10/06/2004 draft  MAN/02/261
	BEST JUDGMENT — Assessment section 73 VATA 1994 — suppression of purchases — whether to best judgment — appeal allowed

MANCHESTER TRIBUNAL CENTRE

 
 	
	S. J. P. GARGAN	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Mr  D S Porter LLB (Chairman)
						Mr N Farooq	

Sitting in public in Birmingham on the 7 and 8 May 2003

Mr Glynn Edwards tax consultant for the Appellant
 Mr Nigel Poole of counsel instructed by the Solicitor for the Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2003

DECISION

1.	The appeal against the disputed decision of the Commissioners assessing the Appellant to £17,552.40 plus interest representing VAT arrears for the period 01 March 1998 to 05 March 2000 under Section 73 of the Value Added Tax Act 1994 contained in a letter dated 29 May 2001.

2.	Mr Nigel Poole of counsel appeared for the Respondents and called Mrs Elizabeth Jayne Roper, Mrs Margaret Elizabeth Semple and Mr Philip Geoffery Andrews as witnesses.

3.	Mr Glynn Edwards tax consultant appeared for the Appellant and called Mr Roger Steggles, Mr Andrew Groom, Mrs Ann Dodd, Mrs Caroline Anne Gargan director and secretary, Mr Stuart John Peter Gargan Appellant, Mr Alan Basterfield accountant.  

4.	We were referred to the following cases:
1) Rahman (trading as Khayam Restaurant) v Customs & Excise Commissioners     (No. 2) [2002] EWCA Civ 1881
2) T Y McGurk Sports Limited & Commissioners of Customs & Excise 
    VTD 17599

5.	Mr Poole asked as a preliminary point whether he might call Mr Andrews and Mrs Roper both of whom may not be available to the hearing on the second day.  Mr Edwards confirmed that he would consent to that although he accepted that the evidence deduced by the Respondents prior to the hearing of all the evidence by the Appellant might cause some difficulties.

6.	An agreed bundle was presented to the tribunal.

The Facts
7.	Stuart John Peter Gargan (the Appellant) and Caroline Anne Gargan (Mrs Gargan) carried on business in partnership at a public house from premises at the Railway Inn, Dinmore, Hereford, HR1 3JB.  The Appellant was originally registered for the purposes of Value Added Tax under registration number 667 0842 14 with effect from the 23 July 1996 as a partnership and changed to a sole proprietorship with effect from 16 October 1996.  The Appellant subsequently deregistered with effect from 6 March 2000.  

8.	Mrs Elizabeth Jayne Roper visited the Appellant on 1 November 1999 and had inspected the Appellant’s records and accounts.  From the information obtained by her it appeared to her that the returns rendered by the Appellant were incomplete or incorrect and that output tax was under declared.  The visit was a routine inspection.

9.	She saw the previous three years accounts, noted that the till in the restaurant upstairs was not working and one of them was delivering Z-readings but no Z-readings generally were being taken.  The tribunal were referred to the letters at Folios 4, 5, 5a, 6, 7, 8 and the note at 41.  She suggested to the Appellant that he should keep Z-readings and she noted there was difference of £3,901 between the turnover in the accounts and the VAT returns.  The accountants confirmed that the discrepancy was as a result of deposits received for advanced bookings for Christmas and the New Year and goods used for own use (see Folio 7).  Mrs Roper advised that she had not received the final accounts for the year to 31 August 1998 and it was agreed at that point that £2,600 could be used as an adjustment for wet goods for own use and that these should be included in the VAT returns for the future.

10.	As there were no till receipts the mark-up on food appeared low.  She referred the matter to Mr Andrews as set out in the note of Folio 41 on the basis that the profit appeared to be understated by £25,000.  

11.	Before any further action was taken by the Respondents they were notified that the business had changed hands; the Appellant having ceased trading there with effect from 6 March 2000.

12.	Mr P G Andrews who had had the matter referred to him by Mrs Roper attended privately at the Railway Inn and noted that various people were going upstairs and that there was a till in use down stairs.  Mrs Roper had been advised that only one till worked and that the one upstairs was only used at weekends.  He went back to the Railway Inn after the Appellants had left and picked up their diary which showed bookings for the period that they were in the business.  Booking levels appeared much higher than the turnover indicated.  He did not however rely on the diary and nor raise this issue with the Appellants at all.  

13.	He decided to check two wholesalers, AMB Butchers and Brian Parry who sold fruit and vegetables.   He decided to use these two because there was evidence of cash payments and the volume of invoices could be checked reasonably easily.  At Folio 11 he produced a 55 page document which consisted of the invoices identified from AMB Butchers; a reconciliation of the invoices identified in the Railway Inn resulted in a short fall of £25,563.15.

14.	At page 11 (LV) he set out the result of his enquiry which showed that actual purchases from AMB during the period from April 1997 to March 2000 was £56,824.26.
The declared purchases from AMB in the records for the period from April 1997 to March 2000 were £36,837.66.
Undeclared purchases from AMB for the same period were £19,986.60
The undeclared purchases from AMB as a percentage of the declared purchases amounted to 54.26%  
The declared catering sales were 43.92% of total sales.

15.	His analysis then showed the total output tax; the amount payable for catering; with an undeclared balance showing a total of £25,563.15.  As this was capped prior to 05/98 the liability was reduced to £17,552.40 and he assessed the Appellant accordingly. He accepted under cross-examination that he had made no allowance for own use as he considered the figure far to large to be credible.  He accepted that the catering and the pub business had run separately until 2 March 1998 and for the period to 31 August 1998 no figures had been shown for invoices for AMB Butchers.  Thereafter there had been a continuation of the invoices shown in the books which were substantially less than the full invoices for AMB Butchers.

16.	Because of the suppression of purchases to AMB he had taken the view that a similar suppression must have taken place across the business and he had therefore worked out the assessment on that basis.  He had however not made an allowance for the actual figure for 05/98 and 08/98.  He treated these within the average to produce the 54.26 under declaration of purchases.

17.	Margaret Elizabeth Semple was the reviewing officer from Shrewsbury who had the information from Mr Andrews passed to her.

18.	Correspondence passed between her and Compton & Co represented by Mr Basterfield.  In her letter or 19 July (see Folio 20 on the second page) she set out at 6 the following “ I understand that your contention is, that the purchases assumed by Mr Andrews to have been used by the business, were partly for Mr and Mrs Gargan’s own use and partly for resale to customers.  In view of the level of unrecorded purchases, identified by reference to the sale invoice raised by your client, the unrecorded purchases were approximately 57% of all purchases made.  I think that purchases, which are entirely consistent to the normal trading of the business, could reasonably be assumed to have been used by the business as part of their normal trade.  With regard to the level of own  consumption your letter dated 17 January 2000 to Mrs Roper identified that the own use for your clients was £2,600 per annum, and this was said to be all wet goods.  I am therefore not clear what level of own use there was in relation to food.”

19.	In his letter of 20 August 2001 Mr Basterfield identified that food items were purchases on behalf of customers, which were not recorded as they were not treated as a business transaction.  

20.	 In her letter 12 September 2001 (see Folio 27) on the second page she stated “ I am still considering whether that all aspects of the assessment were in best judgment, and although I have some reservations on that point I will not make a final decision till I have all the information to hand.”  She confirmed that her concern was that Mr Andrews had not provided a large enough under declared percentage as he had not included the two periods 05/98 and 08/98 and the assessment should have been higher.  She produced to the tribunal a revised catering split for those periods showing the original calculation; the percentage excluding the periods 05/98 and 08/98; and the percentage including them.  The figures came out much the same.  These figures were not relevant to any decision on best judgment because they were produced after the decision had been made by both Mr Andrews and herself.  She decided that Mr Andrews’ decision was reasonable and that their statement as to “own use” was not credible.

21.	Mr Edwards on behalf of the Appellant called 3 individuals to give evidence as to the purchase of meat from the Appellants.

22.	Mr Roger Steggles confirmed that he came up from London most weekends to a house that they had in Hereford.  He went either weekly or certainly two weekly to the pub were he had a meal with Appellants.  He bought meat for himself and for his family from them.  In a note (see Folio 31c) he confirmed that he bought meat on a two weekly basis and spent about £60. In evidence in chief he indicated that he went on a weekly basis and could spend between £80 and £120.  We found his evidence less than credible. We believe, however, that he buys meat for his family but we do not think it is at the level that he suggested

23.	Mr Edwards called Mr Andrew Groom the son-in-law of the Appellants.  He confirmed that he, his wife and children attended at the pub on a regular basis and were provided with free meals.  He also confirmed that meat was bought probably two weekly and he spent between £40 and £50.

24.	Mrs Anne Dodds sister to the Appellant confirmed the same.

25.	Having heard the evidence of the 3 witnesses with regard to the purchase of meat from the pub, we are satisfied that meat was purchased from the pub but we are not satisfied that anything like the level suggested by the witnesses.

26.	Mr Edwards called Mrs Caroline Anne Gargan, wife to the Appellant. She gave evidence that she had worked in the bank for 14 years and had decided she would like to go into the restaurant business.  She ran the “Sidings” restaurant entirely on her own and she had registered herself and her husband for VAT purposes on the 24 June 1996 as a partnership.  (See Folio 1.)  

27.	She was subsequently advised by the accountant that they should register to separate businesses and she then registered separately on 16 October 1996.  She indicated that she was responsible for the accounts.  She was concerned that they needed to identify the food bought for their own use.  The accountant had recommended that they should separate this out because it was needed for income tax purposes.

28.	She therefore decided that she would use the invoices from AMB Butchers as the benchmark for all the supplies she and her family had for their own use.

29.	As the Butchers invoices arrived she calculated the value that week of all the food that they had used for themselves, which included food from the freezer company, Brian Parry for vegetables and the meat.  She indicated the total food for their “own use” would be around £450 to £500 a month.  She retained out of the invoices for the butcher that amount and paid those invoices personally and only accounted for the balance in the books.

30.	It had not been clear to the tribunal until that point that the invoices paid in this way for the meat did not in fact represent the last of the meat but represented the entirety of all items for their own use which were deducted from the butchers’ account as a matter of convenience.

31.	In a letter of 26 July 2002 (see Folio 37) Mr Edwards adjusted the team at Droitwich Business Centre of the system.  The “missing” meat invoices were his clients method of adjusting for the private purchases of all food stock.  

32.	Mr Poole conceded at this point that he had not appreciated that the suppression of the invoices did not represent a suppression as such but merely a payment of invoice representing use entirety of the food consumed by the Appellants for own use.

33.	The tribunal suggested to the parties that the case should be adjourned whilst they considered the implication of those facts.

34.	The parties returned to the tribunal and indicated that although there appeared to be a substantial change in the facts, they would like the matter to continue on 8 May.  It was agreed that the matter would continue the following day.

35.	In cross-examination Mrs Gargan confirmed that the domestic purchases were paid in cash she would assess at the end of each week the amount of purchases for own use.  She would then set that figure off against the next convenient invoices from AMB Butchers and identify them as weekly invoices.  If for example her figure for “own use” was £120 and there was an invoice for £70 and then a further one for £30 and another one for £50 then she would use the £70 and the £50 to make up £120 and ignore the one for £30 which would be entered in the books.  If she couldn’t find one in that week she would run it through to the following week.  She might then pay the whole bill at the end of the month or sometimes pay it during the month.  She accepted that it was not an exact system but the errors worked both ways.  She indicated that she paid in cash because she invariably had cash receipts for meat purchased on behalf of members of the family.  She used AMB Butchers and Brain Parry because Bookers were paid by business cheque as a cash and carry and Brake Brothers were paid by direct debit.  She insisted throughout her evidence that Mr Andrews was fully aware of the system.  She also indicated that the minute of the meeting (see folio 42) had not been seen by her or her advisors until shortly before the tribunal hearing and that it was not correct in some cases.  She felt she had made it abundantly clear that in taking out the invoices for AMB Butchers she was accounting for all expenditure for their own use

36.	She gave evidence to the effect that Mrs Kirk, who had taken over the business, had made life very difficult for them and at one stage she had asked the police to stop her interfering with the case.  

37.	Mr Alan Basterfield the accountant was called and confirmed that he had been in practice for 20 years. 

38.	He had made allowance £2,600 for wet goods an allowance for £2,600 for food for own use.  All the allowances had appeared in the accounts for the “Siding Restaurant” as a deduction on purchases, so that the purchase figure was a reduced figure.

39.	He had advised the Appellant that it was necessary to keep a record of purchases for  their own use and that he would have preferred to have applied this at the end of the year.  Mrs Gargan wanted to keep a weekly record as it would be more accurate.  He genuinely believed that Mr Andrews was fully aware of the system and that he didn’t therefore need to enlarge on it.  In the calculations of the purchases from AMB Butchers Mr Andrews had clearly indicated that he understood that there were purchases for catering as he had separated them in his calculations (see folio 11).  He believed that Mr Andrews deliberately chose to ignore the information he had been given.  It was cleared from his first letter that he believed that there were undeclared purchases and he had made his mind up.

40.	Mr Poole summed up on the basis that it was for the tribunal in the first instance to decide whether there had been a genuine misunderstanding and that the system operated by Mrs Gargan had genuinely been used for the purposes indicated by her; or whether Mr Andrews had never been given an appropriate explanation, and that his evidence and his letters and his note of the meeting on the 26 April 2001 were all consistent with that understanding. The tribunal could take the view as far as Mr Andrews was concerned
1)	that he chose to ignore the system but there was no good reason for him to do though as he was not acting dishonestly
2)	that he didn’t understand it
3)	the explanation was not given in the way they it has given to the tribunal

41.	He was surprised that Mr Basterfield had not chosen to explain the system (in simple terms).

42.	In any event whatever the system was there was no means of verifying the figures as these were decided on by Mrs Gargan on a weekly basis.

43.	As far as the supply of meat to other individuals apart from Mrs Dodd and Mr Groom the evidence given by Mr Steggle was not credible.  He changed his view from £60 every two weeks to £80 - £120 weekly.

44.	If the tribunal chose not to accept the evidence given by Mrs Gargan, then Mr Andrews’ assumptions were wholly reasonable.  From his calculation it was clear that purchases had been suppressed to suppress sales. This was familiar pattern where there  were no verifiable records.

45.	Mr Andrews had clearly had taken considerable care in his calculations and his method of arriving at the assessment was to best judgment (Folio 11).

46.	Mr Edwards considered, in summing up, the evidence given by Mrs Gargan was consistent and honest.  She had not wavered in relation to her operation of the system.  She wanted to have a system which she could verify on a weekly basis.  This would be necessary in any event for the VAT returns.  He referred the tribunal to Rahman (trading as Khayam Restaurant) v Customs & Excise Commissioners (No. 2) [2002] EWCA Civ 1881 and T Y McGurk Sports Limited & Commissioners of Customs & Excise VTD 17599.

47.	He accepted that Mr Andrews had not been dishonest or capricious but he did consider he hadn’t taken into account all the material he ought to have done.  On any showing the Appellant had to eat, and an allowance should have been made for purchases consumed for own use; those used for entertainment; and the private sale of meat.  These represented a substantial part of the assessment and lead to the view that the assessment could not have been made to best judgment.

Decision
48.	As suggested by Mr Poole we have considered the credibility of the system operated by Mrs Gargan.

49.	We found Mrs Gargan’s evidence totally credible, and although the system was less than sophisticated, it clearly suited her purposes.  We have no doubt that she took out of the records those elements of the purchases in AMB Butchers and Brian Parry, which she genuinely believed represented the entirety of her expenditure for own use; entertaining; and the purchase of meat.

50.	We are surprised that neither the Appellant nor Mr Basterfield elucidated that system.  It was not until Mr Edwards letter of 26 July 2002 (see Folio 37) that the system was described in anything like a comprehensible way.  

51.	Given that Mr Andrews would appear not to have understood the system at the time that he was making his assessment, the question is whether that failure would mean that the assessment was not to best judgment.  It is our view that on any showing Mr Andrews should have allowed a reasonable amount for own use.  The figures provided to us at the hearing in relation to the meat would have produced at least £160 spent every other week by the 3 witnesses.  This would have amounted to £2600 on the year.

52.	It is also clear from the evidence given by Mrs Gargan that she must have spent at least £450 a month for her own use and entertaining, which would amount to another £5,400.  Those two items together would have produced £8,000.  Armed with that figure Mr Andrews would have had to ask the Accountant to show exactly how that allowance was made up.  At that point, we have no doubt that Mr Basterfield would have identified the invoices held back for AMB Butchers and maybe Brian Parry, and it would have become clear that the whole amount was in fact the amount claimed for own use.  At that point there is no doubt that Mr Andrews would have appreciated the system operated by Mrs Gargan.

53.	As he did not make those enquiries, which he should have, we do not think that his assessment was to best judgment and we allow the appeal.

54.	Having allowed the appeal we award costs to the Appellant such costs to be agreed between the parties and failing agreement to be brought back to this tribunal.

D S PORTER LLB
CHAIRMAN
Release Date: