18918
VALUE ADDED TAX — restaurant and take-away business — test meals and observations — whether evidence gleaned by Respondents reliable — yes — whether theft of takings by member of staff relevant — no — whether evidence of free meals adequate — no — no basis for reduction of amount assessed — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	SPICE OF LYEFE LTD 	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal: 	Colin Bishopp	 (Chairman)
						Marjorie Kostick BA FCA CTA	

Sitting in public in Birmingham on 29 November 2004

Mr I Ali, accountant, for the Appellant 
Joanna Vicary, counsel, instructed by the Solicitor’s office of HM Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2005

DECISION
1.	The Appellant, Spice of Lyefe Ltd, is the proprietor of a restaurant and takeaway business, trading under the same name, at Lye, West Midlands.  It appeals against an assessment for what the Respondents say are arrears of value added tax of £12,974.  The assessment was issued on 15 July 2002 and it covers each of the consecutive accounting periods from 1 July 1999 to 31 March 2002.
2.	The Appellant was represented by its accountant, Mr M I Ali, and the Respondents by Joanna Vicary of counsel.  We were provided with an agreed bundle of documents.  It was decided that the Respondents should go first and we heard evidence from the assessing officer, Barry Bartley, from another Customs officer, Jane Parry, who had taken part in the Commissioners’ enquiries, and from Ismail Razak, one of the Appellant’s directors.  In addition, we had the unchallenged statements of a number of other Customs officers who had participated in the enquiry.
3.	The Commissioners’ enquiries followed a pattern common in cases where it is contended that the proprietors of a restaurant have suppressed their takings.  They consisted of a number of test purchases and of observations of customers entering and leaving the premises, leading to a comparison of the expected takings with those declared by the Appellant in its periodic VAT returns.
4.	The Appellant’s case was that the directors believed that the takings had been fully and correctly accounted for throughout.  They did recognise that some of the officers’ test purchases had not found their way into the sales records and they blamed that failing on a dishonest member of staff whom they had dismissed.  The directors maintained, too, that due to increasing competition, the takings had at no time been as high as the Respondents imagined; the competition had increased to such an extent that in 2003, when the directors concluded they could no longer compete, the business had been sold.
5.	The evidence produced by the Respondents showed that on 24 January 2001 two Customs officers ate in the restaurant, making observations of other customers as they did so.  As they were on the point of leaving, two other Customs officers entered for the same purpose; and as they left two further officers entered.  Their observations, covering the entire evening’s trade, led them to the conclusion that 30 customers’ bills, including both those for meals eaten in the restaurant and those for meals taken away, were to be expected; but when the records were later examined only 27 appeared.  Of the three Customs officers’ bills, two were missing.  
6.	A similar exercise was undertaken on 9 February 2001 but on this occasion there were three pairs of Customs officers dining, followed by a foursome including Mr Bartley.  On this occasion, the officers’ observations led them to the conclusion that 78 customers’ bills should be expected but 67 were found to have been recorded.  Two of the four Customs officers’ bills were missing from the records. 
7.	Further, similar observations were carried out on 17 February 2001 when three pairs of officers, followed by a threesome, ate in the restaurant.  On this occasion the observations indicated that 83 bills should have been declared but in fact only 75 were in the records and of the four Customs officers’ bills, two were missing.
8.	Mr Bartley explained that he had based the assessment on the calculated average cost of a meal, meaning the total cost recorded on a meal bill (the average was determined by using the meal bills obtained from the Appellant’s records), multiplied by the number of parties seen to be eating by the officers on the three days of observations.  By comparing the expected takings calculated in this fashion with those declared for the three days (that is, the daily gross takings recorded for the day) he was able to calculate a suppression rate, which he then extrapolated over the three years covered by the assessment.  There was, he said, no evidence to suggest that there had been anything other than a constant rate of suppression over the three years.
9.	Mr Ali did not seek to challenge Mr Bartley’s method of calculating the assessment, nor his arithmetic, but attacked the reliability of the observations, and their utility as a realistic measure of the volume of trade at the restaurant.  It was put to Mr Bartley that it was not possible for the officers to see the entirety of the restaurant at any one time, because of its layout, a proposition which Mr Bartley accepted.   He said, however, that the officers were expected to note only what they saw; consequently if there were customers within the premises whom the officers did not see they would not be counted, the true number of bills would correspondingly be greater than the calculated number and therefore any omission from the observations would count in the trader’s favour.  Similarly takeaway sales were counted only when it was clear that the customer had been provided with a meal for which he had paid; thus any customer who asked for part of his meal to be placed in a doggy bag would be counted as a diner and not as a takeaway customer.  Mrs Parry added that when she was observing, she took care to ensure that people who entered the restaurant but left before consuming a meal would not be counted as paying customers.  The objective was to record the number of parties consuming meals, and not the number of  people entering and leaving the restaurant.
10.	She had been conscious, she said, that it was necessary to count parties in this fashion because the restaurant was unlicensed, but allowed customers to bring their own alcoholic drink.  It was recognised that once a party had entered the restaurant, one member of it might go out to a nearby off licence to purchase some wine; thus simply counting people going in and out would not give a reliable result.     
11.	Mr Razak offered the explanation we have already mentioned, namely that a member of staff had been stealing, and he also suggested that some of the parties whom the officers had counted might have been groups of his friends whom he did not charge.  He conceded, however, that there would not be many parties in that category and he recognised that the number of missing bills detected by the Respondents could not possibly all be accounted for by his providing free meals to friends and family.  Plainly, too, the missing officer’s bills cannot be explained in that way.
12.	We are satisfied from the evidence before us that the observations were carried out carefully.  We think there was little risk that too many customers were counted; it is more probable that the officers have under-recorded the true total.  We accept too that Mr Bartley approached his calculations in an appropriate fashion.  We are satisfied in particular that when the evidence available to him was inconclusive,  he resolved doubts in the Appellant’s favour.   There was additionally nothing before us to suggest that Mr Bartley’s decision to extrapolate his calculations over the three years assessed was in any way unwarranted; nothing in Mr Razak’s evidence suggested that suppression had started at any particular point in that three year period, or that it had increased or decreased during the course of it.  In principle, therefore, the assessment must stand.
13.	It then becomes necessary to ask whether there should be any reduction in the amount assessed to allow for the thefts or the free meals that Mr Razak mentioned.   
14.	Unfortunately for the Appellant, there is no basis upon which a reduction for staff theft could be allowed.   On Mr Razak’s own evidence, the Appellant made a supply to a customer who paid for it.  It thus became necessary for the Appellant to account to the Commissioners for the VAT included in that customer’s bill.   That the payment might have been stolen by a member of staff does not affect that obligation and the affected trader must look to the dishonest member of staff for redress.  Mr Ali did not, in the end, dispute that proposition.
15.	We were not satisfied from Mr Razak’s evidence that the number of free meals provided for  friends and families was significant.  Certainly the Appellant has not discharged the burden which lies on its shoulders of satisfying us that Mr Bartley’s calculations were affected by the provision of one or more free meals on any of the three days of observations.  There is, in other words, no material before us justifying a reduction in the assessment, nor indeed any material on which any such reduction might be calculated.  
16.	The assessment must therefore stand as made, and the appeal is dismissed.  We make no direction in respect of costs.

COLIN BISHOPP
CHAIRMAN
Release Date: 21 January 2005
MAN/03/407