20214
VAT — ASSESSMENTS — best judgment — café and takeaway business — proportion of standard-rated supplies — method of basing assessments on evidence of self-invigilation sheets approved — method of increasing declared takings on ground of alleged suppression based on proportion of missing readings in sequence of “z” readings disapproved — appeal against assessments allowed in part  

VAT – REGISTRATION — liability for — application to deregister — level of trade allegedly beneath threshold — evidence lacking — appeal dismissed     

MANCHESTER TRIBUNAL CENTRE

 
 	
					MRS PAMELA ANN DENTON	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: Michael Johnson (Chairman)
Alban Holden

Sitting in public in Manchester on 11 and 12 April 2007

The Appellant appeared in person

Jonathan Cannan, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2007

DECISION

1.	The Appellant is the VAT registered proprietor of a café and sandwich takeaway business.  She was registered for VAT with effect from 11 June 1997 following the transfer of the business to her as a going concern. 

2.	Two wholly distinct matters are before the tribunal for decision in this appeal.  The Appellant is firstly appealing against assessments made under s 73(1) of the Value Added Tax Act 1994 (“the Act”) totalling £6,314.00, not including interest, in respect of her VAT trading periods from 12/01 to 03/03 inclusive.  Secondly, the Appellant has been met with a refusal of her application to be deregistered for VAT as from 20 February 2006 on the ground of the reduced turnover of her business, so she is also appealing against that refusal. 

3.	The assessments are dated 14 August 2003.  At that stage the Appellant was already represented in her dealings with H M Revenue and Customs, formerly H M Customs and Excise (“Customs”) by Mr Brian Upton of Upton & Co, accountants of Barnsley.  The tribunal has before it a bundle of relevant documents assembled by Customs, containing inter alia copies of the exchange of correspondence between Mr Upton and Customs.  

4.	The notice of appeal is dated 9 June 2006.  Customs have not taken any point as to the lateness of the appeal, having invited the appeal by letter dated 19 May 2006.

5.	The first head of appeal concerns the value of the Appellant’s sales vatable at the standard rate. Customs formed the view that the business was selling more standard-rated items than have been shown in the Appellant’s declared takings.  Hence, they say, there has been a continual shortfall in the amount of VAT for which the Appellant has accounted.  Customs also allege suppression of takings.  Those matters are disputed by the Appellant.

6.	The second head of appeal concerns the turnover of the business.  According to the Appellant, her turnover has been beneath the VAT threshold.  She says that the low level of takings entitles her to be deregistered.  That matter is disputed by Customs.

7.	The grounds of appeal contained in the notice of appeal, prepared by Mr Upton, therefore state:

“My client feels [that] the ratio for apportioning of standard-rated sales used on the VAT forms submitted is correct.  Turnover as shown by VAT return forms submitted is under the threshold.  Therefore deregistration should take place.”   

8.	Mr Upton has not attended tribunal.  For whatever reason, the Appellant has been left to represent herself at the hearing of her appeal.  We accept that this has placed her at something of a disadvantage, and we have sought to make allowance for that.   

9.	Following discussion, it was agreed that Customs would present their case first.  Appearing for Customs, Jonathan Cannan called as his single “live” witness the assessing officer of Customs, Mr Mark Damian Reilly.  He gave oral evidence in addition to his witness statement dated 19 February 2007.  The tribunal also had sight of two other witness statements from officers of Customs, namely that of Mr David Charles Hague, dated 20 February 2007 and that of Ms Julie Ann Denton, dated 19 February 2007.    

10.	The Appellant gave oral evidence as the only witness in support of her case.

11.	We find the following facts.

12.	On 28 September 2001, the Appellant made an application to deregister for VAT, on the ground that she had ceased to trade.  She made a second such application on 9 December 2002, again on the ground that she had ceased to trade.  Both those applications were refused by Customs.

13.	We find that the Appellant had not ceased to trade.  We find that she did intend to sell her business during the trading period 12/01, and at that time went so far as to place the prospective purchaser in possession of the business premises for some seven weeks with a view to the would-be purchaser attempting to run the business; however the sale fell through, the Appellant resumed possession of the premises, and she has continued to run the business ever since.      

14.	An officer of Customs called Kathryn Stephenson visited Mr Upton’s offices on 
18 February 2002 and again on 12 March 2002 and she produced a visit report which spoke of a “ … 50 per cent suppression of takings.  Not satisfied that SR: ZR split is based on anything tangible”.  In other words, she was not clear that the Appellant’s standard-rated sales and zero-rated sales respectively were being recorded and declared in the correct proportions inter se.  The report states that the Appellant was to self-invigilate over a representative period to determine a more accurate split.

15.	Following her visits, Mrs Stephenson wrote to the Appellant.  In her letter, dated 5 April 2002, she referred to the need to separate standard-rated and zero-rated sales in a satisfactory fashion.  She wrote that, if the Appellant was unable to separate her sales in a different way, she might use the catering adaptation scheme and recalculate the output tax of the business in accordance with Appendix C of Customs’ Notice 727, a copy of which she enclosed with her letter.

16.	Mrs Stephenson continued:

“Please note that the scheme must produce a fair and reasonable result.

“The percentage of standard-rated supplies must be determined on a quarterly basis with reference to a sample of actual sales over a representative period, taking account of weekly, daily and hourly fluctuations.

“Your current practice of applying a set 60:40 standard-rate split is not considered to be representative and must not continue.”   

17.	In tribunal, the Appellant could not recall that she had had that letter, but we have no reason to doubt that it was sent and received.  With regard to the 60:40 split, the Appellant told us that, on one occasion, she “did an exercise” with Mr Upton for the purpose of determining the standard-rated/ zero-rated split, resulting in some 30 – 39 or 40 per cent of sales being zero-rated.  When it was put to her by Mr Cannan that each of her VAT returns showed a zero-rated proportion of 29.85 per cent, she said that that was Mr Upton’s doing.   

18.	Following Mrs Stephenson’s letter, a delay ensued.  The Appellant was not immediately requested to self-invigilate.  However, Mr Reilly was then asked to deal with the Appellant’s case.  This was in May 2003.  He first visited the Appellant at her business premises on 6 June 2003, visiting again on 19 and 24 June 2003.  On the first occasion, he left with the Appellant a number of self-invigilation sheets on which he asked her to record her daily sales.  The Appellant complied with this request and commenced self-invigilation on 9 June 2003.  Copies of the sheets that she completed are included in the bundle of documents presented to us.  It was suggested by Mr Cannan that not all the entries on the sheets were made by the same hand, but in our view it would be wrong to make any assumptions in that regard without handwriting evidence.   

19.	The Appellant was accustomed to place her takings in a till containing a till roll.  However, whether or not the till had buttons allowing a distinction to be made between standard-rated and zero-rated sales, as to which there was some debate before us, we are satisfied that the Appellant and her staff were not satisfactorily distinguishing, in using the till, between the standard-rated and zero-rated takings of the business respectively.  We find that the contents of the till roll constituted inadequate evidence for establishing that distinction, so that the self-invigilation exercise was a desirable measure for arriving at the appropriate split.        

20.	Unfortunately, the value of the completed self-invigilation sheets is somewhat undermined by the following factors:

(1)	The sheets were not, as we find, completed in numbered sequence.  The sheets bear numbers, but we find that the Appellant was not conscious of the numbering when she completed the sheets.  So they were completed in random order.

(2)	Provision is made on the sheets for the date of completion to be entered but, in most cases, only the day has been entered, viz “Mon”, “Tue”, etc.  As there was more than one Monday, Tuesday, etc on which sheets were completed, it is difficult to form a view to which dates respectively most of the sheets correspond.

(3)	Some sales were recorded by the Appellant on follow-on pieces of paper of her own, torn from a paper bag.  There is a difference of opinion between Mr Reilly and the Appellant as to whether sufficient sheets had been left by him with her to record her sales.  The Appellant says that she had run out of blank sheets by the time she resorted to the follow-on pieces of paper.  We find that Mr Reilly’s intention was that the Appellant should self-invigilate for three weeks, ie 18 trading days.  However, she appears only to have recorded her sales for 13 trading days.  We find that, if the Appellant initially received sheets sufficing for three weeks, which she may have done, sufficient sheets were in the end not available readily to hand to enable her to self-invigilate for the full period intended.  

(4)	There is a question mark over the comprehensiveness of the sheets that were completed.  According to Mr Reilly, the Appellant admitted on 24 June 2003 that she intended to make up any deficiencies in the sheets from the till roll.  As mentioned above, the till roll did not itself enable the standard-rated/ zero-rated distinction to be made.  Moreover, on various dates, inter alia in June 2003, officers of Customs made and observed purchases, some of which do not appear to have been recorded in the self-invigilation sheets.

21.	Listening to the Appellant in tribunal, we have formed the view that a degree of confusion existed, and indeed still exists, in her mind as to which of her sales are properly standard-rated and which not.  This arises from the fact that the business sells both hot and cold food, some of which is eaten in and some taken out.  This we think constituted a further reason why the self-invigilation exercise was appropriate in her case, problematical though it has turned out to be.  

22.	Whilst it is largely unclear what the Appellant’s sales may have been on particular dates, nevertheless a sufficient view can, in our opinion, be formed from the completed sheets of the respective proportions of standard-rated and zero-rated sales over the 13 trading days concerned.  From the information contained in the completed sheets, Customs calculated total takings of £1,411.31, of which £1,020.26 appeared to be sales that were standard-rated for VAT, and £391.05 zero-rated.  In other words, just over 72 per cent of sales were standard-rated.  In cross-examination, the Appellant accepted that there was no other tangible evidence before the tribunal going to show that that percentage might be incorrect, in June 2003 or otherwise. 

23.	We offered the Appellant the opportunity to challenge Customs’ interpretation of the self-invigilation sheets by detailed reference to the entries made on the sheets.  To an extent, she took that opportunity.  However we do not think that she has succeeded in showing that Customs’ conclusion as to the split disclosed by the sheets is erroneous, save at best to a tiny extent which we regard as de minimis.

24.	On 11 July 2003, Mr Reilly wrote to the Appellant to justify the assessments that he intended to make, being those under appeal.  

25.	He firstly drew attention to some of the various shortcomings with the self-invigilation sheets, but stated his intention to rely upon them nevertheless as showing a standard-rated percentage of sales of 72 per cent (rounded down) throughout the periods assessed.  

26.	Secondly, he raised the matter of staffing.  He wrote that the Appellant had told him that she had one part-time assistant only, but that Customs had observed at least two members of staff apart from herself.  However, from what the Appellant told us, we find that the truth of the matter is that the Appellant was helped at different times by members of her family, thereby enabling the Appellant to absent herself from the premises on occasions.

27.	Thirdly, Mr Reilly mentioned the matter of daily gross takings records.  The Appellant had supplied to Customs records of income and expenditure from 11 November 2002 to 31 May 2003, but not otherwise.  These records were uplifted by Mr Reilly on 19 June 2003.  The Appellant has not since provided any further records.  Moreover she could not at the time produce, and she cannot now produce, most of the “z” readings from her till.  Customs took possession on 19 June 2003 of a small number of “z” readings, which were put before us as important evidence.  Like the self-invigilation sheets, they are problematical.  

28.	According to the Appellant, one “z” reading was taken per day.  However the numbered sequence of readings shows that there was a reading on 11 June 2003, two readings were missing between then and 13 June 2003, two readings were taken on 13 June 2003 itself, and apparently no reading was taken on 14 or 15 June 2003.  We listened carefully to what the Appellant had to say about these peculiarities, but we find that the position is without satisfactory explanation.  We are left to speculate that the two missing readings were taken on 12 June 2003.

29.	Finally, Mr Reilly referred in his letter to the Appellant’s records of purchases of food.  He wrote that these appeared to be incomplete.  In tribunal, the Appellant said, and we are prepared to accept, that she had received free supplies of raw food, in particular pork, which had not therefore been the subject of purchase invoices.  

30.	Mr Upton was, as we find, sent a copy of the letter dated 11 July 2003, but he did not react thereto on the Appellant’s behalf prior to the raising of the assessments on 14 August 2003.  In constructing the assessments, Mr Reilly firstly applied the average of the monthly takings shown by the takings records for 11 November 2002 - 30 May 2003 to the earlier trading periods of the Appellant from 12/01 onwards.  He then uplifted the whole by 22.2 per cent, being the suppression rate he believed to be suggested by the “z” readings.  The rate of 22.2 per cent was based upon the fact that there were two “z” readings missing from a sequence of nine.  Two-ninths is, of course, 22.2 per cent.  

31.	Mr Reilly then took 72 per cent of the resultant figure as attributable to standard-rated supplies, being the percentage derived from the self-invigilation sheets, and calculated the output tax payable in consequence.  The assessments represented the difference between the declared tax and the tax so calculated to be due, less centrally assessed amounts.

32.	An admitted flaw crept into Mr Reilly’s calculations.  Having calculated the turnover of the business, period by period, Mr Reilly needed, according to the methodology he adopted, to uplift the turnover by 22.2 per cent.  He did this by reference to the declared turnover.  However, as Mr Cannan accepted, it was the true turnover to which the uplift would fall to be applied.  Mr Cannan further accepted that, for seven weeks, the Appellant was out of possession of the business premises whilst her prospective purchaser attempted to trade therefrom.  Mr Cannan accepted that the Appellant should not have been assessed in respect of VAT said to be due in respect of those weeks during which she did not herself trade the business.

33.	Following the assessments, Mr Upton corresponded at some length with Customs, but until 2006 the correspondence related exclusively to the issue of deregistration and the abortive sale of the business.  Eventually, on 21 March 2006, Mr Upton wrote:

“Our client is adamant that the percentages as shown on [her VAT] Returns [are] a true reflection of the percentage of standard-rated goods sold.   She states that sheets prepared for you were done under great pressure from your members of staff who at that time were visiting her on a relatively frequent basis and this added to the pressure of the general decline in [her] business and trying to keep the business afloat coupled with the fact that she did not fully understand what she was doing led to her completing the forms apparently incorrectly. …

“The assessments that have been raised by [Customs] we feel are excessive based on actual Returns that have now been submitted … .”

34.	No other explanation has been put forward in answer to the assessments which are under appeal in this case.  Nor have alternative calculations been put forward to the calculations underlying the assessments, whether by Mr Upton or anyone else.  

35.	We record that there has been an argument before us over what documents precisely were in the possession of Customs to ground the assessments, and what documents may have been returned to the Appellant, or may still be in the possession of Customs.  However we remain unpersuaded that Customs ever had sight of any documents which they should have taken into account, beyond those which Mr Reilly told us that he saw and took into account.

36.	On 30 September 2005, the Appellant made another application to deregister, on the ground that she was trading under the threshold.  She made a further such application on 15 February 2006.  It is in respect of the latter application, refused by Customs, that the Appellant is now appealing, as confirmed by a letter from Mr Upton to the Manchester Tribunal Centre dated 30 October 2006.

37.	The Appellant described to us how her takings had been, and still were, affected by the seasonality of the student population.  Moreover intense competition from other outlets and changes to traffic routes in the vicinity of her premises had meant a loss in passing student trade.  We accept that such factors would be relevant to the level of trade.  

38.	For Customs, Mr Cannan submitted that the “z” readings were the best evidence in the case.  The self-invigilation sheets were, he said, inaccurate.  He said that the Appellant’s estimate of the percentage of zero-rated takings had been 30 – 39 or 40, not the 29.85 per cent adopted in the VAT returns.  But he submitted that both were unsubstantiated.  

39.	Mr Cannan said that the Appellant had not identified an error in Mr Reilly’s calculations.  Mr Reilly’s approach was justified in the absence of records.  He should have been provided with a proper set of “z” readings, but he was not.  Mr Cannan said that the Appellant had made no attempt to provide Mr Reilly with the information that he needed.  In these circumstances, Mr Reilly’s approach to the assessments was a reasonable one.  Mr Cannan submitted that there existed an underdeclaration of up to 24 per cent, when one compares and contrasts the “z” readings with the declared total takings.   He said that it was for the Appellant to establish that the true level of takings was different from that relied upon by Mr Reilly, and that she had not done this.

40.	With regard to the application to deregister, Mr Cannan submitted that this did not get off the ground.  Referring to paragraph 13 of Schedule 1 of the Act, Mr Cannan said that it sufficed for the tribunal to dismiss the appeal that no attempt had been made to satisfy Customs that, in 2006, the Appellant was not liable to be registered. 

41.	In answer, the Appellant said that she had relied upon Mr Upton both with regard to the completeness of her returns and the correctness of her standard-rated/ zero-rated split. She said that she was not equipped to comment on the figures.  Her staffing levels were as she had indicated to Customs.  

42.	We agree with Mr Cannan that the “z” readings are the evidence on which primary reliance should be placed.  A set of such readings, uplifted in such circumstances as those in the present case, can in our view properly be relied upon as indicating the correct level of takings of the business for the period to which they relate.  When such level of takings is shown to be inconsistent with the takings of the business otherwise recorded in the recent past, it can reasonably be concluded that those records are deficient.

43.	However, in this case there is nothing that would appear to make the evidence of the “z” readings atypical of the declared trading pattern of the business.  We agree that there is nothing to suggest that one should not calculate the notional takings of the business for periods prior to 11 November 2002 by reference to the average monthly takings in respect of the periods for which records are possessed.  We do not accept the evidence of the Appellant that the business was declining for the reasons given in paragraph 37 above, because this does not appear to us to be borne out by the Appellant’s VAT returns.  Nor, considering her returns, does there appear to be anything in the point that the takings were student-related and hence seasonal.  According to the returns, sales climbed to some extent in the summer months.  So a monthly average calculated without reference to recorded takings in the months July to October inclusive appears favourable to the Appellant.

44.	Nevertheless, the total of one week’s takings of the business, as evidenced by the “z” readings, produces a figure which is not, in our view, out of step with the declared takings from 11 November 2002 to 31 May 2003.  For example, the “z” readings from Friday, 13 June 2003 to Thursday, 19 June 2003, inclusive, total £830.31.  If one assumes that the takings for Thursday, 12 June 2003 equated to those for Thursday, 19 June 2003, the “z” readings from Wednesday, 11 June 2003 to Tuesday, 17 June 2003, inclusive, would total £831.48.  There are 21 occasions on which, between 11 November 2002 and 31 May 2003, the recorded weekly takings exceeded those amounts, most recently in week 3 of May 2003.  

45.	We do not accept Mr Reilly’s suppression figure of 22.2 per cent.  The number of missing “z” readings as a proportion of the sequence uplifted is not, in our view, related to the amount of tax that should be declared.  Suppose that only one “z” reading out of the sequence were missing, would the rate of suppression then be only one ninth, instead of two ninths?  And if there had been three “z” readings missing from the sequence of nine, would the rate of suppression then have been one third?  And what if the sequence of “z” readings had been more or less than nine in total?  

46.	We think that Mr Reilly’s figure of 22.2 per cent is unreasonable because of its arbitrariness.  Accordingly we reject it.  Being of the view that suppression has not been made out in this case, save in relation to standard-rated supplies as mentioned below, we do not substitute any figure for the 22.2 per cent.

47.	Whilst Mr Cannan correctly submits that the self-invigilation sheets are flawed, we regard the evidence of those sheets as to the relative proportions of standard-rated and zero-rated sales respectively as acceptable evidence on which Mr Reilly reasonably relied.  We think that to apply the percentage of 72 per cent to the true turnover, being the figure for standard-rated supplies derived from the self-invigilation sheets, was an entirely proper way of proceeding. As Mr Cannan submitted, there existed no better way of performing the split.  We have not been satisfied that any other formulation of the split had a proper foundation.

48.	We moreover accept Mr Cannan’s submission that the case for deregistering the Appellant in 2006 has simply not been made out.  The evidence to demonstrate such a case is not before the tribunal. Whether the Appellant might now, in 2007, be entitled to deregister is a moot point.  She is, of course, not prevented from making a further deregistration application, supported by the evidence to substantiate her application.

49.	In summary, we decide as follows –

(1)	We uphold Mr Reilly’s method of ascertaining the Appellant’s notional takings from period 12/01 onwards, given the absence of records prior to 11 November 2002;

(2)	However the true takings for purposes of assessment are only ascertained by disregarding any notional takings attributable to the seven week period during which the business was in the hands of the Appellant’s prospective purchaser;

(3)	The true takings are not to be treated as uplifted by 22.2 per cent or by any other figure on account of alleged suppression of takings;

(4)	Of the true takings, 72 per cent of them related to standard-rated supplies in respect of which output tax fell to be accounted for;

(5)	The Appellant having used a notional split between standard-rated and zero-rated supplies which attributes a lower percentage than 72 to standard-rated supplies, the Appellant has to that extent underdeclared the tax due and should pay any balance of tax owing according to a 72:28 split between standard-rated and zero-rated supplies respectively over the periods with which we are concerned;

(6)	The assessments under appeal should be adjusted or (if appropriate) discharged accordingly;

(7)	The Appellant has failed to substantiate a case for deregistration in 2006.

50.	This appeal therefore succeeds in part, to the extent just mentioned.  

51.	We are not called upon to decide any issue as to costs, inasmuch as at the conclusion of the hearing Mr Cannan indicated that he was not pursuing costs, and the Appellant indicated that she was not claiming any out-of-pocket expenses.

 MICHAEL JOHNSON
CHAIRMAN
Release Date: 19 June 2007
MAN/2006/0443