REGISTRATION – Compulsory re-registration of fish and chip shop – Suppliers’ records not reflected in Appellant’s records – Lengthy periods where no purchases shown – Accounts show turnover close to registration limit at all relevant times – Assessment made on basis records of two suppliers – Question of whether made to best judgment not before the Tribunal – Tribunal satisfied there had been some suppression – appeal dismissed
 
LONDON TRIBUNAL CENTRE

	THEODOLOS PAVLOU T/A THE FISHERMAN	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	MISS J C GORT  (Chairman)
						MR P D DAVDA FCA
					 	MR J G ROBINSON

Sitting in public in London on 12 June 2003

There was no appearance by or on behalf of the Appellant

Mr Robert Keller of counsel, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	This is an appeal against a compulsory re-registration of the Appellant for value added tax dated 18 December 1997.  

2.	The Appellant in his grounds of appeal states as follows:

“The Appellant states that a decision dated 4 February 1999 by HMCE to compulsorily re-register the Appellant for VAT on the basis that his turnover has been suppressed is incorrect.  The Appellant maintains that the method and calculations used by HMCE do not stand up to scrutiny and he has commissioned his own independent report disproving HMCE calculations method and theory.”

Background

3.	At the relevant time the Appellant carried on business as a retailer of fish and chips from premises at 233, Plaistow Road Stratford, London E15 3EN.  

4.	He was registered as a sole proprietor for value added tax with effect from 28 December 1989 until he applied for and was deregistered from 24 October 1995.  The Respondents subsequently re-registered the Appellant on 18 December 1997 with effect from 24 October 1995.  

The facts and evidence

5.	The Respondents produced a bundle of documents including photographs of the Appellant’s premises.  In addition the Tribunal heard oral evidence from Kenneth Norman Clark, senior officer of HM Customs and Excise and Jackie Gray, officer of HM Customs and Excise.

6.	Following the Appellant’s application to deregister, the Respondents undertook a test purchase on 24 October 1996 and ascertained that the shop’s opening hours were 1200-1400 hours and 1600-2200 hours Monday to Saturday.  Two staff were working on that occasion and a till was in use.  

7.	Mr Clark obtained the sales records of fish from the wholesaler “Atlantic Fish Wholesale Ltd” who had supplied fish to the Appellant during the period 1/11/95 to 31/10/96.  Similarly sales records of chicken to the Appellant from the wholesaler “Brook Farm Produce” from the period 31/10/95 to 13/5/97 were obtained and analysed.  

8.	Mr Clark, apparently by coincidence, discovered that the Appellant’s shop was advertised for sale with a local agent and the takings of the business were advertised as being £3000 per week.  However, since Mr Clark was unable to give the date of this advertisement, we do not take it into account for the purposes of this decision.

9.	On 13 May 1997 Mr Clark made an unannounced visit to the premises in the company of another officer.  

10.	Mr Clark returned two weeks later to examine the Appellant’s business records.  This visit was by arrangement and took place on 27 May 1997.  The Appellant’s accountant, Mr Singh, was present.  The records were examined and uplifted and the Appellant was left with self-invigilation sheets to complete.  On that visit it was confirmed that the business was not for sale.  In addition Mr Clark was told that no till rolls or Z-readings were used, cash was removed from the till during the day and often used to pay for stock, a further £40 was kept back, weekly takings averaged £900, the best day for business being Friday when between £250 and £300 was taken, the business normally stayed open until 2230 hours six days a week.  The Appellant would not agree to retain the till rolls.

11.	Mr Clark later made a comparison between the purchase invoices produced by the Appellant for the period 28/10/95 to 24/5/97 and the information obtained from the fish and chicken suppliers.  These comparisons revealed that a large quantity of purchases were missing from the Appellant’s records.

12.	It was Mr Clark’s opinion based on his experience that suppression of  purchases normally equated directly to the suppression of sales.  

13.	There were gaps in the Appellant’s records of supplies of stock whereby some weeks it showed no purchases of  potatoes, fish or pies had been made.  In particular the spreadsheet which Mr Clark had prepared showing the declared purchases showed that between 17 August 1996 and 7 September 1996 no purchases at all were made, and in the case of fish and the potatoes which were supplied from a firm called Masters, there had been no supplies after 3 August until 7 September 1996.  Mr Clark, in response to a direct question, informed the Tribunal that at no time had the business been closed.  This was not borne out by a report prepared by Messrs K&M Accountants acting for the Appellant, sent to the Respondents by Richard West Freeman Christofi, solicitors, in which it was stated inter alia that the business was closed for the last two weeks in August in 1996.  It was however acknowledged by K & M accountants in their report that there was a period of five weeks from 3 October 1996 to 15 November 1996 when there had been no purchases of potatoes and with regard to this the accountants stated as follows:

“… it will be difficult to explain how a fish and chip shop can operate without buying potatoes for five weeks.  Therefore, we suggest to admit that invoices for the purchase of potatoes, during those five weeks, have been lost or misplaced.”

14.	In order to verify the accuracy of the self-invigilation which the Appellant had carried out, Mr Clark arranged to have test purchases undertaken over a period of a week.  A total of three such purchases were made on 29 May 1997, 5 June 1997 and 6 June 1997.  In addition to the purchases made by the officers, purchases by other customers were observed. Mr Clark in his witness statement recorded that of twelve purchases which were observed, three did not appear in the self-invigilation records.  

15.	The invigilation was carried out by the Commissioners on 19 September 1997 which showed takings of £339.75.  The lunch time takings, as stated by the Appellant for that day, were £55, making a daily gross takings of £394.75.  The average takings declared by the Appellant for a Friday were £278.

16.	On 22 September 1997 Mr Clark and another officer held a meeting with the Appellant in which it was explained that various discrepancies had been noted (the notes of this meeting were not available to the Tribunal).  Mr Clark in his witness statement records that the Appellant stated that mistakes had been made during the officers’ invigilation and he believed the accurate takings figure to be only £343, he denied that any purchase invoices were missing from his records, he did not accept that any test transactions were missing, he maintained that he was trading below the VAT threshold and requested that another invigilation be undertaken.  Another invigilation was attempted on 18 November 1997 when Mr Clark and Ms Gray told the Appellant what they intended to do.  They were told by the Appellant that his solicitor had advised him not to allow them to remain on the premises and they therefore went outside the shop and carried out external observations from the pavement by the shop window.  A clear view of all the transactions was afforded.  The total days takings, including the lunch time takings of £45, was £160.05.  The average declared takings by the Appellant for a Tuesday were £128.

17.	Documents produced by Mr Clark were inter alia:

1.	A spreadsheet showing the declared and undeclared purchases from the Atlantic Fish (Wholesale) Ltd for the period 1/11/95 to 23/10/96, and the declared purchases from Brake Brothers, a company from whom the Respondents had been unable to obtain records of supplies to the Appellant, and therefore the Appellant’s declared purchases are taken as representing an accurate record. The combined total of the Atlantic Fish and Brake Brothers purchases amounted to £4,666.52.  The total of the undeclared purchases from the Atlantic Fish Company was £4,121.23. Mr Clark had calculated that the undeclared purchases amounted to 87.20%. In fact the true calculation is 88.3%, but Mr Clark’s miscalculation gave an advantage to the Appellant in the subsequent calculations he made.  

2.	A schedule of the missing chicken supplies covering the period 31/10/95 to 13/5/97. In this schedule where there is doubt about the invoice numbers because they were not clear the Appellant was given the benefit of the doubt.  This schedule showed the total of declared purchases as being £1,348.10 and the undeclared purchases as £1,126.76, giving a figure of 83.58% of undeclared to declared purchases.  

3.	The analysis of declared purchases which showed the gaps previously referred to in the purchase of fish and potatoes, inter alia.

18.	By a letter dated 20 November 1997 the Appellant’s solicitors wrote to Mr Clark complaining about the conduct of the officers in carrying out the invigilation and of  “veiled threats” to the Appellant as to what would happen should he not re-register for VAT. There was also a specific complaint against Mr Clark during his visit of 18 November in which it was stated that Mr Clark became rude and aggressive and told the Appellant that he had no intention of corresponding with the writer of the letter whom Mr Clark knew was acting for the Appellant.  There was a complaint about the manner in which the observation was carried out from outside the premises, including a complaint that Mr Clark and Miss Gray laughed hysterically, and stared at the Appellant and his customers in such a way as to make the Appellant feel threatened.  This caused the Appellant to complain to Mr Clark at the time about the conduct, but the behaviour continued until the shop closed.  No record of a complaint being made at the time appears in the notes we have seen.

19.	We note that in the course of this letter Mr Clark is specifically informed that the shop was shut during the summer for a period of three weeks (1997) when the Appellant went on holiday.  

20.	By a letter dated December 1997 the matters raised on behalf of the Appellant were responded to by a Mr A J Burley, officer of Customs and Excise, and it was specifically denied that there was any basis for the complaints made about the conduct of the officers on 18 November 1997, and it was also specifically denied that the Appellant had complained to the officers at the time.

21.	By a letter dated 18 December 1997 Mr Clark wrote to the Appellant (but not to his solicitors) informing him that he would be re-registered with effect from 24 October 1995.  He was also informed that he would be sent a VAT return which he should complete declaring the tax due.  He was told that if he did not do so, then Mr Clark would raise an assessment based on best judgment.

22.	The Appellant was informed of the following discrepancies:

1.	The level of purchases declared in the Appellant’s records are not reflected in the records of the suppliers.

2.	The invigilation on Friday 19 September 1997 showed daily takings of £398.80 which was £120 above the average Friday sales of £278.  In the course of that invigilation several customers were unable to purchase fish as the Appellant had “run out” and the business was closed early, at 2200 hours instead of 2230.  Several orders were served free of any payment.  

3.	The further invigilation on Tuesday 18 November showed an estimated amount of £145 in comparison with average takings on Tuesday of £123.  (In his witness statement Mr Clark had stated the takings for the day were £163, which he told the Tribunal was the correct figure.)

4.	There was an early closing of the shop on that day at 2055 hours, 1hr 35mins earlier than normal.  

5.	None of the test purchases made on 29 May 1997 were shown and two of the test purchases made on 6 June were missing from the self-invigilation sheets.  

6.	In addition to the missing purchase invoices for chicken and fish, the records showed large gaps in the Appellant’s purchasing records.  

23.	The schedules listed above were included with that letter.

24.	A further series of correspondence followed between the Respondents and the Appellant’s solicitors. On 3 March 1998 Mr Clark raised an assessment for value added tax in the sum of £25,818 based upon best judgment.  In his letter informing the Appellant of this assessment he attached a schedule showing that the assessment was based on an average suppression of 85.39%, being the combined average of the suppressed fish and chicken purchases for the period 25/10/95 to 31/1/98.  Mr Clark took the declared takings for the period 25/10/95 to 7/6/97, the declared average weekly turnover and applied a suppression rate of 85.39% to the estimated declared total turnover for a 34-week period of £31,990 combined with the actual declared takings of £75,197.50.  7/47th of the total amount of £198,713 amounted to £29,595 from which he deducted an input tax allowance of 12.76% which was based upon previous declarations, and this gave an assessment of £25,818. 

25.	Further correspondence followed, culminating in the sending by the solicitors of the report by K&M Accountants on 27 July 1998.

26.	The report by the accountants shows inter alia that the accounts for the year ended 30 April 1997 show takings as per the records of £46,254, and takings per the accounts £46,248.  The difference of £6 is said to be due to rounding up.  The Appellant’s gross profit percentage is said to be 59.41%.  It is claimed that the Inland Revenue and Customs and Excise expect fish and chip shops to achieve about 55% gross profit.  Mr Clark said that he was unaware of any possible relevance of gross profit.  The accountants also stated that it was appropriate to use the gross profit percentage to establish that the Appellant’s records were accurate.  It was submitted by the accountants that the assessment assumed that, as the Appellant had suppressed the purchases of fish and chicken by an average of 84.39%, they must have suppressed all the purchases on the takings by the same percentage.  It was suggested that this was not an appropriate method as several items were shown to have been purchased every week.  

27.	It was further stated in the report with regard to the weeks when fish was not purchased that, as frozen fish was used, fish did not have to be bought every week.  Furthermore some invoices in respect of the fish may have been lost or not received from the suppliers.  In order to achieve a 55% gross profit the Appellant would have needed additional purchases totalling £1,668.

28.	With regard to the purchases of chicken from Brook farm and the fish from Atlantic Fish the accountants say: 

“There is no doubt that the above purchases have been made by Mr and Mrs Pavlou.  Copies of the undeclared invoices from Brook Farm produce have been provided by the Customs and Excise. Also the undeclared purchases from Atlantic Fish (Wholesale) Ltd have been confirmed by the suppliers.” 

It was stated that undeclared purchases do not automatically mean that takings have also been underdeclared.  The reason why the purchases had not been declared was that some of the invoices had been lost or misplaced or not received from the suppliers and some of the purchases had not been for the fish and chip shop but for the Appellant’s family and relatives as well as their tenants.  Some 50% of the purchases were not for the business.  The accountant then made his own analysis and calculated that there was a gross profit of 53%, there were no additional takings and the Appellant was not above the registration threshold.

29.	Mr Clark invited the solicitors to provide the full names and addresses of the family, relatives and tenants allegedly receiving 50% of the purchases made to the business in order that they may be interviewed.  He also asked for sight of all purchase invoices and takings records for the period 1/4/95 to 30/7/98.  The solicitors responded with a letter dated 17 November 1998 giving the names of three people who could be contacted through the solicitors and who were willing to be interviewed.  No interviews took place with these people.  Mr Clark told the Tribunal this was because the solicitors stopped acting for the Appellant shortly after 17 November 1998.  In fact the solicitors were still acting for the Appellant up until 1 February 2000.

30.	At no point did the Appellant submit a return for the relevant accounting period.   The Respondents confirmed the decision to re-register the Appellant and, by a letter of 4 February 1999, informed him that a review of the assessment for the 01/98 period was not necessary as no appeal would be available to the Appellant until he had rendered a return for the period.  By that letter he informed the solicitors that he was prepared to examine any further evidence that the Appellant may wish to produce.

31.	The relevant registration limits were as follows:

30.11.94 to 28.11.95		£46,000
29.11.95 to 26.11.96		£47,000
27.11.96 to 30.11.97		£48,000

32.	Mr Clark in part based his assessment that the Appellant should be re-registered for value added tax on the fact that the accountants gave the Appellant’s takings for the year ended 30 April 1997 as £46,248 at a time when the registration limit was £48,000, it would therefore have taken only a very small amount of  suppression for the Appellant to have gone over the limit.  In addition the daily gross taking books for the periods 1992 to 1997 which had been analysed by Mr Clark showed that every year he was very close to the registration threshold.  Mr Clark accepted that he had made no allowances for any lost or misplaced invoices in arriving at his assessment.  

33.	In response to questions from the Tribunal Mr Clark informed us that the highest Friday sale declared was £345 which was in March 1997, and the highest Tuesday sale declared was £193 on 1 April 1997.
  
The Respondent’s case

34.	On behalf of the Commissioners it was submitted that it was reasonable to conclude that there had been suppression of sales where there had been substantial suppression of purchases, because the sales generated the income to make the purchases.  The Appellant’s records were clearly inaccurate and on the invigilation days the recorded sales had been high even though the Appellant had closed early and he had given away free orders.

35.	It was submitted that it was appropriate to take as a starting point the accountant’s record of takings as being £46,248 and the fact that for the duration of the business the annual takings had always been close to the registration limits.  

36.	Even if the purchases had been made for the Appellant’s friends, this would in any event constitute a taxable supply and this fact had not been mentioned previously by the Appellant.  

Reasons for decision

37.	This appeal is not concerned with whether or not the assessment raised was made to best judgment.  As the Appellant had not submitted a return for the relevant period, he had no right of appeal against the assessment. The Tribunal was initially concerned as to whether the Appellant had been aware that he only had the right of appeal against the re-registration, and not against the assessment.  We decided that it was clear both from the wording of the grounds of appeal, and the content of the Respondents’ letter dated 4 February 1999 that the situation was entirely clear to him.  In addition, at the time he lodged his appeal he had solicitors acting for him.  

38.	We are satisfied on the basis of all the evidence before us that the Appellant was not properly declaring his takings. Furthermore, although we have doubts about Mr Clark’s methods and methodology, in particular with regard to the raising of the assessment, nonetheless we are satisfied for the reasons advanced by Mr Keller that the amount of underdeclaration was sufficient such that, had the Appellant maintained true records, he would have been over the registration limits at all times. In all the circumstances therefore this appeal is dismissed.

41.	There is no order for costs.

MISS J C GORT
CHAIRMAN

RELEASED:

LON/99/206