Value Added Tax – zero-rated supplies of children’s footwear – Item 1, Group 16 of Schedule 8 VATA 1994 – articles designed as footwear for young children – significance of sizing of shoes – meaning of “young children” – significance of sizing and styling requirements in VAT Notices 714 and 714A;  whether assessment made to best judgment – Section 73(1) VATA 1994 – method of calculating under declared VAT – whether conduct of Commissioners in investigation resulted in unreasonable or arbitrary assessment – appeal dismissed
LONDON TRIBUNAL CENTRE

	NICHOLAS ANDREW GURA (trading as VINCENT FOOTWEAR)  	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	MR A E SADLER	  (Chairman)
						MR M M SILBERT FRICS

Sitting in public in London on 24 April; 18, 19 August; and 26 September 2003

Mr David Bartlett of Counsel, instructed by Wetheralls, for the Appellant

Miss Nicola Shaw of Counsel, instructed by the Solicitor for the Customs & Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

The Appeal and the Decision

1	This is an appeal by Mr Nicholas Andrew Gura who carries on a trade as a retailer of shoes, trading as Vincent Footwear (“the Appellant”).  By an assessment dated 2 July 2001 the Appellant was assessed to VAT in the sum of £5,833 together with interest on that amount of £956.15, and the Appellant appeals against that assessment.  This case arises because the principal supplier of shoes to the Appellant supplied to him certain types of children’s shoes on a standard-rated basis, but the Appellant, in selling those shoes to his customers, sold them on a zero-rated basis, and claimed to recover the VAT charged to him by the supplier.

2	The Commissioners of Customs & Excise (“the Commissioners”) raised their assessment under the provisions of Section 73(1) of the Value Added Tax Act 1994 (“VATA”) on the grounds that the Appellant had zero-rated certain supplies of children’s shoes when those supplies should have been standard-rated, and that accordingly the Appellant had made incorrect returns of VAT.  The Commissioners used their powers to assess the amount of VAT due from the Appellant to the best of their judgment.

3	The Appellant appeals against the assessment on what are essentially three grounds, which may be summarised as follows:-

(1)	the supplies of children’s shoes in question were properly zero-rated in accordance with the law, and therefore the VAT returns made by the Appellant were correct, and the assessment should be discharged;
(2)	if, however, the supplies should have been standard-rated, then the assessment made by the Commissioners was not made, as is required by Section 73(1) VATA, to the best of their judgment, having regard to the conduct of the relevant officers of the Commissioners in their dealings with the Appellant and the investigation of these matters, and the assessment should be discharged;
(3)	if the assessment is upheld in principle on the basis that it was made according to the best of the Commissioners’ judgment, the basis of calculation used by the Commissioners to determine the amount of VAT due is flawed, and the sum assessed should be reduced to the sum of £1,347 plus interest.

4	We feel constrained to comment that, had good sense prevailed on both sides, this matter should not have reached the Tribunal:  the costs incurred by each party in what became a four day hearing must be entirely disproportionate to the difference between the parties as to the quantum of tax due.  We can understand that the Appellant felt aggrieved at the treatment he received from the officers of the Commissioners, particularly at the outset of their investigation when they were approaching the matter as possible civil evasion of tax, and where mis-communication between the parties added to the distrust on both sides.  We can also understand that the Commissioners wish to defend themselves from the allegations as to the conduct of their officers which formed the basis of the Appellant’s case that they had not exercised best judgment in making the eventual assessment.  The issues, therefore, are not trivial, and it was apparent from the hearing that both parties held strong views which were forcefully argued.  But a degree of objectivity on both sides would have put this long-running dispute into its proper perspective, and at least would have introduced some sense of proportionality between the amount of tax at issue and the costs of resolving the matter by recourse to litigation.  Since our decision, as will appear, is in favour of the Commissioners, they may feel vindicated in the stance they took, but if that is their view they should reflect on whether their conduct in the early stages of the investigation (where there are grounds for criticism, as we detail in para. 67 below) ultimately contributed to an intransigence on both sides which seems to have precluded the parties from reaching a sensible settlement before resorting to litigation and its attendant costs – particularly since, so far as we can observe, this is not a case where the Commissioners need a decision to determine a point of principle or resolve an uncertainty in the law.

5	As indicated, our decision is that we dismiss the Appellant’s appeal, and we set out in detail below our reasons for that decision.  In summary, it is our decision that the supplies of shoes in question made by the Appellant were standard-rated, not zero-rated supplies, so that the Appellant should have accounted for VAT on those supplies.  That decision requires us to consider whether the assessment was made to the best of their judgment by the Commissioners, as is required by Section 73(1) VATA:  on that issue, after careful consideration of the extensive evidence produced by both sides relating to both the appropriate method to be used for calculating the amount of under-declared VAT, and the information which is to be taken into account in quantifying that amount of VAT, we conclude that the amount shown in the assessment is the amount of tax properly due from the Appellant. That being so, it may not be strictly required to examine further the conduct of the Commissioners to determine whether the assessment was made to best judgment, but the matter was argued before us and it is our decision that, notwithstanding any criticism which may be made as to the failure of the Commissioners to ensure that the Appellant was informed of the seriousness of the potential case against him at the outset of the investigation into his affairs, the assessment which eventually resulted, and which is the subject of this appeal, was made by the Commissioners to the best of their judgment. 

The nature of the disputed supplies made by the Appellant 

6	The first matter for decision is whether the Appellant complied with the relevant VAT legislation in treating the supplies of children’s shoes in question as zero-rated supplies, or whether, as the Commissioners contend, he was required to treat those supplies as standard-rated supplies and therefore account for VAT on those supplies.  If the Appellant was correct in his treatment of those supplies, his VAT returns were neither incorrect nor incomplete, and there was accordingly no basis for the Commissioners to make an assessment under Section 73 VATA.

7	This appeal relates principally to sales of certain styles of girls’ shoes, and in relation to this first matter for decision the argument was concerned almost exclusively with girls’ shoes (in the calculation of tax due the Commissioners were not necessarily prepared to accept that the under declaration of VAT related solely to sales of girls’ shoes).  The Appellant’s evidence was that he purchases the children’s shoes for sale in his shop predominantly from the well-known manufacturer Clarks – certain types of shoes, such a plimsolls, are purchased from other suppliers, but for the purposes of the appeal both parties proceeded on the basis that the dispute related only to certain of the shoes purchased from Clarks.

8	The Appellant purchased from Clarks during the relevant period certain styles of girls’ shoes, of sizes 5½ (adult sizing) or less.  The Appellant produced in his evidence the Clarks catalogue for the retailer for autumn/winter sales periods in 1998 and 1999, which included a general style of “Bootleg” shoes for girls, of which shoes of a style called “Vivid” were an example of shoes which were sold as zero-rated by the Appellant.  Clarks supplied those shoes to the Appellant as standard-rated in the case of shoes of sizes 2 and over.  It is the Appellant’s case that shoes of this and similar style should be zero-rated because it is intended that they should be worn by young children, and the sizing of the shoes is not relevant.

9	The statutory provisions on this point are simply stated:  Section 30 VATA sets out the rules for the zero-rating of supplies, and provides, in subsection (2), that “A supply of goods or services is zero-rated by virtue of this subsection if the goods or services are of a description for the time being specified in Schedule 8 or the supply is of a description for the time being so specified.”

10	Item 1 of Group 16 to Schedule 8 VATA provides as follows:

“Articles designed as clothing or footwear for young children and not suitable for older persons”

Thus supplies of such articles of footwear are zero-rated supplies;  and supplies of any other articles of footwear, not being zero-rated supplies, are standard-rated supplies.

11	Both parties accept that, to fall within Item 1 of Group 16, the footwear must comply with two conditions:  it must be designed for young children; and it must not be suitable for older persons.  Both parties also accept that the burden of proof in establishing both these conditions lies on the Appellant, as specified in the Tribunal case of Walter Stewart Ltd v HMCE (1974) 1 VATTR.

12	Before considering the submissions of the parties in relation to the terms of Item 1, it is necessary to look at the terms of VAT Notices 714 (April 1995) and 714A (May 1995).  These set out the detailed interpretation which the Commissioners give to the terms of Item 1 with the intention of standardising for wholesalers and retailers the VAT treatment of children’s clothing and footwear.  These were the published Notices for the periods relevant to this appeal.  The Appellant also referred us to the successor Notices (VAT Information Sheet 01/01, subsequently replaced by VAT Notice 714 (January 2002)), which came into effect on 1 April 2001.  These Notices are not, of course, part of the law – they are merely the Commissioners’ interpretation of the law, and represent guidance by the Commissioners (agreed with the appropriate trade bodies) for those who, on a daily basis, must seek to apply to the myriad ranges of clothing and footwear the succinct words of Item 1.

13	As to what constitutes “young children” for the purposes of Item 1, VAT Notice 714 (April 1995) states:  “Although the law does not specify exactly when a child ceases to be a ‘young’ child, it was agreed with the clothing and footwear trades when VAT was introduced, that the upper age limit of a young child would be taken to be the eve of the fourteenth birthday.”	

14	The general approach to the treatment of zero-rated footwear is stated as follows in VAT Notice 714 (April 1995):  “You can only zero-rate footwear which is both held out for sale specifically for young children, as set out in para. 5, and which is also not suitable for older persons.  Boys’ shoes are considered unsuitable for older persons if they do not exceed the size limits in Notice 714A.  Because of the greater overlap between young girls’ foot sizes and those of older girls and women, shoes designed for girls are only zero-rated unconditionally up to size 1½.  Above this size, there are certain additional styling requirements which must be met before you can zero-rate.  These styling restrictions, which are set out in Notice 714A, are intended to limit relief to footwear which is specifically designed, and suitable only for, young girls.”   (There was no issue in this appeal as to whether or not the relevant shoes had been held out specifically for young children.)

15	Thus in the case of boys’ shoes, the Commissioners consider that they are within Item 1, as designed for young children and not suitable for older persons, if they do not exceed a stated size (6½, according to Notice 714A) – this is so regardless of the style or design of the shoes.

16	For girls’ shoes, the position is far more complex, but can be summarised as follows: shoes sized up to and including 1½ are zero-rated irrespective of style or design;  shoes sized 2 to 3 are zero-rated only if certain styling conditions are met, relating to the maximum thickness of the sole, the maximum height of the heel, and the maximum difference between sole thickness and heel height;  shoes sized 3½ to 5½ cannot be zero-rated if they are open front and open back shoes:  otherwise they can be zero-rated if they meet the styling conditions relevant for shoes sized 2 to 3 and, additionally, have a bar or a lace fastening which must also comply with certain conditions as to style.  Thus for girls’ shoes, at least those above size 1½, both size and style are to be taken into account in order to qualify for zero-rating, according to the Commissioners’ interpretation of Item 1.

17	As mentioned, the Commissioners changed their interpretation as from 1 April 2001, “to simplify the rules and update the size limits to take account of the increasing size of young children”:  VAT Information Sheet 01/01.  These new “rules” were agreed with representative trade bodies.  In the case of shoes designed for boys, the size of the shoe remains the only criterion, and the upper size limit remains size 6½.  In the case of girls’ shoes, shoes sized up to and including 3 are zero-rated irrespective of style or design;  shoes sized 3½ to 5½ are zero-rated only if they are neither court shoes nor other types of shoes whose heel height exceeds the sole thickness by more than 4 cms.  Thus for girls’ shoes up to size 3, the size of the shoe is the only criterion;  beyond that, to size 5½, both size and (simplified) style features are to be taken into account.

18	In his evidence the Appellant produced two girls’ shoes purchased after 1 April 2001 and he also produced the relevant Clarks catalogue.  The style of one shoe was called “Manipulative”, and the other was called “Extent”.  Both were size 5½, and were very similar in style (and in particular in relation to depth of sole and height of heel, and the excess of heel height over sole thickness) to the “Vivid” style of shoe listed in the Clarks catalogue for 1998 and 1999 – the “Extent” style shoe had the same product number in the later Clarks catalogue as the “Vivid” style of shoe had in the earlier catalogues.  Both the “Manipulative” and the “Extent” shoe were shown as zero-rated in the Clarks catalogue, reflecting the changes in interpretation set out in the VAT Information Sheet 01/01 and the subsequent VAT Notice 714.  Thus Clarks, according to their catalogues, (and acting throughout in accordance with the interpretation of the Commissioners as to the terms of Item 1) sold this particular size and style of girls’ shoe as a standard-rated supply during the periods relevant to this appeal and up to 31 March 2001, and thereafter sold it as a zero-rated supply.  The Appellant had sold the “Vivid” style of shoe in all sizes as a zero-rated supply during the periods relevant to this appeal.  We were told that the Appellant had sold other styles of girls’ shoes, in sizes up to 5½, as zero-rated supplies notwithstanding that Clarks had supplied them to the Appellant as standard-rated supplies, but we were not shown examples of those other styles of shoes.

19	The Appellant’s first submission was that, for the purposes of Item 1, the expression “young children” does not, as a matter of binding legal definition, mean children below the age of 14.  He accepted that this had been widely used as the threshold age in applying Item 1 since the introduction of VAT.  He also acknowledged that in the Walter Stewart Ltd case this had been accepted as reasonable in the case of a girl’s outercoat, although the point had been conceded in that case by the representative of the appellant (a director of the company), so that the point was not the subject of legal argument.  The Appellant suggested that children up to the age of 16, as dependent children who were prohibited from carrying out full time work, might more properly be regarded as “young children” for these purposes.

20	In reply, the Commissioners agreed that the threshold age is not specified in law, as they concede in the relevant VAT Notices.  They argued that the finding on the point in the Walter Stewart Ltd case should, however, be regarded as persuasive and correct, since it has a rational basis.  Their contention is that a benchmark age to distinguish “young children” from “children” generally must give a proper and realistic sense to the meaning “young”, and that children aged 14 and over cannot realistically be described as “young children” – indeed, the benchmark of the eve of the fourteenth year may be regarded as generous (in the sense of favourable to the taxpayer) in delineating the boundary between “young children” and older children.

21	Apart from suggesting that the benchmark age should be related to the age at which children might cease compulsory education and begin full time work, the Appellant offered no reasoned submission nor any evidence in support of an argument that the practice of the last thirty years should be regarded as wrong in law and that a child of 14 or over should properly be regarded as a “young” child.  In our view, if Parliament had intended that clothing and footwear supplied to children in compulsory education should be zero-rated, that aim would have been achieved in language other than referring to them as “young children”.  
 
22	The Tribunal had this to say in Walter Stewart Ltd (1974) 1 VATTR 131 at 135:

		“Mr Stewart told us that for the purposes of design the Appellant adopted as its definition of the upper age limit of ‘young children’ the age of 14 years, based upon an answer to a Parliamentary question.  Whilst making no general finding thus defining such upper age limit, we are prepared to accept 14 years as being reasonable in the case of a girl’s outercoat, having regard to the clear purpose of Parliament in relieving young children’s clothing from value added tax as being to save parents’ expense during the period of rapid growth, which we observe from British Standards compilation BS 3728:1970, put in evidence before us, as commencing to decelerate after the age of 13 years.”

23	We see the good sense of that approach, and would need to be convinced that the same approach should not be adopted in relation to girls’ footwear of the kind which the Appellant sold and which is the subject of this appeal.  The burden is on the Appellant to establish his case, and he failed to convince us that the threshold age accepted in the Walter Stewart Ltd case was either wrong in law, or inappropriate in the context of girls’ footwear.

24	As mentioned, to fall within Item 1 of Group 16, articles must satisfy two requirements:  they must be “designed as clothing or footwear for young children” (sometimes referred to as “the design test”); and they must be “not suitable for older persons” (“the suitability test”).  It is for the Appellant to show that the girls’ shoes he treated as zero-rated satisfied both tests.

25	As to the design test, the Appellant accepted that in this appeal it is the intention of Clarks, as designers and manufacturers of the shoes, which is relevant.  He produced no evidence from Clarks as to their intention with respect to the shoes other than the catalogues they produced for their retail customers for the relevant periods, as referred to above.  The catalogues show the shoes as children’s shoes, rather than as adults’ shoes, although there is no explicit categorisation of shoes for “young children” or shoes for older children.

26	The Appellant’s case is that the size of the shoe should not be regarded as a factor in determining whether or not the shoe is designed for “young children”:  the design test should be satisfied by reference only to the style of the shoe.  If the shoe is designed for the “young children” market, it should not matter whether the child requires the shoe in size 1½ or size 5½.  Likewise, if the shoe is designed for that market, so that “young children” are buying that shoe, details of design (such as the height of the heel and the thickness of the sole) should not be relevant – “young children” (particularly young girls) are increasingly fashion-conscious, and require shoes which resemble those worn by older teenagers and young adults.   In this respect, he argues, the terms of Notice 714 (April 1995) and Notice 714A (May 1995), to the extent that they specify a size factor and relate that to a style factor, are not in accordance with the law.  The Appellant’s evidence was that he zero-rated sales of shoes if the shoes were marketed as for the children’s market and the sale was made to a child, irrespective of the size of the shoe or particular style features;  if an adult woman purchased for herself such shoes, he would standard-rate the sale.

27	The Appellant found support for his position in the changes in practice introduced by the Commissioners on 1 April 2001 (see para. 17 above) –changes which were not prompted by any change in the law.  As he demonstrated by reference to particular types of girls’ shoes, shoes of a size and style which the Commissioners claimed should be standard-rated up to March 2001 they were now accepting as eligible for zero-rating.  In the Appellant’s view this indicated that the previous interpretation of Item 1 by the Commissioners was accepted as wrong and inconsistent with the law.

28	The Commissioners argue that in determining whether a shoe is “designed for young children”, both size and style are features of design, and are therefore relevant factors.  They point out that “style” alone should not be seen as determining whether or not a shoe is designed for young children, since there will be some kinds of shoe (such as plimsolls or beach shoes) which are “neutral” in style (that is, the same style is worn by all ages), and if the size factor were not seen as relevant to design, they could never be zero-rated since they could not pass the design test.  In support of the argument that size is an important feature of design in applying Item 1, the Commissioners referred us to the Tribunal decision in Smart Alec Limited v CCE (VAT Decision 17832), which relates to the supply of school uniforms, and where the Tribunal held that the age of the child for whom the uniform is purchased is not relevant for the design test, but that the size of the uniform is relevant in determining whether the clothing has been designed for young children or for older children.

29	As to the intentions of Clarks as designer, the Commissioners argue that, in the absence of any other evidence, their intentions must be determined by reference to the VAT treatment they apply in their sales to retailers:  if they zero-rate certain shoes that is evidence that they regard those shoes as designed for young children, and, more relevantly for this appeal, if they standard-rate sales of certain shoes, those are shoes which are not designed for young children.

30		As for the change in practice made on 1 April 2001, it was submitted that the Commissioners, in interpreting the requirements of Item 1, must take account of changes such as the increasing size and growth rates of children, and changes in style in terms of what is acceptable as a shoe for a young child.  The practice set out in the VAT Notices is a pragmatic approach designed to provide certainty and consistency, but it is based on a reasonable interpretation of the law.  Any change in practice has to take effect on a specified day and that will inevitably result in anomalies in the sense that the selfsame article of clothing or footwear may be treated as standard-rated on one day and zero-rated the next, but that is not to say that the earlier practice was an incorrect interpretation of the law.

31	As for the suitability test (that the shoes are “not suitable for older persons”), the Appellant relied on the same arguments:  if Clarks were designing shoes for the market of young children, then it was fair to regard those shoes as suitable for that market, and not for the market of older children or adults.

32	The Commissioners argued that the Appellant had not discharged the burden of showing that shoes of the style he had sold as zero-rated were not suitable for older persons.  The difficulty lies not with shoes which are self-evidently young children’s shoes (such as children’s traditional sandals), but in shoes of a style which is acceptable to both young children and to older children and perhaps even adults – in other words, the type of girls shoes which Clarks may have supplied as standard-rated and which the Appellant may have sold as zero-rated.  In those cases size becomes the major factor in applying the suitability test.

33	We consider that the Appellant failed to show that the girls’ shoes of the type in question were designed as footwear for young children and not suitable for older persons.  We consider that the Appellant’s case, as we understood it, is simplistic in that it fails to deal with the crucial issue of where to draw the boundaries in the case of shoes which are acceptable, stylistically, to those under 14 and those aged 14 or over.  In the case of shoes which will not conceivably be worn by older children there is no difficulty in satisfying both the design test and the suitability test.  But where, say, young girls want to share the fashions of older teenagers or even young adults, so that the style of shoe does not in itself determine the boundary, then if size is disregarded, as the Appellant seems to argue, there can be no way to bring such shoes into the zero-rating definition.  This is the point recognised in the Smart Alec Ltd case, where the style or nature of the clothing (such as sweatshirts) did not intrinsically provide an answer to the question of whether the clothing was designed for young children – in such a case one looks to size as the element in the design which will help to answer that question.  It is entirely reasonable to do this, since, as the Commissioners argued, size is an integral feature of design in the case of footwear and clothing.

34	As the Appellant pointed out, there are difficulties in relying on size to establish the boundary line – most obviously the problem of the lack of uniformity in foot sizes in children.  It seems that the way in which the Appellant dealt with this was to decide whether the shoes in question were marketed at children, as per the Clarks catalogue, and then to take a view as to whether the purchaser was a child:  if so, he would zero-rate the sale regardless of style or size;  correspondingly, if the purchaser were an adult, he would standard-rate the sale, regardless of style or size.  The Appellant was no doubt aided in this in practice by his view (which in our decision is wrong) that children up to the age of at least 16 can be regarded as “young children”.  But that is the wrong approach, just as, in the Smart Alec Ltd case it was the wrong approach for the taxpayer to zero-rate clothing by reference to the age of the child.  Item 1 requires that we look to the nature (design – including size - and suitability) of the articles of clothing or footwear, not to the age or any other characteristic of the purchaser.

35	The Appellant understandably placed much emphasis on the changes in interpretation in the VAT Notices, and in particular the fact that girls’ shoes of a style he zero-rated in 1998 and 1999 (wrongly, in the view of the Commissioners, and contrary to the terms of the then current Notice) became zero-rated under the later interpretation enshrined in the revised Notices effective from 1 April 2001.  The Appellant saw this as an acknowledgement by the Commissioners that the interpretation given to Item 1 during the period relevant to this appeal was wrong, thereby vindicating his approach.  However, given the terms of Item 1 it is inevitable that, as fashions change, as young girls want a more adult style of dress to identify with the pop culture they seek to belong to, and as the relationship between growth rates and age change, the view of what is “designed as clothing or footwear for young children and not suitable for older persons” will correspondingly change.  The relevant VAT Notices represent the basis of interpretation, agreed between the Commissioners and the relevant trade bodies, as will reasonably apply the terms of Item 1 in a practical and consistent way to the children’s clothing and footwear market at that time.  Changes in that market will rightly require changes in the practical way in which Item 1 is applied.  Of course, there were no overnight changes in the market on 31 March 2001, and so an overnight change in practice can seemingly give rise to an anomalous result.  That, however, is the inevitable consequence of a practice which it may fairly be said tries to respond to change whilst delivering a consistent approach and certainty for suppliers and customers.

36	This is not to elevate the VAT Notices to the status of law, since, however convenient and pragmatic they may be, any of the “rules” they set out can be challenged if in any circumstance they give a result which it can be shown is in conflict with the terms of Item 1 as properly applied to that circumstance.  In this appeal, however, the Appellant was not able to put forward a convincing case that the approach he had adopted in seeking to apply Item 1 to the shoes in question was correct in law, and therefore he was in no position to seek to bolster his case by pointing to any changes resulting from the interpretation reflected in the later VAT Notice.

37	In conclusion we would add that in relation to this first ground of appeal there is, in our view, no injustice in need of remedy:  in relation to this particular matter the Appellant is a victim only of his own carelessness or lack of judgment.  In supplying the shoes to the Appellant Clarks separately invoiced each type of shoe, standard-rating or zero-rating it according (we presume) to the “rules” in the prevailing VAT Notice, so that the Appellant was on notice of the VAT treatment which Clarks thought was appropriate for each size and style of shoe.  Further, the Appellant will in all probability have been sent a copy of that VAT Notice by the Commissioners, and even if that were not the case, he can reasonably be expected to keep himself informed of the VAT treatment of the goods he sells:  at the very least he can be expected to see the discrepancy between the VAT treatment of the shoes by Clarks when they supply the shoes to him on the one hand and the VAT treatment he adopts in selling the shoes to his customers on the other.  His failure to reconcile that VAT treatment was either due to oversight on his part of something which should clearly have been apparent to him, or it was due to his taking the active step of forming a view of the law which led him to conclude that Clarks were wrong in law in standard-rating certain children’s shoes which by the proper application of Item 1 should have been zero-rated.  If the latter is the case the Appellant acted with a boldness which one might consider verged even on the reckless in taking such a view on a difficult matter of law without, as we understand was the case, seeking advice.

Was the assessment on the Appellant made by the Commissioners to the best of their judgment?

38	Since it is our decision that the Appellant, in zero-rating supplies of certain shoes which were properly standard-rated supplies, had not complied with the law, the Commissioners were entitled to assess the Appellant under the provisions of Section 73(1) VATA on the basis that his VAT returns for the relevant periods were incorrect.  In so assessing the Appellant, however, the Commissioners were required to assess the amount of VAT due from the Appellant “to the best of their judgment”.  If the Appellant can show that the Commissioners, in making the assessment under appeal, did not do so to the best of their judgment, the assessment must be discharged, subject to any direction we might make as to the proper amount of tax due.

39	In summary, the Appellant’s case on this ground of appeal is that the Commissioners did not apply best judgment in making the disputed assessment.  The Appellant argues that the conduct of the Commissioners throughout the lengthy investigation which they carried out leading to the assessment, and particularly during the early stages when the Local Fraud Unit was involved, was unreasonable, intimidating and vindictive.  He argues that the magnitude of the discrepancy between the original calculation of VAT due and the eventual figure appearing in the assessment supports his claim as to the unreasonable and capricious behaviour of the officers of the Commissioners involved.  He further argues that the Commissioners adopted the wrong method to calculate the under declared VAT, so that the amount assessed is incorrect and excessive and therefore the assessment was not made to best judgment.

40	The Commissioners defend their conduct.  They, in summary, argue that they carried out their investigation in a manner which was appropriate to the situation as it unfolded, and that in making the eventual assessment they used an appropriate method to calculate the under declared tax and in applying that method they properly took into account all the information revealed or disclosed in the course of the investigation including the information and representations made by the Appellant and his adviser.  It is therefore their case that they acted reasonably and fairly in making the assessment, and that, accordingly and having regard to the case law which sets out the standard of conduct required of them in order to exercise best judgment for the purposes of Section 73(1) VATA, the assessment made in this case was made to the best of their judgment and should be upheld.

41	We heard detailed evidence on this issue from the Appellant and his business analyst adviser, Mr Keith Grissett of Messrs Wetheralls, solicitors, and for the Commissioners from Mrs Mandy Hobbs and Mrs Louisa O’Bryan, the officers responsible for the investigation and assessment.  We also read the transcripts of the taped interviews of the Appellant by Mrs Hobbs and by Mr Michael Ellery (another officer of the Commissioners involved in the early stages of the investigation) on 15 March 2000 and 27 October 2000, and listened to a tape of that part of the interview on 15 March 2000 which the Appellant contended was oppressive conduct on the part of the interviewing officers.  We find the following facts from the evidence before us:-

(1)	The Appellant owns a small shoe shop in a precinct of Poole, Dorset and has carried on there since 1991 the business of retail shoe shop.
(2)	On 19 July 1999 Mrs O’Bryan, a Customs & Excise officer based in the Poole office of the Commissioners, visited the Appellant at his shop for the purpose of inspecting his business records for the year to 31 July 1997.  The visit lasted between two and two and a half hours.  The visit was prompted by VAT returns of the Appellant showing the Appellant as being in a net repayment position.  In the course of that visit Mrs O’Bryan established that the Appellant was identifying the VAT liability of sales made at the point of sale on the till by coding them as (1) Zero-rated children’s shoes; (2) VAT liable ladies shoes; and (3) VAT liable gentlemen’s shoes and sundry sales.  This coding was reflected in the separate display of shoes in the shop, and in the system of storage of shoes, in these categories.
(3)	In the course of her visit Mrs O’Bryan made various detailed calculations for the year ending 31 July 1997 relating to the respective proportions of sales declared in the Appellant’s VAT returns as zero-rated and standard-rated, and the respective proportions of purchases shown in the accounts as zero-rated and standard-rated.  These figures, when compared, indicated that the mark up on sales of standard-rated sales for this period was 12% whilst the mark up on zero-rated sales was 141%.  Mrs O’Bryan’s evidence is that these figures were discussed with the Appellant at the conclusion of the visit.  However, the evidence of the Appellant is that Mrs O’Bryan discussed with him only the till coding of sales, the segregated display and storage of shoes, and a general discrepancy between the accounts and the VAT returns.
(4)	In a letter dated 23 July 1999 Mrs O’Bryan wrote to the Appellant, referring to the visit on 19 July, and setting out “the points discussed” at that visit.  The first point concerns a discrepancy of £3,538 between the amount shown for sales in the accounts of the business for the year to 31 July 1997 and the amount declared as sales in the Appellant’s VAT returns for that period.  The letter then states:  “The second point was something we discussed in some detail and at the time of my visit you were unable to provide an explanation for the apparent discrepancy.”  There is then a schedule setting out the detailed figures and calculations giving rise to the different mark ups on the standard-rated sales and the zero-rated sales as referred to above.  The letter concludes with a request for a reply within the next 14 days, and an invitation to the Appellant to contact Mrs O’Bryan if he has any queries.
(5)	The evidence of Mrs O’Bryan, which we accept, is that this letter was signed, put in an envelope which was sealed and put out by her for posting in the standard office procedure, and she had no reason to believe that the letter was not posted in the normal way.  The evidence of the Appellant, which we also accept, is that this letter was never received by him.
(6)	In a letter dated 20 August 1999 Mrs O’Bryan wrote to the Appellant in the following terms:  “I refer to my letter of 23 July 1999 to which your reply is now overdue.  In the absence of a reply within the next 7 days, an assessment will be issued upon the difference explained in my earlier letter.”
(7)	Again, the evidence of Mrs O’Bryan, which we accept, is that this letter also was signed and put out by her for posting in the standard office procedure, and she had no reason to believe that the letter was not posted in the normal way.  Again, the evidence of the Appellant, which we also accept, is that this letter also was never received by him.
(8)	Despite the absence of any reply to her letter, Mrs O’Bryan did not issue an assessment.  She concluded that she did not then have sufficient information to quantify accurately and fairly any potential mis-declaration of VAT.  She therefore arranged with the Appellant a second visit to his premises.  This visit was carried out (together with another officer) on 27 October 1999.
(9)	The evidence of Mrs O’Bryan is that she cannot recall whether, in the course of the visit on 27 October 1999, she asked why she had not received a reply to her two earlier letters:  her assumption is that she did, as it would have been an obvious point to raise.  The evidence of the Appellant is that there was no reference to these letters, so that he remained unaware of their existence and content.  It is reasonable to suppose that if the subject of the previous letters had been raised, and the Appellant had made it clear that he had received no such letters, then Mrs O’Bryan would have supplied him with further copies, but there is no evidence that this was done.  The inference we draw is that the letters were not discussed, so that the Appellant remained unaware of their contents.
(10)	In the course of Mrs O’Bryan’s visit on 27 October 1999 she examined the Appellant’s purchase records in respect of purchases of zero-rated shoes from Clarks for the year to 30 June 1999.  From this information (comparing sale price to the Appellant with the retail sales price recommended by Clarks) she was able to calculate an average weighted mark up on sales of such shoes of 50%, a figure not reflected in the VAT returns.  Details of purchases of zero-rated shoes from Clarks for the preceding three years were examined, and from this information Mrs O’Bryan proceeded to make an initial calculation of the under declared VAT for the period 1 January 1997 to 30 June 1999.  Since the methodology Mrs O’Bryan used in this initial calculation was the basis of all later calculations which she made, including the calculation resulting in the actual assessment (after taking into account certain additional factors or information, as referred to below), it is necessary to detail the way in which she made her calculation, which was as follows:
(a)	From the Appellant’s VAT returns for that period she took the aggregate sales declared (net of VAT):  these totalled £304,871;
(b)	From the Clarks’ invoices of sales to the Appellant for that period she took the aggregate amount of zero-rated purchases (i.e. the sales by Clarks to the Appellant which the Clarks invoices showed as being zero-rated supplies):  these totalled £59,218.74;
(c)	These zero-rated purchases were marked up by the 50% average weighted mark up ascertained from the Clarks recommended retail price, as referred to above:  this gave total sales of zero-rated shoes of £88,828.11 (i.e. £59,218.74 x 150%);
(d)	The total standard-rated sales were then calculated, by deducting from the total sales as per the VAT returns (£304,871) the calculated total zero-rated sales (£88,828.11), giving total standard-rated sales of £216,042.89;
(e)	There was then calculated the “expected” output tax, i.e. the amount of VAT which would have been charged on the calculated total standard-rated sales of £216,042.89 (i.e. 17.5% of that figure), which is £37,807.51;
(f)	This “expected” output tax of £37,807.51 was then compared with the actual output tax declared of £18,147.53, and the difference (£19,660.98) was calculated as the amount of VAT under declared for this period from 1 January 1997 to 30 June 1999.
(11)	Mrs O’Bryan’s evidence is that she requested at the second visit details of stock on hand at 30 June 1999 (or at 31 July 1999, the financial year end of the Appellant’s business) in order to check whether the mark up of the amount of stock purchased from Clarks fairly represented the amount of stock sold.  No further information was given to the Appellant at that time (and in particular the Appellant was not told of the calculations referred to above), although the evidence of the Appellant is that he was asked at the end of the visit to indicate the split between his zero-rated and his standard-rated sales, and that he indicated that 60% of his sales were zero-rated.  On 4 November 1999 Mrs O’Bryan wrote to the Appellant referring to the visit and asking, “…if you would provide me with your stock figures as at 30 June 1999, or as near to that date as possible.  Details of this information will allow me make [sic] the required adjustments to your purchase figures.  A reply within the next fourteen days would be appreciated.”  The letter is stated to be copied to Pam Edwards (the accountant adviser to the Appellant – she had not previously been included in the investigation).
(12)	The Appellant’s evidence, which we accept, is that he never received this letter.  It is also his evidence that Ms Edwards never received a copy of this letter.  The evidence of Mrs O’Bryan (which we also accept) is that the letter was put out by her for posting, in accordance with standard procedure, and she had no reason to believe that it was not posted to the Appellant.
(13)	A “chasing” letter dated 23 November 1999 was sent by Mrs O’Bryan to the Appellant – again, never received by the Appellant.
(14)	At this point Mrs O’Bryan revisited the calculations and corrected them to take into account an error made in calculating the total net sales from the VAT returns.  Revised calculations were made (using the same method as set out above), resulting in a reduced amount of calculated under declared VAT, £18,581.73.  These revised calculations were not sent to the Appellant.
(15)	Mrs O’Bryan then, after discussion with her superiors, referred the investigation to the Local Fraud Unit of the Commissioners in Poole.  She told us that where there is an initial investigation which has revealed an under declaration of VAT of an amount exceeding £10,000, and there is the possibility that the under declaration is deliberate, it is the routine practice to refer the matter to the Local Fraud Unit.  Following referral, and as from 21 January 2000, the investigation was carried on by Mrs Hobbs and another officer, Mr Ellery, both of the Local Fraud Unit, in conjunction with Mrs O’Bryan.
(16)	There was no further communication with the Appellant until March 2000, when he was telephoned by the Poole VAT Office with a request that he attend a tape recorded interview.  There was discussion as to whether it would be feasible to hold the interview at the Appellant’s premises, but since the Appellant could not ensure that there would be no interruptions, it was agreed that the interview would be held at the premises of the Commissioners at Portcullis House, Poole.
(17)	Prior to the interview the Appellant instructed Messrs Wetheralls, solicitors, and Mr Grissett, a business analyst employed by that firm, then acted for him throughout the remaining part of the investigation.  Mrs Hobbs indicated to Mr Grissett, by a telephone conversation in advance of the interview, that the Appellant was under investigation for possible under declaration of VAT in circumstances where there could be civil evasion.  She indicated the likely scale of the under declaration, as appearing from the calculations made by Mrs O’Bryan, and explained that the investigation could extend to earlier periods, and that there could be penalties and interest assessed on the Appellant.
(18)	The interview was held on 15 March 2000 in an interview room adjoining the custody suite at Portcullis House, Poole.  According to the evidence of Mrs Hobbs, it is the preference of the Commissioners to conduct taped interviews in civil evasion investigations at the premises of the taxpayer under investigation.  The interview room used on this occasion is often used for taped interviews where there is a possible case of civil evasion (it has a sound recording facility and is soundproof), but is not necessarily used.  Interviews of this kind at Portcullis House are normally conducted in a conference room if it is available (which is where the second interview was conducted the following October).  
(19)	The Appellant described the interview room used for the March 2000 interview as “a cell”.  We saw recent photographs of the room, but there was disputed evidence as to whether at the time of the interview it was furnished in the same way as in the photographs.  It is a small room, with a desk serving as a table for the interview, four chairs, all chained to the floor, and tape-recording machinery.  The Appellant contends that at the time of the interview it was more austere in character:  that the chairs were wooden (and not upholstered, as in the photographs);  that the chains were more substantial than in the photograph; and that the floor was linoleum (or similar) covered (and not carpeted, as in the photograph).  We were told by Mrs Hobbs that the chairs are chained to the floor to comply with health and safety requirements – presumably to remove any risk of them ever being used as a weapon: the room is also used for interviews of those held by the Commissioners in custody.
(20)	The interview was conducted in accordance with the standard procedures of the Commissioners for taped interviews in civil evasion investigations, where the procedures set out in the relevant code of practice of the Police and Criminal Evidence Act 1984 are applied.  At the outset of the interview it was explained to the Appellant that the “PACE” procedures would be applied, with an explanation of those procedures but also with an explanation that the matter under investigation was not a criminal matter.
(21)	The interview was attended by the Appellant, Mr Grissett, Mrs Hobbs, and Mr Ellery.  Mr Ellery carried out most of the questioning.  It was made clear to the Appellant that he was being investigated for under declaration of VAT in relation to sales of children’s shoes, and that the investigation was a civil matter and not a criminal matter.  The Appellant was told that if the investigation revealed deliberate under declaration involving dishonesty, he would be liable to penalties in addition to the arrears of tax and interest, and he was given a copy of VAT Notice 730 (Statement of Practice, Civil Evasion Penalty Investigations) to read during the interview.  In illustrating the effect of the penalty regime and its mitigation Mr Ellery referred to a notional under declaration in these terms:  “…so if we said you owe us £50,000 we would want £50,000 plus interest as an assessment and a further £50,000 as a penalty….”   The Appellant was also told that if his under declaration arose from his innocent mistake, he would not be within the penalty regime.
(22)	The questioning during the interview was wide-ranging and included the following matters:  the conduct by the Appellant of his business;  the nature and extent of his business records;  the scope of the Appellant’s knowledge of the VAT treatment of children’s footwear and his awareness of the relevant VAT Notice;  the VAT treatment of supplies of children’s shoes by Clarks and by the Appellant;  certain credit and “returns” arrangements between Clarks and the Appellant (see below).  There was brief reference to the letters sent by Mrs O’Bryan and the failure of the Appellant to reply.  There was reference to the calculations made by Mrs O’Bryan and her estimate of approximately £18,000 of under declared VAT over the relevant period.  There was discussion of some calculations made by Mr Grissett and the methodology he adopted, and Mr Ellery agreed to use Mr Grissett’s weighted mark up figure of 65.93% in place of the 50% mark up used by Mrs O’Bryan in her calculation.
(23)	In the taped extract of the interview which we listened to as part of the Appellant’s case, at one point Mr Grissett intervened in Mr Ellery’s questioning of the Appellant to say that the manner and tone of Mr Ellery’s questioning was oppressive to the Appellant.  Mr Ellery’s response was that he had no intention of being oppressive, but that it was his job to challenge the Appellant’s explanation of any VAT irregularities to find out whether such explanation was reasonable.
(24)	On 28 June 2000, and as agreed at the conclusion of the interview, Mr Grissett sent to Mrs Hobbs an extensive analysis of the Appellant’s VAT records and accounts.  The analysis covered the period April 1996 to March 1999.  It took into account a number of factors affecting the weighted-average mark up (including stock turn, sales promotion periods and the types of returns for refund).  In particular, the analysis noted the distorting effect of the system of “worn returns” for children’s shoes, a system of refund offered by suppliers to small retailers of shoes to enable them to compete with large retailers:  the refund is given by the supplier to the retailer for shoes returned by customers on purchase of a new pair where the child has grown out of the old pair before they are worn out (but where the shoes are not faulty), provided the retailer returns the old pair to the supplier:  there is no corresponding credit given by the retailer to the customer.  Such refunds, if shown as a reduction in the cost of sales, distort the mark up calculation, so the analysis showed them as income (as though an incentive or marketing payment by the supplier).  Taking these various factors into account, the analysis prepared by Mr Grissett gives a mark up of 65.93%.  The analysis concluded that the Appellant’s “liability for under declared VAT lies in the region of between £2,000 and £7,400.”  This range is explained by an analysis of the VAT treatment of sales according to the categorisation of sales used in the till system operated by the Appellant on the one hand (giving the lower figure of £2,000) and an analysis of the VAT treatment of sales based on the VAT treatment of purchases alone (i.e. assuming all stock purchased was sold – giving the higher figure of £7,400).  
(25)	As a separate exercise, Mr Grissett calculated from the Appellant’s records that children’s shoe sales totalling £9,043.74 had been made as zero-rated supplies when those shoes had been purchased as standard-rated supplies, and that if those sales were treated as VAT-inclusive, the under declared VAT amounted to £1,347:  for the purposes of this calculation Mr Grissett used information relating only to purchases and sales of girls’ shoes.  (This calculation was explained in more detail in a letter written by Mr Grissett in the course of one of the adjournments of the hearing, as is referred to below.)
(26)	Further detailed information and calculations were supplied by Mr Grissett in response to requests made by Mrs Hobbs after she received the initial analysis.  In particular, in letters dated 31 August 2000 and 8 September 2000 Mr Grissett provided additional information about the system of “worn returns”, purchases from Clarks of zero-rated and standard-rated shoes, and sales and promotion periods.
(27)	Mrs O’Bryan made a further calculation, using the method set out above, but taking into account information as to zero-rated purchases, zero-rated credits, and “worn returns”, and the 65.93% mark up, all extracted from the analysis supplied by Mr Grissett, and making adjustments for opening and closing stock based on figures extracted from Mr Grissett’s analysis.  This calculation resulted in an under declaration for the period from April 1996 to March 2000 of £16,746 (rounded down).  This calculation was supplied to the Appellant in advance of a meeting with him on 27 October 2000.
(28)	The meeting on 27 October 2000 was a taped interview attended by the Appellant, Mr Grissett, Mrs Hobbs, and Mrs O’Bryan.  It was held in the conference room in Portcullis House, Poole.  Mrs Hobbs conducted the interview, and her questioning related to the till roll records and other accounting systems of the Appellant, the system of “worn returns”, and various other matters arising from the information supplied by Mr Grissett in his analysis.  Following the interview Mr Grisset supplied further information principally relating to purchases made by the Appellant from Clarks, and credit notes supplied by Clarks.
(29)	Mrs O’Bryan obtained directly from the VAT records of Clarks details of the zero-rated sales they had made to the Appellant for the relevant period.  These showed that Clarks had made more zero-rated sales to the Appellant than was apparent from the Appellant’s own records.  Mrs O’Bryan considered that it was fairer to the Appellant to use Clarks’ records rather than the Appellant’s records, as the Appellant’s records may not have been complete.  She made a further calculation (using the same method as described above) using the Clarks zero-rated sales figures, and this resulted in a reduced figure for under declared VAT of £13, 539 (rounded down).
(30)	On 5 April 2001 Mrs O’Bryan wrote to the Appellant with the calculations which resulted in this figure, and explaining that the calculations used figures obtained directly from Clarks.  She said that an assessment for £13,539 would be “issued shortly”, and stated that the case remained under investigation as one of civil evasion, and that penalties might be applied.
(31)	On 30 April 2001 Mr David Robertson of Wetheralls wrote to Mrs O’Bryan sending purchase figures obtained by the Appellant from Clarks, and commenting on discrepancies between these figures and those used by Mrs O’Bryan in her latest calculation, and suggesting that those discrepancies could perhaps be explained by rebates and cash discounts.  The letter also asserted that the calculation had not taken into account zero-rated purchases from suppliers other than Clarks, nor had it taken into account adjustments (in the form of deferral in VAT due) for stock turns (the holding period between purchase and sale of the shoes).  The letter included a calculation using Mrs O’Bryan’s method, but taking into account these various factors, resulting in an under declaration of £6,712.85.  In addition, the letter asserted that there was no evidence that the Appellant had deliberately evaded VAT; that no fault had been found in the Appellant’s records throughout the investigation; and that the Appellant had been subjected to an oppressive and intimidating interview at the outset and allegations which had proved to be wrong.
(32)	Following receipt of this letter, Mrs O’Bryan and Mrs Hobbs reviewed matters, and concluded that on the balance of probabilities it could not be shown that the Appellant had acted dishonestly.  On 11 June 2001 the decision was taken that the case should no longer be treated as one of civil evasion, and the Local Fraud Unit retired from the investigation.
(33)	Mrs O’Bryan made a further calculation (same method), using the Clarks sales figures given in the letter of 30 April 2001, and also the adjustments for credit items such as rebates and discounts included in the calculations provided with that letter.  The revised calculation did not take into account zero-rated sales to the Appellant by suppliers other than Clarks, as to which Mrs O’Bryan had no information.  Since the matter was now no longer one of civil evasion, the Commissioners were restricted in their right to assess for earlier periods under the three year “capping” rules, so the calculation was made for the period April 1998 to June 1999.  The revised calculation used the Appellant’s figures of zero-rated purchases from Clarks for the 12 month period to 31 December 1998, rather than an apportioned figure for the 9 months from April to December 1998 (a factor which benefited the Appellant in the calculation) since in Mrs O’Bryan’s view it was not possible to attribute exact figures to the 9 month period and time-apportionment would not necessarily be fair to the Appellant.  Also in favour of the Appellant she attributed the VAT due to the VAT quarterly periods ending 31 December 1998 and 30 June 1999 (rather than quarter by quarter over the period assessed), thereby reducing the amount of interest which would be payable by the Appellant on the under declared VAT.  The revised calculation resulted in an under declaration of £5,833.
(34)	On 27 June 2001 Mrs O’Bryan replied in detail to Mr Robertson’s letter of 30 April 2001, advising him that the matter was no longer one of evasion of tax, enclosing her revised calculation and confirming that she had used the Clarks figures supplied in that letter.  She stated that she had understood from the Appellant that Clarks were the main supplier of zero-rated shoes, but that she was prepared to take into account supplies made by other suppliers if the Appellant provided that information.  The Appellant has not supplied any such information, and the evidence of the Appellant in cross-examination was that such information would be of minimal relevance to the calculation.
(35)	The assessment in the sum of £5,833, plus interest of £956.15 was made on 2 July 2001.
(36)	On 12 May 2003 (during the period of adjournment after the first day of the hearing of this appeal) Mr Grissett wrote to the Commissioners in response to a question put by Miss Shaw for the Commissioners at the hearing, asking him to explain the basis of his calculation that the under declared VAT amounted to not more than £1,347 (see (25) above).  He explained the calculation as follows:  from the Appellant’s records the total purchase figure for girls’ standard-rated shoes for the relevant period was £4,665 (it being the assumption that these were supplies by Clarks which were standard-rated, but the Appellant then proceeded to sell the shoes as zero-rated supplies);  if this purchase figure is marked up by the agreed mark up margin of 65% it gives a sales figure of £7,697, and the VAT on such sales (had they been made as standard-rated sales – i.e. the under declared VAT) would be £1,347.  If the same method of calculation is made for the total purchases of girls’ and boys’ standard-rated shoes supplied by Clarks (totalling £7,996), and it is likewise assumed that the Appellant sold those shoes as zero-rated supplies, the under declared VAT would be £1,976 (Mr Grissett’s letter gives this figure as the result of this last calculation, although if the same, VAT-exclusive, calculation is made as in the case of girls’ shoes, the figure becomes £2,322 – it was not made clear to us why certain of the marked up sales figure should be treated as VAT-inclusive).

42	On the issue of whether the assessment was made by the Commissioners to the best of their judgment, Mr Bartlett for the Appellant submitted that the Commissioners acted unreasonably, capriciously and vindictively towards the Appellant, although not dishonestly.  The main grounds for this submission related to the early stages of the investigation, and in particular the failure of the Commissioners to inform the Appellant of the nature and scope of the investigation they were carrying out prior to the taped interview on 15 March 2000, and the circumstances and conduct of that interview.  He submitted that such behaviour on the part of the Commissioners, including the referral of the investigation to the Local Fraud Unit, was wholly inappropriate in the context of a taxpayer whose compliance history and conduct provided no grounds for any reasonable suspicion of dishonest conduct in his VAT affairs.

43	In detail, Mr Bartlett points to the failure of Mrs O’Bryan to advise the Appellant of the nature and consequences of her investigation at or following her visits to the Appellant’s premises on 19 July 1999 and 27 October 1999, and her failure at the second of those visits to explore why the Appellant had not replied to her letters seeking further information, which would have disclosed that those letters had not been received by the Appellant.  He referred us to the stress placed on the Appellant by the summons to a taped interview without the Appellant being made aware beforehand and in detail of the serious nature of the allegations made against him, so that he was not prepared for the severity of that interview.  He referred us to the taped interview of 15 March 2000:  to the interview room and its furnishings which the Appellant likened to a cell;  to the reference to the “PACE” procedures at the outset of the interview;  to the questioning style of the officers, which at times was oppressive;  to the reference to a liability to tax of £50,000 plus penalties of a further £50,000 – all of these features, in his submission, not only intimidated the Appellant, but reflected an attitude of mind and predisposed conduct on the part of the officers carrying out the investigation which was not consistent with their responsibility to exercise their best judgment.

44	Mr Bartlett also submitted that Mrs O’Bryan had not made out a case for the method she had consistently adopted in the various calculations leading up to the eventual assessment, and had failed to justify that method as against the alternative approach put forward by the Appellant.  In his submission, Mrs O’Bryan’s method of calculation was so flawed in principle that it not only resulted in an incorrect assessment, but it resulted in a discrepancy which in itself is suggestive that the assessment was arbitrary and therefore not to best judgment.

45	In her submissions on behalf of the Commissioners, Miss Shaw first referred us to the Court of Appeal decision in Rahman (trading as Khayam Restaurant) v Customs & Excise Comrs (No 2) [2003] STC 150, which, in her submission, requires that the Tribunal should focus on the question of the quantum of the assessment.  If on the evidence the assessment is substantially correct in its amount, there is no basis for arguing that it is made contrary to best judgment.  If on the evidence the assessment is not substantially correct, it is then for the taxpayer to show that the error in the assessment arises from conduct by the Commissioners which is arbitrary, dishonest, vindictive or capricious, or is based on a spurious estimate or guess or is wholly unreasonable (that is, applying the standards of conduct specified in the cases of Van Boeckel v Customs & Excise Comrs [1981] STC 290 and Rahman (No 1) [1998] STC 826).

46	In Miss Shaw’s submission, the Appellant had failed to show that the amount of tax assessed was excessive:  the Appellant had suggested an alternative method for ascertaining the under declared VAT, but had not shown that the method used by Mrs O’Bryan was unreasonable or otherwise wrong in principle nor that the detailed calculations were incorrect because of a failure to take into account the relevant information or numbers.  What was clear from the evidence was that the Commissioners had taken a great deal of trouble to assess all the information which they gathered, or which the Appellant supplied to them in the course of the investigation, and had reflected this in their calculations which resulted in the actual assessment.  Accordingly, the assessment is correct in its amount and cannot be regarded as made contrary to best judgment.

47	The Commissioners also argue that there was nothing in the conduct of the investigation, nor in the resulting assessment, which was arbitrary, dishonest, vindictive or capricious, so as to call into question whether the assessment was made to the best of their judgment by the Commissioners.  The initial enquiry was entirely legitimate, arising from a claim made to recover input tax where output tax was not accounted for, and the Commissioners were obliged to determine whether the resulting under declaration arose from deliberate and dishonest action on the part of the Appellant or from his honest mistake.  The initial investigation was referred to the Local Fraud Unit because the initial calculation indicated a level of under declaration suggestive of dishonest conduct, and the Appellant appeared unwilling to co-operate in that he did not reply to letters sent to him (the Commissioners were unaware that he had not received those letters).  The Commissioners strongly rejected any assertion that the interview on 15 March 2000 was conducted in a manner which was intimidating or oppressive, or that the Appellant had been treated as though it were a criminal investigation:  it was conducted in a room routinely used for taped interviews in potential civil evasion cases;  the taped interview procedures had been explained to the Appellant;  and the conduct of the interview was appropriate to its purpose, namely to ascertain, first, why the Appellant was selling shoes as zero-rated supplies when he was purchasing them as standard-rated supplies, and second, what was the scale of the under declared VAT.  The Appellant may have found it a difficult and stressful process, but viewed objectively, and in context, the conduct of the officers concerned was reasonable and appropriate. What was quite clear from the history of the investigation was that once Mr Grissett was brought in by the Appellant, and a full analysis made of the business, the Commissioners took into account at each stage, and with adjustments to their calculations, the points made by the Appellant and the further information made available to them.  Accordingly, the actual assessment, when finally made in July 2001, was the outcome of a careful process undertaken reasonably and as an honest and genuine attempt to establish the proper amount of the VAT which the Appellant accepted in principle was due if he had misapplied the law on zero-rating children’s footwear.

48	In reaching our decision on the best judgment issue we note the following observations of Chadwick LJ in Rahman v Customs & Excise Comrs (No 2) [2003] STC 150 at 168:

“In the usual case the tribunal will have the material before it from which it can see why the Commissioners made the assessment which they did;  and may have further material which was not available to the Commissioners when the assessment was made.  In such cases, as it seems to me, a tribunal would be well advised to concentrate on the question ‘what amount of tax is properly due from the taxpayer?’ taking the material before it as a whole and applying its own judgment.  If that leads to the conclusion that the amount of tax properly due is close to the amount of the assessment, the tribunal may well take the view that it would be a sterile exercise to consider whether the Commissioners exercised best judgment in making their assessment….It is in cases where the amount of tax found by the tribunal to be properly due is substantially different from the amount assessed by the Commissioners that the tribunal may think it appropriate to investigate why there is that difference;  and to seek an explanation.”

49	We have adopted that approach, and it is our decision that the assessment made by the Commissioners is an assessment of the amount of tax properly due from the Appellant.  The Commissioners were able to show that the method of calculating the tax under declared was appropriate, and that in applying that method they had taken into account all relevant matters and information available to them from their own investigation or as provided by the Appellant and his advisers.  No further matters or information relevant to the calculation of the assessment were brought forward by the Appellant after the assessment was issued or in the course of the appeal.  The Appellant argued for a different result based on a different method of calculation, but we were not convinced that this method was correct in the circumstances of this appeal.  Nor were we convinced by the Appellant’s claims that the method of calculation used by the Commissioners was unreliable or inappropriate.

50	We have set out in para. 41(10) above the method adopted by the Commissioners to calculate the tax due.  It is convenient to describe it as a “top down” method, since it looks at the entirety of the business transactions of the Appellant for the relevant period in order to calculate the difference between the tax due taking all those transactions together on the one hand, and the tax declared as due in the relevant tax returns made by the Appellant.  By contrast, the method for which the Appellant argued (see para. 41(36) above) can be described as a “bottom up” method, since its starting point is those particular transactions where it is likely that the Appellant has sold shoes at a zero rate of VAT notwithstanding that he has purchased them at a standard rate of VAT.

51	As a matter of approach and perhaps also of principle, we see the advantage of the “top down” method adopted in this case.  The amount of VAT due must relate to the entirety of the business of the Appellant, and the merit of the method used by the Commissioners is that it encompasses all the transactions reflected in the Appellant’s business.  In outline, the calculation begins from the total sales of the business, and then identifies the amount of the zero-rated sales which should have been made, working from the actual zero-rated purchases marked up by the gross profit margin of the business;  from these figures it is possible to calculate the balance of sales (i.e. the aggregate standard-rated sales – what is not a zero-rated sale must be a standard-rated sale in this business, as there are no exempt supplies), and hence the amount of VAT which should have been charged had all those sales in fact been standard-rated sales.  In this way, those shoes supplied by Clarks as zero-rated supplies are fully taken into account and recognised as zero-rated sales by the Appellant;  likewise, those shoes which were supplied as standard-rated and sold as standard-rated are taken into account;  and those which were supplied as standard-rated and sold as zero-rated are identified in the difference calculation, as is the amount of tax thereby under declared.

52	The only significant objection which the Appellant made to this approach as a method was that it failed to identify the standard-rated transactions made by the Appellant in his business, except in arithmetic terms by subtracting the zero-rated sales (that is, the “corrected” zero-rated sales calculated from the zero-rated purchases as marked up) from the total sales recorded in the Appellant’s VAT returns.  In the Appellant’s submission that resulted in a failure to identify the correct proportion of actual standard-rated sales to actual zero-rated sales, which in turn affected the calculation of the mark up for the gross profit margin for the different types of sales.  That objection may have had some force if the Commissioners had used the resulting mark up as calculated for zero-rated sales despite evidence of a different mark up from the business records themselves.  The evidence is that they used the discrepancy in mark up between standard-rated and zero-rated sales to highlight an under declaration of VAT, but in making the actual calculation of mark up on zero-rated sales they initially used the “trade” average weighted mark up percentage (ascertained from the recommended sales price in the Clarks catalogue), and when subsequently shown evidence from the Appellant’s business records of the average weighted mark up for zero-rated sales in the Appellant’s business, that was factored into the calculation instead.  The Appellant did not show that the failure to identify actual standard-rated sales had any other consequence, or otherwise called in question the validity of the method adopted by the Commissioners.

53	The alternative method proposed by the Appellant takes as its starting position those sales specifically identified as girls’ shoes standard-rated supplies by Clarks to the Appellant, on the basis that it was such shoes that were then sold by the Appellant on a zero-rated basis – in this sense it is “bottom up” since it starts from individually identified supplies and builds from that to the overall picture.  The price paid by the Appellant for such supplies is marked up at the same gross profit margin, and the VAT which would have been paid on sales of those shoes at that marked up price is taken as the under declared VAT.  On the Appellant’s figures this gives an under declaration of £1,347.  There was an alternative formulation, taking all youths’ standard-rated supplies made by Clarks (that is, boys and girls), and the same method results in a calculation of the VAT under declared of £1,976 (or, perhaps, £2,322 if the calculation is made on the same VAT-exclusive basis as for the calculation by reference to girls’ shoes only) (although this calculation, in the form in which it was presented to us, may have been for a different – that is, longer – period).  But it seems to us that the very fact that the Appellant is not clear as to the exact starting point for his calculation (should it be girls’ shoes only, or all youths’ shoes supplied as standard-rated?) highlights the problem presented by his preferred method – to give the correct outcome it is necessary to identify exactly the transactions which have given rise to the under declaration.  It may not always be possible to do this with any degree of certainty, either because the business or VAT records are not accurate, or because it is necessary to make certain assumptions as to exactly what errors or mistakes the taxpayer has made which have given rise to the under declaration – this was acknowledged by Mr Grissett in his evidence, when he told us that the amount of tax under declared could exceed the amounts resulting from his method of calculation if there had been fraud or genuine mistake.  The difficulty, it seems to us, is that the issue which gives rise to the problem becomes the basis of the calculation which is then made to identify the scope of the problem.  This difficulty is particularly acute where the whole issue turns on drawing boundary lines, as in this case, between different categories of supplies.  If the wrong assumption is made as to what has given rise to the under declaration (if it assumed to be a mistake in the treatment of girls’ shoes, rather than all youths’ shoes, or if it is assumed to be a mistake in the treatment of youths’ shoes, but in addition there have been mistaken zero-rated sales of some adults’ shoes, for example), the calculation will merely reflect that assumption:  it will not give an objectively correct result.

54	The Appellant therefore failed to convince us that his method of calculation produced a more accurate result in determining the amount of under declared VAT in the circumstances of this appeal.  We consider that the method employed by the Commissioners is more likely in principle to produce an accurate result, since it takes account of the whole business of the Appellant and is objective in the sense that it does not rely on an analysis of what, in detail, the Appellant may or may not have done, but instead is based on the outcome of what he has done including the actual zero-rated supplies made to him.

55	It is not sufficient, however, that the Commissioners should have used an appropriate method of calculation:  they must have properly applied that method to the facts and circumstances in arriving at the assessment.  Mr Bartlett sought to make a point about the reasonableness of the Commissioners’ approach by pointing out that their initial calculation resulted in a sum of under declared VAT of approximately £19,600 whilst their final calculation resulted in an actual assessment of £5,833 .  (The point should be made that, because of the “capping” rules, the final calculation was for a significantly shorter period than that covered by the initial calculation – nevertheless, there is still a major difference between the initial figures and the eventual assessment figures, even when this different basis period is allowed for.)  However, the evidence of Mrs O’Bryan, as we have set out above, is that although she applied a consistent method, she applied that method to the changing information revealed by the investigation as it proceeded, whether it was information obtained from Clarks, or provided by the very detailed analysis of the Appellant’s business undertaken by Mr Grissett once he was brought into the case.  In the calculation the crucial changes were made in respect of the Appellant’s zero-rated purchases from Clarks, and from the evidence before us those changes or adjustments were made to reflect the actual supplies made by Clarks, the systems of credits operated between the Appellant and Clarks (including the unusual system of “worn returns”), the opening and closing stock adjustments and the stock turn.  In addition, in calculating what should have been the zero-rated sales (by way of mark up from the zero-rated purchases from Clarks), the Commissioners used the weighted average mark up percentage specified by the Appellant.  The Appellant, in the evidence of Mr Grissett, asserted that the final assessed figure did not fully take into account all these factors, but that assertion was not supported in any way, whereas the evidence of Mrs O’Bryan is that she used the information provided in the schedules attached to Mr Robertson’s letter of 30 April 2001 in making her final calculation, and the schedule produced to us in evidence appears to confirm that.

56	From the evidence before us, therefore, we conclude that, in arriving at the assessed amount, the Commissioners fairly applied the method of calculation to the relevant facts and circumstances of the Appellant’s business as disclosed or revealed in the investigation.  At the hearing there was no evidence that there were additional material facts or circumstances which were not available to the Commissioners at the time they made the calculation which resulted in the assessment, so that there are no grounds for us to recalculate the assessed amount to take account of any relevant matters or omissions which have come to light since the assessment was made.  For completeness, we should mention that in his letter of 30 April 2001 Mr Robertson refers to the absence of figures for zero-rated supplies made by suppliers other than Clarks:  in her reply of 27 June 2001 Mrs O’Bryan states her readiness to include such information in her calculations, but it seems that no such information was provided to her.  In his evidence at the hearing the Appellant stated that such supplies were not significant in his business, and we must therefore conclude that they would not be material to the calculation of tax due.   
	
57	We therefore confirm the assessment of £5,833 as being the correct amount of VAT for which the Appellant is liable for the period in question.

58	This being so, and following the approach suggested by Chadwick LJ in Rahman (No 2) referred to above of focusing on the correct amount of tax due, there may be no real purpose served in considering whether the assessment was made to best judgment so as to comply with Section 73 VATA.  However, that issue was argued at length and with vigour by both parties:  the Appellant clearly felt that he had been harshly treated by the Commissioners in a way which was inappropriate given his record of compliance and the honest mistakes, rather than dishonest conduct, which had resulted in the under declared VAT;  the Commissioners wished to defend their actions and to refute any suggestion that they had acted in an oppressive or unreasonable manner during the conduct of their investigations.  Their respective submissions are summarised above.  In view of the importance which both parties attached to this point it is appropriate for us to decide the matter.  There are also matters where the conduct of the Commissioners in the investigation is open to criticism, which we wish to note.

59	As Mr Bartlett acknowledged, the taxpayer has a difficult task in seeking to show that the conduct of the Commissioners has fallen short of the standards set out in the relevant case law, where an assessment can be shown not to have been made to best judgment only if it was arbitrary, dishonest, vindictive, or capricious, or based on a spurious estimate or guess, or otherwise is wholly unreasonable.  In the present case it is the behaviour of the Commissioners in the early stages of their investigation which was the focus of the dispute and the principal ground for the Appellant’s case that the Commissioners had failed to meet those standards.  For this reason we have set out in some detail in para. 41 above the evidence as to what occurred during those stages, and our findings based on that evidence.

60	What is clear is that the Commissioners felt that they had reasonable grounds, based on a preliminary investigation of the Appellant’s business records, for suspecting that the Appellant had not accounted for significant amounts of VAT.  It should be noted that the context in this case is (in VAT terms) relatively simple:  the supplier categorises the shoes for VAT purposes, and all that is required of the taxpayer retailer is that he sells the shoes according to the selfsame VAT categories.  If the taxpayer fails to do what is required of him in these (relatively simple) circumstances, one (although not the only) reasonable assumption as a basis for investigation is that he does so as a deliberate and dishonest act.  The Commissioners’ suspicions in this regard were reinforced by the apparent failure of the Appellant to respond to their letters calling for further information or for comment on their preliminary findings.  Their decision to investigate this case as a matter of possible civil evasion, using the specialist resources of the Local Fraud Unit, was therefore in our view reasonable given the way in which matters unfolded from their viewpoint.

61	The viewpoint of the Appellant was somewhat different:  there is some conflict in the evidence as to what was discussed with him by Mrs O’Bryan at the conclusion of her first visit to his premises, and at the second meeting at his premises, but it is clear that he received no written statement of the grounds on which he was to be investigated, or of the likely magnitude of the under declared tax, so that the gravity of the case, or at least of the suspicions of the Commissioners, was not apparent to him.  The first taped interview conducted at Portcullis House, Poole was therefore, understandably, a very stressful experience for the Appellant:  the brief telephone discussion which Mrs Hobbs had with Mr Grissett prior to that interview was hardly adequate preparation for the Appellant for the scope and tenor of the interview.

62	As to the conduct of that interview, we listened to the tape of that part which Mr Bartlett referred to as the “high water mark” of the oppressive conduct (as he contends) of the interviewing officers.  We have also read through the transcript of the entire interview, as Miss Shaw asked us to do, in order to place this extract in its context.  We have also taken note of what one might call the wider context, namely the location and furnishing of the interview room and the explanation of the procedures adopted for taped interviews by reference to the relevant “PACE” code, all of which contributed to the serious and very real apprehensions of the Appellant.  Whilst in no way seeking to dismiss or minimise the stress which the Appellant suffered, or the apprehensions and worries which the whole interview process raised in him, viewing that process objectively, and in the context of assumptions as to the Appellant’s behaviour which it was not unreasonable for the Commissioners to make at the outset of an investigation, we do not consider that the conduct of the Commissioners at or in relation to that interview was unreasonable, oppressive, vindictive or capricious.

63	As to the location of the interview room, we note, first, that the Appellant was given the choice of whether to be interviewed in his premises or at the Commissioners’ premises:  sensibly, in view of the practical constraints of a taped interview with a serious purpose which required the undivided attention of all those present, the choice was to hold it at the Commissioners’ premises.  We also note that the interview room used was not the first choice of the interviewing officers, although it was regularly used for interviews such as this when the conference room in the building was not available.  Therefore, although the room, located in the custody suite, might well have seemed forbidding to the Appellant (whether it was furnished as he recalls, or as we saw in the photographs), we do not consider that the officers concerned, in using that room, were taking action designed to intimidate or oppress the Appellant.

64	Similarly, in describing the taped interview procedures, with the reference to the “PACE” code, we consider that the officers were acting in accordance with routine, and appropriate, procedures.  At several points in the interview they made it clear that their investigation was not in relation to criminal matters, but into what was possibly a civil evasion case, and the Appellant was given the opportunity to read the Commissioners’ Notice on the procedures for such investigations.  We also note that the Appellant was accompanied by a representative of his solicitors, and no doubt to a degree the formalities of the procedure, and the explanation of them, were tailored to that situation, with the officers assuming that the Appellant would look to his adviser for further guidance or explanation in any case of doubt or lack of understanding on his part.

65	As to the interview itself, we consider that the officers concerned were pressing and persistent in their enquiries, and sometimes sceptical of the replies given, but not intimidating in tone, nor were the enquiries (either as to content or manner) unreasonable or inappropriate in the context of the investigation which those officers were making, and where it was a reasonable assumption (even if not the only possible assumption) that the Appellant could have acted dishonestly.  Their purpose was to make clear to the Appellant the likely scope of their investigation, the range of consequences (civil evasion with consequent penalties, or recovery of VAT with interest), and to find out how the Appellant managed his business and his accounts in the context of his VAT responsibilities.  We do not consider that the reference to a liability of £50,000 plus penalties of £50,000 was intended to intimidate the Appellant as an indication of his likely liability, since elsewhere in the interview reference was made to the figure of £18,000 arising from Mrs O’Bryan’s initial calculations.  In the overall context, and at that stage of the investigation, the officers were, as Miss Shaw put it, doing their job.  Their conduct was not vindictive or arbitrary, nor, in its context, was it unreasonable.

66	Thereafter, although the investigation by the Commissioners was lengthy, and was not without its points of difference forcefully expressed on the part of the Appellant’s advisers, matters proceeded on a calmer footing:  essentially, once Mr Grissett became engaged in the process on behalf of the Appellant, supplying detailed information about the Appellant’s business and challenging the assumptions and calculations made by the Commissioners, a reasonable dialogue was established, and the Commissioners concluded that the under declaration of VAT arose from the mistakes, and not from any dishonest conduct, of the Appellant.  As we have already mentioned in some detail, once the Appellant began supplying information to the Commissioners, that was carefully considered and taken into account in subsequent calculations:  Mrs O’Bryan held firm to the method of calculation which she considered to be correct, but applied that method to the details of the Appellant’s business as the information came to her attention, and in this she was not simply reactive to the Appellant, but made her own enquiries of Clarks to compare their records with those of the Appellant, giving the Appellant the benefit of any discrepancy. 

67	We were, however, troubled by one aspect of this case, and that was the failure of the Commissioners to follow up with the Appellant after the first visit his apparent failure to reply to their letters.  As we see it, much of the stress for the Appellant and his concerns about the first taped interview arose because he had not received, at least in writing, any intimation of the potential seriousness of his position;  correspondingly, the approach of the officers reflected, as they saw it, the lack of co-operation by the Appellant in replying to their questions or providing information they had requested.  If the Appellant had had clear warning of the possible case against him, with the opportunity to bring in his advisers at an earlier stage, although the eventual outcome (in terms of the amount of tax assessed) would have been the same, the process to achieve that outcome might well have been smoother and less stressful for the Appellant, and possibly less costly for him also.  Whilst we accept the evidence of Mrs O’Bryan (who, throughout, we found an entirely credible witness) that her letters were put out for posting, we consider that there are grounds for criticism in that no action was taken, other than by sending a “chaser” letter, to find out why the Appellant was not replying to those letters.  At the second visit by Mrs O’Bryan to the Appellant’s premises it is unclear whether the point was followed up by Mrs O’Bryan (the Appellant says they were not mentioned, and Mrs O’Bryan has no recollection of whether they were, but considers it likely that the matter was raised) – what is clear is that further copies were not sent, nor was any other action taken after that second visit to ensure that the Appellant had some written record of the information set out in the letter from Mrs O’Bryan dated 23 July 1999.  After the second visit on 27 October 1999 the pattern repeated itself, in that unanswered letters were not followed up, although in this case the letters were simply calling for information, and were not imparting information or preliminary calculations to the Appellant – nevertheless, and notwithstanding the earlier experience, no other approach, such as a telephone call, was made to the Appellant, and his apparent reluctance to respond was no doubt reflected in the attitude of the officers who subsequently interviewed him.

68	Whilst we are critical of these failures on the part of the Commissioners in the early stages of their investigation, they are not such as to render their overall conduct of this matter unreasonable or arbitrary.  Our conclusion is that the eventual assessment which resulted from the prolonged investigation and was issued on 2 July 2001 was not only correct in the amount assessed, but was made to the best of their judgment by the Commissioners.

69	We therefore dismiss the appeal.

70	We make no order as to costs.

EDWARD SADLER
CHAIRMAN

RELEASED:

LON/2001/0978