Coolbreeze Ltd v Customs and Excise [2004] UKVAT V18933 (09 December 2004)

18933
	
	VALUE ADDED TAX — assessment covering period of five years — whether partially out of time — VATA 1994 s 77(4) — whether dishonesty established — yes — whether assessment based on reliable method — yes— appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	COOLBREEZE LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Colin Bishopp (Chairman)
						Arthur Brown 	
						Peter Whitehead 

Sitting in public in Manchester on 15, 16 and 17 November 2004

Richard Barlow, counsel, instructed by Hollings Crowe Storr & Co, accountants for the Appellant

Nigel Poole, counsel, instructed by the solicitor’s office of HM Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2004

DECISION

1.	In this appeal, Coolbreeze Limited (“Coolbreeze”) challenges an assessment dated 3 March 1999 covering each of the accounting periods from 31 July 1993 to 30 April 1998 inclusive. The aggregate amount of tax assessed is £106,030.
2.	Coolbreeze was the proprietor of a night club, café bar and restaurant, using first the name “The Regal” and latterly “After Dark”, at premises in Skipton, North Yorkshire. It had taken over the business on 6 December 1995, as a going concern, from a partnership between two of its directors, Bipin Patel and Philip Cartman. The partnership had itself taken over the business as a going concern from the receivers of Onelot Leisure Limited, a company with which both Mr Patel and Mr Cartman had been involved, though Mr Cartman at least was not a director. The partnership acquired the business on 31 July 1993, the first day of the period covered by the assessment. 
3.	It was accepted by Richard Barlow, counsel for Coolbreeze, that the transfer of the business from the partnership to Coolbreeze fell within the provisions of section 49(2) and (3) of the Value Added Tax Act 1994 and Regulation 6(1)(d) of the Value Added Tax Regulations 1995 (SI 1995/2518), with the consequence that Coolbreeze assumed responsibility for the partnership’s outstanding VAT liabilities (while gaining the benefit of any extant input tax relief). Accordingly if it were shown that there had been under-declaration of its liabilities by the partnership, liability for that under-declaration devolved upon Coolbreeze. For the respondents, Nigel Poole of counsel accepted that as the Commissioners had assessed tax allegedly under-declared for periods more than three years before the making of the assessment, they must establish dishonesty, in order to satisfy the requirements of section 77(4) of the 1994 Act, which otherwise imposes a time limit of three years.
4.	The dishonesty they allege is that of Mr Cartman, of Janak Patel (Bipin Patel’s brother, who acted as consultant to the partnership and to the company but was neither a partner nor a director) and of Carol Power, Coolbreeze’s book-keeper. It was agreed that all three were convicted at Bradford Crown Court on 27 July 2001 of an offence which was charged in the indictment against them as “conspiracy to fraudulently evade VAT contrary to section 1 of the Criminal Law Act 1977”. Although the certificates of conviction produced to us do not recite the offence in those terms, it was agreed between the parties that all three were in fact convicted of the offence precisely as it is set out in the indictment. Mr Cartman and Mr Janak Patel were sentenced to terms of imprisonment, and Mrs Power was ordered to undertake community service. Mr Cartman and Mr Patel were also subjected to confiscation orders of £22,500 each. Mr Patel, we learnt, failed in an appeal against his conviction but was successful in a challenge to the confiscation order, though only to the extent that it was adjusted to correct an arithmetical mistake made by the judge. Mr Bipin Patel was not prosecuted. We will return to the question of dishonesty and to the validity of those parts of the assessment which relate to periods more than three years before its date, when we have dealt with the facts of the case. 
5.	We heard evidence from Angela McCalman, the officer who made the assessment, from John Wickes, another Customs officer, from Janak Patel, from Mr Cartman, from John Shackleton, a chartered accountant and from Derek Milns, a certified accountant. We had also a substantial number of documents, including extracts from the transcript of the criminal trial. 
6.	It was apparent from those documents that the Commissioners were looking into the Appellant’s business by as early as late 1995, and had been undertaking observations of the customers entering the premises, but the events with which we need to deal began on 21 June 1998 when Mr Wickes, in company with a number of other Customs officers, paid an unannounced visit to Mr Cartman’s home in order to undertake a search. During the course of the search, they found various documents among which, the Respondents say, were some containing true and accurate figures of the takings of the business. Those figures differ from the values declared in the records produced to Customs by the Appellant. The amount assessed consists of a calculated extrapolation of the difference between the figures shown in the discovered documents and those in the produced records, which could be reconciled to the VAT returns. The arithmetic of the assessment was not challenged and we do not need to deal with it, save to record Mr Barlow’s observation (to which we will return) that there is insufficient material to justify the Commissioners’ conclusion that, if there was any evasion at all, it occurred both during the period when the business was owned by Coolbreeze and during the earlier period when it was controlled by the partnership.
7.	There was a variety of seized documents (not all of which were found at Mr Cartman’s home) and the significance of the documents was explored at the hearing. As most were irrelevant to the making of the assessment itself, we do not propose to deal with them in detail. Of those produced to us, one was a set of what appear to be wages records, in one case containing a column headed “undeclared”, suggesting that some employees’ remuneration was partially or wholly concealed. A second was a notebook belonging to Janak Patel containing what Mrs McCalman suspected was a record of undeclared takings. However, while we do not believe the explanations of these documents which we were given by Janak Patel (his explanation of the “undeclared” remuneration was, frankly, incomprehensible and he told us the notebook was a record of his family’s income and expenditure), we do not feel able to draw any conclusion about what the documents truly represent. While none of them, in our view, directly supports the assessment, we detected nothing in them which was inconsistent with it, nor with the conclusion that there has been suppression. We concentrate henceforth on the discovered documents on which Mrs McCalman relied.
8.	They comprised, first, some handwritten sheets listing, as the sheets themselves make clear, takings and expenditure, and a further, single sheet on which appear, on the left hand side, what appear to be takings figures for the week ending 9 May 1998 and, on the right hand side, the equivalent figures for the week ending 10 May 1997. 
9.	Although Mrs McCalman did not give direct evidence that she had taken the figures shown on the handwritten sheets obtained by Mr Wickes as a record of the true takings, it was perfectly clear from the evidence as a whole that this was what she had done. Her comparison of those figures was with computer-generated records which Coolbreeze and (we deduce) the partnership before it had prepared for production to its accountants, Mr Milns’ firm, and which Customs obtained from Mr Milns. Mrs McCalman told us that her assessment was based entirely upon that comparison and on a further comparison between the figures set out on the single sheet and with the declared takings for the same two weeks; although she had reached the conclusion, from considering the observation records, that there had been under-statement of the number of paying customers, she recognized that those records were unreliable and did not use them in any way in arriving at her assessment. She had concluded that it was appropriate to assess for the entire period during which the partnership or Coolbreeze owned the business, as she could detect nothing in the pattern of declared takings which suggested to her that suppression had started at any particular time. On the contrary, the declared takings showed, in her view, steady growth over the entire period. She was aware that the premises had been expanded internally, by the creation of an additional bar, but she did not know when and she did not think this was a factor which undermined her conclusion. Mrs McCalman made no allowance for input tax on under declared purchases since she found no evidence that there had been any under-declaration of purchases.
10.	It was not in dispute that the night club part of the premises opened only on Fridays and Saturdays and that most of the Appellant’s trade took place on those two days. Within the premises there were as many as twelve tills, some of which were used only during busier periods. The computer-generated sheets given to the accountants were prepared on a weekly basis. One page consists of a record of takings showing, on a day-by-day basis for the week, the takings of each till in use on that day with, in respect of Fridays and Saturdays, a record of the admission charges to the night club, a figure for the takings of the cloakroom and a note of the amount of the till float brought forward from the previous week. On a second page, there is a record of cash payments, including one for staff wages and concluding with a record of the amount paid into the bank, and of the float carried forward to the following week. On the examples we saw, the totals of the two sheets tallied precisely. 
11.	The sheets obtained by Mr Wilkes and which, Customs say, contain the true record of takings and cash expenditure are, by contrast, entirely handwritten. They resemble the computer-generated sheets in that each till in use is identified, day by day, but instead of a single figure, four columns are used. Working from right to left, they show the amount of cash actually in the till, the amount recorded on (it must be assumed) a Z-reading and, where there is a discrepancy between the two, the amount of the surplus or deficit is written in the two remaining columns: one column records deficits, the other surpluses. Within the columns recording the Z-readings and the actual cash appear a number of other figures, not directly linked to a till, which are written in parenthesis. On the right hand side of the sheet there are two more columns, each containing various figures, some in parenthesis and some not. Some of the figures are identified by the words “door” or “cloakroom”; these words, too, often appear in parenthesis. The total of each of those two columns is provided, together with a total of the column recording the actual takings and, by excluding some of the figures in parenthesis but not others, it is possible to arrive at the recorded total. As on the computer-generated sheets, there is a record of the float carried forward from the preceding week, and another item which does not feature on the computer generated sheets, described as “cigarette commission”. There is, again, a record of cash payments, including wages and the amount banked. The final total on each of the two sheets matches exactly. 
12.	We were provided with complete examples of the computer-generated and handwritten sheets for two separate weeks in February 1998. The computer-generated sheets identify the business whereas the handwritten sheets do not, but it is quite obvious that they do relate to the same business, since most of the tills are identified, with exactly the same amounts on both sheets, and most of the cash payments also match exactly. 
13.	The evidence we heard from Janak Patel (we did not hear from Bipin Patel) was that he had been engaged by both the partnership and Coolbreeze as a consultant, initially spending a good deal of time in the business but reducing his commitment as time went by. His role, he said, was principally to advise the partners and, later, the directors on means by which they could expand the business and he had not concerned himself at all with day to day management and in particular with accounting. Despite that assertion, it was clear to us that he had considerable familiarity with the accounts of the business. 
14.	He told us that in about 1998 Coolbreeze received an approach from another company seeking to buy the business. The business was eventually sold to that company, although only after about three years’ negotiation. While the directors were willing to sell the business, they needed (as Mr Cartman was later to explain) another business venture in order to provide them with income and it was intended that they would take (as in due course they did) the redundant Crown Court building at Wakefield which they proposed to convert into a similar business, that is a night club with café bar and restaurant attached. In order to secure the necessary finance from lending institutions it was necessary, Mr Patel said, to prepare projections of income, expenditure and cash flow and the handwritten sheets had been produced for that purpose. He had, he said, asked Mrs Power, who as Coolbreeze’s book-keeper was familiar with its method of accounting, to prepare projections of the likely income of the new venture by taking the income of Coolbreeze’s business and adjusting it by adding selected parts of the income of another establishment, Woburn House, also at Wakefield, to arrive at a composite figure which could be used as a projection. Woburn House was a similar business in which the Patel family had had an interest some years previously. Among the documents produced to us were some takings sheets of Woburn House, accompanied by Z-readings from a till; the figures on the Z-readings match some of those written in parenthesis on the handwritten sheets. At this point, we record only our surprise that the dates on the Z-readings are in February 1991, some seven years earlier than the takings figures of Coolbreeze’s business which (if Mr Patel’s evidence is correct) Mrs Power was using. 
15.	The second page of the handwritten calculations, Mr Patel told us, was compiled by Mrs Power by taking the cash outgoings of the current business, and then adjusting the wages figures and also the amounts which the directors might be able to earn from the business. We shall return to the manner in which those adjustments were made shortly. 
16.	We accept that there was a genuine intention to enter into a new business venture in Wakefield, and that income, expenditure and cash flow projections were necessary. Mr Shackleton’s evidence was directed to that issue; he explained to us that another of Mr Patel’s brothers, Yashvin Patel, had produced to him some handwritten figures as the basis upon which Mr Shackleton was to prepare professional projections. We were provided with copies of the projections prepared by Mr Shackleton and also of the handwritten workings produced to him by Yashvin Patel. 
17.	Mr Shackleton told us that when Yashvin Patel handed his workings to him, Mr Shackleton asked what the source of the figures was.  Mr Patel pointed to some sheets upon the table in front of him. Mr Shackleton thought they were the handwritten sheets obtained by Mr Wilkes; after reflecting, he said he thought they were similar. 
18.	Although we accept Mr Shackleton as a witness of truth, we are quite satisfied that he gave the documents on the table no more than a cursory glance and that he could not be sure, particularly after the lapse of some years, that they were identical to those of which we had copies, although we are willing to accept that they were similar in appearance. Of course, it does not necessarily follow that Yashvin Patel told him the truth and, if the documents on the table were indeed those of which we had copies, he undoubtedly did not tell him the truth since there is no resemblance whatever, in format or in figures, between the documents he gave to Mr Shackleton and those obtained by Mr Wickes. The handwritten documents given by Yashvin Patel to Mr Shackleton, though they were a little rough and ready, do at least form the basis of a properly thought through projection, as is indeed demonstrated by Mr Shackleton’s ability to prepare a calculated forecast from them. The handwritten sheets obtained by Mr Wickes, by contrast, do not. 
19.	We are quite satisfied that Janak Patel was not telling us the truth about the handwritten documents and that they were not created for the purpose of making projections about a future business in Wakefield. It is, in our view, quite implausible that Mrs Power, asked to create a document which could form the basis of a projection, should do so on a week by week basis, by recording the individual takings of each and every till and, moreover, recording discrepancies between cash and Z-readings. Mr Patel’s first explanation was that she had taken his instruction too literally; we do not believe that explanation. If there was, as his explanation suggested, another document recording the takings in cash and as recorded on the Z-readings, with discrepancies, it would have been simplicity itself to photocopy it and use the photocopy as the starting point for adjustments. It is impossible to believe that Mrs Power, without questioning what she thought were her instructions, would meticulously copy the figures by hand when it must have been obvious to her that most of the detail could be of no conceivable relevance to a projection. The total takings for each day, separated into various categories of takings (night club admission fees, bar takings and so on) would have been quite adequate.
20.	Even more incredible is Mr Patel’s explanation of what appeared on the sheet recording, so he maintained, anticipated expenditure. No adjustments at all have been made to the petty cash payments, many of trivial amounts, but, significantly, there are adjustments to the wages and to the payments to be made to the directors. Although, we were led to believe, the Wakefield establishment would be bigger than that at Skipton, the projected wages (if we are to believe Mr Patel) are, remarkably, lower. The sheet records (on one of the examples produced to us – the amounts are higher on the other) payments of £1,000 each to “Phil” – Mr Cartman – and “BR” – Bipin Patel.  A little lower down appears the entry “BR/Phil (2000)”. Mr Patel’s explanation of that entry was that it represented the additional earnings which his brother and Mr Cartman might expect. We reject that explanation. It is quite inconsistent with what Mr Patel told us, in his increasingly evasive and self-contradictory evidence, about the income which had been earned by his brother, Mr Cartman and himself and how it had been accounted for by Coolbreeze. As each document was put to him, he gave a different explanation.  The manner in which he gave that evidence left us in no doubt that, however the three of them had taken money, whether or not legitimately, from the business, it was not in the manner which he described. Though Mr Cartman’s evidence on the point was by no means as evasive it was vague and unconvincing, and we are satisfied that he was not telling us the truth about the matter. We mention in passing that Mr Cartman’s evidence made it clear to us that Bipin Patel, who seems to spend most of his time in India, was little more than a sleeping partner, and that Mr Cartman himself relied very much on the guidance of Janak Patel. We accept that he was truthful in telling us that he, Mr Cartman, dealt with the trading of the business but had little aptitude for or understanding of its accounts.
21.	We are satisfied that the handwritten sheets are precisely what the Respondents believe them to be, that is a record of the true takings with further entries denoting how the amount to be under-declared on the Appellant’s VAT returns (and, no doubt, in its other tax returns) was to be concealed. We bear in mind that it was not sufficient in this case merely to understate the takings, and support the understatement by a falsified day-book. Coolbreeze’s declared turnover was such that the provisions of Part VII of the Companies Act 1985, as amended by the Companies Act 1989, imposed upon it the requirement that its accounts be audited (Mr Milns confirmed, in his evidence, that the accounts had indeed been audited) and it necessarily followed that a method had to be devised by which the under-declaration could be concealed, and not later revealed by an audit. In our view the sheets produced to us demonstrate the method by which the concealment was to be carried out: the takings of some tills were to be suppressed altogether and, where it was possible, the takings of others understated. We are quite sure that Mr Patel’s evidence was designed to provide an explanation of incriminating documents, and that the explanations he gave were untruthful. We consider the sheets can be taken as reliable records of the true takings of the business and that, although a comparison between the handwritten sheets and the computer-generated figures for only two weeks was possible, Mrs McCalman properly used them as one basis of her calculation of the suppressed takings.
22.	The entries on the other, single, sheet on which Mrs McCalman also relied were much briefer, consisting only of aggregate takings figures for each day of the week (and even then a single figure for the sales on Monday, Tuesday and Wednesday is given), with no details of expenditure.  The left hand side has some figures in parenthesis, while the right hand side does not.  There is nothing on either side to indicate the source of the takings, that is from tills, the door or the cloakroom.  Mrs McCalman did, however, have the computer-generated figures for the week ended 9 May 1998 and, by comparing the handwritten entries with that sheet, she was able to demonstrate (and we accept) that the two were derived from the same source: there is a substantial correspondence between the figures.  The brevity of the handwritten entries makes it difficult to determine precisely what all the figures represent, though it is clear that three of the figures in parenthesis represent the aggregate of the takings of two of the tills, as they are recorded by the computer-generated sheet, on Thursday, Friday and Saturday.  The aggregate takings, if that is what they are, recorded on the handwritten sheet are substantially greater than those recorded on the computer-generated sheet which, again, could be reconciled to the Appellant’s VAT returns.
23.	The only explanation we had of the handwritten sheet came, again, from Mr Patel.  He told us that it, too, was in Mrs Power’s handwriting and that it related to similar premises at Wakefield, known as Highland View.  We are quite sure that explanation is palpably untrue.  First, it is impossible to accept that, by co-incidence, the takings of two separate establishments were identical on several days in a single week.  Second, it emerged from Mr Patel’s evidence that the establishment at Wakefield was that from which, he had told us, the other sheets had been prepared as the basis for a projection of income and expenditure and which, accordingly, had not been trading at all at the relevant time.  We are satisfied, too, that this document contains a record of the takings of the Appellant’s business in the two weeks to which it refers.
24.	The assessment was made by the simple expedient of comparing the figures shown on the handwritten records for each of the four weeks for which they were available with those shown on the computer-generated sheets for the corresponding weeks, and then calculating an average rate of suppression of 17.5 per cent of the true takings.  Mrs McCalman then recalculated the true takings by applying the assumed rate of suppression, uniformly, to all the periods included in the assessment.  In the absence of any other, more reliable, evidence, we are satisfied that her approach was reasonable and likely to lead to a fair result. 
25.	At their criminal trial, as Mr Barlow properly reminded us, Mr Patel and Mr Cartman were convicted only of conspiracy. Accordingly, the prosecution can be taken to have established to the criminal standard only an agreement to defraud and not that any fraud had actually taken place. We accept that point. On the other hand, it is quite clear from the judge’s remarks, as they were recorded in the transcript produced to us, that when sentencing Mr Patel and Mr Cartman, and when making a confiscation order against them, he was satisfied (to the civil standard which is the appropriate requirement) that each had benefited to the extent of £1,000 per week – money which they covertly took out - from the concealment of Coolbreeze’s takings. Both the sentences and the confiscation order reflected that conclusion. He did, however, deal only with the period during which the business was in the ownership of Coolbreeze; his conclusions do not deal at all with the earlier period when the business was run by the partnership. 
26.	Mr Barlow’s argument was that the Commissioners were entitled to make an assessment for periods more than three years before the date of the assessment only if they could establish conduct falling within section 60(1) of the 1994 Act, that is they must show that “for the purpose of evading VAT, a person” has done, or omitted to do, something and that his act or omission involves dishonesty. Moreover, he said, they must do so in respect of each and every period for which an assessment had been made. The judge had gone back no further than the takeover of the business by Coolbreeze and even if we took the view that there was dishonest conduct during the period after the takeover by Coolbreeze, we could not infer from the evidence before us that there had been any evasion, still less evasion due to dishonesty, during the period when the partnership owned the business.
27.	 We disagree. We are satisfied that Mrs McCalman’s conclusions drawn from the pattern of declared takings is correct. There is no sudden, or even discernible, drop in the declarations of the turnover of the business following the takeover. We see no reason to suppose why the two partners in a business, following incorporation of that business, should decide at that moment to start concealing their takings. No reason why they might have done so was suggested. We take the view, as it appears to us the judge did, that despite his being neither a partner nor a director of Coolbreeze, Janak Patel was the driving force behind both the partnership and the company and that in reality it was he, rather than his brother, who was managing both. We are quite sure that his evidence was directed to conceal from us the reality of what had happened and that we can accept nothing of what he told us, unless it is confirmed by other, entirely reliable, evidence. We have concluded that there were persistent and substantial under-declarations of the takings of the business, systematically concealed, and that those under-declarations were due to dishonesty. The Respondents have also satisfied us, to the requisite standard, that such dishonest conduct took place over the entire period covered by the assessment and they are accordingly not restricted by the three year time limit. 
28.	Since there was no challenge to the arithmetic of the assessment, it must stand in its entirety. The appeal is accordingly dismissed. 
29.	Mr Poole did not make a formal request for a direction in respect of costs, but asked that we reserve the matter and give an indication of our view. Subject to the hearing of any further argument on the matter from Mr Barlow, our present inclination is that Customs are entitled to a direction in their favour.

COLIN BISHOPP
CHAIRMAN
Release Date: 9 December 2004

MAN/99/0288