ASSESSMENT – based on observations of restaurant – approved subject to some recalculation
CIVIL EVASION PENALTY – whether dishonest – yes – mitigation not increased – appeal dismissed

LONDON TRIBUNAL CENTRE

ABDUL MIAH T/A THE GANDHI	Appellant

- and -

HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

		Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
JOHN G ROBINSON					

Sitting in public in London on 1 and 2 August 2005

Mir Rahman FCA,  Habib Rahman & Co, Chartered accountants, for the Appellant

Nicola Shaw, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	Mr Abdul Miah trading as The Gandhi appeals against an assessment to VAT of £55,040 made on 30 July 2002 for the period 31 December 1997 to 12 November 2000, and against an assessment to a civil evasion penalty of £49,531 made on 14 April 2003.  The Appellant was represented by Mr Mir Rahman FCA, and the Respondent by Miss Nicola Shaw.
2.	We heard evidence from the Appellant and from officers G Nolan and M Paskins.  In addition, witness statement from officers Holliday, Handscomb, Hayward, Perryman, Shadbolt, Parks, Thomson, Thomas, Sims, Ashworth, Gowing and Vincent who had made test purchases or observations were admitted.  A witness statement by officer E Norman, who made a test purchase on 16 September 2000 together with officers Jenkins, Ashworth and Donald, was objected to and she was unable to attend to give evidence, to which Mr Rahman objected.  Since we excluded her evidence we do not consider that this was prejudicial to the Appellant.
3.	We find the following facts:
(1)	The Appellant was a sole trader operating an Indian restaurant and take-away at 72 Regent Street Cambridge.
(2)	The period of the assessment is the whole period of the Appellant’s trading.  The business was transferred to a limited company on 12 November 2000.
(3)	On taking an order the waiter writes on top of the pre-printed bill form the table number and the number of persons, for example “7/4”, indicating table 7 and 4 persons, or “out” for a take-away.  Bill forms are unnumbered.  A carbon copy of the order is passed to the kitchen and is not retained.  The top copy is kept in the bar and is totalled using a calculator when the customer asks for the bill.  There is an electronic till but it does not produce till rolls.
(4)	At the end of the day the bills are stapled together and totalled, the total being recorded in a cash book.  The VAT returns are based on the cash book.
(5)	Customs initially conducted 3 days observations and test purchases on 24, 25 and 27 November 1999 from which they considered that there were underdeclarations of VAT and they decided to make further observations with a view to assessing a civil evasion penalty.  The further observations and test purchases are described below.
4.	The assessment to tax was based on the following method.  Customs decided to make further observations covering every day of the week twice at different times of the year plus a total of 13 test purchases, of which 12 are shown below because there was no witness statement evidence of one of them.  The result is summarised as follows.  
		Meals in	Take-aways	Test purchases	
Day	Date	Decl	Obs	Diff	%	Decl	Obs	Diff	%	Made	Decl	
Wednesday	24-Nov-99	80	111	31	28%	4	5	1	20%	1	1	
Thursday	25-Nov-99	60	114	54	47%	1	1	0	0%	1	1	
Saturday	27-Nov-99	115	170	55	32%	4	6	2	33%	1	0	
Wednesday	08-Mar-00	41	62	21	34%	1	2	1	50%	0	0	
Tuesday	14-Mar-00	42	60	18	30%	2	4	2	50%	0	0	
Friday	14-Apr-00	66	112	46	41%	2	2	0	0%	0	0	
Saturday	15-Apr-00	81	111	30	27%	4	4	0	0%	1T/A	0	
Sunday	16-Apr-00	31	36	5	14%	1	2	1	50%	0	0	
	25-Apr-00									1	0	
Thursday	13-Jul-00	61	77	16	21%	0	0	0	0%	0	0	
Monday	17-Jul-00	58	91	33	36%	2	3	1	33%	1	0	
Monday	31-Jul-00	47	63	16	25%	0	0	0	0%	1	1	
Tuesday	01-Aug-00	39	55	16	29%	0	2	2	0%	0	0	
Friday	04-Aug-00	94	172	78	45%	2	3	1	33%	0	0	
Sunday	06-Aug-00	44	58	14	24%	1	6	5	83%	0	0	
	16-Sep-00									2	0	
	22-Sep-00									3	1	
Totals		859	1292	433	34%	24	40	16	40%	12	4	
5.	The average price of a meal per person was calculated for the observation days from the bills declared which show the number of persons at the table (we shall return to the question whether this is the number present or eating) at £12.82 and the average price of a take-away at £14.30.  The observed persons were treated as having purchased meals at this average price or made purchases of take-aways at the average price.  This resulted in additional turnover of £5,920.88 over the declared turnover of £11,214.55 for the 14 days observations which is a suppression rate of 34.55 per cent which Mr Nolan rounded down to 34 per cent and applied this suppression rate to the whole period of the assessment.  
6.	In addition Customs officers made a total of 13 test purchases of meals (of which there was evidence of only 12, and which we have shown as 12 only in the table above) on 24, 25 (two separate purchases, only one of which is covered by an officer’s witness statement) and 27 November 1999, 15 (a take-away) and 25 April 2000, 17 and 31 July 2000, and 16 (two purchases) and 22 (three purchases) September 2000.  Of these, 4 were declared (those on 24 November 1999, the one for which there is evidence on 25 November 1999, 31 July 2000 and one of the three on 22 September 2000).  The test purchases did not form part of the calculation of the assessment.  
7.	Mr Rahman, for the Appellant, applied during the hearing to amend his grounds of appeal to contend that the assessment was out of time, which we permitted him to do.  Section 73(6) of the VAT Act 1994 provides that:
“An assessment under subsection (1)…above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided in section 77 and shall not be made after the later of the following—
(a) 2 years after the end of the prescribed accounting period; or
(b) one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge….”
8.	He contended that the investigation was completed when the last test purchase was made on 22 September 2000 but the assessment was not issued until 30 July 2002.  Miss Shaw pointed to a letter from Mr Nolan to the Appellant of 9 January 2002 asking for meal bills for March, April and August 2000 which he said he would collect on 11 January 2002.  His letter of 1 March states that “I have now completed my examination of your records.”  Mr Nolan confirmed that he needed this information in order to calculate the assessment.
9.	Since Mr Nolan used the information in the bills for March, April and August 2000 to calculate the average price of meals on the observation days in those months we find that the latest evidence of facts used in making the assessment did not come to the knowledge of Mr Nolan until 11 January 2002.  Mr Rahman’s argument is really that Mr Nolan could have made an assessment earlier based on other facts, such as taking the average price of a meal for a different period.  But the issue is whether he had facts to justify the making of the assessment, which he did not until 11 January 2002.  Accordingly we find that the assessment was in time.
10.	In relation to the assessment and penalty Mr Rahman contended:
(1)	The Appellant’s records were correct.
(2)	Mr Rahman’s own method was to work out a drinks to food ratio and take-away to restaurant ratio based on bills for March to May 1999.  He also worked out a weighted mark-up for drinks based on purchases from March 1999 to February 2000.  A figure for wastage of drinks was included.  This gave tax undeclared of £3,149.05 for the same year. 
(3)	The assessment gave a profit margin of 76 per cent which was unheard of for an Indian restaurant.
(4)	No additional allowance for input tax had been allowed.
(5)	Mr Paskins’ memory was faulty as he did not remember taking part in any of the observations, which he did on 8 March 2000 but it was not included in his witness statement; he did not make a record of the visit on 17 July 2001 (although Mr Nolan did).  
(6)	Not everyone who went in would eat a meal.  In particular in a group of students one or more might have already eaten and were just joining their friends for a drink.  Friends of the Appellant regularly came in for a drink.
(7)	Using the bills for 22 September 2000 of which there were copies in the papers the average price of a meal per person was £11.65 and of a take-away £14.05.
(8)	Further mitigation should be allowed to the penalty for co-operation.
11.	Miss Shaw contended:
(1)	The observation evidence was not attacked and was carefully carried out
(2)	The explanations for the discrepancies were not credible.
(3)	Mr Rahman’s alternative method was based on the purchase records but the sales records had been shown to be unreliable and so the purchase records were unlikely to be reliable.  If it gave too high a profit margin this suggested that purchases had been suppressed.  There would be no additional input tax if suppressed purchases were of food; it was unlikely that purchases of drink carrying VAT had been suppressed.
Reasons for our decision on the assessment to tax
12.	We deal first with the assessment to tax.  From looking at the observation records the observations seem to us to have been carefully carried out and in many cases the benefit of the doubt has been given to the Appellant.  For example, a person not seen to leave was not counted; people present for less than 30 minutes were not counted unless they came out with a take-away bag.  We have the benefit of every day of the week being observed twice with observations spread throughout the year in March, April, July, August, and November.  In every case there is a difference between observed and declared numbers for meals varying between 5 (a Sunday with the lowest numbers observed) and 78 (a Saturday with the highest numbers observed) with an average difference of 31 per day (33 per cent).
13.	We have considered Mr Rahman’s alternative average price of a meal and a take-away but we consider that it is better to use the declared price on the days of the observations than an average based on the whole of one month.  The Tribunal suggested during the hearing that the officers’ test purchases on the same days as the observations should be excluded from the calculation of the average price of meals since potentially this could distort the average.  Making this adjustment this reduces the average price of a meal to £12.80 and the suppression rate to 34.45 but since this was rounded down it makes no difference to the result.  Since the hearing we have noticed that the average price of meals per person was calculated separately for each day and then the average for each day was itself averaged by taking the total of the averages and dividing by 14.  This gives a wrong result because it fails to take account of the different numbers each day.  To give a simple example, if a restaurant sells 10 meals on one day at an average price of £10 and 5 meals on another day at an average price of £8 the average for both days is not (£10+8)/2=£9 but (£100+40)/15=£9.33.  Our recalculation of the average by taking the total cost for all days and excluding the officers’ purchases results in an average meal price of £12.60 and an average take-away of £15.43.   This gives a suppression rate of 33.62 per cent which we round down to 33 per cent.
14.	The first of the Appellant’s explanations for the observed but undeclared diners is that not all those observed may be dining.  He said that this occurred more often with students where a group may go out to have an Indian meal and some others who had already eaten might join them for a drink only, but it was unusual apart from students.  If this explanation were correct one would expect fewer differences in observations made outside term-time.  We do not have any evidence of Cambridge terms but on any basis July and August must be outside term-time.  We notice that the average difference between observed and declared diners for the 6 days observed in July and August was 33.53 per cent, which is marginally higher than the average of 33.51 per cent for the other 8 days, which may fall at least in part in term-time.  We do not therefore consider that this factor has distorted the results.  The test purchase log for 25 November 1999 covering 2005 to 2220 hours records under the heading “number of parties observed not dining” that “couple who joined party of 11 downstairs only paid for 2 lemonades.”  We also accept the Appellant’s explanation that the number of persons shown on the bill is more likely to be the number dining, rather than the number sitting at the table, so as to enable the waiter to check that the order was complete.  On this basis there may be some non-diners observed who are not included in the total number of persons on the bills.  It is impossible to quantify this and we consider that any such numbers will be taken into account by rounding down the suppression rate to the nearest whole number, which we calculate is equivalent to ignoring 8 people dining in.  Since on the 5 days where test purchases and observations were made on the same day only two people were observed not eating, this should allow for all such people on the 14 days observations. 
15.	The Appellant’s second explanation was that it was common for friends to come in for a drink, particularly after other restaurants had closed at 11.30 pm whereas he was open until midnight.  The test purchases log for 22 September 2000 covering 1805 to 2012 hours records that there was a man drinking until 2000 hours who left carrying a blue carrier bag who is recorded as a possible take-away.  The log for 24 November 1999 covering 1958 to 2216 hours records “man seen sitting at bar, possibly left with take away.”  We consider that these are more likely to be take-away customers than friends who were drinking.  The log for 17 July 2000 covering 2028 to 2305 hours records under the heading “number of parties observed not dining” that there were “2x2 and 1x3 left without eating but returned later to eat.”  Under the heading “number of parties seen not to have received a bill” it records “none seen.  3 people seen at the bar—not seen eating—no t/away seen.”  We assume that the 3 at the bar are in addition to the ones who left and returned to eat and they may be friends of the Appellant who were observed but did not eat.  We consider that the rounding down of the suppression rate also adequately takes account of these as it is the equivalent of ignoring 8 people dining in.  The logs do not cover the period from 11.30 to midnight but if any friends came in during this period they would not have been counted as they would have been there for less than 30 minutes.
16.	No explanation was put forward for the difference between the 24 declared and 40 observed take-aways (40 per cent).  People observed coming out with bags of the same colour are unlikely not to be take-away customers.
17.	So far as the undeclared test purchases are concerned, the only explanation given was the possibility that the waiter might put the bill in his pocket and take the cash.  We cannot accept that this could account for 8 out of the 12 test purchases carried out over 9 days.  It implies a massive scale of theft, which the Appellant would surely have noticed.
18.	Mr Rahman did not expand upon his alternative calculation.  We should have needed evidence about whether wastage of £6,942.25 on purchases of £28,472.53 was reasonable.  We cannot accept the basis of the calculation because it starts with calculating drink-to-food, and take-away to eat-in, ratios from the declared bills which we consider to be incomplete.  But even if the method were accepted, the Appellant could not explain the tax undeclared of £3,149.05 for a year resulting from this method.  Indeed he seemed unaware of the existence of such calculation.
19.	We note Mr Rahman’s point that Mr Paskins did not remember taking part in the observations and we agree that he should have covered this in his witness statement.  However, we had other evidence of the observations that day and the assessment does not depend on Mr Paskins’ memory.
20.	Accordingly we find that the Appellant has not displaced the assessment except to the extent of the following adjustments:  (1) the average prices per meal per person and per take-away and the resulting suppression rate should be adjusted as above (which should be checked by the parties); (2) the assessment recalculated using this suppression rate. 
Reasons for our decision on the penalty 
21.	Section 60(1) of the VAT Act 1994 provides:
“(1) In any case where—
(a) for the purpose of evading VAT, a person does any act or omits to take any action, and
(b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability),
he shall be liable…to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct….”
22.	We have to decide is whether the Appellant’s conduct involves dishonesty, meaning that the Appellant knew that what he was doing or omitting would be regarded as dishonest according to the ordinary standards of reasonable and honest people (R v Ghosh [1982] 2 All ER 689 at 696).  The burden of proof is on the Commissioners and it is to the civil standard (Ghandi Tandoori v Customs and Excise Comrs (1989) VATTR 39).  The standard of proof is to the balance of probabilities but to a high degree.  This was explained by Lord Hoffmann in Secretary of State for the Home Department v Rehman [2002] 1 All ER 122, 141a: “It would need more cogent evidence to satisfy one that the creature seen walking in Regent’s Park was more likely than not to have been a lioness than to be satisfied to the same standard of probability that it was an Alsatian.”  Proving dishonesty on the part of the Appellant is something that requires cogent evidence.
23.	We have considered above whether there is any credible explanation for the difference between observed and declared numbers that would account for the total difference of 433 diners, 16 take-aways and 8 test purchases, and concluded that there is not.  Accordingly we infer that the Appellant must have been dishonest.
24.	We have considered the mitigation of 10 per cent and conclude that the Appellant has been given the maximum mitigation for attending interviews (which Customs waived because of his ill-heath) and that there is no basis for mitigating on account of an explanation why the arrears arose and the true extent of them, or for co-operation in substantiating the true amount of the arrears.
25.	Subject to the recalculation required to give effect to this decision we dismiss the appeals.  We direct that Customs recalculate the assessments in accordance with this decision within 30 days of the date of release of this decision.  If the Appellant disagrees with the calculation within 30 days of receiving the recalculation from Customs and the parties cannot agree, the matter will be resolved by the Chairman on either party referring the mater to the Tribunal Centre.
26.	We direct the Appellant to pay Customs’ costs of and incidental and consequent upon the appeal on the standard basis to be determined in the absence of agreement between the parties by a Tribunal Chairman.
27.	As a postscript we question whether it was necessary to have 14 days of observations.  We entirely agree that limiting the observations to the initial three days in November 1999 might have been regarded as atypical, but making observations twice on every day of the week when every observation showed substantial differences might be regarded as going to the other extreme.

JOHN F. AVERY JONES

CHAIRMAN
RELEASE DATE: 9 August 2005

LON/02/0464