18888

	VALUE ADDED TAX - assessment – transfer of an existing business manufacturing wholesale and retail three piece suites–– under declaration – commissioners method of calculating assessment changed from number of frames purchased to number of foam sets purchased - assessment to best judgment – no co-operation from Appellant –100% penalty under section 60 (1) value Added Tax Act 1994 – no reduction - appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	FIROZ OMAR	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 David Porter (Chairman)
						 J T Brian Strangward 
						 Marjorie Kostick BA FCA CTA	
						
Sitting in public in Manchester on 5 November 2004

Philip Rayner for the Appellant 

Nicholas Mason of counsel, instructed by the Solicitor’s office of HM Customs and Excise, for the Respondents

	© CROWN COPYRIGHT 2004

DECISION

1.	Firoz Omar appeals against an assessment dated 17 April 2002 pursuant to section 73(1) of Value Added Tax Act 1994 in the sum of £29,048 and an assessment dated 21 August 2002 pursuant to section 60(1) of the 1994 Act to a penalty in the like amount.
2.	Philip Rayner, of Portcullis VAT Consultants Limited, appeared for the Appellant and the Appellant gave evidence through an interpreter Nilesh Vyas, both of whom affirmed before giving evidence. Nicholas Mason of counsel appeared for the Commissioners, and produced a bundle of copy documents. Kristine Partington gave evidence on behalf of the Commissioners. 
3.	The Tribunal were asked to address two preliminary issues. 
(i)	There had been an application by the Commissioners on the day prior to the hearing that Peter Sharrock, the officer who made the decision to raise the penalty, should attend and for the appeal to be adjourned to a convenient date for that purpose. That application had been refused but a further application for the adjournment was withdrawn at this hearing and both parties agreed that the matter could proceed without Peter Sharrock giving evidence. 
(ii)	Nicholas Mason produced to the tribunal an amended assessment in the sum of £26,538, which had not been notified to the Appellant nor to his representative. In a letter dated 8 May 2003 the Commissioners wrote to Portcullis VAT Consultants Limited explaining that output tax of £1,255 had been over declared for the period 02/01. They considered the output tax should be reduced to nil for that period and deducted from the assessment for the previous period 11/00. The letter did not identify the amount of the new assessment but merely explained the mathematical error and that an amended assessment would be sent in the near future. The amended assessment was never sent out. As a result the amended assessment although valid is unenforceable because it has not been notified to the Appellant nor his representative (see s73(9) and (10) value Added Tax Act 1994). The statement of claim and the entire appeal has been based on the earlier assessment of 17 April 2002 and as that assessment has not been withdrawn nor cancelled this appeal will be heard on the basis of that assessment. 
4.	It was agreed at the hearing that as the assessment gave rise to a penalty, the Commissioners, represented by Nicholas Mason, should go first. We heard evidence from Kristine Partington the visiting Officer and later from the Appellant through the interpreter and found the following facts.
5.	The Appellant owns a business “Fahim Upholstery” that manufactures three-piece suites. The upholstery work is carried on from a workshop in Blackburn but it is unclear how many people the Appellant employs. He indicated to Kristine Partington when she visited his premises, that he employed nine people, but the accounts showed that he had between 17 and 21 employees. The three-piece suites consist of two chairs and a sofa. Padded stools are also manufactured. The three-piece suites are fabricated from frames, which are purchased ready made to which is attached foam. The foam is purchased in sets. The frames and the foam are then covered in fabric. Some of the suites are of standard quality whereas others require additional padding.  It is unclear whether a set of foam merely contains sufficient foam to make up a suite or whether it includes additional foam to allow for extra padding. The Appellant, through the interpreter, was unwilling to confirm not only whether there was extra foam purchased but also what price, if any, he paid for the extra foam, if the suites required additional padding. In the circumstances we are satisfied that a set included enough foam to make the suites. The Appellant confirmed at the time of the visit by Kristine Partington that the only stock he had was that which could be seen on the premises. The annual accounts showed that the opening stock was nil when he took over the business in June 1999. 
6.	We are asked to decide on what basis the calculations for the assessment should be made. Philip Rayner considers that the calculation for the provisional assessment of £20,220, based on the number of frames purchased, accurately identifies the Appellants turnover for the periods in question. The Commissioners are of the opinion that a calculation based on the amount of foam sets purchased more accurately identifies the Appellant’s turnover. There are only three suppliers of foam sets and all of them are registered for VAT. There are several suppliers of the frames and many of them are not registered for VAT. 
7.	Kristine Partington explained that she visited the Appellant’s accountant on 14 August 2001 on a routine visit with regard to the Appellant’s business. She produced no traders notes to the tribunal and explained that she now used a lap-top and she no longer had access to her notes. It emerged at the hearing that her notes are available and Philip Rayner produced them to the Tribunal. Kristine Partington conceded that they were her notes. The notes indicated that the previous owner had been under investigation and that her visit was prompted by those investigations and it had not been a routine visit.   We find that to be the case and refer to it later in our decision. 
8.	Kristine Partington examined the Appellant’s books and records whilst she was at his accountant’s office and she found that they were far from complete. As a result she then went with the Appellant to his work place and identified the stock position. She wrote to the Appellant setting out her preliminary calculations, which were based on the number of frames purchased by the Appellant.  She considered that to be the most accurate method of calculating the under declaration. Her preliminary calculations suggested an assessment of £20,220 based on 1,534 frames.
9.	M A Ibrahim, the Appellant’s accountant, replied to her correspondence and identified two areas, which he considered had been incorrectly incorporated in her workings. He considered that the weighted average price between the wholesale and the retail prices for the frames should be £75. As a result the weighted average price for a completed suite should be £459.51 and not £521.78 used by her in her calculation. Kristine Partington agreed and used the figure of £459.51 in her subsequent calculations. 
10.	Kristine Partington then changed her method for calculating the assessment. She decided to use the number of foam sets purchased to arrive at the likely turnover. She decided that the invoices from the foam suppliers were a more reliable source of information than the invoices in relation to the frame sets. She has used the value of the invoices from the J & A Foam. (See p23 to 38 in the bundle).  Her calculations are based on 1,888 foam sets. She has used the agreed average weighted price of £459.51, which produces a VAT liability of £29,056 rounded down to £29,048. She concedes that there is an additional error in her invoice list for the first period from 02/06/1999 to 31/08/1999 (see page 5 of the bundle) in that she has omitted to add in the first three numbers on the invoice list, which amount to £2,507. This amount has not been brought into her calculations. She also confirms that she has allowed the Appellant’s declared input tax when working out the assessment. The assessment also needs amending to £26,538 to allow for the error of the two amounts of £1,255 totalling £2,510 mentioned earlier, which would have been corrected by the amended assessment. The parties agreed that this reduction should be made.
11.	The Appellant gave evidence through the interpreter. He confirmed that he knew who his suppliers were and the amount he paid to them, but was evasive when asked to be specific as to the cost of the additional foam. He indicated that he had members of staff, who with his authority looked after the supplies and payments. As far as he was concerned, his books were up to date and all the necessary information was given to his accountant. He denied that he had been dishonest and that he had tried to hide the full extent of his activities.  We were left with the distinct impression that in spite of his answers he had a thorough working knowledge of the business, which he owned.  
12.	Philip Rayner raised four issues that he considers are relevant and submits that the assessment is not to best judgment:-
•	Kristine Partington was dishonest when she said that she did not have her trader’s notes to produce to the tribunal. It is clear from her notes that the previous owner had been under investigation and that she believed the previous owner was running the business. The visit had not been routine as she claimed
•	Her provisional assessment based on the number of frames purchased was to best judgment. When she changed the methodology to that based on foam sets she was using an unreliable source. It was unclear whether the foam sets had additional foam in them. Nor had she taken into account any wastage
•	There was a serious mathematical error in her additions from the Invoices, where £2,507 had been omitted.
•	It was also conceded that £1,255 had been added to the period 02.01 instead of being deducted. This had given rise to a proposed amended assessment, which reduced her figures by a further £2,510. That assessment had never been notified to the Appellant
13.	Philip Rayner referred us to the case of Mentford Limited decision number 16624 but did not elaborate on it. From our reading of the case we assume that Philip Rayner considers that Kristine Partington had not properly examined the sales invoices of J & A Foam Supplies and if she had she would have been put on enquiry as to their accuracy
14.	Nicholas Mason referred us to the cases of Van Boeckel v Customs and Excise Commissioners Simon’s Tax cases 1981 page 290 and Rahman ( trading as Khayam Restaurant) v Customs and Excise Commissioners Simon’s Tax cases 1998 page 826 It was not necessary for the Commissioners to do the work of the tax payer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due. They need to make a value judgment based on an honest appraisal of the relevant information. There was sufficient information available in the invoices for a reliable calculation to be made. There was nothing capricious in the way the calculations had been done. The figures provided by the Appellant were incomplete and he had refused to assist in anyway with the investigation. Kristine Partington had used the only available figures provided by the Appellant’s accountant in her calculations.  The assessment was to best judgement. 
15.	With regard to the proposed penalty a letter was written to the Appellant on 1 March 2002 advising him of the penalty procedure and inviting him to come to an interview. The Appellant refused to attend the interview. A subsequent letter had been written to the Appellant on 21 August 2002 setting out the penalty as 100% of the tax liability on the basis that there were no grounds upon which the Commissioners could reduce the amount of the penalty.
16.	Philip Rayner submitted that as the Commissioners had not called Peter Sharrock there was insufficient evidence to give rise to a penalty. He also submitted that if the assessment is not to best judgment then the appeal should be allowed and no penalty should be imposed.
17.	Nicholas Mason submitted that the Appellant had dishonestly failed to keep appropriate records. If he had been acting legitimately he would have been prepared to make a full disclosure. He had been selective as to the facts when giving his evidence and the under-declaration was substantial and could only be accounted for because the Appellant had deliberately withheld information. 
18.	We have considered the evidence and we have decided that the assessment is to best judgment. As the parties have agreed that there is an error for the periods  01.12.00 to 28.02.01 and 01.09.00 to 30.11.00  the assessment should be reduced by £2,510 to £26,538. 
19.	We also have decided that the Appellant has been dishonest and that a penalty of 100% be imposed. As a consequence of the reduction of the assessment the penalty will be similarly reduced to that figure.
20.	We accept that Kristine Partington was dishonest when she suggested that her visit to the Appellant arose from a routine visit. We do not accept that that dishonesty affects her calculation of the assessment. Chadwick LJ in Rahman (2) [2003] STC 150  
	“We are unable to accept that the test of best judgment is wholly subjective. Of course bad faith or vindictiveness are subjective being depended on the state of mind of the assessing officer. However the question whether an assessment is capricious or a spurious estimate or guess or wholly unreasonable does not depend on the officer’s state of mind although it may result from it…. Although the Commissioners are required to ‘fairly consider all the material placed before them and, on that material, come to a decision which is reasonable’.”
21.	We agree with the Commissioners that the calculation based on the number of foam sets is probably the most accurate way to calculate the under-declaration. Philip Rayner has accepted that if the calculation had been based on the original provisional assessment of £20,220 he would have agreed that the methodology was correct and the assessment would have been made to best judgement. The alternative calculations carried out by Kristine Partington base on substantially more reliable evidence are, in our view, to be preferred.
22.	The provisional figure of £20,220 to which Philip Rayner agrees shows that the Appellant must have significantly understated his turnover. That could only have been done dishonestly. We do not consider that the failure to call Peter Shorrock to give evidence in any way detracts from our finding that the Appellant was dishonest. The Appellant was given the opportunity to attend an interview after his accountant had raised specific objections but he failed to do so. Peter Sharrock had no more evidence before him than we have and he could have added nothing to the proceedings.  
23.	Neither party has made mention of the case of Pegasus Birds Ltd v Commissioners of H M Customs and Excise [2004] EWCA Civ 1015.Carnwarth LJ. no doubt because this appeal started in November 2002 and was set down for this hearing before the decision in that case.
24.	Carnwarth LJ has set out a guidance for the Tribunals when faced with “best judgment” cases which need to be adhered to:-
1.	The primary task for the Tribunal is to find the correct amount of tax - the burden of proof resting on the taxpayer.
2.	Any challenge to the assessment as a whole on “best judgment” must be clearly and fully stated.
3.	Any allegation of dishonesty or other wrong doing against those acting for the commissioners should be stated unequivocally; fully particularised; and responded to in writing by the commissioners. The Tribunal should not in any circumstances allow cross-examination of the Customs Officer concerned, until that is done.
4.	The hearing should be heard as to the amount of the assessment and where necessary any challenge to the “best of their judgment” and its consequences should be left to be dealt with at the end of the hearing
25.	We would comment with regard to this appeal that Kristine Partington agreed that she had visited the Appellant other than as a routine visit. Her dishonesty in that regard did not make her subsequent calculations capricious. If the allegations had been ventilated earlier as required by Carnwarth LJ the case would have been limited to the amount of the assessment. 
26.	For future cases allegations of dishonesty or wrong doing must be stated unequivocally and the commissioners must be given the opportunity to respond to those allegations in writing if the matter is to be heard before the tribunal.
27.	Nicholas Mason applied for the costs to be assessed by the tribunal if the dishonesty of the appellant for the purposes of the penalty is established. As dishonesty has been established we confirm that an application can be made accordingly if the costs cannot be agreed between the parties.

DAVID PORTER

MAN/02/0617

CHAIRMAN
Release Date: 29 December 2004