[2009] UKFTT 369 (TC)

TC00307

Appeal number MAN/06/0260

VAT – assessment on alleged under declaration - misdeclaration penalty - assessment alleged not to best judgment and /or excessive - amounts reduced on appeal - appeal allowed in part.

FIRST-TIER TRIBUNAL

TAX

LANCERS RESTAURANT LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT)Respondents

Tribunal: ELSIE GILLILAND (Judge )

SUSAN STOTT (Member)

Sitting in public in MANCHESTER on 24 and 25 APRIL 2008 , 11 and 12 May 2009 and on 30 September 2009

TAHER NAWAZ chartered accountant for the Appellant

JAMES PUZEY counsel , instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction.

  1. This is an appeal by Lancers Restaurant Limited (the Appellant) against an assessment to Value Added Tax (VAT) in respect of the periods 05/03 to 05/05 inclusive. The assessment is dated 29 March 2006 and is in the sum of £116,359 together also with an additional sum of £14,355 by way of interest. Subsequently on 20 December 2006 a misdeclaration penalty in the sum of £17,067 was assessed on the Appellant on the basis that the Appellant had under-declared the amount of VAT for which it was accountable in respect of the periods 05/03 to 02/05. The Appellant has also appealed against the misdeclaration penalty and that appeal is also before us.
  2. The assessment to VAT was made by Mr. Anthony Reynolds (Mr. Reynolds) an officer of the Respondents, following 3 material visits to the Appellant’s premises at 20 High Street, Bawtry, Doncaster at which the Appellant has carried on a restaurant and take away business under the name of Lancers Indian Restaurant since it registered for VAT in 1998.

Visits.

  1. The first visit was made on 1 April 2005. This was a routine inspection visit and had been arranged with the Appellant’s accountants, Islam & Co. Mr. Reynolds attended accompanied by Mr. Nick Baker on behalf of the Respondents. Ms. Naz Ali from the accountants was present at this visit as was Mr. Sajidur Rahman (Mr. Rahman). Mr. Rahman is the director of the Appellant and an equal shareholder with his brother Mr. Safiqur Rahman who is the chef. Mr. Safiqur Rahman was not present at any of the 3 visits. The second visit took place on 13 June 2005 when Mr. Reynolds was accompanied by Mr. Colin Smithson (Mr. Smithson). There is an issue whether Mr. Rahman was interviewed by Mr. Reynolds on this visit. Mr. Reynold’s evidence was that he did interview Mr. Rahman on this visit and that Mr. Rahman had provided some information about wastages and allowances for drinks at the restaurant. Mr. Rahman’s evidence was that he had only handed over the meal bills for April and May 2005 which Mr. Reynolds had requested in his letter dated 4 April 2005 following his visit on 1 April, that he had stayed for only about 10 minutes and that there had not been any interview at all although he does recall having received a telephone call on his mobile from Mr. Reynolds whilst he had been driving but that he had not discussed any matters with Mr. Reynolds because he had been advised by his accountants that all queries about the business should be dealt with through the accountants. The third visit took place on 23 November 2005 when Mr. Reynolds collected further meal bills for July from the restaurant. Mr. Rahman had left the meal bills in a bag outside the side door of the restaurant. There is no dispute that Mr. Rahman was not present when Mr. Reynolds collected these further documents which he had earlier requested.

Case for the Respondents.

  1. The Respondents case is that the Appellant had been under-declaring the amount of VAT for which it was accountable for over 2 years up to May 2005. It is clear from the documents and calculations before us that the Respondent’s case is based essentially upon the premise that the Appellant had been under-declaring its sales at the restaurant. However the present case is not one where there is any direct evidence that the Appellant has been suppressing sales invoices. Although the Appellant prior to the first visit did not have any till rolls recording its takings no discrepancies have been found between the amounts paid into the Appellant’s bank account and the amounts returned by the Appellant in its VAT returns. The VAT returns were prepared and signed by the Appellant’s accountants who were provided with the Appellant’s meal bills. No trial purchases had been made by the Respondents. This is a case which depends upon the validity and accuracy of the calculations which have been made by the Respondents of what it estimates the Appellant should have received from its sales of meals and drinks and the assessment was based upon the difference between the expected sales and the amounts of the sales as recorded in the VAT returns.
  2. The Respondents’ case involves a number of distinct calculations. First the amount attributable to the purchase of drinks for resale has to be ascertained. Prima facie this should involve an analysis of the Appellant’s purchases for the relevant period so as to exclude from the calculation any non drinks items. The analysis should use the VAT exclusive cost of the purchases. This analysis will produce a “cost of goods sold” figure (COGS). From this figure a deduction will have to be made for any wastages and also for any drinks not actually sold to customers, for example drinks consumed by members of staff or provided free of charge. Next a calculation of the Appellant’s average or weighted mark up on drinks has to be made so as to arrive at the value of drinks sold. Next, the meal bills have to be analysed to establish the drinks to meals ratio (or parts to total ratio) which can then be used to calculate the projected sales of both drinks and food for each quarter. Finally, a comparison is then made between the VAT on the total projected sales and the VAT declared on each of the returns. Any under-declaration will then be incorporated into the assessment. No issue arises in the present case as to the methodology of the calculation of any under-declared VAT. The issue in the present case is whether the Respondents have correctly calculated the relevant figures.

Calculations

  1. There is in our view no doubt the original calculations carried out by Mr. Reynolds and which gave rise to the assessment significantly overstated any alleged under-declaration. On the first day of the hearing on 23 April 2008 the Respondents produced a revised calculation showing a total under-declaration of £57,780.23. This was a reduction of £58,758.77 or 50.5% from the original assessment made by Mr. Reynolds. Among the differences were a reduction in the COGS figures for the relevant periods, an increase in the wastages allowance to £190 from £120, a reduction in the weighted mark up from 226% to 206% and the drinks to meals ratio was increased from 16.09% to 18.22%. This revised calculation appears to have taken into account some at least of the points which had been made by Mr. Nawaz in his letter dated 21 January to the Respondents. That letter had been sent without prejudice as it contained a without prejudice offer to settle the Respondents’ claim but that offer was not accepted. The Appellant has waived privilege in respect of the contents of the letter.
  2. On 25 April 2008 at the close of the second day of the hearing the appeal was adjourned part heard. On 30 April 2008 Mr. Nawaz sent an open fax to the Respondents commenting on a number of aspects of the Respondents revised calculation of under-declared VAT and enclosing his calculations of drinks purchases. At the resumed hearing which took place on 11 and 12 May 2009, Mr. Smithson who gave evidence for the Respondents accepted these calculations. They have not been challenged before us and we accept them. The consequence is that based on the revised figures for COGS provided by Mr. Nawaz, there should be a further reduction in the assessment from £57,780.23 to the figure of £39,819 which can be found in Schedule A attached to Mr. Nawaz’s written submissions. Mr. Nawaz made his submissions in writing because there was insufficient time on 12 May for his oral submissions to be heard. Mr. Puzey, having seen this document which was only provided after Mr. Puzey had closed his oral submissions on 12 May 2009 has not objected to the Tribunal having regard to this document. Having looked at it, we are satisfied that it does no more than adjust the revised assessment to take account of the figures for drinks purchases which had been provided by Mr. Nawaz to the Respondents by fax on 30 April 2008. However for the sake of completeness we should refer briefly to them.
  3. The method of ascertaining the amount of the Appellant’s drinks purchases used by both the Respondents and by Mr. Nawaz for the periods 05/03 to 02/05 inclusive has been to start from the Appellant’s figures for input tax for the relevant periods. This is a common practice and is based on the premise that the taxpayer is in general unlikely to understate the amount of the VAT which he has been charged and also that there will normally be VAT invoices available against which the total amount of input tax claimed in the VAT returns for a particular period may be checked. In the case of a restaurant, since purchases of food are zero rated, most of the input tax paid is likely to be attributable to the purchases of drinks. Mr. Nawaz in his calculations attached to his fax dated 30 April 2008 has gone through the VAT invoices for the relevant periods and has adjusted the total amount of the VAT for each quarter so as to agree with the VAT invoices and he has excluded invoices which he says have been duplicated and also those which relate to other periods. Full details of the invoices in question are set out in the six pages of attachments at pp. 159j to o in section 3 of the bundle where the figures for input tax for each of the 9 quarters have also been totalled.
  4. However it cannot be assumed that all the input tax is attributable to the purchases of drinks and an adjustment will have to be made to the amount of the input tax so as to exclude any non drinks items. In the present case it is not in dispute that the Appellant’s purchases which attracted VAT included ice cream. Mr. Reynolds, as appears from his letter dated 21 March 2006, calculated that the amount of purchases of non drinks items such as ice cream came to £105 or 2.08% of the total input tax of £5023.96 and this is the percentage figure by which he has reduced the total input tax for the relevant quarters to arrive at the input tax relating to the drinks purchases. Mr. Smithson on the other hand had noted that the ice cream purchases came to £451.45 or some 9% of total purchases. Mr. Nawaz in his fax dated 30 April 2008 stated that he had calculated the amount of the ice cream purchases was £473.40 or 11.85% of total purchase figure of £3993.67. However, having analysed the invoices for all the quarters, Mr. Nawaz’s conclusion was that non drinks purchases from Heath & Smith and from Bookers Cash and Carry came to 4.94%.He also provided invoices showing non drinks purchases from these suppliers. In his fax, Mr. Nawaz invited the Respondents to consider the figures he had produced for the total purchases and also figures for non drinks purchases and that if the Respondents were minded not to accept his figures, the figures could be gone through at the resumed hearing. As we have already stated, the figures for purchases were accepted by Mr. Smithson and they have not been challenged by the Respondents at the resumed hearing. In Schedule A which Mr. Nawaz has attached to his final written submissions, Mr. Nawaz has used the revised VAT input figures for 8 quarters and has reduced the total input figures by 5% so as to ascertain the input tax attributable to the drinks purchases. The figure of 5% is 4.94% rounded up. The amount of under-declared input tax for the 8 periods is calculated at £37,150.63 to which has been added £2668.88 for the period 05/05 thereby producing a total under-declaration of £39,819.32. The figure of £4861.02 for COGS on Schedule A for the period 05/05 has been calculated in the same way, based on the gross VAT figure of £895.45 appearing on p. 159o of the bundle. It is to be noted that these calculations by Mr. Nawaz of under-declared VAT for the 9 periods in question are based on the use of the figures of £190 for allowances and the weighted mark-up of 206% used by the Respondents in their revised assessment which appears at p.80b of the bundle. Mr. Nawaz has challenged these figures and we consider them later in this Decision. The reduction in the assessment from £57,780.23 to £39,819.32 is due entirely it seems to us to the reduction in the value of the Appellant’s drinks purchases for the 9 periods in question.

The Appellant’s case.

  1. The Appellant’s case is that the figures used by the Respondents in their calculations of the alleged under-declaration of tax are incorrect and also that the assessment has not been made by the Respondents to “the best of their judgment” within s.73(1) of the Value Added Tax Act 1994 (“the Act”). So far as the figures are concerned, there are 2 issues which have to be considered. The first is what is the correct amount to allow in any calculation of any under-declared VAT for wastages etc.? The second is what is the correct figure to apply by way of a weighted mark up? We shall consider these questions first before proceeding to consider the submission that the assessment was not made to best judgment.
  2. By wastages we are referring to all those drinks which have not actually been resold to customers and they will include, for example, drinks consumed by those working at the restaurant as well as beer which has been drawn off and poured away as part of the process of cleaning the beer lines. The calculations giving rise to the figure of £109 used by Mr. Reynolds in making the original assessment were based, he said, upon answers which Mr.Rahman had given to questions he had asked him during his second visit to the restaurant on 13 June 2005.

Evidence relating to the visits.

  1. Mr. Reynolds has produced copies of the handwritten notes which he said he had made during this visit and in which he said he had recorded the replies Mr. Rahman had given when he had asked him about what drinks wastages there had been at the restaurant. There is no dispute that on his first visit on 1 April Mr. Reynolds had been asked to put in writing any queries he might have about the business and that they should be put through the accountants. It is unfortunate that Mr. Reynolds did not follow this procedure as there is now a dispute about what if anything Mr. Rahman did actually say to Mr. Reynolds about wastages during the second visit. It was apparent from Mr. Reynolds answers in cross-examination that Mr. Reynolds decided not to follow this course because he thought it was more useful to ask questions orally.
  2. Mr. Reynold’s notes of the second visit, somewhat surprisingly, record the visit as having taken place on 13/6/06 and not in 2005. The figures 06 on the notes have subsequently been altered to 05 and initialled by Mr. Reynolds against which Mr. Reynolds has written the date 9/5/06. It was his evidence that he had altered the year to 05 on 9 May 2006 on reviewing his notes. This of course was after the assessment had been made and nearly a month after the appeal had been lodged. It is in our experience unusual to make a mistake in the year when making notes, except perhaps at the beginning of a new year. Any mistake of this nature does however in our view raise questions about the degree of care with which Mr. Reynolds made his note as well as its accuracy.
  3. In his cross-examination of Mr. Reynolds, Mr. Nawaz suggested that the note was not a contemporaneous note and had been written up after the second visit, possibly in May 2006. Mr. Rahman’s evidence was that on the second visit there had been no discussion as such with Mr. Reynolds about the business and that all he could recall was that there had been a subsequent telephone call on his mobile phone in which Mr. Reynolds had wanted to discuss matters like staff drinks. Mr.Rahman said, correctly, that it had been requested at the first visit on 1 April 2005 that any queries about the business were to be made in writing through his accountants. His evidence was that there had been no discussion as such on the second visit and that he had handed over the documents which had been requested and had stayed only for about 10 minutes. Mr. Rahman said he had been driving at the time he had received the telephone call, did not have a hands-free telephone and that he had declined to become involved. He again referred to the arrangement for queries to be made through the accountants. That a telephone call was made to Mr. Rahman on his mobile after the second visit is probable since a note of Mr. Rahman’s mobile telephone number appears at the foot of the first page of Mr. Reynold’s notes.

Consideration of and conclusions on the evidence relating to the visits.