VALUE ADDED TAX — assessment – assessment based on annual accounts different to VAT returns—further information (bankings) now known for part of period— capital introduced and paid out to be taken into account  — but bankings confirm no reduction needed as a result of capital introduced — appeal dismissed.

MANCHESTER TRIBUNAL CENTRE

	KEIGHLEY GLAZING 	Appellant
	
	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Mr R Barlow (Chairman)
                                                       		Mr N Phillips (Member)

Sitting in public in Manchester on 21 July 2003 
Mr Azeem Malik of Rehman Michael & Co for the appellants.
Mr Jonathan of counsel instructed by the solicitor for the Customs and Excise for the respondents.

	© CROWN COPYRIGHT 2003

 DECISION
1.	In this appeal the appellant partnership appeals against assessments of value added tax contained in two notices.  The first dated 18 January 2001 in the sum of £6,468 is for the periods from 07/98 to 04/99 which coincide with the appellant’s accounting year ending 30 April 1999.  The second, dated 27 February 2001 in the sum of £11,818, is for the periods 07/99 to 10/00 and covers the following accounting year plus two additional periods.
2.	The appellant was represented by Mr A Malik of Rehman Michael & Co chartered certified accountants and the commissioners were represented by Mr J Cannan of counsel.  We are indebted to both for their presentation of the case in a helpful and efficient manner which enabled us to complete the hearing within the one day time estimate.
3.	This decision is the unanimous decision of the tribunal.
4.	Keighley Glazing is a partnership which manufactures and supplies windows and related items such as conservatories.  The partnership of Mr Ashiq Hussain and Mr Rafaqat Hussain was registered for value added tax from 19 February 1998. We were not told that any formal steps have been taken to amend that registration but Mr Rafaqat Hussain left the partnership and Mr Mohammed Riaz and Mr Arfan Shazad joined Mr Ashiq Hussain as partners from 5 January 2000.
5.	A partnership agreement drafted by a solicitor was signed on 5 June 2002 but it provides that the partnership was deemed to have commenced on 5 January 2000.  In that agreement Mohammed Riaz and Arfan Shazad are acknowledged to have paid Ashiq Hussain £36,000 each to join the partnership.  Mr Rafaqat Hussain is not a party to the agreement and is not mentioned in it but we were told in evidence, which we accept, that he was paid £55,000 for his share in the partnership and that is corroborated by a bank statement which shows a payment of that amount to the solicitor acting for the partners and a letter from the solicitor which showed that the money had been paid to another solicitor who was acting for Mr Rafaqat Hussain.  The payment was made on 24 March 2000. 
6.	The matters under appeal are the assessments and we were not asked to make any findings about the liability of individuals or the constitution of the partnership, even if our jurisdiction would have allowed us to do so, and our decision is limited to consideration of the assessments.
7.	The first assessment was made on the basis that there was a difference of £36,979 between the annual accounts of the business for the year ending 30 April 1999 and the sales declared in the outputs declarations on the VAT returns.  The annual accounts were prepared by a firm of accountants (not Rehman Michael & Co) and if they were aware of the difference they appear not to have drawn it to the partners’ attention and certainly not to that of Customs and Excise.  The accounts were stated to be prepared net of VAT and the assessing officer Mrs Parsons checked that the outputs declaration (exclusive of VAT) agreed with the tax declared in the sense that those outputs could be calculated from the VAT declared and were in agreement with it.  On that basis and in the absence of an explanation that satisfied her that the apparent under declaration disclosed by the accounts could be explained other than as additional sales Mrs Parsons raised the assessment.
8.	Mrs Parsons did not have annual accounts for the following year and indeed the appellants admitted that they had not been prepared until recently.  She therefore raised an assessment for the following year and two further periods on the basis that the ‘cash difference’ demonstrated in the year ending April 1999 by comparison of the accounts and the VAT returns would have continued.  The cash difference was 26.84% of the declared figure and application of that percentage to the declared takings for the following periods gave rise to the assessments totalling £11,818.
9.	It was not suggested that the assessments were not made to the commissioners’ best judgment as required by section 73(1) of the VAT Act 1994 and it is clear that they were made to best judgment.  The method of assessment for the second assessment is unusual but that does not in any way invalidate it and in the circumstances it provided a sensible method.
10.	It follows that it is for the appellants to show that the assessments are excessive and the burden of proof lies upon them to do so but, as with most cases, we heard evidence from both parties and have been able to reach positive conclusions about the necessary facts without the location of the burden of proof becoming a relevant consideration, except in two respects which we will mention below.    
11.	We heard evidence from Mr Ashiq Hussain, partner both before and after January 2000, Mr Ashfaq Hussain (his brother) a manager in the business, Mr Mohammed Akram father of Arfan Shazad (partner from January 2000) who was abroad and Mr Mohammed Riaz (partner from January 2000).  We have no doubt about the truthfulness of their evidence having observed them giving evidence.  None of the witnesses exaggerated their evidence nor was it self contradictory or evasive and in many respects it was corroborated by documentary material.  Having said that, it is clear that the recollections of the witnesses were hampered by the passage of time but it would have been suspicious if that had not been the case rather than a reason to reject their evidence.
12.	Mrs Parsons also gave evidence which we also accept to have been entirely truthful.  Her recollection was assisted by contemporaneous notes.
13.	Mr Ashfaq Hussain has worked in the business since about the time Mr Rafaqat Hussain left but even before that time he had assisted with the record keeping.  He readily admitted that there was no proper book-keeping system until some time after the periods covered by the assessments and it appears that Mrs Parsons’ visit had prompted an improvement, indeed Mr Ashfaq Hussain spontaneously thanked her for her assistance while he was giving evidence.
14.	The notice of appeal (submitted by the previous representative) gave no separate grounds in relation to the two assessments and the only ground stated was that money had been introduced by incoming partners and that information had been sent to the VAT office which had been misplaced.  Any suggestion of misplaced documents, if that is what was meant, was not pursued before us.
15.	In fact, the introduction of capital by the new partners post dated the period covered by the first assessment and is irrelevant to it.
16.	Mr Ashfaq Hussain said he thought that payment of deposit monies, mainly by customers who were ordering conservatories, could explain some of the difference in the accounts.  He said that the business had started making conservatories only at the end of the accounting year to April 1999 and that they may only have completed one by that date but that they may have taken orders for conservatories with deposits in the order of £9,000 to £10,000.  Where deposits were paid the VAT was not accounted for until the invoice was issued on completion of the job.  
17.	Whilst we accept that this was the way deposits were dealt with and that it could result in a difference between the accounts, assuming they were based on information other than the invoices, and the VAT returns, assuming they were based on the invoices, we are not satisfied that the evidence proves that the first assessment was incorrect because of this aspect of the business.  Mr Ashfaq Hussain was not working in the business full time at the relevant time.  He was still working as a life guard at a local swimming pool.  He told us that 10 to 15 conservatories were made in the following year i.e. the year ending April 2000 which he described as a ‘ball park’ figure and that conservatories cost £6,000 or so.  In order for the deposits to explain the difference between the accounts and the returns, or any of it, they would have to have been paid before the end of April.  The only conservatory that was built in the year ending April 1999 was begun in March and Mr Ashfaq Hussain told us it had to be built three times before the firm got it right because at that time they did not really know how to build conservatories.  
18.	In those circumstances we are not satisfied that the evidence proves that any deposit money for conservatories was taken in the year to April 1999.  Nor can we conclude that the book keeping system would have meant that there would be a cash difference if deposits had been taken.  This is the first respect in which the location of the burden of proof has to resolve the issue against the appellants.
19.	It follows that the first assessment must be upheld in full as of the only two matters raised in evidence to challenge it one is irrelevant and the other is unproven.

20.	The second assessment was raised on the same basis as the first and Mr Cannan argued that even if there was an introduction of capital during the period covered by the second assessment that was irrelevant to it.  Mr Ashfaq Hussain admitted in evidence that the book keeping system was not changed after the end of the year to April 1999.  Mr Cannan therefore argued that whatever had caused the cash difference in that year would have continued in the following year and the later two periods covered by the second assessment and the 26.84% under recording of declared takings would have continued whether or not capital was introduced.
21.	The logic of that contention is unassailable but we have to bear in mind that the application of 26.84% is a best judgment basis of assessment.  Mrs Parsons judged it to be a proper figure to use.  However, for the year ending April 2000, by the time the appeal was heard, we have the benefit of additional information that Mrs Parsons did not have.  After the second assessment was issued Customs and Excise obtained copies of the bank statements of the business from 1 May 1999 to 30 April 2000, i.e. the accounting year following the first assessment and also the bulk of the period covered by the second assessment.  They showed bankings in excess of the sum that declared tax would require of £101,866.14 of which the VAT element would be £15,171.55 assuming that the sums banked were all taxable supplies at the standard rate.  In other words there is a difference between declared takings and bankings, rather than between declared takings and annual accounts.  
22.	As the part of the assessment of £11,818 which relates to the year to April 1999 was £6,834, a lower amount than the £15,171.55 which might have been justified by the bank records, Customs and Excise have stated in correspondence that the bank records support the assessment.
23.	In evidence Mrs Parsons agreed with the chairman of the tribunal that the bank records did provide a more accurate method of assessment than the assumption that 26.84% under-declaration continued.  This was of course only with the benefit of hindsight and does not undermine the best judgment aspect of the second assessment which was based on information available at the earlier time. 
24.	At first sight the consequence would be that the assessment could have been increased and should certainly not be reduced.  However, if the bank records provide a more accurate method of determining the amount than the method of assessment we cannot ignore that fact and would not wish to do so (as to this see also Rahman –v- Customs and Excise [2003] STC 150).
25.	Basing the revision of the assessment, if any proves to be necessary, on the bankings will require us to consider whether any of the sums banked were not in fact takings and this brings us to the main factual issue raised in this case namely the question of capital introduced by the incoming partners.

26.	The appellants’ case is that £72,000 was introduced as capital by the new partners in or about January 2000.  In order to prove this the appellants produced to Customs and Excise documents signed by Mr Arfan Shazad and Mr Mohammed Riaz.  However these documents stated that each had invested £35,000 not £36,000, as stated in the partnership agreement when it was drawn up and indeed in evidence to us.  This difference may well have had an innocent explanation because we were told that the new partners were asked to provide £36,000 each but that it was agreed that £1,000 would be paid back to each of them as soon as possible, though that has not happened.  Naturally Customs and Excise were suspicious because of the difference in those figures.  
27.	The appellants produced corroborative documentary evidence in the form of references to bank statements showing round sums paid into the business account and sums drawn out of accounts of investors.  These documents on closer examination did not entirely prove that each of the new partners had provided exactly £36,000 and there remained some questions about some of the entries.  We are satisfied that both the new partners provided £36,000 and so find.  Ultimately this is because we believed their evidence but we would add that the corroborative evidence at least proved that both had provided a substantial part of the £36,000 and the remaining gaps in the corroborative evidence did not undermine our having believed the appellants’ oral evidence. 
28.	Given that the bank records provide a more accurate means of assessment than the original estimated amount assessed by Customs and Excise we have to exclude that sum from the banked amounts to see whether the assessment should be reduced.
29.	The £72,000 would reduce the bankings that represent the excess over declared takings takings from £101,866.14 to £29,866.14 but, following the same logic, as £55,000 was also paid out of the bank account to the retiring partner from monies that had been paid into the account, we have to add back that sum.  The bankings referable to takings in excess of the declared takings are therefore £29,866.14 plus £55,000 making a total of £84,866.14.  Tax on that amount would be £12,639.64.
30.	It is correct to calculate the tax on the bankings by applying the ‘VAT fraction’ (seven forty-sevenths) because, unlike the annual accounts, the bankings figure after removal of the capital sums is tax inclusive. 
31.	As the tax which could have been assessed by that method in the year ending April 2000 would have exceeded the amount actually assessed we confirm the original assessment.
32.	For the last two tax periods included in the second assessment which are not within the accounting year ending April 2000 we do not have any evidence of capital introduced and in the absence of any evidence that a recalculation of the sum assessed for those two periods based on the bankings rather than the application of the 26.84% uplift would result in a reduction of the assessments for those two periods we cannot make any finding in favour of the appellants in respect of those two periods.  This was the second respect in which the location of the burden of proof played a part in our decision.
33.	It follows that the appeal against the second assessment must also be dismissed.  In accordance with the usual practice Mr Cannan made no application for costs and we make no order. 

RICHARD BARLOW
CHAIRMAN
RELEASE DATE: