01 0638 KEIVAN ESKANDARI Mr M S Johnson Mr R Presho North Shields, Tyne and Wear 18 May The First Appellant did not attend and neither Appellant was represented Mr N Poole, of counsel, instructed by the Solicitor's Office of HM Customs and Excise, for the Respondents 
                                                                                                                      18723
	VAT ASSESSMENTS & PENALTIES  — pizza takeaway/delivery outlet — suppression of takings — assessments to best judgment — conduct involving dishonesty for purpose of evading VAT leading to penalty assessments — no attendance by appellants — appeals against all assessments dismissed subject to minor adjustments

MANCHESTER TRIBUNAL CENTRE

 
 	
	(1) KEIVAN ESKANDARI	Appellant
	(2)  SORRENTO PIZZA LTD

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Mr M S Johnson (Chairman)
						 Mr R Presho (Member)	

Sitting in public in North Shields, Tyne and Wear on 18 May 2004

The First Appellant did not attend and neither Appellant was represented

Mr N Poole, of counsel, instructed by the Solicitor's Office of HM Customs and Excise, for the Respondents

	© CROWN COPYRIGHT 2004

DECISION

1.	There are before the tribunal four separate appeals.  The appellants have appealed against the following assessments issued by the Commissioners of Customs and Excise (“Customs”):
The First Appellant

1)	An assessment dated 13 July 2001 for £25,527, plus interest, under section 73 of the Value Added Tax Act 1994 (“the Act”), in respect of the First Appellant’s VAT trading periods at the Sorrento Pizza takeaway/delivery outlet, Birtley, County Durham (“the Sorrento”) between 1 November 1995 and 31 August 2000;

2)	A penalty assessment dated 12 November 2001 for £21,701 (subsequently amended on 31 January 2003 to £21,465), under section 76 of the Act, in respect of the like trading periods.

The Second Appellant

3)	An assessment dated 16 July 2001 for £2,236, plus interest, under section 73 of the Act in respect of the Second Appellant’s VAT trading periods at the Sorrento between 1 September 2000 and 28 February 2001;

4)	A penalty assessment dated 12 November 2001 for £1,901, under section 76 of the Act, in respect of the like trading periods.

2.	The appellants have appealed on the grounds, in the case of the non-penalty assessments under appeal, that they are based upon “totally unreliable evidence”, and in the case of the penalty assessments under appeal, that they are based upon assessments (that is to say, the non-penalty assessments), that are themselves totally unreliable as mentioned.  It does not therefore appear that the appellants are, in respect of the penalty assessments, raising distinct grounds of appeal against those assessments, should this tribunal find that the non-penalty assessments have been based upon reliable evidence.

3.	When the appeals were made, the appellants had as their representatives Omran Business Services, accountants of Consett, County Durham.  Subsequently they had representing them Mr J C FitzPatrick of FitzPatrickRoyle, accountants of New Bridge Street, Newcastle upon Tyne.  Still later they had representing them Mr G B Kent, of Alnwick Tax Advisory Service, of Belvedere Terrace, Alnwick, Northumberland.  It appears from the file that none of these firms is now acting.  On 14 December 2003, the appellant Mr Eskandari wrote personally to the Manchester Tribunal Centre (“the Centre”) stating that he was unable to find anyone to represent him at the present time.  On 6 May 2004, the Centre notified Mr Eskandari at his home address in Kingston Park, Newcastle of the date, time and place of the tribunal hearing of the appeals, indicating that a postponement of the hearing would not be allowed except for the most compelling reasons.
4.	Whilst we understand that the appellants may still be without representatives prepared to act, we do not see this as a good reason for postponing the appeal hearing, as time is passing and it is now over five months since Mr Eskandari’s letter.  Accordingly, in view of the absence of an explanation for the non-attendance of Mr Eskandari personally, we determined to proceed with the hearing pursuant to rule 26(2) of the Value Added Tax Tribunals Rules 1986 (as amended).
5.	Customs were represented by Mr Nigel Poole of counsel.  He called four Customs officers to give oral evidence, namely Mr Russell Kevin Stephenson; Mr John Robert Martin; Mr John Terrell; and Mrs Linda Turner.  The tribunal also had written witness statements from those witnesses, and from a number of other Customs officers who did not give evidence, namely:

Name of Witness						Date of Statement

Russell Kevin Stephenson				03.12.01
John Robert Martin					10.12.01& 1.12.01
John Terrell						19.12.01
Linda Turner 						03.12.01
David Heilbron						30.11.01
David Glyn Roberts					15.01.02
Yvette Deborah Hay					17.12.01
Gerard Paul Anthony Marescaux				06.12.01
Marion Ann Beech					28.11.01
George David Liddle					04.12.01
George Robert Wade					28.11.01 (2 statements)

6.	Mr Poole also provided the tribunal with a folder of documents containing copies of the notices of appeal, assessments, Customs’ Statement of Case, VAT Forms 1, 2 and 7, correspondence, records of interviews with the appellant Mr Eskandari, details of sales and deliveries by the Sorrento, observation logs and notebook entries relating to test purchases by Customs officers from the Sorrento, meal bills, calculations of allegedly undeclared takings, an advertisement for the Sorrento and a menu.
7.	The position as we find it to be is as follows.
8.	The Sorrento was a takeaway pizza business located in Birtley, near Chester-le-Street.  It was registered for VAT as from 1 November 1995 by the appellant Mr Eskandari as sole proprietor, who described his business activity in Form VAT 1 as a “hot & cold food takeaway”.  Subsequently the second appellant was registered for VAT as from 1 September 2000 by Mrs Lynne Eskandari, who we find to be the first appellant’s wife and sole director of the second appellant.  Contemporaneously, application was made to cancel the registration of the first appellant.
9.	We find that the business of the Sorrento was seamlessly taken over by the second appellant from the first appellant so that trade prior to 1 September 2000 was carried on by the first appellant and was as from that date carried on by the second appellant.
10.	The non-penalty assessments came about because Customs had formed the view that the Sorrento had substantially underdeclared its takings.  This conclusion resulted from a programme of test purchases and observations conducted by Customs in 1999/2000.  The Sorrento both sold food over the counter and made deliveries of orders placed by telephone.  Customs thus set out to obtain evidence both of counter purchases and of delivery runs made by the business.  From this evidence Customs were able to calculate expected daily gross takings for the business for comparison with declared daily gross takings, relying upon an average meal price which was not queried by the appellants.  
11.	From purchases and observations conducted on Saturday, 10 July 1999, Wednesday, 20 October 1999 and Friday, 11 February 2000, Customs calculated an average percentage declared rate in respect of takings.   In relation to the first appellant, they applied the percentage suppression rate derived from the declared rate uniformly to each VAT quarter from 11/95 to 08/00.  Allowing for tax paid, they calculated a total shortfall in VAT accounted for in respect of those periods amounting to £25,531.68.
12.	Customs did not initially appreciate that, as from 1 September 2000, the business had become that of the second appellant.  They employed one further day’s purchases and observations, conducted on Thursday, 21 September 2000, to indicate the extent of the shortfall since the second appellant took over the business.  That day, taken alone, produced a declared rate of 55.27%.  The total declared rate for all four days of purchases and observations was 65.49%. 
13.	Customs adopted for the purpose of calculating the shortfall in tax declared by both appellants a declared rate of 68%.  That figure was rounded up from the average percentage declared rate for the first three days of purchases/observations, when the first appellant was proprietor, which was 67.26%.   In calculating the shortfall in VAT accounted for in respect of periods 11/00 and 02/01, Customs used the percentage declared rate of 68% “to maintain consistency”.  The VAT shortfall in respect of those periods was accordingly calculated in the total amount of £2,237.12.
14.	The evidence before the tribunal, relied upon to ground Customs’ calculations, appears to us to have been obtained in a thorough, detailed and conscientious manner.  It is significant that those representing the appellants did not challenge that evidence to any great extent, either in correspondence or when Mr Eskandari was interviewed.  
15.	On 18 December 2000, Mrs Turner wrote to Mr Omran of Omran Business Services acknowledging that he had provided to Customs meal bills and delivery records for the business.  She pointed out that none of those items bore dates and that hence they were useless as primary records for VAT purposes.  She sought provision of till rolls with “Z” readings.
16.	On 17 January 2001, Mr Eskandari was interviewed for the first time by Mrs Turner, with Mr Terrell and Mr Omran also present.  It emerged at that interview that there were no till rolls because the till was broken.  Records of the business prior to those supplied in December 2000 were said to have been dated, but it was accepted that the records supplied in December 2000 were not.
17.	We accordingly find that the appellants had not lately been keeping any of the dated records for the business which would be required to provide a proper comparison with the evidence of likely takings assembled by Customs.
18.	Mr Omran met with Mrs Turner on 27 February 2001, and she explained the calculations of Customs regarding alleged shortfalls.  In subsequent correspondence, she stressed the need for a further meeting.  Mr Omran asked for time to take instructions from his clients.  Attempts were made by Mrs Turner to fix a further meeting without success.
19.	Eventually Mrs Turner interviewed Mr Eskandari again on 5 June 2001, again with Mr Terrell and Mr Omran present.   This was a long meeting, which lasted from 10.32 to 11.50 am.  Mr Eskandari’s position was that all the VAT returns for himself and for the second appellant were correct.  He made the following points:
•	That Customs might have counted a single delivery as two deliveries.  This would allegedly flow from the fact that a delivery man would deliver part of an order, and then return to the shop to fetch the remainder of the same order.  In our opinion, it would be inherently unlikely that that would happen.

•	Again, Customs might have counted as multiple deliveries occasions when orders got mixed up.  That would entail delivery drivers returning to the shop to change orders.  In our opinion, that might occasionally happen, but it is unlikely that this would be a regular problem.

•	Again, Customs might have counted as multiple deliveries occasions when orders had to be delivered more than once, because customers were not present at the delivery destination on the first occasion.  In our opinion, that too might occasionally happen, but not on a frequent basis.

•	That the business suffered hoax calls ordering food for delivery.  We accept that that might be a factor reducing takings, although to what extent, we are not equipped to say.

•	That each delivery trip may or may not have been for more than one order.  We think that a single order per delivery is unlikely to have been the absolute rule, but that this was probably the norm.

•	That Customs were mistaken in their observations.  Mr Eskandari did not say why this might be, and having considered the evidence, we accept the accuracy of the observations.

•	That it was inherently unlikely that Mr Eskandari’s records would contain so many mistakes.  However we have concluded, as we say below, that the omissions were not mistakes. 

•	That Mr Eskandari’s meal bills were incorrectly allocated by Customs.  We find, however, that Customs have done their best with the documents provided, which were not so organized by the appellants as to make the task of allocation a straightforward one.

•	That there were items missing for which Mr Eskandari was not responsible.  But we find that, as between Customs on the one hand and the appellants on the other, Customs were not responsible for losing any documents in this case.

•	That zero-rated sales were not properly taken into account.  We deal with this point in paragraph 33 below.

20.	The interview ended with the parties agreeing to disagree.  On 27 June 2001, Mrs Turner provided Mr Omran by letter with details of the test purchases made by Customs.  She then attended to the raising of the assessments under section 73 of the Act, writing to Mr Omran with her final calculations on 4 July 2001, and to Mr Eskandari personally in like terms on 9 July 2001.
21.	Subsequently, when penalty assessments were issued in November 2001, Mr Omran appears to have dropped out of the picture, and Customs corresponded with Mr FitzPatrick, and also had dealings with Mr Kent, who was initially with FitzPatrickRoyle, and afterwards practised as Alnwick Tax Advisory Service.  
22.	In a letter to Customs dated 13 January 2003, Mr FitzPatrick reiterated that Mr Eskandari believed that his VAT returns were “substantively” correct, although he admitted that the records were “partially incomplete”.  The errors and omissions in the records were attributed to negligence, not dishonesty.
23.	Mr FitzPatrick maintained that the Sorrento was operating in intense competition with other similar outlets trading locally.  He enclosed a plan with his letter to illustrate this point.  He sought to link that fact to the Sorrento’s trading pattern, but in a way that we find to be confusing rather than convincing.  He proposed a settlement to Customs based upon a notional gross profit rate for the business, which we find it to be unsurprising that Customs rejected.
24.	In a letter to the Centre dated 3 June 2003, Mr Kent, by then practising as Alnwick Tax Advisory Service, stated that the contents of Mr FitzPatrick’s letter of 13 January 2003 would form the basis of the appellants’ case at the appeal hearing.  Mr Kent continued:  “It is intended that at the full hearing this submission with the supporting documentation and also the presence of Mr Eskandari and myself to answer questions will be the basis of the appeal”.  In the event, the tribunal has not had the benefit of hearing either from Mr Eskandari or Mr Kent.
25.	Subject to points of detail, which we deal with in paragraph 33 below, we find that the assessments issued pursuant to section 73 of the Act were made to the best judgment of Customs and should not be upset.  The purchases and observations upon which the calculation of the suppression rates was based amounted to satisfactory evidence on which to found those assessments.  We do not fault the approach of Customs in this case to the accumulation of the evidence on the basis of which their calculations were made.  The methodology of the calculations underlying the assessments appears to us not to have been undermined by the appellants and we find it to be sound.  As Mr Poole pointed out in his closing submissions, the burden of proof rests on the appellants as to any alleged irregularity attending these assessments, and that is not a burden that the appellants have discharged.  
26.	The penalty assessments are founded upon the premises of section 60(1) of the Act, namely that, for the purpose of evading VAT, the appellants did certain acts or omitted to take certain action, and that their conduct involved dishonesty.  For the purpose of demonstrating these matters, Customs rely in their Statement of Case upon the history of the case, including what was said in interview, the dominant role of Mr Eskandari in the running of the business, his admission that the results of Customs’ observations could well be correct, subject to the matters mentioned above, and the failure of Mr Eskandari and his accountants to provide any plausible explanation for the discrepancies noted by Customs. 
27.	For Customs, Mr Poole submitted that Customs had proved sufficient facts for the tribunal to be confident that the penalty assessments were justified within the premises of section 60(1).  The burden of proof as to these matters rests upon Customs – see section 60(7) of the Act.  As to this, we should adopt the standard of proof whereby the tribunal should be satisfied with proof “by a preponderance of probability, always provided that … the [tribunal] should not be satisfied with anything less than probability of a high degree” – see Gandhi Tandoori Restaurant v C & E Comrs [1989] VATTR 39.  The lack of any explanation for the shortfalls in this case, let alone a convincing explanation, should lead us to conclude, Mr Poole submitted, that the burden of proof was discharged to the requisite standard.
28.	It seems to us that the starting point in determining the outcome of these appeals must be that the appellants have not themselves satisfied us as to the soundness of their appeals against the section 73 assessments, namely that those assessments have been based upon “totally unreliable evidence”.   We have found that the evidence relied upon was far from totally unreliable, so much so, indeed, that it cries out for a proper answer to it from the appellants.  We have not had that answer, despite the burden of proof on this issue being upon the appellants.
29.	Next, we note that the appeals against the penalty assessments, according to the expressed grounds of appeal, are based upon our having found that the section 73 assessments depended on totally unreliable evidence.  We have not so found, so it follows that these grounds of appeal fail.  But we do, of course, need to take into account what was said in Mr FitzPatrick’s letter to Customs dated 13 January 2003 and Mr Kent’s letter to the Manchester Tribunal Centre dated 3 June 2003.  
30.	We note from those letters that negligence is admitted and averred, so far as record-keeping by the appellants is concerned.  Dishonest suppression of takings is denied.  However it seems to us that this is not a case of mere slipshod record-keeping.  The shortfalls that we have found to exist are not adequately accounted for by negligence.  We are unimpressed with the assertion, expressly maintained by Mr FitzPatrick and Mr Kent, that the appellants’ returns were “substantively” correct.  That is not so – rather, the returns were seriously incorrect.   In a case of admitted negligence, one would normally expect some explanation from the negligent party as to the circumstances in which the negligence arose.   We have had no such explanation in this case, despite the unequivocal promise from Mr Kent, contained in his letter dated 3 June 2003, that this tribunal would have the opportunity at the hearing of eliciting such explanation as there might be.
31.	Finally we have the assertion of the appellant Mr Eskandari himself, contained in his letter to the Centre dated 14 December 2003, that he had been “unable to find anyone to represent me at the present time”.  We draw the conclusion from this, and from the unexplained absence of Mr Kent and Mr Eskandari himself, that they have deliberately foregone the opportunity for explanation afforded at the hearing.
32.	We conclude from the above that the only legitimate explanation for the accounting shortfalls in this case is that Mr Eskandari was indeed, as Customs allege, dishonestly compiling his business records to present a false picture, and was doing this for the purpose of evading VAT.  The change in ownership of the business appears to us to be purely cosmetic, so far as relating to the matters with which this tribunal has to deal.  Mr Eskandari appears to us to have been in the position of “managing officer”, as defined by section 61(6) of the Act, so far as the second appellant was concerned.  His dishonesty is accordingly to be regarded as that of the second appellant.
33.	Certain of the bulleted matters mentioned in paragraph 19 of this decision seem to us to be not totally devoid of weight.  We think that it would have been appropriate to have built into Customs’ calculations an allowance for zero-rated sales and for potential misinterpretation of the evidence gathered, the accuracy of which we do not otherwise doubt.  It is impossible to be precise about the appropriate figure.  Doing the best we can, we conclude that the section 73 assessments should be reduced by a factor of 10%.
34.	That reduction will, of course, have an impact upon the quantum of the penalty assessments as well.  On the other hand, we do not think that we should interfere with the level of mitigation in this case, which stands at 15%.   That is more than generous, as we see it, for the degree of co-operation and amounts of information provided by the appellants in this instance.  Accordingly the penalty assessments will stand at 85% of the reduced figures adjusted to reflect the reduction by 10% of the non-penalty assessments.
35.	Subject to those adjustments, these appeals are all dismissed.  Mr Poole applied for costs, and we award Customs the amount of their reasonable costs incurred in and about these appeals, to be summarily assessed by the tribunal in default of agreement.

MR M S JOHNSON
CHAIRMAN
Release Date: 16 August 2004
MAN/01/0638
MAN/01/0963
MAN/01/0964