19139

VAT – ASSESSMENTS –CANCELLATION OF REGISTRATION – Suppressed sales – two separate records kept for takings – one used for VAT return – satisfied on evidence that the combination of the two records represented the true daily takings – suppressed sales found – application for cancellation made by one of the directors – were the Commissioners permitted to cancel knowing there was a dispute between directors – found that Commissioners cancelled registration under their own powers which was not based on the application but on the Company ceasing to trade – Appeal Dismissed

LONDON TRIBUNAL CENTRE

	I VISION DEVELOPMENTS LIMITED	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal:	MICHAEL TILDESLEY (Chairman)
					MICHAEL SILBERT FRICS

Sitting in public in London on 26 May 2005

Buta Kalirai, Company Director, for the Appellant

Jonathan Holl, Advocate for HM Revenue and Customs , for the Respondents

© CROWN COPYRIGHT 2005

DECISION
The Appeal

1.	The Appellant was appealing against the Respondents’ revised assessments for VAT issued  on 9 September 2003 in relation to the VAT returns for 8/02, 11/02 and 11/03.
2.	The revised assessments were as follows:
Date of the Return	Revised Assessment	Reason	
08/02	Total value of sales increased to £17,308
Output tax increased to £3,029.02
VAT reclaimed reduced to £17,308	Suppression of sales resulting in a higher figure for output tax 	
11/02	Total value of sales increased to £24,734
Output tax increased to £4,328.36
Repayment claim changed to tax payable in the sum of £2,199.33 	Suppression of sales resulting in a higher figure for output tax	
11/03 (No actual return was submitted for this period, however,  cancellation took place in the period ending 11/03).	Output tax of £22,837.50 inserted	Cancellation of registration : output tax on assets on hand at date of deregistration.	

3.	The outcome of the revised assessments was that the Appellant owed VAT in the sum of £3,098.79.
4.	The grounds of Appeal put forward by the Appellant were as follows:
(1)	Output tax calculated on rental income of £30,478 inclusive, the VAT records show only £12,700 rents received in total.
(2)	Assumed output tax on property for £22,837.50, the Company’s business has been closed under Court order due to an internal dispute among shareholders. As soon as they are resolved the Company will commence trading.
The Issues of Dispute
5.	Two issues of dispute emerged at the hearing:
(1)	Did the Appellant suppress the sales figures in returns 08/02 and 11/02 which resulted in a lower figure for output tax ?
(2)	Were the Respondents entitled to cancel the registration of  the Appellant for VAT on the strength of a letter from one of the Directors when the Respondents were aware that there was a dispute between the Directors?
The Evidence
6.	We heard evidence from the following:
(1)	Mr Buta Kalirai, Company Director, for the Appellant.
(2)	Mrs Meera Rajah, Senior VAT Assurance Officer who carried out the revised assessments.
(3)	Mr Ian Manley, Fraud Team Officer who carried out an investigation into the Appellant’s affairs.
7.	A bundle of documents was presented to the Tribunal.
The Facts
8.	On 7 March 2002 Mr Kalirai, Mr Plaha and Mr Byrne were appointed  Directors of the Appellant Company, which was set up to operate a hotel known as The Red Cow, 8-10 High Street, Donnington, Spalding, Lincolnshire. The Appellant Company was registered for VAT with effect from 1 April 2002. Mr Kalirai disputed that it was his signature on the “Application for VAT Registration”.  The purchase of  The Red Cow was not a transfer of a going concern. The Appellant paid output tax on its purchase because the seller had opted to tax supplies of land.
9.	There has been a complete breakdown in relations between the Directors of the Appellant Company with Mr Kalirai and Mr Plaha on the one side and Mr Byrne on the other. We were not concerned with the details of the dispute except that the Respondents were aware of it when the application for VAT de-registration of the Appellant was submitted on its behalf by Mr Byrne on the 4 September 2003.
10.	The bar at the Red Cow was opened for business on 31 May 2002 to take advantage of the Football World Cup. Mr Kalirai and Mr Plaha ran the bar until the 14 October 2002 when it was rented out to a Mr Taylor for £350 per week. Mr Taylor vacated the bar on 29 November 2002. At the end of August 2002 Mr Kalirai and Mr Plaha let accommodation at the hotel to a local gangmaster, Mr Chin to house agricultural workers. Mr Chin paid £50 per week for each agricultural worker stopping at the Red Cow. The arrangements with Mr Taylor and Mr Chin were not documented in formal written agreements, although there existed a signed handwritten memorandum of the terms between Mr Taylor of the one part and Mr Kalirai and Mr Plaha of the other part. The Red Cow closed for business on 13 December 2002 when Mr Byrne changed the locks on the premises preventing access by Mr Kalirai and Mr Plaha. The Appellant Company was still in existence but had ceased to trade. The bar at the Red Cow has been subsequently destroyed by fire and the premises were boarded up.
11.	The Appellant submitted VAT returns for the periods 08/02; 11/02 and 02/03 claiming net repayments of £23,485.99 (which included the output tax on the purchase); £792.27 and £112 respectively. Two subsequent nil returns were submitted for the periods 5/03 and 8/03. Mr Plaha signed the returns except the 11/02 return which was signed by Rafique Ahmed, the accountants for the Appellant Company. 
12.	As was their normal practice with new businesses, where a repayment was claimed prior to payment, the Respondents did not make repayment of the VAT due until security checks had been carried out. The Respondents contacted the former Appellant’s accountant who expressed concerns about the activities of the Appellant Company. Contact was then made with Mr Kalirai  when a meeting was eventually arranged on 9 May 2003 at Mr Kalirai’s home address (the registered business address for the Appellant Company)  between Mrs Rajah from the Respondents, and Mr Kalirai with Mr Ahmed, the Appellant’s accountant.  
13.	At that meeting Mr Kalirai informed Mrs Rajah that the bar had opened on 31 May 2002 but the rooms at the Red Cow had not been let out due to refurbishment. The daily cash takings from the bar were not banked. The takings were recorded in a “Scooby Doo” A4 notebook, which was seized by Mrs Rajah for further examination.  Mr Kalirai could not produce Z readings or receipts from the till. He had few purchase invoices , none of which related to the refurbishment. In evidence Mr Kalirai told the Tribunal that all the accounting records were in a box which were handed to Mrs Rajah. He denied that he had seen the “Scooby Doo” book until it was seized.  Mrs Rajah, on the other hand, said that Mr Kalirai was uncooperative, the accounting records were laid out on the table in Mr Kalirai’s home and the “Scooby Do” book was given to her by Mr Ahmed.
14.	Following the meeting Mrs Rajah wrote a letter dated 30 May 2003  to Mr Kalirai asking him to confirm in writing that the rooms in the Red Cow were not let out due to refurbishment. Mr Kalirai and Mr Plaha replied on 10 June 2003 stating that they were looking to let the rooms in the Red Cow but prevented from doing so by the actions of the other Director, Mr Byrne. They also confirmed that Mrs Rajah had in her possession all the evidence and any documentation relating to the sales figures that they were able to put their hands on.
15.	On the 23 June 2003 Mr Manley interviewed Mr Kalirai and Mr Plaha on tape under Notice 730, Civil Evasion Penalty Investigations. Mr Kalirai  stated that he allowed people to stay at the Red Cow as a favour to Mr Chin but had not received any income except money for food. Mr Plaha on being presented with a guest list admitted that Mr Chin paid £50 per person per week for the accommodation. He also mentioned that Mr Kalirai recorded the bar takings in a diary. After Mr Manley confronted Mr Kalirai with this information, he agreed to supply the diaries to the Respondents.
16.	 On 4 September 2003 Mr Byrne sent a fax to the Respondents requesting de-registration of the Appellant Company from VAT on the ground that it had ceased to trade in December 2002. The Appellant’s registration for VAT was cancelled with effect from 4 September 2003.
17.	On 9 September 2003 Mrs Rajah issued revised assessments for the returns 08/02, 11/02 and 11/03. In respect of the returns for 08/02 and 11/02 she increased the sales figures which in turn raised the output tax declared. She accepted the Appellant’s declaration value of the purchases declared in the returns. The basis for her calculation of the sales figures were as follows:
(1)	The rent received from Mr Chin and Mr Taylor which were taken from the figures recorded by Mr Kalirai in his diary.
(2)	The bar sales were computed by adding together the daily takings recorded in the “Scooby Doo” book and the diary.
The output tax assessed in the final return related to the value of the Red Cow hotel which was the principal business asset of the Appellant Company remaining on hand at the time of deregistration. Mrs Rajah assessed the value of the hotel by taking  the purchase price paid by the Company in April 2002, effectively reversing the claim for input tax.
18.	The reasons why Mrs Rajah combined the daily takings in the “Scooby Doo” book and the diary were as follows:
(1)	The mark up on the declared sales (the value recorded in the “Scooby Doo”) was low when compared with the norm for the bar trade.  The mark up for 8/02 and 11/02 were 43% and 61% respectively. The average mark up for public houses on drinks sales was 150%, which was given in evidence by Mrs Rajah based upon information provided to her by the Respondents’ specialist team dealing with public houses. The  150% mark up was the average for all public houses in the UK. The combination of the daily bar  takings recorded in the “Scooby Do” book and the diary resulted in a mark up similar to the national average of 150%.
(2)	The daily takings figure recorded in the diary was lower than the figures in the “Scooby Do” book. Mrs Rajah could not understand why Mr Kalirai and or Mr Plaha chose the figures in Scooby Do” book to calculate the value of sales in the VAT returns because they were higher than the figures recorded in the diary, which according to Mr Kalirai was the correct record. In view of this inconsistency Mrs Rajah formed the view that the takings recorded in the diary were the value of the suppressed sales not declared in the VAT returns.
19.	Mr Kalirai maintained that the daily takings recorded in the diary represented the bar takings during the period  the business operated. He denied having knowledge of the “Scooby Doo” book and said that he was not responsible for completing the VAT returns. He offered no explanation to the Tribunal why he delayed delivery of the diary to the Respondents and why he prevaricated with the supply of the rental information about Mr Chin. Mr Kalirai challenged the Respondents’ decision to cancel the registration of the  business on the application of Mr Byrne when they knew that there was a major dispute between the directors and that it would damage the interests of the Appellant Company.  Mr Kalirai and Mr Plaha wanted the Appellant Company to continue trading.
Reasons for Our Decision
Did the Appellant suppress the sales figures in returns 08/02 and 11/02 which resulted in a lower figure for output tax?
20.	 Under section 73 of the Value Added Tax Act 1994 the Commissioners may assess the VAT due to the best of their judgment where it appears to them that the returns are incomplete or inaccurate.  Best judgment requires the Commissioners to consider fairly all the material put before them and on that material reach a reasonable decision as to the amount of tax due.  Mr Kalirai on behalf of the Appellant did not dispute that Mrs Rajah’s revised assessments for 8/02 and11/02 were to best judgment rather he  asked the Tribunal to find that the figures recorded in his diary represented the daily takings for the bar. Our responsibility is to decide the correct amount of VAT due on the evidence before us bearing in mind that the burden of proof on the balance of probabilities rested with the Appellant.
21.	Mr Kalirai  produced no documentary evidence to support the figures recorded in the diary. There were no bank records, no cash book, no till rolls, no Z readings taken from the till. Mr Kalirai was essentially asking us to take his word at face value that the figures in the diary accurately represented the daily bar takings. We are unable to accept his word because of the evidence concerning his dealings with the Commissioners which undermined his credibility as a truthful witness. We are satisfied on the evidence that he deliberately misled Mrs Rajah regarding the receipt of rental income from Mr Chin. Further we are satisfied that he would not have disclosed the diary which contained the bar takings to the Commissioners, if it had not been for Mr Plaha’s revelation about the diary during the taped interview with Mr Manley.
22.	Mrs Rajah, on the other hand, was an impressive witness. She fairly based her assessment on the figures supplied by Mr Kalirai except for the sales figures which  she could not accept because of the resulting mark-up which was low when compared with the average mark up for public houses. Following discovery of the diary she found that  the takings recorded in the diary were lower than those in the “Scooby Doo” book. Mrs Rajah found it strange that the Appellant would base the sales figures declared in the VAT returns on the higher takings recorded in the “Scooby Doo” book. She concluded that the takings recorded in the diary represented the value of the suppressed sales not declared in the VAT return. The combination of the two sets of figures for daily bar takings in the diary and “Scooby Doo” book produced a mark up of around 150%  equivalent to the average mark up for public houses in the UK. We find Mrs Rajah’s evidence and reasoning compelling, and even more so when it is weighed with our considerable doubts about the truthfulness of Mr Kalirai’s evidence. 
23.	We, therefore, conclude for the reasons set out above that the Appellant has failed to satisfy us on the balance of the probabilities that the revised assessments for the periods 8/02 and 11/02 issued on 9 September 2003 were wrong. We find that the Appellant suppressed the sales figures. 
Were the Respondents entitled to cancel the registration of  the Appellant for VAT?
24.	When the Appellant’s registration for VAT was cancelled with effect from 4 September 2003 paragraph 8 of schedule 4 of the Value Added Tax Act 1994 was triggered. Thus any goods (which includes land by virtue of paragraph 9) then forming part of the Appellant’s business shall be deemed to be supplied by the Appellant immediately before ceasing to be a taxable person. Mrs Rajah, therefore, assessed the land used as a business asset  and owned by the Appellant, the Red Cow Hotel, for output tax. She calculated the tax on the purchase price paid by the Appellant in 2002. 
25.	Mr Kalirai has not challenged the method of assessment. He has, however, raised a more fundamental point about whether the Respondents were entitled to cancel the registration of the Appellant Company on the application of one of its Directors without further enquiry when the Respondents knew there was an ongoing dispute between the Directors. 
26.	We consider there is force to Mr Kalirai’s submission if the Appellant’s registration was cancelled on the request of Mr Byrne under paragraph 13(1) of schedule 1 of the Value Added Tax Act 1994. However, having examined the correspondence and the Statement of Case, the Commissioners have exercised their own powers of cancellation under paragraph 13(2) which can be done without application from the Appellant provided the Commissioners were satisfied that the Appellant had ceased to trade. None of the Directors disputed the fact that the Appellant Company had ceased to trade. The Appellant’s Notice of Appeal mentioned that the Company’s business had been closed  under a court order. Thus Mr Kalirai’s submission does not apply to the situation in this case where the VAT registration has been cancelled under paragraph 13(2) of schedule 2 of the Value Added Tax Act 1994.
27.	 We are satisfied that the Respondents were entitled to assess the Appellant to output tax in respect of the value of the land owned and used as a business asset. The value was calculated on the purchase price paid by the Appellant in 2002. Mr Kalirai has suggested no alternative method for determining the value upon which the assessment to tax was based. In those circumstances the Appellant has failed to satisfy us on the balance of probabilities that the assessment for 11/03 as stated in the Respondents’ letter of  9 September 2003 was incorrect.
Decision
28.	We have determined the disputed issues in favour of the Respondents. We, therefore, dismiss the Appeal. We confirm the revised assessments for VAT as stated in the Respondents’ letter of 9 September 2003. We make no order for costs.

MICHAEL TILDESEY

CHAIRMAN
RELEASE DATE: 29 June 2005

LON/03/1202