ZERO-RATING – split between standard and zero-rated sales of café – based on one day’s invigilation – assessment reduced

LONDON TRIBUNAL CENTRE

	JOSENAM LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
					ROY JENNINGS FCA FTII

Sitting in public in London on 7 October 2003

B Kaye of Cecil Kaye, chartered certified accountants, for the Appellant

David Bettoney, Senior Officer, HM Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	Josenam Limited appeals against an assessment to value added tax of £32,131 plus interest made on 22 March 2002 for the periods 05/99 to 04/01.  During the hearing, an arithmetical error in the calculations was pointed out by the Tribunal as a result of which the assessment should be reduced and we deal with the question of figures at the end.  Mr B Kaye appeared for the Appellant, and Mr David Bettoney for the Commissioners.
2.	We heard evidence from Mr Haddad, director of the Appellant and two officers, Mr K Ofori and Mr K Jeffels.
3.	The Appellant carries on business as a café providing both eat in and take away food, mainly sandwiches.  The till has separate keys to record standard-rated and zero-rated items (the Appellant uses key 1 for drinks, key 2 for sweets, key 3 for sandwiches and key 4 for hot food and eat-ins), it produces a receipt for the customer but does not list individual transactions and gives a daily total of each heading.  There are 10 to 13 seats upstairs, 4 or 5 on the pavement outside and 15 to 20 seats in the basement that was refurbished about two years ago.
4.	Mr Ofori visited the Appellant’s premises on 28 August 2001 but there were no records there as they were with the accountants.  The reason for the visit was that the input tax claimed by the Appellant was high for the type of business (there may be a good explanation for this, such as buying equipment).  He and another officer visited again on 12 September 2001 and saw only a few daily totals from the till.  It is clear from the correspondence and the evidence that from the start relations between Mr Kaye and Mr Ofori were strained.  It is not for us to investigate the merits of each of their points of view but the result was that less information than might have been provided was made available to the Commissioners or unfortunately to us.  It was agreed that an invigilation would be made.  Mr Ofori and Mr Jeffels arrived (for obvious reasons) without prior appointment on 11 October 2001.  They examined till receipts for each transaction during the day and made a record of each transaction as it occurred.  This showed the following totals for the day: hot and cold drinks £253.40; sweets £58; sandwiches £390.83; hot food (including eat-ins) £284.10, total £986.33, resulting in standard-rated sales being (he calculated) 56.1% of the total sales (although we calculate it to be 56.46% if the proportion is VAT-exclusive standard-rated sales to total sales, or 60.37% if it is the proportion of VAT-inclusive sales, which is how the assessment is calculated).  These can be compared with the following totals from the Appellant’s records:
Average of the two Thursdays before and after: drinks £61.92; sweets £16.72; sandwiches £441.85; hot food and eat-in £111.03, total £631.51.  The invigilation day was therefore 409%, 247%, 88% (the zero-rated item), and 257% respectively of this average, with the total being 156% of the average.
Average for October 2001 excluding the invigilation day drinks £92.49 (invigilation 274%), sweets £19.60 (296%), sandwiches £480.25 (81%), hot meals £115.41 (246%). 
5.	During the invigilation, two platter sales were observed which the officers were told would be billed weekly or monthly.  These sales are therefore not included in the daily gross taking of the invigilation day.  They obtained from Mr Kaye a total of such sales for five VAT periods.  The Commissioners sent Mr Kaye a schedule proposing an assessment based on standard-rated sales being 56.1% of sales excluding platter sales.  Mr Kaye pointed out one arithmetical error in the schedule and repeated the point that he had made earlier that that 56.1% was high and it would be wrong to assume that what happened on one day was representative of the past.
6.	Mr Kaye objected to the invigilation sheets which had not been sent to him and had not been signed by the Appellant for identification.  Having heard evidence from both officers we do not find any substance in this objection, although it would have been helpful if the Commissioners had sent a copy of the invigilation sheets to Mr Kaye earlier, who may not have known that they would have done this if asked.
7.	At the hearing Mr Haddad contended that the invigilation day was unrepresentative because there was a rail strike that day, although this had not been suggested earlier in the correspondence.  Mr Ofori gave evidence that he came to work by train that day.  Mr Haddad then said that there was a tube strike that day.  Neither officer remembered this and said that if there was something different about the day they would not have made the invigilation.  Mr Haddad said that during the lunch break he had found reference to the tube strike that day on the internet.  Since the hearing the Tribunal has searched the internet (under thetube.com) and found a press release issued on 11 October 2001 which begins “London Underground are sorry for the disruption which will be caused tomorrow, [our italics] through strikes by the RMT and ASLEF unions over demands for almost 10 per cent pay increases.”  In the light of this we find that Mr Haddad was mistaken in saying that there was a tube strike on 11 October 2001.  Accordingly there is no evidence that the day was unrepresentative.
8.	We are concerned about the use of one day’s invigilation being applied to a long period.  However, the Commissioners did offer to do another day’s invigilation but Mr Kaye said in a letter of 11 December 2001 that while his clients did not object he could not see any point in doing this.  In the circumstances, we consider that it was reasonable of them not to do so.
9.	The effect of excluding platter sales from the takings before calculating the 56.1% of standard-rated sales is that these were not cash sales that day and so the percentage is referable to cash sales only.  Mr Haddad stated, and we accept, that when account customers paid these were included in daily gross takings on the day of receipt as sandwich sales.  The effect is that the 56.1%, based on sales excluding platter sales, is applied to sales on other days, which include platter sales, to calculate the assessment.  We consider that this is wrong in principle which will mean that the assessment is too high and will need to be recalculated.  Ideally this should be done by finding the figure for the day, the invoice for which should be in the Appellant’s records.  If not, it could be estimated either by taking a typical figure for the two lots of platter sales observed that day, or by taking the average percentage of platter sales to total (VAT-inclusive) sales for the periods for which we have the figures, which seems to be 3.7%.  We do not consider that the error is sufficiently serious to say that the assessment was not made to the best of their judgment.  The other error in the assessment mentioned above was that after deducting platter sales in five periods the 56.1% was not applied to the difference but the whole was brought in as standard-rated sales.  This is a purely arithmetical error and in our view does not mean that the assessment was not made to the best of their judgment.
10.	The differences between the invigilation day and other recorded days at the same time of year are enormous.  The invigilation day was the highest sales recorded in the Appellant’s records of daily gross takings from 4 September 2000 to 5 February 2002.  Hot and cold drinks were 409% of the average of the two Thursdays before and after, sweets 247%, sandwiches (the zero-rated item) 88%, and hot food and eat-ins 257% of this average.  This strongly suggests, assuming that the invigilation day is likely to be correct, that on the other days standard-rated items have been recorded as zero-rated.  The total sales being 156% of the average might also have suggested under-recording of sales, but this is not alleged by the Commissioners.
11.	These results are consistent with the Appellant wrongly keying standard-rated sales as zero-rated.  The Appellant has produced no evidence to satisfy us that there is anything wrong with the assessment in principle.  However the figures require to be recalculated to take account of the following:
•	Including platter sales for the invigilation day before calculating the percentage of standard-rated sales;
•	Checking the calculation of the percentage;
•	Amending the platter sales in the schedule for period 08/00 to £839.46 instead of £859.46;
•	Making sure that the figures are not included for periods 02/99 and 07/01 which are on the schedule but are not included in the periods assessed;
•	Correcting the arithmetic error in the schedule, which we still do not think is correct, for example we make the 05/00 period £2,939.88 not £2,974.66, although we appreciate that these corrections were made in a hurry during the hearing.
12.	We have considered once again whether the total of these errors means that the assessment was not made to best judgment and have concluded that there are, with the exception of the platters, mere arithmetic errors, which do not affect whether the assessment was made to best judgment.  
13.	Accordingly we allow the appeal to the extent of reducing the assessment to a figure to be calculated in accordance with this Decision but otherwise dismiss it.  If the parties cannot agree the recalculation they have liberty to apply to have the final figure determined by the Tribunal.

J F AVERY JONES

CHAIRMAN

LON/02/301