20005

ASSESSMENT – Best judgment – Existence of credit accounts not considered by assessing officer – Appeal against assessment dismissed but quantum reduced

LONDON TRIBUNAL CENTRE

	ZIYA DEMIRCAN 	           Appellant
T/A WOOD STREET FOOD & WINE

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	MISS J C GORT (Chairman)
						MRS J M NEILL

Sitting in public in London on 11 and 12 December 2006

Mr A M Osam of Zek & Co accountants, for the Appellant 

Mrs P Crinnion, advocate, instructed by the solicitor’s office for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This is an appeal against an assessment dated 24 July 2003 in the sum of £37,230 tax and £3,459.49 interest in respect of periods 08/00 to 02/03.  

2.	The issue in the appeal was whether or not the assessment was made to best judgment.

3.	The Appellant, who is of Turkish origin, carries on business as a retailer of food and wine from premises in London E17.  He trades as a sole proprietor and was registered for VAT with effect from 9 June 1999.  A visit was made to the Appellant’s premises by two officers of the Commissioners on 13 March 2003, and a police officer accompanied them.  A quantity of non-duty paid spirits was seized and the Appellant was questioned about the level and nature of his trade.

4.	The Tribunal heard evidence from Mr Demircan and also from Ali Zener an associate accounting technician of Zek & Co, on behalf of the Appellant. Mr K Clarke, HEO, who had visited the Appellant on 13 March 2003, and Mrs Madeline Ruth Weston, HEO, of the Appeals and Reconsideration team, gave evidence on behalf of the Respondents. Both parties produced bundles of documents and further documents were produced in the course of the hearing.

5.	A preliminary issue arose out of a letter dated 25 July 2005 which Mrs Weston had written to Zek & Co proposing that a figure of 40% should be used as the figure for the amount of the Appellant’s turnover which should be zero-rated, as opposed to the 35% used by Mr Clarke to calculate the assessment, and that of 45% proposed on behalf of the Appellant. This figure was said to be a compromise for the assessment only. We will deal with other contents of this letter below, but as this proposal had neither been accepted or rejected on behalf of the Appellant since it was first proposed, at the outset of the hearing the Tribunal enquired as to whether or not it was still a matter which the Commissioners were prepared to concede. As the Commissioners indicated that they were, and as Mr Osam indicated that he was prepared to accept that figure of 40% on behalf of the Appellant, it was agreed that there would be no need for the Tribunal to enquire into the issue of the proportion of the Appellant’s turnover which should be zero-rated, but we would be concerned with the issue of the amount of the weekly turnover of the Appellant’s business, which, according to the Appellant’s statement on 13 March 2003 was £1,400 at that time, and which the Commissioners’ estimated was £4,000-£5,000..

6.	At approximately 7.00pm on the evening of 13 March 2003 Mr Clarke, accompanied by two other officers of the serious non-compliance team and a police officer from the licensing section had paid an unannounced visit to the Appellant’s premises. There is dispute between the parties as to precisely what happened in the course of that visit, it is however not disputed that a quantity of non-duty paid spirits was seized, and a Seizure of Excise Goods – Warning letter was issued to the Appellant. It appears that Mr Clarke and his colleagues were all involved in the subsequent removal of these bottles of alcohol.  Mr Clarke interviewed the Appellant and contemporaneously recorded his answers to questions on a proforma questionnaire. It appears that no questions were asked beyond those listed in the questionnaire itself, but Mr Clarke noted that present in the till were £200 in £20 notes, £125 in £10 and £5 notes and £31 in £1 coins. He also noted that in the course of the period he and his colleagues were at the premises, customers came in and purchased approximately £15 worth of goods. His recorded time for leaving the premises is approximately 21.15pm. In his notebook, but not on the questionnaire, Mr Clarke has recorded that the amount of cash in the till was £363 excluding the float.  It is not clear at what time this amount relates to, given that it differs from that recorded in the questionnaire. There is no record as to how much money there was in the float.  A ‘Z’ reading was taken from the till which showed £501.48. Mr Clarke seemed to think that he would not himself have taken that ‘Z’ reading, although in the statement of case it is clearly stated that he did do so.  Mr Clarke also recovered the previous day’s ‘Z’ reading from the rubbish bin, which showed an amount of £688.93. The Appellant’s evidence was that it was Mr Clarke who took the ‘Z’ reading.  

7.	At the hearing of the appeal the Appellant gave his evidence through a Turkish interpreter, his English being very poor. At the time of Mr Clarke’s visit there had been no interpreter present. There is no indication on the questionnaire of the Appellant having difficulty in understanding the questions asked, but Mr Clarke did accept in his evidence that it was possible that Mr Demircan had believed that the officers were only interested in the alcohol which was being seized and on which duty had not been paid, rather than in VAT related matters.  

8.	Mr Clarke recorded inter alia in the questionnaire that the Appellant’s VAT returns were completed by his accountant, that the business hours were 8.00am to 11.00pm seven days a week, the Appellant was a sole trader, and there was one part-time member of staff. He also noted that phone cards were recorded through the till and all sales were recorded on the till. The weekly turnover was given by the Appellant as £1,400, the business records were said to be kept in the shop and maintained by the Appellant, and all the purchases were done by the Appellant from the cash and carry.  

9.	It is noted in the questionnaire that Mr Clarke was accompanied by two other officers and the local licensing policeman, although in the Statement of Case it is recorded that Mr Clark and only one other officer of the Commissioners went, accompanied by a police officer. We take this to be an error in the Statement of Case. All of the officers had been involved in removing bottles from the shelf, but only Mr Clarke was involved in completing the questionnaire. No audit rolls had been found in the till, and Mr Clarke had not asked how the Appellant had calculated the zero-rating. He had been told that the Appellant wrote details down in a book, but this was not produced to Mr Clarke. The ‘Z’ readings were said to be written into a book daily, but the ‘Z’ readings themselves were not retained. Despite it being recorded in the questionnaire that the business records were kept in the shop, in his evidence Mr Clarke said that he was told that the book with the ‘Z’ readings was kept at the Appellant’s house. The daily gross takings were said to be calculated from the cash that remained in the till at the end of the day.  At the time of Mr Clarke’s visit there was £561 shown on the ‘Z’ reading, but there was still a further four hours’ trading left in the day.  

10.	The Appellant was not at any time able to produce any invoices for the alcohol. The Tribunal was not provided with a list of what was seized in the way of alcohol, although we were provided with the Seizure of Excise Goods Notice which was provided to the Appellant on the date of the seizure.  This refers to the document C156 on which seized goods were recorded, but this was not produced in evidence, so we do not know either the quantity or the value of the alcohol seized.  Mr Clarke took away with him two black binders which contained the purchase invoices, and also the two ‘Z’ readings. There was no full audit trail available in the form of either a till roll or a manual record.  

11.	Following the visit a standard letter was sent to the Appellant in Mr Clarke’s name informing him that the till was not being used correctly to record the daily gross takings, and that the till must be used to produce the daily, consecutive and correctly dated ‘Z’ readings which must be used as the source for the daily gross takings figure.  It also informed the Appellant that an audit roll, as well as a receipt roll was to be used at all times and that at the time of sale, the sale should be identified as being zero-rated, lower rated or standard rated.  Detailed records of all payments made by the Appellant were to be kept at and all records were to be maintained for six years.

12.	By a letter dated 20 June 2003 Mr Clark asked the Appellant about:

(i)	The lack of purchase invoices relating to the alcohol on which duty had not been paid and the resulting understating of input tax, as well as the understating of sales of the non-duty paid goods.

(ii)	The failure to retain proper records and the failure to maintain a fully-itemised till roll.

(iii)	Incorrect identification of zero-rated goods which appeared to have inflated the value of zero-rated goods to approximately 65% of total sales in any period.  It appeared that the correct zero-rated sales figure would be in the region of 30% of total takings.

(iv)	There was a conflict in the stated weekly sales of £1,400, the declared weekly sales on the VAT returns of £1,700-£1,900 on average, and the sales indicated from examination of the ‘Z’ readings for 12 and 13 March 2003, which showed £4,000-£5,000.

Mr Clarke accepted that it would have been ‘more helpful’ if he had requested any additional evidence which might assist the Commissioners to confirm the correct gross takings, and in particular the Daily Gross Takings record. With the letter Mr Clarke had enclosed a schedule of his preliminary calculations of the potential VAT which was due, based upon zero-rated sales of 30% and a weekly turnover derived from the two ‘Z’ readings he had seen for 12 and 13 March 2003, of £4,166.

13.	On 15 July the Appellant and Mr Zekai, his accountant, visited Mr Clarke in his offices. (It is wrongly recorded in the Statement of Case as taking place at the Appellant’s premises.) No full record was taken of that meeting, although a note was taken by Mrs J Gray, a fellow officer. It was the Appellant’s evidence that he and Mr Zekai had arrived with all the relevant documents, but were never asked to produce them. Mr Clarke agreed that the accountant had some documents with him, but he had presumed that the accountant would have referred to them if he had thought them relevant, a presumption which we find entirely reasonable. The Appellant’s explanation for the failure to produce the list of daily gross takings which he had had with him at Mr Clarke’s office was that his accountant, Mr Zekai was a very small and quiet man who did not put himself forward. There is no record of credit sales having been discussed at the meeting, and it was Mr Clarke’s evidence that there was no mention of credit sales at the time of his visit to the Appellant. Mr Zekai made reference to two burglaries at the Appellant’s premises, and to the money the Appellant had consequently received which in February 2003 he had used to enlarge the selling area, and this accounted for a subsequent increase in turnover.  However, the Appellant in the course of his evidence to us, stated that at no point had the selling area ever been increased, and he was unaware of any burglary. In the course of the meeting Mr Clarke suggested that the turnover was nearer £4,000 per week, whereas Mr Zekai maintained that it was £3,000 per week now, but said that it might well go up in the next quarter. At the end of the meeting there was a discussion between M Clarke and Mr Zekai as to an appropriate percentage for zero-rating, but there was no conclusion as to this.  

14.	Following the meeting no further documentation was produced to Mr Clarke, and on 21 July 2003 he wrote to the Appellant informing him that he had that day raised an assessment in the sum of £37,230 on the basis of the preliminary calculations provided to the Appellant on 20 June. Again nothing further was received by Mr Clarke and on 24 July the assessment was issued to the Appellant.  By a letter dated 29 August 2003, Mr Zekai wrote to Mr Clarke informing him that in his letter of 20 June 2003 he had included in the turnover for 12 and 13 March 2003 the sale of goods on credit to two companies, Crownlee in the sum of £136.31, and Malro, in the sum of £140.45, which had been rung into the till on those respective dates. Mr Zekai attached to that letter two lists in the Appellant’s handwriting showing the dates and the value of sales to Crownlee and Malro respectively from 13 January 2003 up until 12 March 2003 in the case of Crownlee, and up to 13 March 2003 in the case of Malro. Mr Clarke was also informed that the Appellant had changed his cash register to give better and more legible ‘Z’ readings, copies of which taken between 21 July 2003 and 27 July 2003 were attached.  Mr Clarke was also informed that the takings included approximately £300 for top-up telephone cards. We note that the records of interview on 13 March shows that the Appellant stated £500-£600 was relevant to cards.  No reply was sent by Mr Clarke to this letter until 16 March 2004.  There was no explanation for this delay. In his reply Mr Clarke stated he was unwilling to amend his assessment because the issue of zero-rated sales had not been addressed, nor was he satisfied that the turnover levels were accurate, and the VAT returns post-assessment were still not reflecting a turnover of £3,000 per week.  With regard to the sale of telephone cards, he required the production of purchase invoices/sales listings and would consider any new material produced. This was the end of Mr Clarke’s involvement with the case. In evidence he said that he had not amended the assessment on learning about the credit sales because he did not accept that those items had been rung through the till, and he considered it extremely unusual for that to be done.  

15.	In the course of the hearing the Appellant produced Daily Gross Takings records from 10 February 2003 up until 7 September 2003. Mr Clarke pointed to the fact that there should have been an extra amount of money showing on the Daily Gross Takings records for 12 and 13 March because of the money put in for the credit account customers, but there was no such large variance.  He did not accept that the daily takings figures produced at the Tribunal properly reflected the Appellant’s position, firstly because the sums shown ranged from £195.39 on one day, 9 March 2003, to £441.39 for 18 July 2003, and also because at the meeting on 15 July the accountant had suggested an average weekly turnover of £3,000, whereas the highest weekly turnover shown on the documents produced was £2,688.75 for the week ending 17 August 2003. Furthermore, the records only covered a small part of the assessment period, dating only from 10 February 2003, whereas the assessment commenced in 08/00. In addition the figures did not reflect what Mr Clarke had seen on the Z readings.  

16.	Mr Clarke’s assessment was subsequently reviewed by Mrs M R Weston.  By a letter dated 20 March 2005 the Appellant’s accountant had written to the Commissioners suggesting that a meeting should take place and the Appellant might be able to make an offer to settle the matter.  By a letter dated 21 March 2005 Mrs Weston replied to that letter stating inter alia that she was reviewing the case, she asked for details of the credit payments, specifically the account records and evidence that the items sold were rung up at the time sold as well as when payment was received. She asked for copies of Purchase Day Books, or the client’s cash book receipt summary, showing the split of zero-rated purchases to standard-rated purchases. She also asked for proof of sale or purchase of telephone cards prior to April 2003. She wrote again on 1 April 2005 after having seen copies of the ‘Z’ readings taken in March 2003 and those in July 2003 which had been provided with the accountant’s letter of 29 August. She asked a series of questions about them but received no reply until 30 April 2005, when the accountant wrote saying he was hoping to meet the client.  No documents were sent on behalf of the Appellant, but a letter was sent enclosing the letter originally sent to Mr Clarke on 29 August 2003.  Further e-mail correspondence ensued, and a meeting was proposed, but none ever took place.  By a letter dated 30 May 2005 Mr Osam, who had now taken over the Appellant’s case, submitted a suggested method of calculating the figures and stated that new calculations with the actual figures would be following. No figures were ever sent.  A Notice of Appeal dated 7 November 2004 had been served on the Tribunal on 24 February 2005, i.e. well before this correspondence.  

17.	Despite the absence of further documentation, by a letter dated 25 July 2005 Mrs Weston wrote stating that she was prepared to re-calculate the daily figure, having taken out of the amounts for 12 and 13 March in respect of the two credit accounts which Mr Zekai had claimed were monthly, and not daily, figures. She was also, as stated above, prepared to take 40% as the appropriate figure for the zero-rated sales as opposed to the 35% that Mr Clarke had used.  As a consequence of both matters she reduced the assessment from £37,200 to £17,701. She also asked questions about matters relating to the ‘Z’ rolls. She received no reply until a letter of 20 August 2005 in which Mr Osam set out details of the Malro and Crownlee accounts, ignoring the fact that these had already been conceded by Mrs Weston. In addition Mr Osam replied and stated that it was not possible to answer questions about the ill rolls and the ‘Z’ readings taken in March 2003 since the Commissioners had the ‘Z’ readings in question.  It was also said, inter alia, that the cash register was not operating efficiently at the relevant time for unknown reasons, but that the Appellant was using a new cash machine and he relied on his current till readings to work out retrospectively the appropriate zero-rate. The hope was also expressed that a settlement could be reached without recourse to the Tribunal. There was further correspondence and further delay, but no further evidence was submitted by the Appellant. However, at the hearing of the appeal a bundle of documents was provided by the Appellant, these documents contained inter alia plans and photographs of the shop in question, lists of the items sold with markings as to whether they are subject to VAT or not, photocopies of ‘Z’ readings from 21 July to 27 July 2003, takings records from 16 June to 27 July 2003, the accountant’s records and calculations between June and August 2003, including extracts from the Sales Day Book and the Purchase Day Book, a schedule of zero-rated purchases for the years 2003 to 2006, and various calculations made by the accountant, including the accounts from 9 June 1999 to 31 March 2006. As stated above, it was not until during the course of the hearing, that the Appellant produced his takings records from 10 February 2003 to 7 September 2003 which had not previously been seen by the Commissioners.

18.	Mr Ali Zener, an associate accounting technician of Zek & Co gave evidence to the Tribunal. He had never in fact dealt with the Appellant’s VAT returns, but gave general evidence as to the practice of Zek & Co. He had also prepared a comparison between the Commissioners’ calculations and calculations which he had made on behalf of the Appellant. His calculations differed from those of the original assessment in that he excluded from the average daily takings the credit received from Crownlee and Malro Ltd. He did not however suggest that the figure he arrived at was a settlement figure. He confirmed that the Appellant was operating the retail apportionment scheme, although this does not appear to have been mentioned elsewhere in the documents.  

The Respondents’ case

19.	The Commissioners’ case was that the assessment was issued to best judgment.  It was based on the two ‘Z’ readings for 12 and 13 March, and the fact that in his original interview the Appellant stated that the weekly turnover was £1,400, but after the issue of the assessment, both the Appellant and his accountant stated that the takings were approximately £3,000 per week. The Appellant had failed to record individual sales, and had no record of the split between the zero-and standard-rated items sold, he had not retained his ‘Z’ readings and he had not provided records to substantiate his VAT declarations. There had been no supporting records to enable the Commissioners to carry out a full audit trail. There were no records regarding the alcohol which had been seized, but the fact that the Appellant admitted that he had not paid duty on the alcohol, showed that the Commissioners were correct to conclude that the returns did not properly reflect the Appellant’s trading position.  No purchase invoices were ever produced to substantiate the purchase of the non-duty paid spirits, or the source of funding needed to buy the goods.

20.	The Commissioners relied on the case of Rahman v Customs and Excise Commissioners (No.2) [2002] STC 73.  No specific submissions were made in relation to this case.  

The Appellant’s case

21.	On behalf of the Appellant, Mr Osam relied on the cases of Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 and Van Boeckel (1980) 1 BVC 378. It was submitted that the Commissioners had excluded relevant information and had included irrelevant matters. It was suggested that the trader had kept proper books and accounts and made proper returns both before 5 March 2003 and after. In addition the Appellant had never incurred any default or other surcharges or had anything other than an excellent record of submitting his VAT returns.  

22.	It was submitted that the central issue was that all relevant documents had been made available, or the Appellant had attempted to make them available, in particular when he had visited the Commissioners’ office with his accountant when the documents he had with him were not accepted. It was submitted that this was unfair. It was incumbent on the Commissioners to enquire about further evidence.  Furthermore, it was unfair to base an assessment on the responses of the Appellant to forty prepared questions as this could not constitute a thorough investigation, nor a fair investigation.  

23.	The Appellant also relied on the case of Associated Provincial Picture Houses (supra) as authority for the proposition that where a decision on a competent matter was so unreasonable that no reasonable authority could ever come to it, then the court could interfere. In the present case the Commissioners had acted unreasonably and it was submitted that Wednesbury case was concerned with primary principles of law and justice which could only be overruled by the statute, and therefore the Tribunal should adhere to its principles.  

Reasons for decision

24.	Dealing first of all with Mr Osam’s submission in relation to the case of Wednesbury, that case no longer represents the law, it having been overtaken by the case of Van Boeckel (supra) and having been distinguished in the case of Rahman (supra).  In Rahman Lawrence Collins J held that, following the case of Van Boeckel, to overturn an assessment it must be shown that the assessment had been reached dishonestly or vindictively or capriciously, or was wholly unreasonable. This properly represents the law as we understand it.

25.	This case has been bedevilled by lack of evidence and misleading statements. We were not impressed by the officer’s approach to the making of the assessment.  In his own words he had thought that at the time of the visit in March 2003 the Appellant had believed that they were only concerned with the non-duty paid alcohol. He had asked a series of questions from a proforma questionnaire of a man whose understanding of English was extremely poor, and who had not properly understood the circumstances of the officer’s visit. He asked no follow up questions whatsoever. He made no enquiries about credit customers because he did not believe it likely that the business would have any, but did not specifically verify whether or not this was the case. (We would say here that the Tribunal accepts that the amounts relating to the two account customers, Malro and Crownlee, were shown on the ‘Z’ readings for 12 and 13 March and the figures for those days were therefore distorted.) Having agreed that the old till was inadequate, nonetheless the assessment was based on this. Whilst there is no evidence that Mr Clarke specifically asked for the record of the daily gross takings at the time of his visit, nor when he was visited by the accountant and the Appellant, it is a matter we might have expected the note-taker to have recorded if Mr Clarke had asked for it.  

26.	Mr Clarke omitted to ask the Appellant questions about the phone cards, and he did not ask the accountant what he had with him when he came to his offices.  It is a curious feature of the case that at no stage prior to the hearing had those acting for the Appellant produced the Daily Gross Takings records for February and March 2003, and at no stage were any earlier records which would apply to the majority of the period of the assessment ever been produced.  In the Appellant’s Grounds of Appeal he states that on 15 July 2004 (sic), (which we take to be a reference to 2003,) the accountant and the Appellant had taken to Mr Clarke’s offices company records and working papers, ‘Z’ readings and a cash book receipt summary. No Daily Gross Takings book is referred to, and, whilst it might have been expected that Mr Clarke would ask what the accountant or the Appellant had with them, it was not for him to do so, but it was for the Appellant and/or his accountant to present the documents to Mr Clarke.  The fact that Mr Zekai was of a nervous disposition is not sufficient reason for his not producing any relevant documents which he had with him.  

27.	The accountant himself seem to have kept good records of any matter sent by the Appellant, and we accept that the Appellant did regularly submit his VAT returns and pay the VAT said to be owing on a regular basis.  

28.	The principle matter relied on by the Appellant is the matter of the two credit accounts for Crownlee and Malro Ltd. There is no evidence that prior to the making of the assessment on the 21 July 2003 (the date given by Mr Clarke in his letter of that date) the Appellant had provided any evidence of the two credit accounts. In the circumstances, although we find that on the balance of probabilities those two matters were rung into the till on 12 and 13 respectively, thus distorting the turnover, we do not find that Mr Clarke’s failure to have become aware of those matters renders the assessment not to best judgment.  We have set out above the various deficiencies in Mr Clarke’s approach, but it was nonetheless for the Appellant to discuss the matter fully with his accountants and for them to raise any relevant matters with the Commissioners. It appears that at the interview only general statements were made, and no reference was made to any specific documentation. The Appellant had ample opportunity to produce such records as he had, but it was only at the hearing of the appeal that any proper attempt was made to provide relevant documentation, and even then there was very little that was relevant to the majority of the period covered by the assessment. We consider that Mrs Weston’s approach to the amount of the assessment was more appropriate than that taken by Mr Clarke, making allowances as she did for the inclusion of the two payments made by account customers on 12 and 13 March, and allowing for an increased proportion of zero-rated sales.  The question we have to answer is whether or not Mr Clarke’s approach had been reached dishonestly or vindictively or capriciously, or was wholly unreasonable, and, of those, we consider the only relevant question is whether or not it was wholly unreasonable. Despite our reservations about his approach, we do not find it was wholly unreasonable, given the paucity of information provided by the Appellant and the knowledge Mr Clarke had that, as the Appellant had admitted, quantities of alcohol had been purchased without the relevant duty being paid, and this constituted prima facie evidence that the VAT records were distorted, and the returns did not properly reflect the situation.  It was also the case that he was not informed about the credit sales until after he had made his assessment. Whilst it might have been expected that a conscientious officer would have enquired about whether or not there were any credit customers, we do not find it wholly unreasonable that he did not do so.

29.	In all the circumstances this appeal is dismissed with regard to the issuing of the assessment. At the conclusion of the hearing it was accepted by the Commissioners that, in the event that they succeeded, the assessment in the sum of £39,000 would be withdrawn and the reviewing officer would be instructed to reduce it line by line in the light of the agreed figure of 40% for zero-rated sales and taking account of the distortion of the figures caused by the inclusion of the figures on 12 and 13 March relating to the two account customers.  We would recommend that, in addition to reducing the assessment, interest is inhibited.

30.	No order for costs.

MISS J C GORT
CHAIRMAN

RELEASED: 7 February 2007

LON/05/235