19642
	VAT — Chinese takeaway — assessment of tax on takings alleged suppressed following test eats, internal observations and external observations of appellants’ premises — held assessments to best judgment — appeal dismissed

	VAT — civil evasive penalty — penalty instigated by 10 per cent for appellants co-operation in determination of the amount of tax penalty confirmed in mitigated amount — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
YUK LIA PANG & KOOK KAU LEE
	trading as HAXBY FORTUNE INN	Appellant

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	David Demack (Chairman)
						Arthur Brown FCA CTA
						Susan Stott FCA CTA

Sitting in public in York on 24 May 2006

G J Francis of CFA Accountancy, for the Appellant 

Andrew Noble, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2006

DECISION

1.	This is an appeal by Messrs Yuk Lia Pang and Kook Kau Lee (“the Appellants”) against:
(i)	a notice of assessments to tax of £47,809 for periods 11/96 to 05/01 inclusive, dated 5 December 2001; and 
(ii)	an assessment to a penalty of £47,809 under section 60 of the Value Added Tax Act 1994 (“the 1994 Act”) notified by letter of 31 July 2002 and mitigated to £43,019 for the Appellants’ co-operation in the determination of their true liability to tax.
2.	In the Notice of Appeal against the tax assessments, given on 21 January 2002, the Appellants gave their reasons for appealing as:
“Not to best judgment and clients full-disclosure had been rejected.”
3.	In relation to the second of those reasons, we may conveniently indicate at this point that on 28 October 2001 both the Appellants signed a document entitled “Schedule of weekly cash suppressed” which was in the following terms: 
“Schedule of weekly cash suppressed
Q/E	Suppressed Weekly	Quarterly	VAT	
Nov-00	400	5200	442.55	
Feb-01	450	5850	497.87	
May-01	600	7800	663.83	
				
	1450	18850	1604.26	

We certify that this schedule of £1604.26 is a complete disclosure of the weekly cash suppressed in the period between November 2000 and May 2001

The reasons for taking cash out from the business are as follows:

1.	We took money from the business to pay for the repairs and maintenance of the kitchen which is above the shop premises and shop premises due to heavy rainfall started in late September 2000.  We decided [?] routine vat visit on 20 September 1999 which the HMC&E have carried out detailed examination of our books and records in particularly in the recording of our sales and the operation of the till.  They confirmed to our accountants- Messrs Forster, Stott & Co that they were happy with the recording of sales and no adjustment is necessary.  We thought that we would not get another visit for some years and we took advantage of this situation.

2.	Fresh vegetable from the local Supermarket.”

4.	The reason the Appellants gave for appealing against the civil evasion penalty, contained in their Notice of Appeal of 23 August 2002, was:
“Appellants denied any dishonesty (sic) conduct involving VAT evasion”.
5.	In the statement of case, HMRC indicated that they relied on the following facts to prove the Appellants’ dishonesty:
(a)	the nature and extent of their underdeclarations;
(b)	the close control the Appellants had over their business and business records;
(c)	the results of observations of the Appellants’ premises carried out on Saturday, 24 February 2001, and Wednesday, 11 April 2001; 
(d)	the results of test purchases made on Friday, 9 March 2001 and Saturday, 10 March 2001, including those made by telephone; and
(e)	their admission that takings were deliberately underdeclared for a nine month period.
6.	Before us, the Appellants were represented by their accountant, Mr G J Francis, and Her Majesty’s Commissioners for Revenue and Customs (“HMRC”) by Mr A Noble, of counsel.  Each party presented us with a bundle of copy documents, and we took oral evidence from the first Appellant, Mr Pang, and the following officers of HMRC:  Messrs G A Lumb, M D Mummery, A S Macallister and J Kinghorn, and Mesdames A McCalmon and M Sharpe.
7.	From that evidence we find the following facts to have been established.
8.	The Appellants carried on the business of a Chinese takeaway in partnership under the style of Haxby Fortune Inn from Unit 3, Ryedale Court Shopping Centre, Haxby, near York from 29 September 1996 until 1 September 2001.  (Immediately the Appellants became aware of HMRC investigations into their affairs, they ceased trading in partnership and formed a limited company which, as we understand it, continues to operate the business).  They registered for VAT on commencing trading, and the registration was cancelled on their partnership being dissolved.
9.	An officer of HMRC visited the Appellants unannounced on 7 July 2001 to observe cashing up at close of business, and to inspect their records and accounts.  He found that the only sales records they had maintained were the meal order bills, a Simplex D cash book, and till audit rolls.  Once they had totalled the bills and recorded them in the cash book, they destroyed the bills.  
10.	Prior to the visit on 7 July 2001, HMRC had arranged for covert observations to be kept of Haxby Fortune Inn in order to calculate the Appellants’ expected takings level.  Those observations were carried out by the six officers named above on Saturday, 24 February 2001 and Wednesday, 11 April 2001.  On the earlier date 196 parties were observed leaving the premises carrying packages considered by HMRC to contain food purchased; and on the later date 102 such parties were observed.  Test purchases were made by officers of HMRC on Friday, 9 March 2001 and Saturday, 10 March 2001.  Two of eight such purchases were not recorded by the Appellants, as were a further five purchases made by third parties, details of which were overheard by the purchasing officers whilst on the Appellants’ premises.  The Appellants’ business records were uplifted by HMRC on 7 July 2001, examined and their contents analysed as follows:
(a)	till audit rolls were compared with meal bills (including some retrieved from waste bins) in an attempt to establish the true takings on 7 July 2001; 
(b)	each day’s declared sales were calculated as a percentage of the declared weekly takings;
(c)	the contents of the audit rolls for both the dates of observation and test purchases were scheduled; 
(d)	an average transaction price was then calculated by reference to the contents of the audit rolls; 
(e)	various projections of the Appellants’ actual takings were then made using the observation results; and
(f)	the test purchases were checked against the Appellants’ audit roll listings, and several were found not to have been declared.
11.	Comparison of the Appellants’ records with the results of HMRC’s various checks on the business revealed that the following items did not appear on the Appellants’ till audit roll:
(a) 	On 24 February 2001 a customer’s order for food costing £5.90 overheard by an officer;
(b)	On 9 March 2001 a customer’s order value £12.60 awaiting collection; 
(c)	On 10 March 2001:
(i)	a telephone order placed by Mrs McCalmon; 
(ii)	a telephone order placed by Mr Lumb;
(d)	On 11 April 2001 
(i)	an order placed by Mr Macallister and Mrs Sharpe; and
(ii)	two telephone orders overheard by Miss Sharpe for £14.90 and £1.10.
12.	HMRC maintained that one further item did not appear on the till roll.  It was for a telephone order said to have been placed on 24 February 2001 for food costing £6.45.  We are unable to accept that such an order was placed for all items were priced on the Appellants’ menu in multiples of 10 pence.
13.	Mr Lumb, the assessing officer, calculated the VAT HMRC estimated the Appellants had underdeclared by means of a mark-up formula.  His calculation contained in an annexe to his calculations  ran as follows:
“On Saturday, 24 February 2001 there were 196 parties [observed by HMRC officers] leaving the takeaway with a purchase.  196 x Average price [per transaction in the Appellants’ own records] £9.64 = £1889.44
On Wednesday 11 April 2001 there [were observed] 102 parties leaving the takeaway with a purchase.  102 x Average price [per transaction from the Appellants’ records]  £8.78 = £895.56
£1889.44 + £895.56 = £2785.00 Projected sales for 24.2.01 and 11.4.01
A Saturday and Wednesday represent 40.72% of the week (taken from an analysis of sales declared from 28.5.00 to 27.5.01)
£2785.00 / 40.72 X 100 = projected weekly sales of £6839.39
The average sales declared in the two weeks commencing 18.02.01 and 8.4.01 are £4379.80 + £5187.10 equates to £4783.45
£4783.45 / £6839.39 = 69.93% declared sales, 30.07% underdeclared sales (rounded down to 30%)”
14.	(We observe, as was admitted by Mr Noble, that the true percentage of weekly takings represented by the takings for a Saturday and a Wednesday was 40.63 per cent, rather than 40.72 per cent used by Mr Lumb.  Using the former percentage in Mr Lumb’s calculation results in the projected weekly sales figure being increased to £6,854.54.  As the error was admittedly that of HMRC, Mr Noble invited us to use the figure contained in Mr Lumb’s calculation, rather than the correct one.  We agree to do so).
15.	Mr Lumb then analysed the contents of the Appellants’ VAT returns made in the tax assessment period and found the mark-up percentages they achieved to be as follows:
Year to	Purchases (A)	Sales (B)	Mark-up % (C)	
31.05.01	82727	220247	166	
31.05.00	90359	224634	148	
31.05.99	65223	197046	202	
31.05.98	54133	166577	207	
31.05.97	26121	72930	179	

(C = B-A)
       A

16.	As there were substantial differences between the mark-up percentages Mr Lumb calculated, he determined to divide the five years into two separate periods. The first, referred to as ‘Period 1’, he allocated to the Appellants’ financial years ending in 2000 and 2001; the second, ‘Period 2’, he allocated to the remaining three years.  His analysis proceeded thus:
“Analysis to identify if 30% suppression rate should be applied to previous VAT periods

Similar mark ups in Years 31.05.01 and 31.05.00		(Period 1)
and similar mark ups in Years 31.05.99, 31.05.98 and 31.05.97	(Period 2)

Therefore 	Average mark up in Period 1	=	157%
		Average mark up in Period 2	=	200%

As the business declared greater profitability in the first 3 years of trading (200% mark-up) it is conceivable sales were not suppressed by the same rate as in years 31.05.01 and 31.05.00.  

Adjustment to suppression rate of 30% is therefore required:-

As declared mark-ups in years 31.05.01 and 31.05.00 (Period 1) are similar a 30% sales suppression is applied to VAT periods in these two years.

The increase in profitability between Periods 1 and Periods 2 is 

	200% - 157%
       157%		= 	28%

	Therefore 30% suppression rate should be reduced by 28% = 23% (rounded down).
	
	23% is therefore applied to the first three years of trading.”

17.	Taking the gross sales declared by the Appellants in each of the accounting periods in the overall assessment period and projecting them in line with the appropriate suppression rate, Mr Lumb calculated that the Appellants had underdeclared output tax of £47,809: and they were subsequently assessed in that sum.
18.	In evidence, Mr Pang sought to withdraw the ‘Schedule of weekly cash suppressed’ as being untrue and made solely because the Appellants’ former accountant recommended that they admit some takings had been suppressed in the hope that that would satisfy HMRC as to the extent of suppression.  His evidence in support of withdrawal was unconvincing, and we reject it.
19.	On 7 August 2001, the Appellants were interviewed under the Notice 730 procedure.  That is, they were invited by HMRC to disclose their takings with a view to their true liability to tax being determined.  During the interview, the interviewing officers disclosed that observations and test purchases that had been undertaken at the premises, and that the Appellants’ VAT returns had been compared with the results of HMRC’s investigation.  In interview, the Appellants did not make any admissions of underdeclarations of tax or that they had been dishonest.
20.	We are quite satisfied that Mr Lumb’s method of calculation of the tax underdeclared was a reasonable one in the circumstances, and hold that the tax assessed on the Appellants was arrived at using the best of HMRC’s judgment.
21.	In his closing submissions, Mr Francis sought to persuade us that the Appellants had suppressed no takings whatsoever.  As part of that process he analysed the evidence relating to each test purchase and internal observation, inviting us to find for various reasons that each had been recorded.  Having considered all the evidence, and not just that relating to the test purchases and internal observations, we are satisfied that with the one exception referred to at paragraph 12 above, the officers’ evidence is both credible and true.  In expressing that satisfaction, we should perhaps mention that since it relates to events which occurred over five years ago, we would not expect it to be recalled with the precision that we should expect of much more recent events.
22.	Mr Francis also sought to convince us that the Appellants could not have cooked as many takeaway meals as the external observations indicated, maintaining that it would have been physically impossible for them to prepare 196 meals in just less than five hours.  No evidence was adduced to satisfy us of such impossibility and, in its absence, we are unable to accept the submission.
23.	Mr Francis sought to dismiss the admission of suppression by the Appellants as the work of their previous accountants, described by him as “a rogue outfit” which “preyed” on the self-employed who found themselves subject to HMRC investigations.  It is not for us to comment on the work of former advisors to the Appellants who have no opportunity to defend themselves against allegations such as those of Mr Francis.  Suffice it to say, that we accept the Appellants admission of suppression, and are unable to find that it was made under “duress”, as Mr Francis alleged.
24.	Finally, Mr Francis addressed the question of the correctness of the Appellants’ accounts, maintaining that if they had suppressed takings on the scale indicated by the assessments, their profits would have been extremely high and showing gross profit margins of 72 per cent.  Again, no evidence was adduced to satisfy us that the assessments were excessive and, in its absence, we proceed on the basis that they were not.
25.	It is now well established (see e.g. Rahman v Customs and Excise Commissioners [1998] STC 826) that the principal concern of the tribunal in an appeal against a tax assessment is to ensure that the amount of the assessment is fair, taking into account the judgment of HMRC and any other points raised by an appellant.  There is no evidence before us in the instant case which might indicate that the tax assessments were unfair or excessive or which might allow us to reduce the tax assessed. HMRC considered all the material that was before them and came to a conclusion which was reasonable and not arbitrary as to the amount of tax which was due.  Consequently, we confirm the assessments in the amounts raised, and dismiss the appeal against them.
26.	We then turn to the penalty assessment.  In his submissions to us, Mr Francis claimed that the interview of the Appellants should have been conducted under Code C of the Codes of Practice issued under the Police and Criminal Evidence Act 1984.  A similar claim was made in Mohammed Sadiq Khan v HM Revenue and Customs [2006] EWCA Civ 89, and was rejected by the Court of Appeal.  In reliance on the Khan judgment, we reject the claim in the instant case.
27.	At the time the penalty assessment was made, HMRC policy as to the mitigation of section 60 penalties was set out in Notice 730 of 1 December 1994.  They were prepared to allow a reduction of up to 40 per cent for an early and truthful explanation of why the arrears arose and the true extent of them; a reduction of up to 25 per cent for a taxpayer’s co-operation in substantiating the true amount of arrears; and up to 10 per cent for his attending interviews and producing records and information as required.  We are content to proceed on the same basis.
28.	In relation to the penalty assessment, by section 60(7) of the 1994 Act it is for HMRC to prove both the evasion of tax and that the taxpayer has acted dishonestly.  In his address to the jury in R v Fairclough (1993) unreported, a case involving a prosecution under what is now section 72 of the 1994 Act for fraudulent evasion of VAT, His Honour Judge Crabtree explained ‘evasion’ as “an English word that means to get out of something.  If you evade something, you get out of its way, you dodge it …”  He went on to explain “fraudulently” as “a common English word” meaning, basically, dishonestly.   He further indicated that the jury were to decide for themselves as “ordinary, right-thinking people” whether what the taxpayer did was dishonest.  The observations of Judge Crabtree were approved by the Court of Appeal in R v Dealy [1995] STC 217.  
29.	Acting as ordinary, right-thinking people, and applying the observations of Judge Crabtree, we have no hesitation in concluding that the Appellants evaded the tax to which they were assessed, and we infer that they did so dishonestly.  We therefore hold that HMRC have established that the conditions for the penalty assessment have been met.
30.	That leaves the question of mitigation of the penalty.  As we mentioned earlier, Notice 730 in the form in force at the relevant time provided for a reduction of up to 10 per cent of the penalty for attending interviews and producing records and information as required.  In our judgment, the Appellants were entitled to the mitigation of the penalty for attending for interview which they were awarded, but since they made no admissions of dishonest evasion, we do not consider they are entitled to more mitigation than that awarded by HMRC.  We dismiss the appeal against the penalty assessment.
31.	Mr Noble made application for HMRC’s costs in the event of the appeal being dismissed.  We grant his application in that behalf and direct that the costs be calculated on the standard basis and be determined by a Costs Judge in default of agreement of them.

DAVID DEMACK
CHAIRMAN
Release Date: 28 June 2006
MAN/02/0090

££Yuk Lia Pang & Kook kau lee (t/a Haxby Fortune Inn v  Revenue & Customs [2006] UKVAT V19642 (28 June 2006)