20537

VAT – ASSESSMENT – dispute on quantum - Appellant suppressed sales – assessment based on alleged admission of average  weekly gross takings and split between standard rated and zero-rated goods – preferred Appellant’s evidence on gross takings and split – no allowance given for notional input tax – Appeal allowed in part by reducing the assessment. 

LONDON TRIBUNAL CENTRE

	SERDANE OZCAN  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      SHAHWAR SADEQUE              (Member)	  

Sitting in public in London on 24 October 2007

Altan Zorba, accountant, for the Appellant 

Jonathan Davey, counsel instructed by the Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
The Appeal
1.	The Appellant was appealing against an assessment dated 30 January 2002 for unpaid VAT in the sum of £73,722 plus interest in respect of VAT periods 04/99 to 04/01 inclusive.
2.	On 14 March 2007 the Respondents reduced the assessment to £65,626 plus interest. The reason for the reduction was that the assessing officer had mistakenly used £7,000 as the Appellant’s gross weekly takings rather than the lower figure of £6,500 as stated in his notification letter. 
The Dispute
3.	The dispute was essentially about the amount of the assessment. There were three specific areas of disagreement between the parties:
(1)	The weekly gross takings;
(2)	The percentage split of weekly gross takings between sales of standard rated and zero rated goods;
(3)	Whether an allowance for notional input tax should be given. 
4.	No issue was raised about the validity of the amended assessment. The amendment was necessary to correct a clerical error made by the assessing officer.
The Hearing
5.	We heard evidence from the Appellant, and from Mr Steven Rasmussen and Mr Colin Sparkes for the Respondents. Mr Rasmussen was the officer who issued the disputed assessment. Mr Sparkes visited the Appellant’s accountants at their premises on 2 September 2002. We received a bundle of documents from the Respondents.
6.	At the end of the evidence but before hearing submissions we offered the parties an adjournment to enable them to discuss the Appellant’s business records held by her accountants at their offices. The Respondents declined our invitation.
Background
7.	The Appellant carried on business as a general store and off-licence in Bounds Green, London under the trading name of Andac Food and Wine. The store was open seven days a week between the hours 8am to 11pm. The Appellant was aged 22 when she started the business. The Appellant was registered as a sole proprietor under a transfer of a going concern with effect from 17 February 1999. The Appellant was deregistered for VAT purposes from 26 January 2002.
8.	On 3 April 2001 three officers from the Respondents’ Finchley Cash Team visited unannounced the Appellant’s premises for the purposes of investigating whether the Appellant had purchased non-duty paid alcohol. The officers seized a quantity of counterfeit Kirov vodka from the premises together with other brands of alcohol which the officers considered suspect. The estimated value of the duty evaded on the seized alcohol was £2,869.50. The Appellant told the officers that she purchased the alcohol from a cash and carry and from a man in the van who came to the premises from time to time. The officers also established there were no business records on the premises. One of the officers, Mr Rasmussen, issued the Appellant with a notice of seizure of the goods and a formal letter requiring the Appellant to maintain a record of daily gross takings. Mr Rasmussen also invited the Appellant to attend the Respondents’ offices in Berkeley House to produce any documentation  demonstrating that the seized alcohol was not  counterfeit or non-duty paid alcohol.
9.	On 18 April 2001 the Appellant attended the Respondents’ offices at Berkeley House where she was interviewed by Mr Rasmussen and Mr Dobson. The Appellant produced two invoices from Checksave Limited as evidence that the seized alcohol was purchased from a VAT registered supplier. The officers considered the invoices to be false. They then discussed with the Appellant the daily gross takings from her business. According to the officers, the Appellant stated that her normal average  weekly gross takings were between £6,500 and £7,000. 
10.	On 9 July 2001 Mr Rasmussen issued a letter informing the Appellant that an assessment in the sum of £73,772 had been raised. The assessment was based on the Appellant’s gross takings disclosure of 18 April 2001. Mr Rasmussen mistakenly used the higher figure of £7,000 rather than the lower figure of £6,500. Mr Rasmussen gave an allowance of 25 per cent for sales of zero-rated goods. Thus he  calculated the VAT due  on 75 per cent of the gross takings. The resulting VAT due for each period was then compared with the Appellant’s declared output tax, which produced a deficit of £73,776.91. As at 9 July 2001 the Appellant had failed to submit VAT returns for period 01/00, 04/00, 01/01 and 04/01. The Respondents formally issued the assessment on 30 January 2002. 
11.	On 5 February 2002 the Appellant’s accountants notified the Respondents that the Appellant intended to appeal against the assessment. The accountants also requested copies of the officer’s working papers. On 8 July 2002 the accountants submitted the Appellant’s VAT returns for 01/00, 04/00 and 10/01. The returns for 01/00 and 04/00 were not signed.
12.	On 15 July 2002 the Appellant’s accountants informed the Respondents that the Appellant’s disclosure of 18 April 2001 about weekly gross takings of £6,500 to £7,000 related solely to the Christmas period for 2000.  The accountants on behalf of the Appellant accepted that there had been an under-declaration of 25 per cent in the gross weekly takings for the VAT returns from April 1999 to October 2000.  The accountants stated that the Appellant’s average weekly gross takings for the quarters ending 01/01 and 04/01 were £6,672 and £5,906 respectively. The accountants considered that the Appellant’s sales during the period of assessment were split equally between sales of standard rated and zero rated goods. Finally the accountant noted that the Respondents’ assessment had not incorporated an extra amount for input tax which represented the VAT on the purchases for the undeclared sales. Using the above assumptions the accountants supplied the Respondents with a schedule of the VAT due from the Appellant for the periods 04/99 to 04/01, which showed that the Appellant was in a repayment situation. 
13.	Mr Sparkes dealt with the letter of the 15 July 2002 from the Appellant’s accountants. On 2 September 2002 Mr Sparkes visited the accountants where he was informed that the Appellant had sold the business and was out of the country due to personal problems. Mr Sparkes told the accountants that the Appellant’s calculation of the VAT due for the period of the assessment was totally unacceptable. Further the Respondents would not consider an allowance for notional input tax on the undeclared sales because they primarily consisted of sales of illicit alcohol. The Appellant would not have paid VAT and duty on her purchases of illicit alcohol. Mr Sparkes did not examine the Appellant’s business records held by the accountants. Mr Sparkes invited the accountants to contact him again when the Appellant returned to the United Kingdom. In June 2006 the Respondents’ National Missing Traders’ Unit advised Mr Sparkes that the Appellant had made contact with it. Upon receipt of this information Mr Sparkes sent a letter dated 27 June 2006 to the Appellant’s accountants confirming the content of their conversation on 2 September 2002.
14.	On 10 July 2006 the Appellant’s accountants submitted a formal notice of Appeal against the assessment. On the 1 December 2006 the Tribunal granted an application to extend the time limit in which to make an Appeal.
 Findings of Fact
15.	The Appellant admitted through her accountant that she had suppressed the gross value of sales  for the business during the period of the assessment.
16.	The Appellant sold alcohol which was purchased from a dubious source (a man in a van).  Some of the alcohol sold was manifestly counterfeit goods, in particular the purported Kirov vodka. Other alcohol sold was non-duty paid goods. We are satisfied that the Appellant would not have paid VAT on the dubious purchases of alcohol.
17.	The Respondents based their assessment on weekly gross takings of £6,500. This figure was derived from the interview with the Appellant on the 18 April 2001, when according to the Respondents the Appellant admitted that her normal average weekly takings were between £6,500 and £7,000.  The Appellant signed the statement, acknowledging that she made a full disclosure about the takings and co-operated fully with the officers. Further the Appellant accepted that an assessment would be based on her disclosure. The Appellant in evidence disputed that the figure of £6,500 to £7,000 given in her statement represented her normal average weekly takings. The Appellant insisted that the figure of £6,500 - £7,000 related solely to sales during the Christmas period for 2000.  She maintained that the average weekly sales figure for other periods was lower, particularly when she first started the business. 
18.	 We found the arrangements for and the recording of the interview unsatisfactory. Mr Rasmussen’s invitation to the Appellant to attend Berkeley House was not in writing. As was clear from Mr Rasmussen’s evidence in chief the purpose of her attendance was to discuss the seizure of the alcohol and produce documentation which may permit the return of the seized items. At interview the Appellant supplied invoices of alcohol purchases. The Appellant was not told by Mr Rasmussen to bring documentation about the weekly gross takings for the business. His letter of 3 April 2001 was a standard letter about the requirement to keep proper VAT records. The letter did not mention that the Appellant’s gross takings were under investigation. Further the letter did not require her to produce documentation about the gross takings for her business.  We are satisfied that when the Appellant attended for interview  on the 18 April 2001 she was unaware that she would be asked questions about the gross takings of her business. The record of interview was not  verbatim account. The record comprised two pages from a notebook with the last page devoted to the declarations about disclosure. The record dealing with the gross takings for the business was brief without context and contained no details of the questions asked. Mr Rasmussen was adamant that the Appellant’s admission of takings of £6,500-£7,000 referred to the average weekly takings throughout the duration of the business. 
19.	We find the Appellant’s evidence that her admission related solely to the Christmas period credible. She was likely to have a better recollection of an interview which took place over six years ago than Mr Rasmussen. An interview would be an exceptional event for the Appellant rather than a regular occurrence for Mr Rasmussen. Further the Appellant fore-warned the Respondents in July 2002 about her understanding of the scope of her admission.  The Respondents did not take any further steps to check the accuracy of the gross takings for the Appellant’s business.
20.	In view of our finding about the credibility of the Appellant’s evidence regarding the scope of her admission, we accept the Appellant’s evidence about the degree of  suppression of the weekly gross takings. Thus we hold that the suppression rate was 25 per cent in respect of the quarters from April 1999 to October 2000.  We agree with the Appellant that the average weekly takings for the quarters ending January 2001 and April 2001 were £6,672 and £5,906 respectively.
21.	Mr Rasmussen formed the view that the value of the undeclared sales was split 75 per cent sales of standard rated goods and 25 per cent for zero rated goods. Mr Rasmussen arrived at the 75/25 split from his observation of the lay-out of the Appellant’s business premises, and his previous employment experience as a stock manager for Tescos. Mr Rasmussen considered that the lay-out highlighted standard rated goods, such as alcohol, tobacco and sweets which in his view were the principal merchandise sold by the Appellant.   Mr Rasmussen pointed out that the Appellant’s competitors on the Parade at Bounds Green gave greater prominence to the sale of foodstuffs, particularly fresh fruit and vegetables. 
22.	The Appellant testified that her business sold a wide range of groceries including bread, dairy items and fresh produce, household goods, toiletries including disposable nappies, and alcohol. Two large fridges containing frozen products were located in the store. The Appellant stated that the sale of spirits was relatively slow, particularly when compared with beer sales. In her opinion it was common for bottles of spirits to remain unsold on the shelves for four to five months. The Appellant considered that the goods sold by the business were split equally between standard rated and zero rated goods.
23.	We find the Appellant’s evidence of the 50:50 split of sales between standard rated and zero-rated goods more persuasive than Mr Rasmussen’s proposed split of 75:25. We consider that the Appellant’s business was a general store and off-licence with each part of the business having equal prominence. We place greater weight on the Appellant’s knowledge of her business than Mr Rasmussen’s impression of the Appellant’s trade which was formed following a brief visit to the premises where the focus was on the sale of counterfeit goods. Further the Appellant notified the Respondents of the 50:50 split in July 2002 which was not followed up by the Respondents.
24.	The Appellant’s computation of 15 July 2002 incorporated a notional input tax allowance which was subtracted from the VAT on the undeclared sales. The Appellant estimated the notional allowance by deducting a theoretical mark up of 25 per cent from the revised figure for the Appellant’s sales of standard rated goods. The Appellant supplied no documentary evidence in support of the notional allowance.  The Appellant accepted that she could only find two invoices relating to alcohol purchases. Mr Rasmussen considered that the invoices were false particularly as the supplier of the alcohol, Checksave Limited, was de-registered for VAT from 1 July 2000, some four months prior to the date of the first invoice.
25.	Mr Rasmussen did not include a notional input tax allowance in his assessment. His reason for adopting this course was that the suppressed sales of standard rated goods related to illicit alcohol for which the Appellant had no records and did not pay VAT on the purchases.
26.	We consider Mr Rasmussen’s reasoning plausible. We find the Appellant’s calculation for notional input tax consisted of theoretical assumptions without a factual basis and unsupported by invoices of purchases. The Appellant ignored the factual reality that she was dealing in counterfeit and illicit alcohol and engaged in  suppression of sales. We hold that the Appellant has failed to satisfy us on the facts of this case that a notional input tax allowance was justified.
The Law
27.	Section 73(1) of the VATA 1994 sets out the Respondents’ power to assess for unpaid VAT:
“Where a person has failed to make any returns required under this Act ... or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him”.
28.	Section 83(p) of the 1994 Act deals with the Tribunal’s powers on Appeal in respect of an assessment which can be summed up as follows:
'First, whether the assessment has been made under the power conferred under that section; and, second, whether the amount of the assessment is the correct amount for which the taxpayer is accountable.'
29.	Lord Justice Carnwath in Customs and Excise Commissioners v Pegasus Birds Ltd [2004] STC 1509 stated that the Tribunal’s primary task on an Appeal against an assessment to VAT was to find the correct amount of tax. Lord Justice Carnwath offered the following advice (per curiam) to Tribunals when dealing with issues of best judgment:
“When faced with 'best of judgment' arguments in future cases the tribunal should remember the following four points.  (i) Its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer.  In all but very exceptional cases, that should be the focus of the hearing, and the tribunal should not allow itself to be diverted into an attack on the commissioners' exercise of judgment at the time of the assessment.  (ii) Where the taxpayer seeks to challenge the assessment as a whole on 'best of their judgment' grounds, it is essential that the grounds are clearly and fully stated before the hearing begins.  (iii) In particular the tribunal should insist at the outset that any allegation of dishonesty or other wrongdoing against those acting for the commissioners should be stated unequivocally; that the allegation and the basis for it should be fully particularised; and that it is responded to in writing by the commissioners.  The tribunal should not in any circumstances allow cross-examination of the Customs officers concerned, until that is done.  (iv) There may be a few cases where a 'best of their judgment' challenge can be dealt with shortly as a preliminary issue.  However, unless it is clear that time will be saved thereby, the better course is likely to be to allow the hearing to proceed on the issue of amount, and leave any submissions on failure of best of their judgment, and its consequences, to be dealt with at the end of the hearing”.
30.	The notion of best judgment under section 73(1) of the 1994 Act was considered in Van Boeckel v Customs and Excise Comrs [1981] STC 290.  Woolf J giving judgment indicated at 292 that in fulfilling their duties under section 73(1) the Respondents (i) had to perform their functions honestly and bona fide; (ii) had to have some material upon which they could base their judgment; (iii) were not required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which in the Respondents’ best judgment was due.
31.	Chadwick LJ in Pegasus Birds at paragraph 80 rejected the submission that where a tribunal has substantially reduced an assessment it must inevitably follow that the assessment was not made to best of judgment:
In Rahman (No 2) the tribunal had made their own assessment of the correct amount of VAT due from the taxpayer.  They had reduced the Commissioners' 73(1) assessment by about 50%.  The submission that I was addressing in paragraph 32 of my judgment in that appeal was to the effect that, where there has been a substantial reduction by the tribunal in the assessments made by the Commissioners on the same material, it must inevitably follow that the Commissioners' assessment was not made to the best of their judgment.  In rejecting that submission I said this:
'[32] ... But non sequitur: on a true analysis all that can be said is that the fact that, on considering the same material, the tribunal has reached a figure for the VAT payable which differs from that assessed by the commissioners requires some explanation.  The explanation may be that the tribunal, applying its own judgment to the same underlying material at the second, or "quantum", stage of the appeal, has made different assumptions--say, as to food/drink ratios, wastage or pilferage--from those made by the commissioners.  ... Or the explanation may be that the tribunal is satisfied that the commissioners have made a mistake--that they have misunderstood or misinterpreted the material which was before them, adopted a wrong methodology or, more simply, made a miscalculation in computing the amount of VAT payable from their own figures.  In such cases--of which the present is one--the relevant question is whether the mistake is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or is of such a nature that it compels the conclusion that no officer seeking to exercise best judgment could have made it.  Or there may be no explanation; in which case the proper inference may be that the assessment was, indeed arbitrary
Reasons for Decision
32.	Our primary task in this Appeal was to find the correct amount of tax payable so far as possible on the evidence before us with the burden resting on the Appellant. 
33.	In our findings of fact we were critical of some aspects of the Respondents’ methodology for arriving at the assessment. This was not a case where the officers concerned failed to exercise best judgment. We accept that the officers acted honestly and bona fide, and that they were not outside the margin of discretion inherent in the exercise of best judgment. Nevertheless their investigation lacked a degree of thoroughness and rigour normally associated with assessments performed by the Respondents. In truth the focus of their investigation was to catch traders dealing in illicit alcohol rather than carrying out assessments for unpaid VAT. As a result the process for interviewing the Appellant was flawed which undermined the reliability of the Appellant’s admission about weekly gross takings. The Respondents did not make the Appellant aware beforehand of the purpose of the interview in respect of the takings of her business.   The Appellant thought that the purpose of her attendance was to challenge the seizure of the alcohol which was corroborated by the evidence in chief of Mr Rasmussen.  The Respondents kept no verbatim note of the interview. Likewise the factual basis for the Respondents’ judgment on the appropriate split between standard rated and zero-rated goods was flimsy based on the general knowledge of the officer concerned. Finally the officers did not take appropriate steps in respect of the Appellant’s computation of the VAT due dated July 2002. Normally the Respondents when presented with new information would require the taxpayer to justify his position. In this case the officers concerned simply dismissed the computation as unacceptable which left the Appellant’s position unchallenged in certain material respects.
34.	The effect of the assessment lacking in rigour was that the Appellant had a smaller hurdle to jump in discharging the evidential burden for specific aspects of the Appeal. We found the Appellant’s evidence on weekly gross takings credible, particularly as her figure incorporated a substantial uplift for the value of the suppressed sales.  Her assessment of the split between standard rated and zero rated goods was more plausible than the impression formed by Mr Rasmussen, and appropriate to the nature of  her business. However, we found unconvincing the Appellant’s notional input tax allowance, which essentially was a theoretical construct of the Appellant’s accountants. The Appellant’s evidence that she had no invoices for the alcohol purchases except the two false Checksave Limited invoices undermined the validity of a notional input tax allowance. Further the notional allowance bore no relationship to the central facts of this Appeal which concerned deliberate suppression of sales and dealings in counterfeit and non duty paid alcohol by the Appellant.
35.	We determined the correct amount of tax payable on the evidence before us. It was not our job to search for better evidence. We offered an adjournment to the parties after hearing the evidence so that they could consider the Appellant’s business records held by her accountant. The Respondents turned down the invitation.
Decision
36.	  We, therefore, have applied the following findings of fact to determine the correct amount of tax payable:
(1)	 The suppression rate for weekly gross takings was 25 per cent in respect of the quarters from April 1999 to October 2000. The average weekly gross takings for the quarters ending January 2001 and April 2001 were £6,672 and £5,906 respectively.
(2)	  The split of sales between standard rated and zero-rated goods was 50:50.
(3)	No allowance for notional input tax which applied also to the quarters ending January 2001 and April 2001.
37.	We find the correct amount of VAT payable for the periods 04/99 to 04/01 is £24,695 (see Appendix A).
38.	We, therefore, allow the Appeal in part by reducing the assessment from £65,630.34 to £24,695 plus interest.  As this was a case involving deliberate suppression of sales we make no order for costs in favour of the Appellant. 

                          

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 17 January 2008

LON 2006/0953

SCHEDULE A

Period	 Disclosed Gross Takings 	50% Standard Rate	VAT on SR sales	 VAT Paid 	VAT Owing	
Apr-99	 £                       46,740.00 	 £            23,370.00 	 £          3,480.64 	 £2,283.28 	 £      1,197 	
Jul-99	 £                       65,681.00 	 £            32,840.50 	 £          4,891.14 	 £2,973.68 	 £      1,917 	
Oct-99	 £                       57,023.00 	 £            28,511.50 	 £          4,246.39 	 £2,785.73 	 £      1,461 	
Jan-00	 £                       60,950.00 	 £            30,475.00 	 £          4,538.83 	 £   703.00 	 £      3,836 	
Apr-00	 £                       61,132.00 	 £            30,566.00 	 £          4,552.38 	 £   653.00 	 £      3,899 	
Jul-00	 £                       69,620.00 	 £            34,810.00 	 £          5,184.47 	 £3,732.81 	 £      1,452 	
Oct-00	 £                       66,388.00 	 £            33,194.00 	 £          4,943.79 	 £3,559.63 	 £      1,384 	
01-Jan	 £                       86,736.00 	 £            43,368.00 	 £          6,459.06 	 £2,103.00 	 £      4,356 	
Apr-01	 £                       76,778.00 	 £            38,389.00 	 £          5,717.51 	 £   525.00 	 £      5,193 	
Total VAT Due				 £     24,695