20246
VAT — ASSESSMENTS  —  best judgment  —  discrepancies between recorded takings and evidence of till rolls  —  general store and sub-post office carried on at same premises  —  post office-side takings audited but general store takings not reconciled  —  amended assessments held justified on basis that money must have been taken from till  —  appeal dismissed 

MANCHESTER TRIBUNAL CENTRE

 
 VERINDER KUMAR DHARNI and PRINITA DHARNI
					trading as COOPER LANE POST OFFICE	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: Michael Johnson (Chairman)
Susan Stott

Sitting in public in Manchester on 10 November 2006 and 2 May 2007

Richard Barlow, counsel instructed by Independent VAT Consultants, Leeds for the Appellants

David Gilchrist, counsel instructed by the Solicitor for H M Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

The assessments under appeal
1.	This appeal is against amended assessments for value added tax totalling £11,688.00 notified to the Appellant by H M Revenue and Customs (“Customs”) on or about 10 July 2006.   Assessments totalling £16,405.00 were originally issued against the Appellants by Customs pursuant to section 73(1) of the Value Added Tax Act 1994 on 17 November 2003 but the larger amount is no longer being pursued.

2.	The assessments relate to the business of a general store carried on by the Appellants in partnership from premises in Cooper Lane, Bradford.  The Appellants were registered for VAT in respect of their business as from 28 March 2001.  The assessments cover each of their trading periods for VAT from 04/01 to 06/03 inclusive:  period 04/01 being from the date of registration until the end of the following month, period 09/01 being for two months, otherwise the periods assessed being of three months each.

The evidence	
3.	In addition to the general store business, the Appellant Mr Dharni carries on the business of a sub-post office from part of the premises.  He is the postmaster licensed by the Post Office to conduct that business.  (In this decision we will describe his employer as “the Post Office”, in capitals, and the Appellants’ activities for the Post Office as “post office-side” business.)   The requirements of the Post Office are that post office-side business should be carried on in a manner that is kept completely separate from that of the Appellants’ own trading activities at the premises. 

4.	The Appellants’ case is that they have fully accounted for the VAT due from them in respect of their business.  The best judgment of Customs has been that they have not done so.  Hence the assessments, and hence the appeal.

5.	The tribunal has heard evidence from Mr Dharni about how the various activities carried on in the Cooper Lane premises have operated.  We have also heard from two officers of Customs, Mr Marc Andrew Nelson Pither and Mrs Sylvia Anne Ford (formerly Jones).   We have also had the benefit of considering a bundle of relevant documents provided to us by David Gilchrist of counsel, representing Customs, and sight of till rolls and photocopies provided by Richard Barlow of counsel, representing the Appellants.

The facts
6.	The following are the facts as we find them to be.

7.	The Appellants’ premises are so arranged that the post office counter and section of the premises is separate from the general store section of the premises.  All takings from the post office-side are recorded in the post office records.  There is a weekly audit of post office-side sales and takings conducted on behalf of the Post Office which is required to be accurate to the last penny.  

8.	The post office section of the premises is not always open during the hours when the general store is open for business.  The post office-side opens from 09.00 to 17.00 from Mondays to Fridays, and from 09.00 to 12.30 on Saturdays; the general store from 08.30 to 19.00 Mondays to Saturdays.  Postage stamps, electricity pre-paid tokens and telephone “top-up” cards, normally sold from the post office section, are also sold in the general store.  

9.	National lottery tickets are sold from a terminal located on the general store shop counter.  The terminal itself keeps a record of sales.  The proceeds of such sales are put into the shop till; however the lottery sales, together with those of instant (“scratch”) lottery cards, are part of the post office-side takings and not those of the general store.  Therefore the sales of instant cards have to be accounted for to the Post Office, just as any lottery winnings paid to customers have to be shown as a debit to the post office-side.

10.	Accordingly Mr Dharni instituted, and we find that he has faithfully maintained, a stock-taking system whereby stamps, electricity tokens, “top-up” cards, instant lottery cards and any other items sold in the general store, but belonging to the post office- side, have been counted and evidenced in such a way as to satisfy the Post Office at its weekly audit.  Mr Dharni is an experienced postmaster: he had previously run another sub-post office for some six years.  He is also an experienced grocer, having started work as such in or about 1984.   

11.	The Appellants’ procedure for arriving at their takings for the general store was as follows.  As sales were made, takings would be placed in the store till.  After trading, each day’s takings were counted the same day and recorded in a takings book.  Unfortunately this book was not available for production to the tribunal, but there is second-hand evidence of some of its contents.  This is because Customs had the opportunity of recording in a schedule relied upon for the purpose of their calculations what are said to have been the relevant takings.  We find that the book was of A5 size ruled off in columns with days of the week. 

12.	As is unfortunately common in this kind of case, a dispute exists as to precisely which of the traders’ documents were passed to Customs for inspection, which documents have been retained and which returned.  This tribunal cannot speculate on the contents of documents it has not seen; it can only decide this appeal on the evidence produced.

13.	The assessments under appeal are founded on a conclusion to which Customs came that a series of “z” – readings taken from the Appellants’ till between 25 September and 2 October 2003 showed expected daily sales from the general store in excess of the Appellants’ declared daily sales for VAT.  The shortfall was said to be at the rate of 32.29 per cent.  Applied to each of the VAT periods assessed respectively, this produced an underdeclaration for VAT totalling of the order of £16,400.00.

14.	The Appellants instructed IVC, VAT consultants, to question this conclusion.  IVC wrote to Customs to say that the contents of a different selection of till rolls from the business went to indicate a significant difference to the sales used by Customs.  IVC also raised the matter of sales of Post Office goods, with takings transferred to the post office-side, for which allowances had not been given.

15.	Subsequently IVC carried out a weighted mark-up exercise, calculated from purchase invoices, which was said to compare favourably with the mark-ups shown by the annual accounts of the business.  IVC made the point that to incorporate the alleged shortfall into the calculation would produce a trading result that would be unachievable for the business.  

16.	In a letter to IVC dated 18 April 2005, Ms Jane Dawson, a reviewing officer of Customs, indicated the preparedness of Customs to accept that items classified as post office-side sales made in the general store, and in addition other items shown in the till rolls which might have been misclassified as store sales, should all be left out of account in calculating store takings.  Ms Dawson continued:

“I have examined the mark-up produced and note that if the mark-up is based on correct assumptions, such as all purchases are present and the recommended retail selling price is used, the assessed uplift would result in a high mark-up for this type of business.  However the basis of the assessment is that discrepancies have been found between the till roll and the declared takings and even allowing for the highest estimate of misclassified sales there is still a discrepancy and the mark-up exercise does not explain this difference.”

17.	It appears, therefore, that Customs were at that point simply relying upon the evidence of the till rolls initially perused by them, as distinct from that of other rolls, such as those produced by the Appellants.

18.	Consequently upon her review, on 8 November 2005 Ms Dawson notified the Appellants of amended assessments totalling £15,830.00.  She explained that course as follows in a further letter dated 19 December 2005:

“My letter of 8 November 2005 was to notify that the original assessment would be reduced by the accepted errors found on the till analysis.  It was not reduced by the figures for electric and tokens and stamps sales as that point I took the view that these reductions could not be supported.

“If there is argument that would support a further reduction to the daily takings figures I will be happy to consider this with a view to resolving the matter without recourse to tribunal.”

19.	Ms Dawson subsequently revisited her calculations following representations of IVC with regard to levels of stamp sales in the general store.  On 16 February 2006 she notified a further amendment to the assessments.  The total unpaid tax assessed became at that point £11,953.00.

20.	On 21 March 2006 the total amount assessed was amended further to £11,688.00, to omit from the reckoning an account customer who should properly have been treated as included within misclassified sales.  As mentioned above, that amount now represents the figure under appeal.

21.	The rationale of the assessments in their final form is explained as follows in Ms Dawson’s letter to IVC dated 21 March 2006:

“Following your comments over the number of days analysed, I have examined the till rolls held and note that there appear to be three other days on the rolls.  The rounded amounts found on these days support the average misclassified sales already found, however because I have limited information for these days I am unable to feed these figures into the assessment calculation.  Although it is not possible to include these days on the calculation it does appear from the level of rounded amounts found that these days would make little difference to the underdeclared takings, and therefore would not lower your mark-up to the levels you find acceptable.

 “I have considered your comments regarding the mark-up, however as recently discussed I am satisfied that the till roll analysis provides a sound basis for the assessment.  Allowances have been made for any amounts that could have artificially inflated the till takings figure, and I am therefore satisfied that the expected figure represents the takings of the shop business.

“I would also note that after even all allowances have been made, on each of the days used, there remains an unexplained difference between the declared takings and the expected takings.”

22.	The discrepancy between the contents of the till rolls and the Appellants’ insistence that they have accounted for all the store takings which remained after post office-side deductions is therefore the fundamental matter for resolution by the tribunal.

23.	The difference in emphasis between Customs and the Appellants is that Mr Dharni has not himself regarded the evidence of the till rolls; rather on a daily basis he has performed an actual count of the contents of the till itself and recorded the result of the count.  We find, as has been confirmed by Customs, that he then used a computer accounting package to perform a retail scheme apportionment calculation for VAT acceptable to Customs and that the computer programme was found to be operating accurately.

24.	Mr Dharni made a good witness.  He came across as an able and responsible postmaster in whom, as it appeared to us, the Post Office had properly placed its trust.  He had in place a mechanism for separating post office-side dealings from those of the general store which worked.  The adequacy of his procedures had been supported by Post Office audits.  Every monetary item was required to be resolved to a zero balance.  We find that there was in practice no scope for equivocation in that regard and no evidence of errors exists.

25.	Following the meticulous reconciliation required by the post office-side requirements, the Appellants were left with the rest of their takings.  Mr Dharni calculated those takings.  His wife would do the figures if he was not there.  To his gross weekly takings he added on a weekly basis his record of credit card transactions.  All figures were written in the book mentioned in paragraph 11 above.  He used his accounting apportionment software once a week.  He told the tribunal that he did not understand retail schemes, but he accepted the process and that it was right for him to be on such a scheme.  His system had been set up as right for his business, on the advice of his accountants.

26.	Mr Dharni was adamant that no money had been removed from the till to pay for anything.  His wife and his teenage son worked in the general store and they employed a lady called Mrs Patel for 20 hours per week to work in the store.  Only the Appellants themselves would ever enter the post office section of the premises.  

27.	Mr Dharni said that the Appellants worked on the principle of trust.  Whilst the till was set up to allow different types of sale to be recorded by different buttons, they did not feel the need to take advantage of that facility.  That seemed unnecessary, given that they had never done so in the past, when involved in previous family businesses.  Mr Dharni said that he inserted till rolls in order to avoid damaging the printer.

28.	We find, however, that the till rolls appear to show use made of buttons for lottery sales.  There appears to be an inconsistency between the use of different buttons for the purposes for which they might have been used.  It is less than clear how occasional lottery prizes due to winners were dealt with.  This compounds the difficulty in understanding the evidence of the rolls themselves.

29.	We find that the Appellants did not keep their till rolls because the Post Office did not require them to be kept.  No reconciliation was performed between the contents of the rolls and the money counted.  Perhaps surprisingly, the Appellants do not appear to have regarded the till rolls as a means of checking their gross takings on the general store side once post office-side amounts had been subtracted.  A contrast thus arose between the audited nature of the post office-side subtractions on the one hand and the unaudited balance of the takings.  

30.	We find that, at bottom, there is no explanation of the difference between the net amounts shown by the till rolls obtained by Customs on which the assessments under appeal have been based and the declared figures extracted from the record book on which the Appellants relied.

Submissions for Customs
31.	For Customs, Mr Gilchrist reminded the tribunal of the approach to be adopted by us in deciding this appeal, having regard to the decision of the Court of Appeal in The Commissioners for Customs and Excise v Pegasus Birds Ltd [2004] STC 1509, and referring us in particular to [14] and [18] – [19] of the judgment of Carnwath LJ.  

32.	Mr Gilchrist characterised Mr Dharni’s system for recording takings as unreliable.  He submitted that we should have regard to the contents of the till rolls relied upon by Customs as speaking for themselves.  No explanation, he said, had been offered of the consistent understatement of takings made by the Appellants when compared with the rolls.

33.	Mr Gilchrist pointed out the scope of the deductions allowed by Customs in arriving at the amended assessments now under appeal.  He said that no records had been kept by the Appellants of the post office-side adjustments to takings, which would have offered a means of checking the deductions against their net takings.  He said that no miskeying or other kinds of error had been identified.  There was no evidence as to what corrections, if any, might be made.

34.	Mr Gilchrist submitted that the one reliable means of providing a reconciliation with recorded takings – the till rolls themselves dating from prior to those obtained by Customs – had not been preserved.  He submitted that the Appellants had simply preferred to keep their own record, which did not amount to a satisfactory method, and which in itself justified the conclusion reached by Customs that there was a shortfall of tax as set out in the amended assessments.  He invited us to dismiss the appeal.

Submissions for the Appellants
35.	For the Appellants, Mr Barlow submitted that the Appellants could, and were, putting forward a positive case to justify their true level of takings.  He referred us to the Pegasus Birds case at [18] – [19], where Carnwath LJ quoted from his judgment in Rahman (t/a Khayam Restaurant) v The Customs and Excise Commissioners (No 1) [1998] STC 826 at 840, viz:

“The principal concern of the tribunal should be to ensure that the amount of the assessment is fair, taking into account not only the Commissioners’ judgment but any other points that are raised before them by the appellant”.

36.	Mr Barlow said that the Appellants were not obliged to refute every allegation suggested against them.  He submitted that Mr Dharni’s system was sensible and straightforward.  He was not dishonest nor had he been careless.  He submitted that the assessments were incorrect because no allowance had been given for lottery prizes.  He drew attention to the high mark-up result if Customs were correct.  

37.	Mr Barlow submitted that we would need to reject Mr Dharni’s evidence in order to decide this appeal against the Appellants.  Errors were not a feature of the Appellants’ case.  He submitted that there was no ulterior motive in underpaying tax.  He invited us to allow the appeal.

Decision of the tribunal with reasons
38.	As we have indicated, we found that Mr Dharni made a good witness.  Customs have not suggested that he is dishonest, and it would be surprising if a dishonest trader were found to be in charge of a post office outlet operating meticulous accounting procedures.

39.	Moreover, as we have found, the business operated a system that appears properly and adequately to have safeguarded the interests of the Post Office.  However, the opposite appears to have been true of the general store side.

40.	Although no instances of money going missing from the till have been suggested, let alone proved, we think that the balance of probabilities is such that that is what must have happened.  It is, as we see it, the most likely explanation – if not the only explanation – of the differences between the evidence of the till rolls on the one hand and that of Mr Dharni’s record book on the other.  Whilst it would be wrong to speculate on how this might have happened, the opportunity clearly existed for unrecorded money to have been taken.   

41.	We agree with Mr Barlow that the Appellants are called upon to put forward a positive case, and that is what they have done.  That case is not without its attractiveness.  But if that case cannot account for the discrepancies identified by Customs, it is not a full case.

42.	The original assessments under appeal could probably not have been justified: that has been accepted by Customs as the discussion proceeded.  However, with the amended assessments finally under appeal, substantial allowances have been made.  In particular, all post office-side deductions, and all deductions which might in addition reasonably fall to be made, have been incorporated into the final calculations, to the benefit of the Appellants.

43.	We have not been persuaded that any further deductions might be due, in particular on account of lottery prizes.  We accept the submission of Mr Gilchrist that the evidence is lacking to demonstrate the appropriateness of making such deductions.

44.	The questions may be asked:  were Customs right to base the assessments on the evidence of the particular “z” – readings employed, as distinct from others, such as those produced by IVC?   Was Ms Dawson right to adopt the stance evident from her letter dated 21 March 2006 (paragraph 21 of this decision)?  

45.	In our opinion, this does not show a lack of exercise of best judgment in the Pegasus Birds sense.  In that case, at [84], Chadwick LJ quoted with approval from the judgment of Dyson J in McNicholas Construction Co Ltd v The Commissioners of Customs and Excise [2000] STC 553 at [76], when he said:    

“In order to succeed, the taxpayer must show that the assessment was wrong in a material respect, and that if so, the mistake is such that the only fair inference is [that] the commissioners did not apply best judgment … ”

46.	Chadwick LJ went on to say, at [85] – [88], that Parliament had engrafted no objective standard onto the requirement of an assessing officer to do his or her best.  If nevertheless the assessment turns out to be wrong, the tribunal has power to substitute its own assessment on appeal.

47.	We have considered, and take full account of, IVC’s reasoned objections to the outcome of the amended assessments in this case.  The force of those objections does not, in our view, overcome the methodology adopted by Customs.  Customs were justified in constructing the assessments in the way that they did, and we find no fault with the amended assessments, in their final form, either in principle or point of detail.

48.	We therefore dismiss this appeal.  We understand that Customs will not be applying for costs, but should this be incorrect, we give liberty for either party to have the appeal restored if required for further argument limited to the matter of costs.

MICHAEL JOHNSON
CHAIRMAN
Release Date: 11 July 2007
MAN/2003/0812