Hare v  Customs and Excise [2004] UKVAT V18696 (16 July 2004)

18696

VAT ASSESSMENT – Best Judgment – Yes – Was the Assessment for the Amount of VAT Correct – Yes– Appeal Dismissed

LONDON TRIBUNAL CENTRE

	MRS NOELEEN HARE        	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	          Respondents

				Tribunal: Michael Tildesley	 (Chairman)
					    Caroline de Albuquerque (Member)	

					 	

Sitting in public in London on 13 and 14 May  2004

Samuel Hare for the Appellant

Sarabjit Singh Counsel  for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The Appeal

1	The Appellant is appealing against as assessment for VAT in the sum of £25,359 for the period the quarter ending 11/99 to the quarter ending 05/02 issued by the Respondents on 24 October 2002 which was subsequently amended by letter dated 25 February 2003.

2.	The grounds of the Appeal are set out in the Notice of Appeal dated 15 November 2002, namely:

“The assessment was estimated by the Commissioners on previous figures which can fluctuate from day to day astronomically, and an average, in a fair sense is almost impossible to estimate. As a small family business we do not earn this type of money”.

The Legislation

3.	Section 73 of the Value Added Tax Act 1994 provides that:

“Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are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”.

The Issues

4.	Mr and Mrs Hare run a public house known as “The Cape of Good Hope” at 78 Albany Street, London NW1 4EE. Mrs Hare was registered as a sole proprietor for VAT from 1 June 1995 under registration number 667 5098 9. The Respondents’ assessment for unpaid VAT against Mrs Hare was based upon the records and accounts kept by the Appellant.

5.	The issues to be decided by the Tribunal are as follows:

a)	Whether the Respondents were entitled to exercise their power of assessment  for VAT against Mrs Hare?
b)	Whether the Respondents’ assessment for VAT on Mrs Hare was made to the best of their judgement?
c)	Whether the amount of the assessment was the correct amount of VAT for which Mrs Hare was liable?

6.	It is for Mrs Hare to prove on the balance of probabilities that the tax assessment of 24 October 2002 was not made to best judgment, or was excessive and should be reduced.

The Evidence

7.	The Tribunal. heard evidence from Mr and Mrs Hare and from Miss Jones and Miss Tucker, Customs and Excise Officers, for the Respondents. A bundle of documents was  presented to the Tribunal.

8.	Mr and Mrs Hare were joint tenants of “The Cape of Good Hope” public house under a ten year lease with a brewery. There were two and half years left on the lease. The rent was £691 a week. Mr and Mrs Hare were required under the lease to purchase the beer from the brewery but not spirits. Mrs Hare held the justices’ on licence for the sale of alcohol from the premises. She was also registered for VAT as a sole proprietor from 1 June 1995. The public house was situated in Regents Park Estate, North West London. According to Mr Hare it was a normal pub with two bars. The business depended upon a regular clientele drawn from nearby housing. Passing trade constituted a small part of the customer base for the public house.

9.	Mr and Mrs Hare lived in the public house with two of their daughters. They were very much part of the local community. Mr Hare was born and brought up in the area. Mrs Hare had lived in the locality with her husband for the past 30 years. They had many friends there with the pub providing the venue for local Christenings and parties. 

10.	The public house was open for the sale of alcohol seven days a week: 12 midday to 12 midnight, Monday to Saturday, and 12 midday to 10.30pm on a Sunday.  The public house also opened at 7.30am when breakfasts were served to customers until 12 midday. 

11.	Mr Hare worked about 14 hours a week in the pub, although it was difficult  for him to be precise about the actual number of hours worked. He used to have a painting and decorating business which finished about year 2000. Some of the income from that business had gone into the pub to keep it afloat. Mrs Hare was responsible for opening and closing the pub. She did all the cleaning herself and served behind the bar. Family and close friends helped Mr and Mrs Hare with the running of the pub. Their eldest daughter was responsible for preparing and serving the breakfasts. Mr and Mrs Hare took no drawings from the business. No wages were paid to friends and family who helped in the public house.  

12.	In August 2003 “The Cape of Good Hope” was raised to the ground by fire. The public house was re-opened the week before Christmas 2003. However, some work still needed to be done on the pub to bring it up to standard. Mr Hare and his son were doing many of the jobs themselves in order to save money because the public house was not fully insured.

13.	No VAT returns were submitted by Mrs Hare in respect of the pub until quarter 05/99. Prior to that date Mr and Mrs Hare were paying the VAT due as stipulated on the Respondents’ central assessment form. This form, however, was generated automatically by the Respondents’ computer when a trader did not submit a VAT return.   The amount of VAT specified on the central assessment form was not an accurate assessment of the VAT owed by Mrs Hare because it was not based on the actual business records for “The Cape of Good Hope”.

14.	The VAT returns submitted since 05/99 were for repayments of VAT. Mr Hare explained to the Tribunal that he had visited the VAT Office at Thomas Paine House, London where Officers advised him on completion of the first VAT return. He  followed the advice given when filling out subsequent returns. Mr Hare could not explain why the business was in a “repayment situation”. In his view he was simply carrying out the instructions of the Officers who advised him.

15.	On the 6 May 1998 the Respondents made an unannounced visit on Mrs Hare at  “The Cape of Good Hope” when Officer David Hall discovered that Mrs Hare did not keep any business records. Following the visit, Officer David Hall issued a letter dated 4 June 1998 to Mrs Hare setting out the business records required to be kept by her for a minimum period of six years. On 12 August 1998 Officer David Hall  conducted an educational visit on Mrs Hare when he discussed the issue of the missing returns and the contents of his letter dated 4 June 1998. He showed her how to complete a VAT return and warned her about the potential serious consequences of not furnishing the returns on time and not keeping the appropriate business records.

16.	On the 9 May 2002 Officers Ray Johnson and Emma Cunningham visited “The Cape of Good Hope”. The visit had been identified by the Respondents’ computer programme as priority because of the history associated with the business of non-compliance with furnishing VAT returns followed by a pattern of returns requesting repayment. The Respondents considered it unusual that a public house would be in a “repayment situation” because pub overheads were generally low and predominantly it was a “sales business”. The Officers discovered that Mr Hare calculated the output tax due on the total money paid out for purchases rather than using the sales figures. Mr Hare did not refer to the till readings to calculate the output tax. 

17.	Officer Ray Johnson revisited the premises on 3 July 2002. He found that Mr and Mrs Hare kept no record of the gross take from the payphone, gaming machines, jukebox, pool table and cigarette machines. Mr Hare explained that the machines were emptied twice a week, however, in the intervening periods Mr and Mrs Hare would take money from the machines to use for change or to buy goods. Officer Ray Johnson also discovered that there was no record of the gross take from food sales. Mr Hare supplied Mr Johnson with the bar till Z readings for the month of February 2002 which included 28 readings in all. Mr Johnson, however, discovered by looking at the cumulative total that 23 Z readings were missing.  
 
18.	On 10 July 2002, Officer Ray Johnson issued Mrs Hare with an assessment for unpaid VAT of £39,734 for the period 08/99 to 05/02. He calculated that the percentage of undeclared bar sales was 82.14%, using the February 2002 till roll, which included the missing Z readings. Thus the total amount of undeclared output tax on bar sales for the specified period was £32,265. He assessed the amount of output tax undeclared on the machines including the payphone and the pool table at £423 per quarter which totalled £5,076 for the assessment period. He arrived at the assessment for the machines by consulting with more experienced colleagues about the “industrial norm” for takings on those machines. Finally Officer Ray Johnson assessed the undeclared tax on food takings at £2,393. This was based on the takings of £108.50 for food on 2 July 2002 when a Z reading was taken on the food till multiplied by 30 days for each month starting in January 2002 when the food business began, according to Mr Hare.

19.	On 30 July 2002 Mrs Hare wrote a letter to the Respondents requesting them to visit the premises again to recheck the till takings.

20.	On 22 August 2002 at 22:20 hours Officers Catherine Jones and Hannah Tucker visited  “The Cape of Good Hope” unannounced. The Officers together with Mr Hare cashed up the bar till and the food till. The Z reading for the food till revealed that £117.35 had been keyed in on 22 August, the amount of cash in the till amounted to £158 which included a £30 float. The Z reading for the bar till showed £254.25, whilst the amount of cash in the till stood at £311.20 of which £100 was the float. Mrs Hare explained the discrepancy by pointing out that she had lent her neighbour cash from the till. Officers Catherine Jones and Hannah Tucker spoke with Mr and Mrs Hare about the running of their business and the reasons why there were two Z readings for most days in the February till roll. A test purchase on 4 September 2002 involving other Officers established that all sales were rung through the till.

21.	On 15 October Officer Catherine Jones advised Mrs Hare in writing that a local review of the July assessment had been conducted. The review took into account the findings of Officer David Johnson and the information gathered by herself and Officer Hannah Tucker. Based upon that information Officer Catherine Jones upheld the assessment of Officer David Johnson in respect of the unpaid VAT for food takings, payphone, pool table, gaming and playing machines and the jukebox. Mr and Mrs Hare informed Officers Catherine Jones and Hannah Tucker that the food business did not start until March/April 2002. Officer Catherine Jones, however, was not prepared to alter Officer David Johnson’s finding that the food business started in January 2002 because Mr and Mrs Hare produced no evidence such as purchase invoices for food and kitchen utensils to substantiate their assertion. 

22.	Officer Catherine Jones altered the assessment for the bar takings and cigarettes. In respect of the former she  analysed  the August 2002 bar takings as recorded on the Z till rolls which revealed average daily takings of £413.42. The estimated suppression rate for August 2002 was 32% compared with 82% suppression rate found by Officer David Johnson. Thus she amended downwards the assessment for bar takings to £18,497.  Her assessment of unpaid VAT for cigarettes sales, however, was amended upwards to £7,884 for the relevant period. This fresh assessment was calculated using the purchase invoices for cigarettes supplied by Mr and Mrs Hare and estimated sale prices for packets of cigarettes. In contrast Officer David Johnson’s assessment for cigarette sales was based on “industrial norms” for cigarettes sales. Officer Catherine Jones, therefore, issued Mrs Hare on 24 October 2002 with a new assessment for unpaid VAT  in the sum of £28,774. 

23.	On 25 February 2003 Officer Catherine Jones revised her assessment dated 24 October 2002 which produced a lower figure of  £25,359 for the period 11/99 to 05/02. This reduction came about because she accepted Mr and Mrs Hare’s further submissions regarding the number of days per week when food was served: five days instead of seven; and that packets of cigarettes were sold for £4 in the public house rather than £4.30/£4.50. Officer Catherine Jones was also provided with three years of Z readings of the bar till dating back to 1999 by Mr and Mrs Hare, from which she calculated an average daily take of £419 by deducting the accumulative total recorded on  the first  Z reading from that recorded on the last Z reading divided by the number of Z readings. The figure of £419 was greater than the average daily take of £413.42 used by Officer Catherine Jones in the assessment dated 24 October 2002. However, Officer Catherine Jones decided in her revised assessment to stick with the lower figure for average daily takings which worked to the benefit of Mrs Hare.

24.	Mr and Mrs Hare considered that the figure of £413 was too high for the daily takings in respect of bar sales. Mr Hare estimated the figure to be in the region of £200-£250. He produced to the Tribunal Z readings for the period September to November 2000; and for the months January and March 2004.  The Respondents calculated the average daily take for the period September to November 2000 at £269. The average amount recorded for the January 2004 Z readings presented to the Tribunal was £320.75.	Mr and Mrs Hare said that business was unpredictable, fluctuating from day to day.

25.	 Mr Hare accepted that the assessments for the cigarettes sales, the gaming machines, juke box and pool table were correct. He considered that the assessment of £25 per month for the payphone was on the high side. He estimated the takings from the phone at £15 per month. Mr Hare also pointed out that the payphone shared the same telephone number with Mr and Mrs Hare’s private telephone. 

26	Mr and Mrs Hare stated that the selling of meals was not part of the public house business. Mr Hare told the Tribunal that his daughter looked after the selling of meals. It was her little business with none of the sale proceeds going into the pub. His daughter had been a trainee manager with a bookmaker  but she did not enjoy the job and wanted her own business. Mr and Mrs Hare offered her the opportunity to sell meals in the pub, which did not interfere with the running of the public house because meals were served in the morning before the pub opened. The meals were served from the kitchen within the bar area. There was another kitchen upstairs which was used by Mrs Hare.  The meal business did not have a separate identity from the public house, although it was known locally as “Charlene’s café”. The daughter had no printed cards advertising the café. Mr Hare told Officer Catherine Jones that his daughter ran the food business.

27	Officer Catherine Jones in her testimony explained the various readings recorded on the till roll. She confirmed that the accumulative total recorded on the till roll would not be affected by electricity failures, only an engineer could reset the totals recorded. Mr and Mrs Hare gave her three years of Z readings for the bar till roll.  However, Officer Catherine Jones was unable to confirm the precise dates for the Z readings because the dates were not correctly set on the till. She, therefore, accepted Mr and Mrs Hare’s account that the Z readings represented a period of three years dating back to 1999. The Z readings supplied by Mr Hare for the period September – November 2000 were included in her analysis of  the three years of Z readings. Thus the average daily take of  £269 for this three month period would have been accounted for in the calculation of £419 representing the average daily take over the three year period. Officer Catherine Jones did not regard the selling of food as a separate business from the public house.

28.	Officer Hannah Tucker re-iterated that the assessment for the gaming machines, pool table and the pay phone was based on the “industrial norms”. Although she considered the assessment for the pay phone as low, particularly as £3 had been taken from the phone on her unannounced visit. Her assessment of industrial norms was based on her experience of carrying out VAT assessments of 30 to 40 public houses and similar establishments.

Authorities

29	We were referred to the following authorities:

	Van Boeckel v Customs and Excise Commissioners [1981] STC 290-297
	Rahman v Customs and Excise Commissioners [1998] STC 826-840
	Rahman v	Customs and Excise Commissioners [2002] EWCA Civ 1881

Our Findings of Fact and Reasons

30	The issues to be determined sequentially in this Appeal are as follows:

a)	Whether the Respondents were entitled to exercise their power of assessment  for VAT against Mrs Hare?
b)	Whether the Respondents’ assessment for VAT on Mrs Hare was made to the best of their judgement?
c)	Whether the amount of the assessment was the correct amount of VAT for which Mrs Hare was liable? 

Whether the Respondents were entitled to exercise their power of assessment for VAT against Mrs Hare?

31	Mr and Mrs Hare began to submit VAT returns from the period 5/99. However, those returns were for repayments of VAT which the Respondents regarded as highly unusual because public houses were predominantly a sales business. The Respondents, therefore, identified  “The Cape of Good Hope” as a priority visit which was undertaken by Officers Ray Johnson and Emma Cunningham on 9 May 2002. The Officers found that Mrs Hare failed to keep a range of accounting records including details of the daily gross takings for bar and meal sales, the gaming machines, pool table and telephone. The VAT returns submitted from the period 5/99 had been calculated by Mr Hare on purchases rather than sales. The Respondents had advised Mrs Hare about what records she needed to keep for VAT purposes on 6 May 1998 when Officer David Hall made an educational visit to the business. In the light of these facts found, we are satisfied that the Respondents were justified to conclude that the returns submitted by Mrs Hare were incomplete or incorrect and, therefore, entitled to exercise their power of assessment for VAT against Mrs Hare. 

Whether the Respondents’ assessment for VAT on Mrs Hare was made to the best of their judgement?

32	The legal test for “best judgement” is summed up in the judgement of Mr Justice Woolf in Van Boeckel v Customs and Excise Commissioners [1981] STC 290-297 at page 290:

“In assessing the amount of tax due “to the best of their judgement”… the Commissioners were required to consider fairly all material put before them by the taxpayer and on that material make a decision which was reasonable as to the amount of tax due. They were not required to make investigations so long as there was some material on which they could reasonably base an assessment, but if they make any investigations, then they had to take into account the material disclosed by that investigation”.

33.	We find as fact that the Respondents based their assessment for VAT due on bar sales on the primary accounting records, namely the Z readings on the till roll. In respect of this assessment the Respondents relied initially on the Z readings taken in February 2002 but then modified their assessment in the light of additional material coming to light, namely the August 2002 Z readings and the three year batch of readings. The Respondents decided finally to calculate the VAT due on bar sales by using the average daily takings for the August 2002 Z readings. Although the August 2002 Z readings were outside the period of assessment  (quarter ending 11/99 to quarter ending 05/02), the figure for the average daily takings in August was lower than the corresponding figures for February 2002 and the three year batch of readings which was to the advantage of Mrs Hare.

34.	The Respondents based their assessment for VAT on meal sales by using the lower figure of daily takings recorded on the till rolls for two separate days in July and August 2002.  Mr and Mrs Hare produced no evidence to the Respondents which challenged the reasonableness of relying upon the lower figure to assess the VAT due. Mr and Mrs Hare, however, did make representations to the Respondents about when the food sales started and the number of days the public house was opened for meals. Officer Catherine Jones requested from Mr and Mrs Hare documentation to substantiate their representations but none was forthcoming. In those circumstances the Respondents amended their assessment by reducing the number of days from seven to five but not the start date.

35.	The Respondents originally assessed the VAT due on the sales for cigarettes on norms for the industry. Officer Catherine Jones recalculated the assessment after Mr and Mrs Hare supplied her with the purchase invoices for cigarettes which increased the amount of VAT owing but provided a more reliable figure for Mrs Hare’s business than one based on “industrial norms”. Officer Catherine Jones used in her assessment estimated sale prices for the cigarette packets of £4.30 and £4.50. Mr and Mrs Hare pointed out to her that they sold the cigarette packets for £4 which Officer Catherine Jones took on board and redid the assessment resulting in a reduction in the amount of VAT owing.   

36.	Mr and Mrs Hare kept no records of the takings from the jukebox, payphone, gaming machines and pool table. Officer Raymond Johnson consulted with Officer Hannah Tucker, a more experienced colleague, about the method of assessment for these sales. She advised him on the “norms for the industry” gained from her experience of carrying out VAT assessments of 30 to 40 public houses and similar establishments. Mr and Mrs Hare were given the opportunity to provide evidence in relation to these takings so that an assessment geared to their specific business could be carried out. Mr and Mrs Hare produced no evidence to contradict the assessment based on “industrial norms”. Spot checks on the amount of money in the machines at the time of the visits by the VAT officers would not have produced a more reliable guide than  “industrial norms” because of Mr and Mrs Hare’s practice of regularly taking the money from the machines for use as change in the business.

37.	We are satisfied from the facts found that the Respondents based their original assessment on accounting records kept by Mr and Mrs Hare and on “industrial norms” where no records were kept. We find that the Respondents made their value judgement on that material honestly and bona fide. The Respondents pursued further lines of enquiry and revised their original assessment when supplied with new information by Mr and Mrs Hare.  Their final assessment in our opinion was reasonable and not arbitrary.  In the light of our findings we conclude that the Respondents’ assessment for VAT on Mrs Hare was made to the best of their judgement.

Whether the amount of the assessment was the correct amount of VAT for which Mrs Hare was liable?

38.	Mr and Mrs Hare challenged the amount of VAT owing in three areas. First the figure of £413 as the average daily takings for bar sales was too high. Second the food sales were not part of the business. Third the assessment for the pay phone was on the high side.

39.	Mr and Mrs Hare suggested that a more realistic figure for the average daily takings for the bar sales was in the region of £200-£250. Mr Hare produced to the Tribunal Z readings for the period September to November 2000; and for the months January and March 2004.  The calculated average daily take for the period September to November 2000 was £269 whilst the average amount recorded for the January 2004 Z readings was £320.75.  We considered that the figure for January 2004 was not relevant to the issues in this Appeal. January 2004 was outside the period under assessment. Also the business in January was in the process of being rebuilt following the disastrous fire at the premises. The figure for September to November 2000 was relevant because it was within the assessment period under dispute. However, the Z readings for this period were part of the three year batch of till rolls which had generated a figure of £419 for the average daily take after analysis by the Respondents.  We conclude that there was no evidence to justify a change in the Respondents’ assessment for the amount of VAT owed by Mrs Hare in respect of bar sales.

40.	 Mr and Mrs Hare contended that the food sales were not part of the business of the public house but run as a separate business by one of their daughters. Mr and Mrs Hare produced no documentary evidence to substantiate their contention, such as a written agreement between them and their daughter separating the two businesses. Mrs Hare accepted that there was no material advertising the separate existence of “Charlene’s Café”.  The food was prepared in the kitchen within the bar area of the public house and served in the public areas. We are, therefore, satisfied that the facts found demonstrate that the food sales were an integral part of the public house business and that Mrs Hare was liable to pay the VAT assessed on them.

41.	 Mr Hare suggested that £15 per month was a more realistic assessment of the VAT computation for the pay phones rather than the £25 estimated by the Respondents. He also mentioned that the payphone shared the same telephone number with the private telephone line for Mr and Mrs Hare. Mr Hare was unable to support his estimate with documentary evidence. The Respondents’ assessment was based upon “industrial norm” which drew on one Officer’s experience of 30 to 40 public houses. Also the Officers had counted £3 in the pay-phone cash box on their unannounced visit in August 2002 which indicated to them that their assessment was an under estimate. In the circumstances we are satisfied that the assessment of £25 per month represents the amount owed by Mrs Hare in unpaid VAT for the payphone.

42.	Mr and Mrs Hare did not dispute the assessments for cigarettes sales, the pool table, the gaming machines and the juke box.

43.	We conclude from our findings of fact that the Respondents’ assessment for VAT in the sum of £25,359 is the correct amount of VAT for which Mrs Hare is liable.

Our Decision

44.	We have decided for the reasons set out above that

a)	The Respondents were entitled to exercise their power of assessment for VAT against Mrs Hare.
b)	The Respondents’ assessment for VAT on Mrs Hare was made to the best of their judgement.
c)	The assessment of £ 25,359 for the period the quarter ending 11/99 to the quarter ending 05/02 was the correct amount of VAT for which Mrs Hare is liable.

45.	We, therefore, dismiss the Appeal and make no order for costs. Mrs Hare is required to pay the assessment for £25,359.

Other Matters

46.	When giving evidence before the Tribunal Mr and Mrs Hare were most concerned about implied suggestions that they were deliberately trying to avoid their legal responsibilities for returning the correct amount of VAT. Mrs Hare stated that “anything that was done wrong was not intentional … I still don’t understand VAT”.  We note that the Appeal proceedings before the Tribunal did not involve allegations of dishonesty by the Respondents against Mr and Mrs Hare.  Mr and Mrs Hare gave explanations for the missing Z readings in February, which were challenged by the Respondents for lacking credibility. We did not consider this dispute between the parties was relevant to the issues before us, so we made no determination on the disputed facts relating to the missing Z readings.

47.	We took cognisance of Officer Catherine Jones’ statement that no interest for unpaid VAT had been levied on the assessment. We noted, however, from the documents provided that there were outstanding balances for a misdeclaration penalty and default surcharge which were not part of this Appeal. We would suggest that Mr and Mrs Hare contact the Respondents to resolve the outstanding matters.

MICHAEL TILDESLEY
CHAIRMAN

RELEASED: 16/07/2004

LON/2002/1017