18165

UNDERDECLARATION OF TAKINGS – incomplete returns – s.73(1) VAT Act 1994 – whether assessment made to best judgment – Van Boeckel v Customs and Excise Commissioners [1981] STC 290; Rahman v Customs and Excise Commissioners [1998] STC 826.

LONDON TRIBUNAL CENTRE

	MAGIC WOK LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Peter H Lawson (Chairman)
					 	Miss S Wong Chong FRICS

Sitting in public in London on 17 February and 3 April 2003

Mr K S Chan, Company Secretary, for the Appellant at both hearings

Mr C Wright, Senior Officer, for the Respondents at the first hearing and
Robert Kellar, Counsel, for the Respondents on 3 April 2003

© CROWN COPYRIGHT 2003

DECISION

1.	This is an appeal by Magic Wok Limited against an assessment for VAT dated 27 May 2002 in the sum of £20,353 plus interest of £2,675.49, a total of £23,028.49.
2.	There was a preliminary hearing on 17 February 2003 at which it was pointed out to Mr Chan that it would assist both him and the Tribunal to produce accounts not later than one week before the date agreed for the next hearing which was 3 April 2003.  He failed to do so.
3.	The Appellant Company carries on business as a supplier of hot food from premises at 65 High Street, Tunbridge Wells, Kent TN1 1XX.  It was registered for VAT with effect from 1 January 1996.
4.	On 23 May 2001, 13 July 2001 and 27 July 2001, five Customs officers, namely Gordon Goodall, Ann Linda Field, Heather Harris, Karen Mary Grandy and Jane Elizabeth Wilkin carried out a number of test purchases at the Appellant's premises and made observations during the test purchases.  A detailed comparison was made of the bills declared on each of the three above dates with the transactions recorded by the officers on the same dates, and this showed that on each occasion a number of purchases were not recorded.
5.	On 12 November 2001 Mr Goodall visited the Appellant's premises and spoke to Mr K S Chan and inspected the Appellant's records and accounts.  The results of the test purchases and observations were compared with the Appellant's records.  This showed that not all sales were recorded.  
6.	A further visit to the Appellant's premises took place on 19 November 2001 when Mr Goodall and Mrs Harris attended.  There they met Mr K S Chan and Mr Stylianou of the Appellant's accountants.  Most of the meeting concerned the point that a number of the meals taken by the officers had not been recorded.  After an exchange of correspondence between Mr Goodall and the Appellant's accountants, Mr Goodall agreed to remove the officers' purchases from the calculations of the tax underdeclared.
7.	The Commissioners, acting under s.73(1) of Value Added Tax Act 1994 assessed the amount of VAT due from the Appellant in respect of the period 1 March 1999 to 31 August 2001 in the figures given in paragraph 1 above.  The assessment was calculated by comparing the declared sales with those observed by the officers and the sales not accounted for being expressed as a percentage and that percentage being applied to the output tax declared on the submitted VAT returns.
8.	In the Notice of Appeal the Appellant contended that the assessment was estimated and was based on figures fabricated by the Customs officers and the allegations made by them were false and misrepresented.  Further, in a letter dated 12 June 2002, the accountant additionally said that the grounds included the fact that the assessment was estimated and excessive and did not reflect the true position.
9.	The Commissioners contended that the assessment was made using best judgement.  The case officer, Mr Goodall, allowed the accountant full access to the officers' notes and had made allowances for the points raised by the accountant in response, including the removal of the officers' expenditure from the calculated underdeclarations.  All the Customs officers made Witness Statements.
10.	Mr Chan objected to all the Witness Statements and all the officers, except Officer Wilkin, gave oral evidence and were cross-examined by Mr Chan.  They had all individually made handwritten contemporaneous notes of their visits.
11.	Mr Goodall is an experienced officer, having been employed by the Commissioners for 23 years and having spent 11 years on VAT Assurance.  He has specific training in gaining assurance in relation to cash businesses.
12.	Mr Goodall prepared a comparison of the declared bills with the observations made by the officers on 23 May 2001, 13 July 2001 and 27 July 2001.  The analysis in each case showed that a number of transactions on each occasion had not been recorded.
13.	Mr Goodall, together with Officer Harris, visited Mr Chan on 12 November 2001 in order to ascertain how the business operated on a daily basis and how the VAT return figures were achieved.  They went on to examine the business records, comparing the VAT summaries to the return figures for periods 11/99 to 08/01.  They examined the meal slips for 23 May 2001, 13 July 2001, 18 May 2001, 19 May 2001 and 27 July 2001 and noted the daily takings for March 2001 to August 2001.  They took up the daily gross takings prime records for periods 05/01 and 08/01.  The notes of this visit were recorded in writing.
14.	On 19 November 2001 Mr Goodall, with Officer Harris, visited the Appellant Company's premises and clarified how the "Streamline" till was used and checked the time the machine was registering.  At that point it was 18 minutes slow.
15.	Mr Goodall and Officer Harris went on to present the detail of their analysis of the prime records of the daily gross takings for 23 May 2001, 13 July 2001 and 27 July 2001.
16.	Mr Goodall had some correspondence with the accountants clarifying points raised by them and this correspondence continued until April 2002.  On 27 May 2002, Mr Goodall wrote to the Appellant Company setting out the basis of the assessment which he then made, based on the observations made by him and his fellow officers the previous year.  The figures for purchases excluded the purchases by the officers.  The calculation showed that sales were understated by 33.92% and this figure was applied for each quarterly period from 05/99 to 08/01 inclusive, with two minor additions for officers' purchases in periods 05/01 and 08/01.  The total output tax accordingly due was £20,353.
17.	In cross-examining each of the officers, except Officer Wilkin, Mr Chan sought to suggest that the accuracy of their observations could not be guaranteed because they had consumed alcohol on the occasion of the visits in which they respectively participated.  All of them denied this and we accept their denial in each case.
18.	We are satisfied that the fact that the Streamline clock showed the time incorrectly did not affect the amount of the assessment.
19.	The correct figure for assessment was actually £20,359.46, £6.46 more than the original assessment, because of three minor adjustments which we need not detail.
20.	In cases of this kind the only question we have to decide is whether the assessment made by the Commissioners was made to best judgment within the meaning of s.73(1) of the Value Added Tax Act 1994.
21.	In the well-known case of Van Boeckel v Customs and Excise Commissioners [1981] STC 290 Woolf J held  that:

"(1)  In assessing the amount of tax due 'to the best of their judgment' within s.31(1) of the Act, the Commissioners were required to consider fairly all material put before them by the taxpayer and on that material make a decision which was reasonable as to the amount of tax due.  They were not required to make investigations so long as there was some material on which they could reasonably base an assessment, but if they did make any investigations, then they had to take into account the material disclosed by that investigation.  In the instant case it was perfectly proper for the Commissioners to make a test over a limited period such as five weeks and to take the results thrown up by the test into account in making the assessment.  It followed therefore that the assessment in question had been made by the Commissioners 'to the best of their judgment'."
22.	In Rahman (t/a Khayam Restaurant) v Customs and Excise Commissioners [1998] STC 826 Carnwath J held that:

"(2)  A tribunal should not treat an assessment as invalid merely because the members disagreed as to how the Commissioners' judgment should have been exercised.  A much stronger finding was required; for example that the assessment had been reached dishonestly or vindictively or capriciously; or was a spurious estimate or guess in which all elements of judgment were missing; or was wholly unreasonable.  Short of such a finding there was no justification for setting aside the assessment."
23.	In this case the enquiries were conducted by a very experienced officer, Mr Goodall, with the assistance of several colleagues.  They made careful notes of the transactions which took place during their respective visits on the dates stated and we have no doubt whatever that the assessment was made to best judgment.  The appeal is accordingly dismissed.  The Commissioners agreed to pay the Appellant's reasonable costs of the hearing on 17 February 2003, not exceeding half a day.  That apart, there will be no direction as to costs.

PETER H LAWSON
CHAIRMAN

RELEASED: 28 May 2003

LON/02/537