20186

VAT – registration – compulsory registration – whether decision reasonable – yes – appeal dismissed

LONDON TRIBUNAL CENTRE

	SAYED AZHAR ABBAS RIZVI  T/A CHICKEN COTTAGE	Appellant

	- and -

THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	JOHN CLARK (Chairman)
					JOHN ROBINSON

Sitting in public in London on 19 April 2007

The Appellant did not appear and was not represented

Pauline Crinnion, Senior Officer, Her Majesty’s Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This is an appeal against the decision of the Respondents (“Customs”) contained in a letter dated 12 October 2005, being a notice of compulsory registration. In a letter provided to us on the morning of the hearing, Mr Rizvi indicated that owing to health problems he would not be attending the hearing.
2.	Mrs Crinnion applied under Rule 18(2) of the VAT Tribunals Rules 1986 for the appeal to be dismissed for want of prosecution. She explained the history; Mr Rizvi’s representative, a firm of accountants, had withdrawn in March 2006. She had spoken to them and they had explained that they had no home address or telephone number for Mr Rizvi. Following investigations by Customs, a bundle of documents had been sent to an address in Merton which had been Mr Rizvi’s address, but these had been returned with an indication that he had moved. Customs had no alternative home address for him.
3.	We explained to Mrs Crinnion that we had seen a letter from Mr Rizvi explaining that he would not be attending owing to health problems and that he had sold the business; this letter had been sent from the business address, despite his reference to the business having been sold. On the basis that there had been a communication from Mr Rizvi, Mrs Crinnion withdrew the Rule 18(2) application and accepted that we should hear the appeal in Mr Rizvi’s absence under Rule 26(2). (We explain the effect of this at the end of this decision.)
The facts
4.	The evidence consisted of the bundle of documents, including a witness statement made by Spencer Turnbull, a Customs Officer working in Customs’ Shadow Economy team. Mr Turnbull also gave oral evidence.
5.	Mr Turnbull explained that a part of the Shadow Economy Team’s work was to look at unregistered businesses to see whether they were registrable. This was often done by carrying out a “street sweep”, checking all the business in a street against Customs’ database. The purpose was to look for unregistered businesses and to note any changes. His first visit to Chicken Cottage at 1420 London Road Norbury was an unannounced visit made on the evening of 9 February 2005. The staff member present told him that the owner was not present at that stage and was only at the premises before 6 pm. Mr Turnbull left a letter and questionnaire to be passed on to the owner. The questionnaire was to be completed and returned within 21 days.
6.	On 10 March 2005 Mr Turnbull telephoned the premises, as he had not received the questionnaire. The person who answered identified himself as the brother of Mr Rizvi, the owner of Chicken Cottage. Mr Rizvi’s brother said that the forms would be returned and should reach Mr Turnbull in the next couple of days.
7.	On 24 March 2005 Mr Turnbull received the questionnaire. This gave Mr Rizvi’s then current home address. The questionnaire showed that Mr Rizvi had taken over an existing business, but did not specify when. Mr Turnbull understood that Mr Rizvi had started in September 2003. The gross turnover for the past twelve months to February 2005 was declared as £54,189. Mr Rizvi stated that he did not wish to apply for registration, as his sales were below the VAT registration limit. The completed questionnaire set out details of gross monthly turnover over the period from September 2003 to February 2005.
8.	Mr Turnbull noticed that a number of the monthly sales totals shown in the questionnaire were exactly the same. On the balance of probabilities, he would consider it amazing to get as many duplications. He decided to investigate further.
9.	On 1 June 2005 Mr Turnbull telephoned the premises with the intention of booking a visit and spoke with Mr Rizvi’s wife, who explained that Mr Rizvi was in hospital. Mr Turnbull left his telephone number and asked Mrs Rizvi to get her husband to call him. By 7 July 2005 no call had been received from Mr Rizvi, so by a letter written on that day Mr Turnbull booked a visit for 14 July 2005. He set out a list of the information required, to ensure that all the necessary details would be produced. He specified the till details required, because of their importance. On 11 July 2005 Mr Rizvi phoned and left a message stating that he was ill and asking for the visit to be re-booked. Mr Turnbull telephoned Mr Rizvi’s mobile phone on 13 July; Mrs Rizvi answered and said that her husband was still ill and could not make the visit on 14 July. Mr Turnbull advised her that if he could not interview her husband at that point, then at least Mrs Rizvi could bring the records to the premises for Mr Turnbull to collect. Mrs Rizvi agreed to do so.
10.	Mr Turnbull arrived at the premises at noon on 14 July 2005.  One person was working behind the counter, whom Mrs Rizvi later described as a “friend”, not an employee. Mrs Rizvi arrived without the records which she had promised the previous day to bring to the premises. He asked her why she had not done so; she said that he should speak to Mr Rizvi to arrange another visit. Mr Turnbull asked her again why she had not brought the records as agreed, and whether Customs could collect them from her home, as this was less than half a mile from the premises. She replied that the records were “not clean”.
11.	Mr Turnbull asked her if he could at the till to see if there was an audit roll inside, as he believed that this might be the only chance to see any records. Mrs Rizvi became very agitated and asked whether Mr Turnbull had the right to look at the till. He explained that officers’ powers under section 10 of the Finance Act 1985 gave him the power to inspect and check any computer record. He asked Mrs Rizvi to take out the audit roll for him. He then asked her to take an X-reading for him, which was actually an X-2 reading. This showed the time as 12.50, yet the actual time was 12.20. The date was also incorrect by three days, referring to 11 July 2005 rather than 14 July 2005. Mr Turnbull gave Mrs Rizvi a receipt for the records and left the premises at 12.25.
12.	On his return to his office, Mr Turnbull made a quick examination of the audit roll. Despite the roll showing a date three days earlier and a half hour time difference, the Z-read totals for takings from Saturday 9 July to Wednesday 13 July 2005 totalled £1284.02 for five days’ trading, which indicated that the business was trading in excess of the VAT threshold. (At the time, turnover of £1,150 a week would have been enough to be over the threshold.) Mr Rizvi’s accountant Mr Ahmed had called the office to ask why Mr Turnbull had visited Mr Rizvi’s premises, and left a message for Mr Turnbull to return the call. On 15 July Mr Turnbull did so and gave Mr Ahmed information about the visit to the premises, telling him that based on the audit roll Mr Rizvi appeared to be trading over the limit. Mr Turnbull told Mr Ahmed that he wished to analyse the records fully. Mr Ahmed said that he would contact Mr Turnbull again.
13.	On 4 August 2005, as he had received no call from the accountant, Mr Turnbull sent a letter to Mr Rizvi referring to Mr Turnbull’s examination of the audit roll, which suggested that Mr Rizvi was trading well over the VAT threshold and should therefore be registered for VAT purposes. Mr Turnbull requested the production on 1 September 2005 at Customs’ office of records for the whole period during which Mr Rizvi had been trading. Mr Turnbull acknowledged Mr Rizvi’s health problems, but indicated that if Mr Rizvi could not bring them in, it would be in his best interests if either Mrs Rizvi or the accountant could do so. If these records were not brought in, it might be necessary for Mr Turnbull to proceed with compulsory registration of Mr Rizvi on the basis of the information already obtained.
14.	No records were brought in on 1 September. Mr Turnbull telephoned the accountant to find out why the records had not been produced; the accountant contacted Mr Rizvi and then advised Mr Turnbull that the records would be produced on 6 September.
15.	On 6 September 2005 Mr Rizvi brought in records only for the period from March 2005 to July 2005 inclusive, despite Mr Turnbull’s request for records for the full period of trading.
16.	Subsequently Mr Turnbull carried out a detailed examination of Mr Rizvi’s records. The analysis took account of the date difference as shown on the records extracted on 14 July. It could be seen from Mr Turnbull’s schedule showing five months of daily gross takings that the daily gross takings which Mr Rizvi had declared for the five days referred to on the audit roll came to a lower total than the Z-readings totals for 9 July to 13 July 2005.
17.	Mr Turnbull then examined the sales figures on a ‘like for like’ basis, for example comparing all Tuesdays, and discovered that the daily gross takings for Saturday 9 July 2005 and Tuesday 12 July 2005 were the highest declared within those five months during the period under examination. The other three days, Sunday 10 July, Monday 11 July and Wednesday 13 July were at the higher end of declarations during the period examined.
18.	He then looked to calculate the average days’ takings on a Saturday to Wednesday to compare these with the five days of Z-readings on the audit roll. He did not include the daily gross takings which Mr Rizvi had declared for the period from 9 to 13 July 2005, as these were much higher than normal and would have affected the average. By comparing the average daily gross takings with the Z-reading on a like for like basis, he was able to calculate that Mr Rizvi was only declaring 57.86 per cent of the true takings.
19.	Mr Turnbull then applied this percentage to calculate the projected true takings on a monthly basis. Based on these projected true monthly takings Mr Rizvi would have exceeded the VAT threshold of £58,000 during the month of April 2004 and therefore would have been liable to register from 1 June 2004.
20.	Mr Turnbull telephoned Mr Rizvi and asked him to attend a meeting at Mr Turnbull’s office on 6 October 2005 in order to take part in an interview and discuss the findings. Mr Turnbull confirmed this by letter. On 6 October Mr Rizvi telephoned and requested that the meeting should take place at his premises instead.
21.	Mr Turnbull arrived at the premises at 1 pm and conducted a short interview. The purpose of the interview was to find out more about the business. He wished to know how Mr Rizvi could survive on a turnover of £50,000 per annum, as the business rates revealed by a checking procedure were £1948.20. Rent and rates together amounted to £16,000 a year. The start date for the business was shown as January 2003, but Mr Rizvi indicated that the actual start date had been 20 August 2003, when he had taken over the business from Asim Riaz. A check on the purchase of Mr Rizvi’s home showed that this had taken place on 30 May 2003. Mr Rizvi explained that he had paid £93,000 for the business; this was for fixtures, fittings and goodwill. This had been financed by family loans and a bank loan of £35,000.
22.	The business was open seven days a week from noon to midnight, although sometimes shut early or started late. There was one part-time member of staff who was unpaid and lived with Mr Rizvi. Sales were cash only. The float was £100. Mr Rizvi or his wife cashed up; daily gross takings were calculated by subtracting the float from the cash. The declarations could not be proved as no audit roll was retained. He explained that he did not use till rolls and that the person working on the till during the five days seen on the audit roll did not know how to use the till.
23.	Mr Turnbull put his findings to Mr Rizvi and explained how he had arrived at the calculations. Mr Turnbull also put it to Mr Rizvi that it was not credible to pay £93,000 for a business turning over £54,000 and that his float was nearly as high as his daily takings.
24.	In evidence, Mr Turnbull confirmed that he had checked whether any special events were occurring at the time of the Z-readings; there had been none, and additionally, takings would normally go down in summer. Mr Rizvi had offered no explanations other than referring to the person using the till being new to the shop and not knowing how to use the till.
25.	It appeared to Mr Turnbull that the person using the till had been well informed; X-readings had been taken, and there were various corrections, with sequences of figures which looked appropriate. Mr Turnbull was therefore not prepared to accept Mr Rizvi’s statement that the relevant person had not known what he or she was doing. Someone must have had a key for the X- and Z-readings. Mr Turnbull had not been able to establish whether Mr Rizvi had or had not been in attendance on those dates covered by the readings.
26.	Mr Rizvi refuted Mr Turnbull’s findings and became very agitated; he refused when asked to complete a Form VAT 1. Mr Turnbull told Mr Rizvi that he would compulsorily register Mr Rizvi and complete the forms on Mr Rizvi’s behalf. Mr Rizvi replied: “Do what you want.” Mr Turnbull confirmed in evidence that Mr Rizvi was ill; his speech was affected but he clearly understood what Mr Turnbull was saying. Mr Turnbull left the records which had been taken previously from the business; Mr Rizvi had signed the receipts for these earlier in the meeting. Mr Turnbull left Mr Rizvi’s premises at 1.30 pm, having left a copy of the findings. He then returned to his office, where he completed and signed a pro-forma VAT 1 and forwarded it to Customs’ Newry office.
27.	On 12 October 2005 Mr Turnbull wrote to Mr Rizvi concerning the basis of the compulsory registration and enclosed a copy of the pro-forma VAT 1; he indicated that if Mr Rizvi had any queries concerning the letter, he could contact Mr Turnbull. The Belated Notification Section at Customs’ Newry office wrote to Mr Rizvi on 7 November 2005 acknowledging the form and referring to liability to outstanding tax and penalties. The letter gave details of the reconsideration procedure, and provided information about appealing against the decision. On 10 November 2005 Mr Rizvi’s accountant on his behalf appealed against the decision in Mr Turnbull’s letter of 12 October. He applied for postponement of tax on the grounds of hardship. (We consider later whether this was appropriate.)
Arguments for Mr Rizvi
28.	In his Notice of Appeal, Mr Rizvi stated that he ran a small takeaway business as a sole trader; his turnover was less than the current VAT registration threshold of £60,000 a year. He had given all his turnover details to Customs showing that his turnover was below the threshold, but they had still compulsorily registered him, a decision with which he strongly disagreed.
Arguments for Customs
29.	Mrs Crinnion referred to the statutory basis for the requirement to register. Paragraph 1 of Schedule 1 to the Value Added Tax Act 1994 (“VATA 1994”) showed when a trader needed to notify liability to be registered once turnover had exceeded the threshold. Under paragraph 5(1) of that Schedule, a trader becoming liable to register as a result of exceeding the turnover limit was required to notify Customs within 30 days of the end of the month in which the limit was exceeded. Paragraph 5(2) imposed a mandatory requirement on Customs to register a trader who had exceeded the limit, whether or not he had notified them; the registration would take effect from the end of the month following that in which the limit had been exceeded, unless an earlier date was agreed.
30.	She reviewed the history of the decision to register Mr Rizvi. It had been based on his own daily record. Daily average takings had been extracted. On 6 October 2005 Mr Turnbull had put his findings to Mr Rizvi, who had not been able to explain the entries on the till roll, including the alterations and corrections; Mr Rizvi’s only basis for challenging this had been his reference to a new member of staff being involved. There had been no Z-readings. No records had been kept for the period from September 2003 to July 2005. The average sales declared in the questionnaire had been £4,500. She argued that the figure for drawings of £148 was not realistic. Mr Rizvi had purchased the business for £93,000, while the takings were claimed to be £54,000.
31.	From March 2005 to July 2005, at a time when Customs were reviewing the position of the business, Mr Rizvi had not thought it prudent to keep records of daily takings and audit rolls. If it was Mr Rizvi’s case that the five days for which records had been extracted were exceptional, one would have expected records to have been preserved to demonstrate this. The till rolls showed X-readings increasing as each day continued; there had been one Z-reading. There were no other records. Surely there must have been some other records for the period from March 2005 to July 2005? An audit trail would have been needed for direct tax. On the basis of the evidence provided to the Tribunal, Customs had been correct to impose compulsory registration on Mr Rizvi; his appeal should be dismissed.
Discussion and conclusions
32.	In Mr Rizvi’s Notice of Appeal, his then accountant applied for a hardship direction. This was not appropriate, as section 84(3) VAT 1994 does not apply to an appeal under section 83(a) relating to registration. Further, no tax has yet been assessed. The only matter to be considered in relation to the present appeal is the decision to impose compulsory registration on Mr Rizvi.
33.	The Tribunal’s jurisdiction in relation to a decision of this type is limited to considering whether the decision was reasonable. The test to be applied in such cases is that in Associated Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223; did Customs take into account matters which they ought not to take into account, or omit to take into account matters which they ought to take into account? If the decision is not open to criticism on these grounds, the further question is whether the decision based on the matters properly taken into account was such that no reasonable authority could ever have come to it.
34.	Applying this test to the present case, we can see no grounds for suggesting that Customs took into account irrelevant or inappropriate matters, or failed to take into account relevant or appropriate matters. We regard Customs’ decision to impose compulsory registration on Mr Rizvi as entirely reasonable. The figures supplied in the completed questionnaire justified further enquiry, particularly because of the duplications of amounts appearing at different points in the list of monthly turnover totals. Once Mr Turnbull was eventually able to visit the premises, the absence of the records which he had previously requested should be made available meant that he needed to follow other lines of investigation; reference to the records not being “clean” was an added encouragement to carry out other checks. The records produced on 5 September were limited, covering the period from March to July 2005 only, with no audit or till rolls.
35.	We regard the process which Mr Turnbull subsequently followed to determine the extent of Mr Rizvi’s undeclared turnover to have been reasonable in the light of the limited information made available to Mr Turnbull. Other than this, we have no specific comments on the methodology employed.
36.	The meeting between Mr Turnbull and Mr Rizvi on 6 October 2006 gave Mr Rizvi an opportunity to challenge the conclusions which Mr Turnbull had arrived at on the basis of the available information. Mr Rizvi did not supply any further information to justify alteration of those conclusions. We consider that Mr Turnbull made proper allowance for Mr Rizvi’s health problems, both at the interview and in allowing an extended timetable for Mr Turnbull’s enquiries to be dealt with. We consider that Mr Turnbull’s decision notified to Mr Rizvi at the meeting and subsequently confirmed by the letter dated 12 October 2005, to impose compulsory registration on Mr Rizvi, was reasonable in all the circumstances.
37.	It follows that Mr Rizvi’s appeal must be dismissed. As mentioned earlier, this decision is made under Rule 26(2) of the Value Added Tax Tribunals Rules 1986. Under Rule 26(3) it is possible for the Tribunal to set aside this decision on application by Mr Rizvi if that application is made within 14 days of the release of this decision; if the application is granted, the appeal can be re-heard. Mr Rizvi should be aware that if he makes an application under Rule 26(3), Rule 26(4) states that a party who does so and does not attend the hearing of the application is not entitled to have the decision on that application set aside. In other words, if the Tribunal decides in his absence not to accept his application to have this decision set aside, he cannot overturn that further decision.

JOHN CLARK

CHAIRMAN
RELEASE DATE: 1 June 2007

LON/05/1163