then calculated from the declared takings in Schedule 7 (approximately 57% and 43%); these are applied to the estimated rates of suppression to provide a weighted suppression rate of 45.06%. This is then applied to the declared outputs over the period of assessment to produce total suppressed sales of £247,548.83 and thus under-declared VAT of £36,868.97 (Schedules 10 and 11). Critical to these calculations is the number of persons dining on the two nights during which observations and test purchases were made. The sensitivity of those numbers can be seen from the fact that by excluding the test purchases (eight covers), the extent of estimated suppressed sales is reduced by £58,256.71 and under-declared VAT by £8,661.