VAT — ASSESSMENT — best judgment — restaurant business underdeclaring output tax — assessments not making allowance for shared meals and non-diners — “bulk bills” misinterpreted — assessments upheld as honest and genuine attempt to make reasoned assessment of VAT payable but adjusted downwards by 10% to allow for uncertainties of Customs’ observations — appeal allowed     
MANCHESTER TRIBUNAL CENTRE

	MRS HASINA HOSSAIN T/A BALTI HOUSE TANDOORI	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	MR M S JOHNSON  (Chairman)
						MR F HAZELDINE		 	

Sitting in public in Birmingham on 3 and 4 March 2003 and 15 January 2004

MR T S V Devadason, B Com, FCA, for the Appellant

Mr J Puzey, of counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	The appellant in this appeal is a restaurateur.  She is contesting assessments to value added tax dated 14 June 2000 totalling £19,155.00 disregarding interest (“the assessments”).  The assessments were issued under section 73(1) of the Value Added Tax Act 1994.  Under that sub-section, if it appears to the Commissioners of Customs and Excise (“Customs”) that a registered person’s VAT returns are incomplete or incorrect, they may assess the amount of VAT due from that person to the best of their judgment and notify it to her.  That is what Customs have done in this case.

2.	The assessments cover the appellant’s VAT accounting quarters from 08/97 to 02/00 inclusive.  They stem from observations of the number of individuals said to have been seen to dine at the appellant’s restaurant, the “Balti House Tandoori” in Heathcoat Street, Nottingham.  From those observations, Customs arrived at the conclusion that the appellant must have substantially underdeclared her takings for purposes of accounting for output tax, throughout the periods assessed.  The assessments are founded upon an estimate of the amount of money each of the appellant’s customers must have spent.

3.	The ground of appeal expressed in the notice of appeal itself, Form Trib 1, is that the assessments are “totally arbitrary and disproportionate”.  Mr Devadason, the chartered accountant representing the appellant who lodged the notice of appeal on her behalf, makes the following additional allegations in the detailed grounds accompanying the notice of appeal:

•	That Customs have misunderstood Indian culture in that they have assumed that every observed customer ordered and paid for a meal, whereas in truth many dishes were shared;

•	That the officers of Customs making the observations were over-zealous;

•	That the officers of Customs conducted their observations on the basis of an inaccurate table plan of the restaurant which invalidates their observations;

•	That the records supplied by the appellant have been misinterpreted by Customs; 

•	That the significance of “bulk bills” has been misunderstood, “bulk bills” being bills evidencing food and drinks supplied to a number of customers for which they were separately charged; and    

•	That any misappropriation of money that there may have been by staff has been ignored.

On the basis of the foregoing, the appellant’s case is that the assessments are flawed and should be discharged.

4.	The tribunal heard oral evidence from one witness on behalf of the appellant, namely her husband Mr Salbir Hossain.  Mr Puzey, representing Customs, called six witnesses to give oral evidence on Customs’ behalf, all of whom were officers of Customs.  These witnesses were: Mr Graeme Anderson, one of the observing officers; Mr John Buckley, also an observing officer; Mr Dene Talbot, also an observing officer; Mr Julian Cook, also an observing officer; Mrs Catharine Cross, also an observing officer; and Miss R Goodwin, who was the assessing officer (she was also one of the observing officers).   

5.	Mr Puzey provided the tribunal with a folder of documents relevant to the appeal, and also with separate photocopies of the contents of the officers’ notebooks (relating to both those officers who were being called to give oral evidence and those who were not).  Mr Devadason provided us with a drawing of the ground floor and cellar of the restaurant, and separately with a folder containing table plans, intended to be contrasted with the one used by Customs for the purposes of their observations.  

6.	We record that the folder provided by Customs contained witness statements from officers of Customs who were not called by Customs to give oral evidence, and that the folder provided by the appellant contained a letter from a Mr Tanner, surveyor of Nottingham, who was also not called.  In view of the evidential disagreements between the parties in this case, and for the avoidance of doubt, we direct that the statements and letter mentioned, and also the copies of the notebooks of those officers who did not give oral evidence, are inadmissible for the purposes of this decision.  We so direct because we are not happy that those documents should stand as evidence in this case without the parties’ representatives having been afforded the opportunity of cross-examining their authors .    

7.	At the tribunal hearing, a small number of photographs of the interior of the restaurant were produced, which we regarded as inadequate for giving the tribunal any clear impression of the premises.  Accordingly, having listened to all the witnesses and looked at the various plans of the restaurant, we took the view that we would like to see the restaurant for ourselves.  The chairman and member therefore attended together at the “Balti House Tandoori” restaurant at approximately 19.00 hours on the evening of Saturday, 31 January 2004.  We deliberately did not make ourselves known, or interrupt trade, which was light at the time.  We record that the purpose of our visit was purely so that we could get a “feel” for the premises, and that we have not regarded anything that we observed as evidence in this case.  In particular, we do not regard the current layout of tables as evidence of what the layout may have been at any particular time.

8.	We find the following facts.

9.	The “Balti House Tandoori” is an Indian restaurant located in the north-eastern quarter of the centre of the City of Nottingham.  The restaurant is open for meals from 17.30 hours until some time after midnight, seven days a week.  Lunch is not served.

10.	The restaurant is licensed for 40 people to dine at a time.  During the periods of the assessments, the restaurant could not comfortably have accommodated more than approximately that number of diners.  In theory, more than that number could have sat down to eat simultaneously, but in that case the seating arrangements would have been less than ideal.  

11.	The kitchen was not geared to the production of a large number of meals at once.  One chef, aided possibly by an assistant chef, would cook the food.  There would be another person to prepare the food, and 2 or 3 waiters to take the food to table.  Food was prepared to order.  A main dish might take 15 minutes to cook.

12.	On Friday and Saturday evenings, the restaurant was over twice as busy as on weekdays.  However some customers would not order a main dish – they would just have a basic “naan and starter” meal, or they might share a main dish.  Groups of 8 to 10 people might enter the restaurant together, some of whom might have as little as just a drink or a coffee.  Their orders might be written down on loose pieces of paper, with a “bulk bill” prepared in due course to reproduce these.  The system whereby orders were recorded on loose pieces of paper and then in “bulk bills” was a system with which the waiters were familiar.  There would be scope for misappropriation of money by staff, but we do not find it proved that this happened.  We do however find that, on some evenings, but not on others, customers who did not order a main dish constituted a significant slice of the customers crossing the threshold of the restaurant.

13.	We accept the above evidence of Mr Hossain as describing the general position at the restaurant.  We find, however, that Mr Hossain does not have detailed knowledge of all the occasions on which Customs made their observations of the restaurant.  Mr Hossain was at the time, and still is, in full-time employment with the City of Nottingham Education Department.  During the periods with which we are concerned, Mr Hossain would often attend at the restaurant and help, and he did the bookkeeping of the business together with his elder son, but it was his wife, the appellant, who ran the restaurant.  As between the spouses, his wife was the one who was habitually there.  

14.	The appellant would bring the previous night’s takings of the restaurant home to her husband, written down in a book, on the evening of each trading day.  He would go through the figures with her, preparatory to their seeing the accountant and the accounts being prepared.  Mr Hossain told us that the appellant had had to work hard in the restaurant and she had become depressed.  The business had been taken over by a limited company directed by Mr Hossain and his son, following the value added tax difficulties experienced.  

15.	We make no criticism of the appellant’s non-attendance at tribunal, but in consequence of her absence, the evidence before the tribunal as to what happened on the occasions observed by Customs is less balanced in favour of the appellant than might otherwise have been the case.

16.	Officers of Customs visited the restaurant on four occasions relevant to this appeal.  On 19 July 1999, officers Anderson and Buckley attended at the restaurant, had a meal and prepared a table plan.  This plan (“the observation plan”) was used as a point of reference when recording Customs’ ensuing observations.  On three further occasions (“the observation days”), namely on Saturday, 23 October 1999, Tuesday, 23 November 1999, and Friday, 4 February 2000, teams of Customs officers attended at the restaurant.  Dining in pairs, the officers ate a succession of meals on each of the observation days, so as to observe the restaurant’s customers throughout the evening, the object being to measure the volume of trade.

17.	Each pair of officers had a good view of the interior of the restaurant and saw customers who appeared to be taking meals.  The tribunal was presented with lists of such customers compiled by the officers making the observations.  

18.	We are satisfied that each of the observing officers who gave evidence to the tribunal was sincere and did his or her job to the best of their ability.  We detected no over-zealousness on the part of any officer, nor the slightest attempt on their part to tell anything less than the whole truth about the observations they made.  Nevertheless we have three reservations about the observing officers’ evidence.

19.	The first reservation concerns the accuracy of the observation plan.  This shows 13 tables with seating for approximately 52 people, plus a serving table.  We do not think that that can be right.  The restaurant does not have the capacity to seat that number of people who are taking a meal.  We consider that the probable explanation of the observation plan is that, by mistake, it shows the wrong number of tables.    

20.	The second reservation is that, without exception, every officer who gave evidence about the observation days had adopted the observation plan for the purposes of their evidence.  One of the observation plans shows a table “crossed out”, thereby indicating, in our view, that the plan was thought to be suspect on at least one occasion that the restaurant was visited by Customs.   The result is, as we find, that officers recorded their observations by reference to the observation plan even though they should have known that the plan was incorrect.  Whilst this practice is understandable – because the officers had been presented with copies of the observation plan as if it were correct – it nevertheless casts an element of doubt on the accuracy of their observations, simply because they have made use of an incorrect plan.    

21.	The third reservation that we have is as to whether all the individuals whom the officers observed to sit down at tables and appear to dine did in fact eat a main meal.  We find that the meals served to table came in serving utensils from which diners might help themselves.  Some utensils might contain main dishes, some might contain subsidiary items, such as vegetables, and some might contain sauces, such as curry sauce.  We find that, in practice, it would be difficult to distinguish how many full meals were brought to a table occupied by a number of people.  We find that it might well be the case that one or more diners who had been observed were not eating a full meal.

22.	These reservations are insufficient, in our view, to invalidate the observations, which we find to have been carefully and accurately made otherwise.  But they do have an impact on the conclusions that might validly be drawn from them by the assessing officer.      

23.	The method of the assessments was to calculate a meal average from the bills declared by the appellant for each of the observation days, find how many additional customers were allegedly represented by the “bulk bills” by dividing their totals by the meal average, and thereby arrive at the total number of customers declared by the appellant.  The total of the customers observed by the officers, less the total number of customers declared by the appellant, would then represent a shortfall of declared customers.  From that shortfall, a suppression rate could be calculated.

24.	The resultant suppression rates calculated for each of the observation days respectively were as follows:

Saturday, 23 October 1999						40.68%
Tuesday, 23 November 1999						15.82%
Friday, 4 February 2000						42.61%.

25.	The assessing officer thought it best to derive a “weekend suppression rate” of 41.49% from the Friday and Saturday observation days taken together, and a separate “weekday suppression rate” of 15.82% from the Tuesday observation day.  She then applied these two suppression rates separately to the declared take for each quarter of the assessments, using the weekend suppression rate for the Fridays and Saturdays in that quarter, and the weekday suppression rate for other days.

26.	We find that that was a reasonable way of proceeding, so long as Miss Goodwin could properly assume that there had indeed been a shortfall of declared customers at the levels supposed.  In that regard, she was entitled to have regard to the information obtained by the officers of Customs who had eaten meals in the restaurant on observation days.  

27.	However we think that it is a valid criticism of the observations that certain assumptions were being made by the observing officers, that could well be, and we think probably were, wrong.  Without doubting the observing officers’ sincerity, we question what they in fact saw.  Who was eating food ordered by themselves and who was not?  Miss Goodwin told the tribunal that she made no allowance for meal sharing, but was it reasonable for her not to have investigated whether that might be the case here?   

28.	It appears to us that, particularly on the Friday and Saturday observation days, not all those present in the restaurant can have been eating full meals.  On the Friday observation day, 44 “covers” were declared, as against 78 alleged; for the Saturday observation day, the figures are 70 declared, as against 118 alleged.  Bearing in mind (a) the length of time taken to cook a main meal; (b) the personnel available to cook those meals; and (c) the scope for misinterpretation inherent in the difficulty of determining purely from observation which persons might or might not have been eating a full meal, we think that the number of “covers” observed by Customs could well have been – and we think probably was – overstated.  

29.	We find that, on both the Friday and Saturday observation days, a certain number of those observed to have eaten meals were probably sharing or eating little or nothing.  We are assisted in that conclusion by what was observed on the Tuesday observation day.  On that day, using Customs’ method of calculating “covers” in relation to “bulk bills”, only 4 “covers” were found to be absent from those declared.  Yet we find that “bulk bills” constitute an imperfect way of calculating “covers”.  “Bulk bills” would arise, as we have found, when parties of customers, some of whom might not order main meals, had their expenditure totalled for purposes of record.  We think that Miss Goodwin has applied precision to the calculation of the number of “covers” demonstrated by “bulk bills” when the reality is that those documents are less than satisfactory from the point of view of demonstrating how many individuals bought food and drinks .

30.	There were only two instances in this case in which the appellant failed to declare bills for food consumed by pairs of observing Customs officers.  Given that the observations were conducted incognito, it does appear that some degree of suppression was present, but not, we think, at as high a level as interpreted by Customs.

31.	Making his submissions on behalf of Customs, Mr Puzey submitted that, even allowing for the deletion of one table from the observation plan, 50 “covers” were possible, and the observing officers “saw what they saw”.  We accept that they believed what they saw, but we have concluded that what they saw probably does not entirely bear out Miss Goodwin’s calculations.  

32.	Mr Puzey invited us to take with a pinch of salt the numbers for whom the restaurant was licensed.  According to the plan produced by the appellant, more than that number could, he said, be seated.  Also there was evidence from observing officers that they had been served alcohol “after hours”.  But we do not believe that those matters are decisive.  Nor does the evidence unequivocally demonstrate that the establishment was catering in excess of its licence.

33.	On behalf of the appellant, Mr Devadason submitted that the appellant’s business could not have operated at the levels suggested by Customs.  The size of the restaurant and its capacity for serving meals were such that the observations of Customs as to the number of “covers” must be regarded as misleading.  He reiterated the appellant’s grounds of appeal.  He submitted additionally that the appellant had correctly accounted for all her takings and the value added tax payable.  She had used procedures that should be regarded as acceptable to Customs.  Customs had misinterpreted the “bulk bills” which did not have the effect contended for by Customs.

34.	In our view there is force in Mr Devadason’s submissions, for the reasons we express in paragraphs 27 to 30 above.  We accept his submission that it was unreasonable on the part of Customs not to take those matters into account in constructing the assessments.  We think, however, that the observations of Customs do demonstrate some level of suppression.  These are not assessments that should be struck down as not being to the best judgment of Customs.  On the contrary, they constituted an honest and genuine (though, as we have found, a flawed) attempt to make a reasoned assessment of VAT payable by the appellant .  Accordingly, we must attempt to do justice in this case by modifying the assessments rather than by discharging them.  

35.	The difficulty is to decide how the assessments should be adjusted.  We are handicapped by the fact that this appeal has been conducted on an “all or nothing” footing.  No alternative basis of calculation has been put forward on behalf of the appellant, for the simple reason that her case is that, if flawed, the assessments should be discharged in their entirety.  We are not prepared so to decide in a case such as this, where the observations demonstrate that there has probably been some level of suppression.  Accordingly we must see what we can do to identify a basis for adjusting the assessments.  Any such basis is bound to be arbitrary and to meet with the disapproval of both parties.  

36.	Doing the best we can in the circumstances, we think that it would have been reasonable for Miss Goodwin to allow a deduction of 10 per cent to reflect the uncertainties inherent in the case.  It was not reasonable for her to have made no allowance for such matters, but a greater factor than 10 per cent would in our view fail adequately to take account of the well-conducted observations on which, as we have held, she reasonably relied.  

37.	We therefore allow the appeal to that extent.  The assessments will be reduced to 90% of the amounts assessed for the periods to which the assessments respectively relate.           

38.	We direct that the appeal may be restored to the list, if either party requires, for the limited purpose of argument as to costs.  It may assist for us to indicate, without at this stage having heard submissions as to costs, that we are provisionally minded to order that Customs should pay the appellant two thirds of her costs, seeing that the appeal has succeeded, but that it has not succeeded to the extent that the assessments have been discharged.  But it may be that we could be persuaded to make a different order.

M S JOHNSON
CHAIRMAN
Released:
MAN/01/0897