Wade (t/a Stump Cross Fisheries) v Customs & Excise [2004] UKVAT V18449 (06 January 2004)

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Cite as: [2004] UKVAT V18449

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Wade (t/a Stump Cross Fisheries) v Customs & Excise [2004] UKVAT V18449 (06 January 2004)

VALUE ADDED TAX — fish and chip shop — compulsory registration — assessment for allegedly under-declared tax — civil penalty for dishonest evasion — successive clerical errors by Commissioners — whether sufficient to invalidate assessment — VAT Regs 1995, reg 25(1), VATA 1994 ss 73(1), (6), 77(1) — tax assessment valid — whether evidence on which tax assessment based reliable — yes — whether dishonesty established — yes — mitigation — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

DAEMON WADE

trading as Stump Cross Fisheries

Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE

Respondents

Tribunal: Colin Bishopp (Chairman)

Marjorie Kostick

Peter Whitehead

Sitting in public in Manchester on 4, 5 and 6 November 2003

Richard Barlow of counsel, instructed by IVC, for the appellant

Nigel Poole of counsel, instructed by their solicitor's office, for the respondents

© CROWN COPYRIGHT 2004

DECISION

This is an appeal by Daemon Wade, who trades as Stump Cross Fisheries, selling fish and chips and other related products from premises at Stump Cross, Halifax. He challenges three decisions of the Commissioners: to register him compulsorily for VAT from 1 February 1997; to assess him for tax alleged to be due, for the period from 1 February 1997 to 31 October 2000, in the total sum of £43,159.77; and to impose on him a penalty for the dishonest evasion of tax in the sum, after an allowance for mitigation, of £28,164. Mr Wade disputes the Commissioners' view of the date from which he should have registered, contending that it is too early. He challenges the assessment for tax both because it relates, he says, to a period which is too long and because it overstates his liability, though he does not contend that it was not made to the best of the Commissioners' judgment, as is required by section 73(1) of the Value Added Tax Act 1994. He argues that he cannot have evaded tax which was not due, and he denies that he has been dishonest. His counsel, Richard Barlow, also raised a technical argument about the assessment, to which we will turn in due course.

We heard evidence from Angela Norris, the officer who determined the date from which the registration took effect and who made the assessment to tax, from Dean Foster, who assisted Miss Norris in her investigation, from Michael Carpenter, the officer who decided upon the imposition of the penalty, and from the appellant. We also had a bundle of documents which Mr Barlow supplemented as the hearing proceeded. From that evidence we make the following findings. In some respects the parties were in agreement; where we have identified a dispute, we have given the competing versions and our reasons for preferring one to the other.

The Commissioners' investigations into the appellant's business began on Thursday 23 March 2000 when Mr Foster made a test purchase at the appellant's shop, although the test purchase is otherwise immaterial to the appeal. On the following day Miss Norris and Mr Foster made an unannounced visit to the shop at 9.40 am, before it had opened for business, but when Mr Wade was already on the premises. Miss Norris told us that she knew that Mr Wade was not registered for VAT and her initial questions of him were designed to determine whether he should be. Mr Wade said, she recalled, that he thought that he probably should be registered by then, and mentioned that he had discussed the matter with his accountant. Miss Norris formed the impression that his accountant had advised Mr Wade that he should be registered. He told her that his takings were about £1,100 a week, and that during the last week he had taken over £1,200. That evidence was confirmed by Mr Foster, who added that Mr Wade had also mentioned that his in best ever week he had taken £1,800.

Mr Wade's version of the conversation was rather different. Until a few weeks before the visit, he said, he had been rather ignorant about VAT, but he saw a television programme on the subject and shortly afterwards he met a man in a pub who claimed to be an accountant and who told him, somewhat inaccurately, that once his takings exceeded £1,000 a week he had to pay VAT, though only on the excess. (In March 2000 the registration threshold was £51,000.) He had not spoken about the matter to his own accountant. He had no real idea of his annual turnover since his takings book had been stolen in September 1999, and he had not replaced it. Until his conversation in the pub, he said, he was not aware of the registration threshold, and he was under the impression that all food, including hot food such as he sold, was zero-rated.

While we accept, as Mr Barlow was able to demonstrate, that Miss Norris's notebook does not fully bear out her recollection, we are satisfied that her version of this conversation is, overall, to be preferred. By March 2000 Mr Wade had been in business for nearly five years. His brother, we learnt, trades as a VAT-registered garage proprietor from premises adjacent to the shop. We cannot imagine that they had never once discussed the subject of VAT. Although he was to tell us that his turnover had gradually increased, Mr Wade did not challenge Miss Norris's evidence that he had given turnover figures exceeding £1,000 per week. We do not accept that he was as ignorant, or ill-informed, about VAT as he maintained. We are willing to accept that, when he took over the shop, he had no experience of selling fish and chips, but he worked (he told us) for a period in another fish and chip shop and took advice about keeping records from one of his suppliers. In the bundle of documents there were copies of his annual accounts for the years ended in July 1996 and 1998, prepared by his accountant. We find it quite incredible that, as Mr Wade insisted, his accountant had not once mentioned VAT, but that he had had a conversation such as he described with a casual acquaintance in a pub. As will emerge, we are satisfied that Mr Wade had a reasonable understanding of VAT and a very good idea of his true turnover, and that he was well aware that he had crossed the registration threshold.

It is convenient at this point to deal with Mr Wade's takings records. Later on the day of her visit he handed to Miss Norris three small exercise books in which are recorded, or purportedly recorded, his takings for the years 1995-96, 1996-97 and 1997-98. For no evident reason the records do not coincide exactly with his accounting years. His method of recording his takings, he said, was to take a till reading and, rather than retain the till reading itself (he routinely threw it away), to transcribe the figure from the reading into an exercise book. If the exercise book was not in the shop, but at his home, he wrote the till reading on a scrap of paper. He then took the scrap of paper home, though not necessarily on the same day, where it was placed in one of several possible storage receptacles (one was a teapot). Later, the figure on the paper was written into the exercise book, often by his wife; but this book was also used for general notes and became soiled. At the end of each year, rather than give his accountant a dirty exercise book, Mr Wade made a fair copy of the takings record in another exercise book, one for each year. The dirty book was then thrown away, and the clean book was handed to his accountant.

Mr Wade said that he did not take Z-readings at regular intervals—that is, at the end of each session of trading or even at the end of each day—but that he might do so at other times, and use those readings. That contention was at odds with other evidence he gave that he was aware that it was necessary to keep a daily takings record. He also told us that he did not always record in his book, or on the scrap of paper, the figure on the till reading; if he had had a poor session he might "borrow" some takings from a better session. He did that, he said, to conceal from his wife or from potential purchasers of the business that there were poor sessions. He was imprecise about the frequency with which he took the scraps of paper home in order that the takings could be entered into the exercise book, although he told us that he would usually accumulate purchase invoices in the shop for some time and than take them home in batches in order that his wife could sort them, add them up and enter the relevant figures in the same book.

It was the "clean" books which were given to Miss Norris. Two of them bear markings suggesting that they have been checked by accountants and used in the preparation of accounts (these books do, as Mr Wade told us, record outgoings as well as takings). Mr Wade had a book for 1998-99 which, he said, he was still using in September 1999 when it was stolen. The theft was not reported to the police; Mr Wade said that the total value of the property stolen was small, and he did not expect that the police would recover any of it. He had been forced to estimate his takings for 1998-99 and for the first few weeks of 1999-2000, and had given those estimated figures to his accountant. When the book he was using was stolen he had merely kept the pieces of scrap paper; he had not replaced the book.

We found Mr Wade's explanation of his system for recording his takings quite implausible. The one point which rang true was his recognition that he knew, from the outset, that he needed to keep details of his takings for each day. We are unable to accept that he thought he must use a needlessly elaborate method of doing so such as he described. It was evident from the samples of till readings which were available to us that Mr Wade used a sophisticated till which, he told us, he had bought new when he started trading. Among the documents produced at the hearing was a copy of part of the till roll taken by Miss Norris from the till when she first arrived at the shop, and which shows several X-readings on the preceding day, 23 March 2000, followed by a Z-reading and other entries (including the cancellation of an error) which, in our view, show that Mr Wade was capable of using the till to good effect. We do not understand why an honest trader would think it appropriate to write down the Z-readings which have been provided for him by the till on pieces of paper which are ejected from the till for the very purpose of being torn off and kept, on scraps of paper (he gave the example of a chip bag, though it was apparent other paper was used as it came to hand), and then discard the paper produced by the till—and, moreover, discard in addition the rolls which remained in the till.

The three exercise books Mr Wade produced, although clean and for the most part legible and neat, do not appear to us to be mere fair copies of dirty originals. The colour of the ink used, and the formatting of the information, changes from time to time. There are several amendments. In one there appear some notes which one would not expect in a fair copy, though we accept that they may have been made by mistake. It appears to us more likely that these records were compiled from the scrap paper notes, or from the till readings, as the year proceeded. While we understand Mr Wade's decision not to report the theft of his book to the police, we do not accept his evidence that, after his book was stolen, he decided not to replace it but to make do with scraps of paper instead. The exercise books (as the price stickers attached to two of them showed) cost less than a pound. It is, in our view, quite incredible that a trader keeping a true record of his takings would choose to do so on scraps of paper rather than, as he had done in the past, in a cheap exercise book. Rather, we think Mr Wade's evidence on this point leads to the conclusion that he has better (and accurate) records which he has chosen to conceal.

During the course of her discussion with Mr Wade on 24 March 2000 Miss Norris removed the till roll which was in use at the time, as we have mentioned, and examined the few records which were in the shop. These included a 1996 diary, to which we will refer again later. She asked to see the remaining records, which Mr Wade said were at his home, immediately after Mr Wade closed the shop following the lunchtime trading session. He told her (as he accepted he had done) that he had no key to his house, and it would not be possible to get in until his wife returned from work at 4 pm. He offered to show her the records then, although there were some differences of recollection (which we do not need to resolve) about whether the records were to be examined at the shop or at Mr Wade's home. Miss Norris remained in the shop in order to invigilate his lunchtime trade while Mr Foster left, returning later to collect Miss Norris. Rather than wait for Mr Wade to return, as he had suggested, they then drove to his home and, Miss Norris and Mr Foster told us, saw Mr Wade arrive, apparently in a hurry, and let himself into the house. They then went to the house and knocked on the door, with no response until Miss Norris telephoned Mr Wade's number and he answered, subsequently letting them in. It was then that Mr Wade handed over his takings books, together with some purchase records.

Mr Wade admitted that he had been untruthful about his not having a key to his house—although, he said, it was under the back door mat rather than in his pocket—but told us he had tried to put the officers off until he had been able to go to his home and get out the records as he did not want them to go through the cupboards at his home as they had done at the shop. He maintained that the officers could not have arrived at his home before he did (he had, he said, seen them travelling in the wrong direction as he was driving to his home) and they could not have seen him going in. When they arrived he was taking a shower and he had not heard their knocks.

Again, we prefer the evidence of Miss Norris and Mr Foster. We are satisfied that their version of that afternoon's events is to be preferred and that Mr Wade's intention was to produce to Miss Norris only those records he wished her to see, and that he was attempting to buy some time in order that he could conceal those records he did not wish her to see. While we can understand Mr Wade's desire to avoid having his house searched, we do not accept that he would have exposed himself to such a risk if he had produced a complete set of records when Miss Norris arrived; and he did not contend that such a search in fact took place when Miss Norris and Mr Foster entered his house, even though they were presented with inadequate records.

His failure to produce any records for 1998-99 on, despite his having had over three years to do so, speaks for itself. Mr Wade said he thought he had handed over those records when Miss Norris and Mr Foster were at his home. That (mistaken) belief might have been credible for a few days after their visit; it defies belief that, three years and more later, Mr Wade still had not realised that the records were in his possession. In fact, all that he has produced, we understand, is his annual accounts for the years to 31 July 1999, 2000 and 2001, with some till rolls and daily takings sheets for the year to July 2000 which he rather dramatically produced on the last day of the hearing. We observe too that, despite the loss of his takings book and his professed need to estimate his takings for the year 1998-99, there is no indication in the accounts for that year—which we understand were produced to the Inland Revenue—that the figures are estimated.

After seeing the appellant at his home, Miss Norris returned to the shop in order to invigilate the evening session; Mr Foster relieved her part way through the session. Between them they covered the whole day's trade. The takings for the day amounted to £549.05.

On 17 April 2000 Miss Norris and Mr Foster interviewed Mr Wade at a Customs and Excise office in Bradford. It was suggested by Mr Barlow that the interview had been organised in a manner that was designed to intimidate Mr Wade. He was, Mr Barlow added, of a nervous disposition (as we could see for ourselves when he gave his evidence) and we accept that he must have found the experience unpleasant, but we do not think the officers set out to intimidate; nor do we think Mr Wade was quite as apprehensive as he would have us believe. It is worth mentioning, since a dishonesty penalty has been imposed, that Mr Wade was not shown before this interview a copy of the Commissioners' Notice 730, setting out their practice when they are contemplating the imposition of such a penalty (though he was later sent a copy), nor was he cautioned in any other way. Mr Barlow did not, however, ask us to exclude what was said at the interview.

One of the topics which was explored at the interview was Mr Wade's purchases of fish, potatoes and bread. He accepted then, and in his evidence before us, that he had not kept all of the invoices he received from his suppliers and accepted too that some of his purchases of potatoes and bread had not been treated as purchases for the purposes of the business but for his own purposes—he sold some potatoes to customers, and he and his family ate bread which he bought from the same suppliers he used for the business. The enquiries about Mr Wade's fish purchases led nowhere, but a good deal of time was spent at the hearing exploring his purchases of bread and potatoes.

He had routinely obtained two separate invoices for his bread purchases, one for that used in the shop, and the other for the bread bought for personal consumption. The two invoices were usually stapled together, and were kept with his other purchase invoices. Quite why one was made out in his name and the other, paid in cash, did not bear his name was not explained. Despite that, we do not think much turns on the bread purchases.

Miss Norris had already obtained from the supplier from whom Mr Wade bought his potatoes evidence that its drivers were authorised to, and did, make additional sales as they made their deliveries, and it was apparent from the records that she obtained from the supplier that some sales for cash to an unnamed buyer were made either immediately before or immediately after a sale shown to have been made to Mr Wade. There were, however, other such sales which were not linked by such proximity to sales to Mr Wade, and a significant number of cash sales to unnamed buyers which could not realistically be linked to him, and we were not satisfied that Mr Wade was systematically buying potatoes and concealing the purchases in order, in turn, to conceal the volume of his sales. He admitted a few cash purchases, made in order that he could supply potatoes (rather, that is, than chips) to some customers, and we are willing to accept his evidence on that point.

While she was at the appellant's shop on 24 March, Miss Norris took possession of the 1996 diary we have mentioned which she thought, at first, had been used to record his takings in that year. Mr Wade maintained that the diary was used by his wife, as a diary, in 1996, and that he had later used it as a notebook. He had recorded some takings figures in it, but they did not relate to 1996, nor did an entry in the diary made on the page for a particular day relate to the same day in a later year. Miss Norris found some correlation between purchases recorded in the diary and those for which invoices dated in 1996 were produced, but no similar correlation between the recorded takings figures and those recorded in the takings book for 1996. While that might have indicated that the diary recorded the correct figures and the takings book lower amounts, Miss Norris accepted that the diary could not be relied on in that way. We do, however, wonder why takings figures were recorded not only on scraps of paper but also in what was by then an out of date diary.

The evidence available to Miss Norris included the records the appellant had made of his daily takings. Even though she doubted their reliability as a true record of the level of his takings, she took them as a reasonably accurate representation of the proportion of his weekly sales which were made on the various days of the week on which the shop was open—it was closed on Mondays and Tuesdays, and open on the remaining days. The till roll she had taken showed, within the Z-reading taken on Thursday 23 March 2000 (apparently at close of business), a grand total of £695.40, which Miss Norris took to be the takings for that day and for the preceding day, Wednesday. Mr Wade protested to us that the figure was too high for his trade on those days, but he did not put forward any alternative explanation of what the figure might represent. He did contend that his daughter had been working in the shop, for the first time, on 23 March and that she might have made mistakes when using the till. We considered that explanation a little too convenient to be true; but even if Mr Wade's daughter had made mistakes there was no evident reason why the apparent takings should have been increased rather than understated.

The known, invigilated, takings for Friday 24 March were £549.05. As Mr Poole pointed out, that figure represents takings of about £85 per hour; a total of £695.40 for Wednesday and Thursday corresponds to about £49 per hour. We consider that Miss Norris's conclusion (that £695.40 fairly represents the takings on the Wednesday and Thursday) is reasonable, and are not persuaded by Mr Wade's unsubstantiated assertion that the figure is too high.

Miss Norris calculated from the figures in the exercise books, taking an average of the 13 weeks from the beginning of March to the beginning of June 1998 (almost the most recent available to her), that Friday's takings represented 26% of the total takings for each week, and that Wednesday and Thursday together represented 38%. She assumed that the week of her visit was typical, and extrapolated from the known takings to reach a weekly figure of £1,973, or (taking 50 weeks to allow for holidays) £98,650 a year, well above the registration threshold. Using figures given by Mr Wade for the prices he charged for fish and chips over the preceding years, and the numbers of bags of potatoes he was known to have bought (extracted from his own records, and leaving out of account any possible concealed purchases) as a measure of approximate volumes of trade, Miss Norris worked backwards in order to calculate the probable takings for each year. The possibility that the appellant might have suppressed his purchases of bread and potatoes in order, in turn, to conceal the level of his sales was disregarded. Miss Norris allowed for the input tax incurred, according to the records Mr Wade produced, and assumed zero-rated sales of 2% (Mr Barlow did not challenge either of those allowances). She then transferred her calculations to a graph from which she determined that Mr Wade exceeded the threshold in December 1996. He should therefore have registered from 1 February 1997 (see Value Added Tax Act 1994, Schedule 1, paragraphs 1(1)(a) and 5(1)). That is, as we have recorded, the date from which he has since been registered.

It later emerged that Miss Norris had made a mistake in her calculations by under-counting the bags of potatoes bought in the year to 31 July 1996; had she used the correct figure her assessment of the takings in that year would have been correspondingly higher, and she would have realised that Mr Wade in fact exceeded the threshold rather sooner than her inaccurate calculation showed. The Commissioners have not, however, sought to correct the error by moving the date of registration to an earlier date. Some criticism was levelled at Miss Norris's use of a graph, both in the correspondence between the parties and at the hearing. The correction of Miss Norris's counting error reveals that a graph was unnecessary; a later re-calculation by a reviewing officer shows that the date from which Mr Wade should have been registered can be calculated quite easily without one. That does not make Miss Norris's approach unreasonable or unfair. However, her approach and her conclusion depend for their validity on the underlying assumption that this particular week, and especially the Friday of invigilation, were typical. Mr Wade contended that they were not.

He advanced three reasons why his takings were not typical. First, he had just won an award given by a local evening newspaper following a readers' vote for their favourite fish and chip shop, and had publicised the fact by placing a banner outside the shop. He produced a copy of the newspaper which showed that a news item reporting the award had been published on that very day, 24 March (though on page 7). Because he knew in advance that he had won the award (other newspaper cuttings he produced showed that this was not the first occasion on which he had done so) he was able to arrange to have a banner prepared. However he conceded in his evidence that the banner may have gone up later, and no mention of a banner was made by his representatives in the pre-hearing correspondence. He was also unable to produce the invoice for the banner.

Secondly, Mr Wade contended that his trade had been boosted by the holding of a craft fair in the nearby Shibden Hall. Miss Norris had checked whether there was such a craft fair and had found that there was, but that it started on the following day. Mr Wade said that stallholders might have been at the Hall on the Friday, setting up their stalls, in readiness for the opening of the fair on Saturday. It was evident from plans produced at the hearing that the vehicular entrance to the hall is fairly close to the appellant's shop, though whether the stallholders leaving the hall by that means would turn right towards the shop or in the opposite direction to the centre of Halifax must be a matter of speculation.

The third reason he advanced was that two nearby shops selling fish and chips (though one sold mainly pizzas) were closed, and some of their trade had diverted to him. He produced a further newspaper cutting showing that one of those shops had been badly damaged in a suspected arson attack in December 1999, and we accept that it was unlikely to have re-opened by March 2000. There was no newspaper cutting relating to the other, but Mr Wade's evidence was that it had been damaged by vehicle impact. He though the accident had occurred just before Christmas 1999, and that the shop had been closed until April 2000. The shops were, respectively, 1½ and 2½ miles from his.

We are not satisfied that any of these factors made a significant difference to Mr Wade's trade in the relevant week. We do not accept that there was a banner in place; we think it much more likely it was put up later, if indeed at all. There was no evidence that any individual customer on 24 March had in fact visited the shop because of the award; what Mr Wade told us amounted to no more than that one or more customers might have come. The same can be said of the stallholders at the trade fair. A mere assertion that customers might have come is not, in our view, sufficient to show that they did in fact do so, even on the balance of probabilities. In this case, we are satisfied it is no more than speculation. The other, closed shops were quite some distance away from the appellant's shop and, as Mr Poole said, there is no telling where customers who might have patronised those shops went while they were closed. We do not think the closure of two shops well over a mile away should be regarded as any more significant than the normal pattern of the opening and closing of take-away establishments which occurs in any area.

The assessment, like the determination of the correct date of registration, is based on Miss Norris's calculation. Despite the correction of her error, it too has not been amended. If her assumptions are right it is, in fact, for too small a sum. Mr Barlow's challenge was based entirely upon his attack on the validity of the assumptions and, since we reject that attack and conclude that the assumptions were reasonable it must follow that the appeal against the decision to register the appellant from 1 February 1997 and (subject to the technical challenge, to which we turn next) against the assessment must fail. Although the amount assessed is too small this is not a case in which we think it appropriate to exercise the power conferred on us by section 84(5) of the Value Added Tax Act 1994 to determine the correct, higher, amount.

On 30 August 2000 Miss Norris wrote to Mr Wade. The relevant part of her letter reads:

"I now conclude that this business should have been registered for Value Added Tax with effect from 1 February 1997. You are invited to complete the enclosed VAT 1 registration form to acknowledge the date of registration.

"I will compulsory [sic] register you from 1 February 1997. You will receive official notification of your registration and will receive a long period VAT return to complete.

"Failure to complete a VAT return will result in an assessment being raised to cover the VAT arrears as indicated in my letter dated 23 June 2000 [to the appellant's advisers]."

Mr Wade declined to complete the registration form and Miss Norris proceeded to complete one for him. In doing so she mistakenly indicated that he had passed the threshold on 1 February 1997 rather than, as she had previously determined, that he was liable to register from that date. No copy of the resulting registration certificate was produced to us, and we are hampered to some extent in dealing with this point by that omission and by the omission from the bundle of some of the subsequent correspondence. It is apparent from the additions made, apparently by another officer, on the registration form that it had been determined from Miss Norris's mistaken entry of 1 February 1997 as the date on which the threshold had been exceeded that the appropriate date of registration was 1 April 1997 and it seems almost certain from those facts and from what occurred later that a certificate giving that date was issued.

That conclusion is further supported by the issue to Mr Wade of a return "For the period 01 04 97 to 31 10 00". Since such returns are computer-generated it must follow that at the time the return form was produced the Commissioners' computer records indicated that the effective date of registration was 1 April 1997. We do not, however, know when the form was sent to Mr Wade. It is evident from the registration form that Miss Norris prepared it on 23 August 2000. The VAT return was completed by Mr Wade (who inserted "none" in every box) on, apparently, 10 October 2000; that, at least, is the date he has added after his signature. It is shown to have been received by the Commissioners on 24 November 2000. Since that date was not challenged we deduce that Mr Wade sent the return to the Commissioners some time after he had completed it. The important point is that in all probability the registration was effected and the return issued during September or early October 2000.

We are aware that it is the Commissioners' common, but not universal, practice to send with a certificate of registration, when the registration is compulsory, a letter explaining the certificate and specifying or reinforcing the requirement to make a first return from the effective date of registration to a prescribed end date. Sometimes, however, the requirement is endorsed on the certificate itself. We do not know whether such a letter was sent in this case nor, of course, what any letter which was sent stated since neither side produced a copy nor, alternatively, evidence that no such letter was sent; nor do we know what, if anything, was endorsed on the certificate. We think it probable, however, that one or the other informed Mr Wade that he was to make his first return for the period from 1 April 1997 to 31 October 2000, as the endorsement on the return itself indicated.

On 18 October 2000 an officer in the Commissioners' registration section wrote to Mr Wade. We did not learn what prompted the letter. Shorn of formal material, its text was as follows:

"After reviewing your application for VAT registration, it has been established that you were given an incorrect effective date of registration.

"The correct date should be 1 February 1997. Your details have been amended and I have enclosed a copy of your VAT certificate.

"The VAT return you have been issued for period 10/00 will now be valid for the period 1/2/00-31/10/00, please account for this period on this return but do not amend the dates."

Before these events took place Mr Wade had consulted his present advisers. On 25 October 2000 they wrote to Miss Norris; their letter included the following:

"Thank you for your faxed letter dated 18 October, the contents of which have been noted.

"The decision to compulsory [sic] register our client with effect from 1 February 1997 has been appealed to the VAT and Duties Tribunal."

We deduce that the letter of 18 October referred to is the letter of that date sent by the registration section. No other possibility was suggested. The chronology therefore seems to be that Mr Wade was notified that he had been registered from 1 April 1997 and was required to make a first return for the period from 1 April 1997 to 31 October 2000 in September or early October 2000, and received a return form consistent with that requirement then or soon after; he completed the return, but did not send it, on or about 10 October 2000; he received, soon after 18 October 2000 (or was made aware of) a letter instructing him instead to make a return for the period 1 February 2000 to 31 October 2000; and in late November 2000 he sent in a return. He had followed the instruction not to amend the dates on the return and we do not know (since no evidence on the point was given) for what period he thought he was making a return.

Mr Barlow based his argument that the assessment was invalid on, first, the requirements imposed on the Commissioners by regulation 25(1) of the VAT Regulations 1995 (SI 1995/2518) which, so far as material, reads:

"Every person who is registered or was or is required to be registered shall, in respect of every period of a quarter or, in the case of a person who is registered, every period of 3 months ending on the dates notified either in the certificate of registration issued to him or otherwise … make to the Controller a return on the [prescribed] form … showing the amount of VAT payable by or to him and containing full information in respect of the other matters specified in the form and a declaration, signed by him, that the return is true and complete;

provided that—

(a) …

(b) the first return shall be for the period which includes the effective date … upon which the person was or should have been registered, and the said period shall begin on that date;

(c) where the Commissioners consider it necessary in any particular case to vary the length of any period or the date on which any period begins or ends … they may allow or direct any person to make returns accordingly …."

His contention was that the letter of 18 October 2000 was quite specific—Mr Wade was directed to make a return for the period 1 February 2000 to 31 October 2000. It was no answer to say that the letter contained what, as Mr Barlow conceded, was a typing mistake; there was no evidence that Mr Wade realised there was an error. But even if he had, the regulation did not allow for such mistakes. The effect of the third paragraph of the letter, read with regulation 25(1)(c), was that 1 February 2000 to 31 October 2000 became a prescribed accounting period—the Commissioners had varied the length of the period and directed that a return be made "accordingly".

Thinking, incorrectly, that Mr Wade had not sent in the return form (it will be recalled that it was received by the Commissioners on 25 November) Miss Norris notified an assessment on 1 December 2000. The notification was handwritten on the Commissioners' form VAT 152A, which is used when a return has not been received. The notification includes the following:

"Take notice that the return of Value Added Tax for the period from 1.2.1997 to 31.10.2000 has not been received. Therefore, the Commissioners of Customs and Excise, by virtue of their statutory powers, assess the amount of tax payable by you for the period as being £43,159.77."

Some time later Miss Norris learnt that the return had in fact been received and on 12 January 2001 she wrote again to Mr Wade in these terms:

"Please find attached a Notice of Assessment of tax for the sum of £43,159.00. This was originally raised on a VAT 152A (used when a VAT return from a trader has not been received) and notified to you on 1 December 2000. It now transpires that you had in fact notified us and consequently this assessment should have been raised using a VAT 641. As a result a VAT 641 has been raised for the sum of £43,159.00. This supersedes any previously notified amount."

Even then there was a discrepancy between the letter and the notification attached to it, which was for £43,160. It was stated to be the tax due for the period from 1 February 1997 to 31 October 2000.

If Mr Barlow is right, that was not then a prescribed accounting period. However, he said, the combined effect of sections 73(1) and 77(1) of the 1994 Act is that assessments may be made only for prescribed accounting periods. So far as material, those provisions are as follows:

"73(1) Where a person has failed to make any returns required under this Act … or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him."

"77(1) … an assessment under section 73 … shall not be made—

(a) more than 3 years after the end of the prescribed accounting period … concerned …."

He might also have referred us to subsection 73(6):

"An assessment under subsection (1) … above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following—

(a) 2 years after the end of the prescribed accounting period …"

Section 25(1) of the Act requires that a taxable person account for tax by reference to prescribed accounting periods; regulation 25(1) contains the provisions for determining what that person's prescribed periods are; and sections 73 and 77, by their references to returns and prescribed accounting periods respectively, show that assessments too must be referable to prescribed accounting periods. The Commissioners had directed, or purported to direct, the appellant to make a return by reference to two periods—1 April 1997 to 31 October 2000, and 1 February 2000 to 31 October 2000; there had at no time been a direction to furnish a return for the period to which the assessment related. Thus, Mr Barlow argued, the assessment could not be valid.

Mr Poole's response was that the letter of 18 October 2000 contained an obvious typing mistake. Mr Wade was by then receiving professional advice, and his advisers could not have been in any doubt even if he was; the fact that the point was not taken at the time, and the terms of the advisers' letter of 25 October, suggested that they knew precisely what was intended. We agree with that contention, though it is not, alone, sufficient to overcome Mr Barlow's argument that the assessment is invalid irrespective of the presence or absence of confusion. Nevertheless, we will deal with the issue of confusion first.

Despite the error in the first certificate issued to him, there cannot in our view have been any real doubt in Mr Wade's mind—even without the benefit of professional advice—that his effective date was 1 February 1997. All of the letters sent to him, including that of 18 October 2000, gave that date. If he had genuinely been in any doubt, he could easily have asked, but he did not do so. The end of the period for which he was required to make a return has, throughout, been given as 31 October 2000. We do not know, because Mr Wade did not produce it, what was set out on the replacement certificate sent with the letter of 18 October 2000, but it seems to us more likely than not that it gave the correct dates for his first period return. The series of errors committed by the Commissioners demonstrates considerable lack of care on their part but, as we have indicated, we do not think that the presence or absence of confusion or doubt is determinative of the issue. The Commissioners are, perhaps, fortunate that we have concluded, on other grounds, that Mr Barlow's argument is unsound.

Regulation 25(1)(b) provides that a trader's first return "shall be for the period which includes the effective date". The use of the word "shall" indicates that the requirement is mandatory. Mr Barlow's argument requires us to accept that paragraph (c) is capable of overriding paragraph (b). We do not think it is. Paragraph (c) comes into play when the Commissioners "consider it necessary" to vary the starting date, ending date or length of a prescribed period. One can think of many circumstances in which they might consider it necessary to do so, but it is impossible to conceive of circumstances in which they would wish to vary the starting date of a taxable person's first return. They cannot require a return for a period starting on a date earlier than the effective date of registration; and they would not wish the starting point to be later than the effective date since there would then be a period for which the taxable person should account but for which he has not been required to do so. In our view it cannot have been the intention of Parliament that the Commissioners should be able to set aside the requirements of paragraph (b) when the plain purpose of that paragraph is that a taxable person will start accounting for VAT from his effective date of registration.

We have, therefore, concluded that the errors in the Commissioners' letters and other documents are not fatal to the assessment. That part of the appeal therefore fails.

We turn, then, to the evidence of Mr Carpenter and to the penalty assessment. Mr Carpenter told us that he took into account, in reaching his conclusion that the appellant had been dishonest, his admission to Miss Norris (as she had recorded) that he had crossed the threshold, his belief that he had discussed registration with his accountant and his apparently conscious decision not to register. He also formed the view that the takings records which Mr Wade produced were not contemporaneous and accurate, but a later falsification. Mr Carpenter concluded that the penalty should be mitigated to a moderate extent because the appellant had attended the interview with Miss Norris and Mr Foster, and had produced some records, but his cooperation ended there. In particular, he had declined to attend a further interview (his advisers offered an interview at their office, though it was evident that the appellant himself was very reluctant) and he had, in Mr Carpenter's view, attempted to hinder rather than assist the investigation.

Mr Barlow argued that the appellant was naïve rather than dishonest. He had, he said, buried his head in the sand when Miss Norris began her investigation; he could and should have handed over his remaining records but his failure to do so could not be regarded as dishonest, and it counted in his favour that he had kept his Z-readings from 24 March 2000 on (as the Commissioners accept he has done). Mr Poole maintained that there was no honest explanation of much of what the appellant had done—his failure to keep, or produce, his records could not be due to mere naivety, and his explanation of his behaviour on 24 March 2000, when he had delayed Miss Norris's and Mr Foster's access to his house spoke for itself; the story he had told of the theft of his takings book and his failure to replace it was quite implausible; and it defied belief that he was not aware, even in general terms, about the need to register for VAT.

While the evidence we heard did not entirely bear out Mr Carpenter's view of the matter, the substance of it is, we think correct. It will be apparent from what we have already recorded that we reject a good deal of what Mr Wade told us. We do not accept, in particular, his contention that he was ignorant of the need to register and that he thought all food was zero-rated. It is well-known, and not only to tax practitioners, that hot food such as he was supplying has been standard-rated for many years. Any ignorance on his part of that fact can be due only to wilful failure on his part to acquaint himself properly with the requirements of the business in which he chose to engage. We do not accept that his accountant did not speak to him about VAT; we consider, on the contrary, that it is almost certain that any competent accountant would take great care to ensure that his clients were well aware of their obligations. We are, therefore, satisfied that Mr Wade knew a good deal more about the need to register than he would have us believe.

We are likewise satisfied that Mr Wade had a much better idea than he claimed of the true level of his takings, that the exercise books he produced showed false figures and that he set out to conceal the true level of his takings, not only in the sense that he produced inaccurate figures but in the sense also that he attempted to obstruct Miss Norris in her efforts to determine the correct figures. There is no possible honest explanation for such conduct, and we are satisfied that the allegation of dishonesty is made out.

The penalty imposed by the Commissioners represents 80% of the tax calculated to have been evaded in the period from 1 February 1997 to 23 March 2000, the day immediately before Miss Norris and Mr Foster made their visit; the Commissioners do not contend that dishonesty continued after that date. The Commissioners apply a "tariff" in accordance with which mitigation is earned by a trader who cooperates with them to identify the true amount of the arrears; the tariff is explained by their Notice 730, which invites a trader to cooperate; a copy of the notice was sent to Mr Wade by Mr Carpenter with his invitation to attend a formal interview. Mr Wade earned 15% (compared to the maximum permitted by the tariff of 25%) for his belated admission that he should have registered some time before March 2000, and 5% (half the maximum) for the production of some records. He was allowed nothing for admitting the extent of the arrears, since Mr Carpenter considered he was continuing to conceal their extent by deceiving the Commissioners.

While we respect the reasons behind the application of the tariff, it is not binding on us and we may take into account any matters we think appropriate, save for the three identified by section 70(4) of the 1994 Act—that is, insufficiency of funds, that there has been no overall loss of VAT, and that the person concerned has acted in good faith. None of those factors arises here. We may reduce the amount of mitigation granted by the Commissioners if we think it appropriate.

Although we would approach the matter in a rather different way from the Commissioners, by taking into account the nature and scale of the dishonesty as well as the trader's remorse, reflected in his efforts to make amends by identifying the amount of tax evaded, we would not come, in this case, to a significantly different conclusion. The dishonesty is not of the worst kind—there is no conspiracy, for example, although it seems that the concealment of the true level of the appellant's takings was persisted in for about three years. On the other hand, Mr Wade has made little effort to make amends. We do not propose to adjust the amount of mitigation allowed by the Commissioners.

We therefore dismiss the entire appeal. As is usual in cases of this kind, Mr Poole sought a direction for costs in the Commissioners' favour, which we think it appropriate to make. If the amount of those costs cannot be agreed, either party make seek to have them assessed by a chairman sitting alone.

COLIN BISHOPP

Chairman

Release Date:

MAN/00/0878

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URL: http://www.bailii.org/uk/cases/UKVAT/2003/V18449.html