20652

VALUE ADDED TAX – Assessment – Eat-in and Takeaway restaurant – No system in place for ensuring all bills accounted for – Observations made by Customs officers – Cashing-up observed on separate occasion – Appellant did not request officers’ presence for cross-examination – No evidence provided by Appellant to account for discrepancies found by officers – Assessment made to best judgment – Appeal dismissed

LONDON TRIBUNAL CENTRE

	CATERING CUISINE LTD	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	MISS J C GORT (Chairman)
						MR J ROBINSON

Sitting in public in London on 19 February 2008

Mr Kwesi Amihyia, director, for the Appellant

Mr Simon Chambers, advocate, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	This is an appeal against a decision of the Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) to issue an assessment in the sum of £64,575 plus interest which was notified to Catering Cuisine Ltd (“the Appellant”) in a letter dated 4 September 2006.  The assessment was amended by a letter dated 15 November 2006 which was notified to the Appellant on 20 November 2006.  The effect of the amendment of the assessment was to reduce it to £59,294 and this occasioned the withdrawal of a misdeclaration penalty in the sum of £1,707 which had been issued at the same time as the initial assessment.

2.	Extensive grounds of appeal were submitted as follows:

	“Grounds of Appeal

1.	In all the circumstances of the case, the Customs officer was wrong in that he failed:

(a)	(i)  to provide sufficient evidence of his findings other than stating his or his colleagues invoices were suppressed (ii) to indicate who were on duty on the material dates;

(b)	to consider that owners were resident overseas and it was also in their interest to know the truth and therefore to demonstrate the customs officer’s conclusion;

(c)	there were over £30,000.000 during the last 3 accounting years declared as income despite absence of sales receipts;

(d)	to take into account that takeaway foods could not be taken into account as one receipt for one bag of foods and also failed to take into account that two bags of food are often accounted for in one receipt;

(e)	to consider that one person could be paying for two tables or more;

(f)	to examine boxes which were kept inside the restaurant and copies of each sale was placed inside as a means of deterring theft or pilferage;

(g)	to consider that owners lived abroad and were hardly ever present and the directors cannot be present at all times to supervise theft (as suppression of receipts implies theft);

(h)	to consider that the suppression of receipts was a criminal act and those guilty of it should be punished and not the owners.

“2.	On the material day when cash were handed over to the Customs officer as he demanded he failed:

(a)	to take into account the usual total sales of the whole day;

(b)	to consider that there was more cash on the day the Customs officer visited the business place because as there were credit card sales due to extra amount of takeaway;

(c)	to take into account that there was international football and thus regular customers ordered takeaway food and paid cash as there was no credit card facility;

(d)	the person responsible to collect cash and cheques handed over for previous day’s takings although not being asked to do so and if the overall sales of the two days were considered, it would have shown that there was no great discrepancy on the sales if compared with other weeks turnover;

(e)	to consider despite the said Customs officer being told that special effort was made to deal with takeaway as there was no sit-in business (which the Customs officer must have noticed himself);

“3.	The assessment by the Customs officer is wrong and is based on a subjective view rather than practical and objective test and leaving a very bad impression and thereof causing doubt and suspicion in the mind of the owners that serious theft was taking place and thus causing them to consider quitting the business.

“4.	The Customs officer failed to consider the consequences namely:

(a)	the owners of the business may close the business and surrender the licence to the landlord or the lessor;

(b)	all employees being stigmatised whereas evidence, if any, could have supported and helped the owners to reconsider their position and discover the culprit;

(c )	there are a number of restaurants that have closed resulting in loss of jobs and the assessment by the Custom officer will possibly lead to a similar fate of this business.

5.	The assessment is wrong in law and fact and be dismissed with costs.”

The background

3.	The Appellant runs a Chinese restaurant from premises in Upper Street, London N1 under the trading name of “Young Cuisine”.  Both in-house and takeaway meals are served.  

4.	The Appellant was registered for VAT with effect from 20 September 1994.  The owners of the Appellant business, Mr and Mrs D Ramdhun, live in Mauritius.  

The evidence

5.	An agreed bundle of documents was produced to the Tribunal and we heard evidence from Mr Kwesi Amihyia, formerly a director of the Appellant company, on behalf of the Appellant, and from Kevin James O’Connell, a higher officer, on behalf of the Respondents.

6.	On 10 December 1998 an officer of Customs & Excise had visited the Appellant at its premises in Upper Street.  The officer subsequently wrote to the Appellant advising that meal slips and bills were required to be retained; the record of meal slips and bills should be on pre-numbered papers and he advised the Appellant to cross-reference the meal slips and bills to daily sheets to ensure that the totals declared on the VAT returns were complete and accurate.  By a letter dated 18 December 1998 the Appellant replied stating that all the above suggestions were impractical for a variety of different reasons.

7.	On 10 November 2005 Mr O’Connell made an unannounced visit to the Appellant’s premises.  There was no one available to speak to other than a waiter.  Mr O’Connell identified poor cash controls and, using his local knowledge, the amounts declared on the VAT returns and the size and seating capacity of the business, he considered that it was highly probable that there was suppression of sales.  He therefore arranged a series of test purchases to be carried out during a full day’s trading on 2 December 2005, which was a Friday.

8.	At the time of his visit Mr O’Connell had noticed that small handwritten, unnumbered bills were being used, there was no till and the cash was put into a draw.  He requested the credit card printouts. He was informed that a Mr Mak was the person that controlled the day-to-day running of the business.  

9.	Prior to analysing the results of the test purchases, on 23 February 2006 Mr O’Connell visited the Appellant’s accountants registered office to inspect the records.  There he met Mr Amihyia.  He was informed that Mr Amihyia collated the takings and bills which he received each week from Mr Mak.  Mr Mak carried out all the day-to-day administration of the business.  Mr O’Connell pointed out his concerns with regards to the cash control and repeated the recommendation made previously that numbered bills should be used, with a copy retained, because these could be used as a check and also as a deterrent to staff.  He was informed that Mr Amihyia was content with Mr Mak and the controls that were in place and that any additional controls would be too expensive and impractical to put in place.  This attitude is one that Mr Amihyia persisted with throughout the hearing of the appeal.  

10.	There appeared to be no effective system of control in the restaurant.  There was no manager there, Mr Mak himself was not an employee of the Appellant company, but was contracted to do work which included collecting the cash and the bills of an evening, and bringing them to Mr Amihyia.  Mr Mak was also responsible for doing the purchases for the restaurant.  

11.	The restaurant was open between about 12 noon and 11.30pm everyday, although on occasion it would close in the afternoon if business was quiet.  From the wages sheets we saw there would appear to be about 14 staff in total, including the chef and Mrs Mak, who was responsible for totalling up the bills on a daily basis and giving them to her husband who would hand them to Mr Amihyia.  The receipts in the restaurants were put into a box.  Mr Amihyia was responsible for keeping the books, he paid the VAT and looked after the PAYE returns.  He was familiar with basic bookkeeping, but the company’s audited accounts were done by a chartered accountant.  

12.	The majority of the Appellant’s business was conducted in the evening.  In addition to totalling the bills at the end of the day, Mrs Mak was also there to supervise the waiters, and would be there for most of the time.  The Appellant’s turnover was about £290,000 to £300,000 per annum.  The lease of the property was owned by the Ramdhuns, who licensed it to the Appellant.  At the time of the hearing that licence had been terminated.  

13.	According to a letter from Mr Ramdhun, written on 10 July 2006, there had in the past been a problem with theft from the restaurant, and therefore two wooden boxes closed with padlocks were placed in the restaurant for copies of each sales receipt. An exercise had been carried out whereby somebody observed the number of people and the number of tables occupied, and these were compared at the end of the week with the receipts.  Discrepancies were uncovered which led to the dismissal of certain employees.  Mr Amihyia believed that there had been no theft since that time.  However, in the same letter Mr Ramdhun wrote:  

“We would be grateful to you if you could give us substantial evidence as to your finding to enable us to take legal action against the culprit as we are the loser in this case and not the tax collector as such.  Your finding is similar to ours but we were unable to be to (sic) sure that there was a clear case of theft and if there is any who in particular is the culprit.  

“You will realise the assessment made against us is illogical, we cannot be having a company which is making such a loss and expecting us to be liable to a sum of money of which we are not responsible.”

14.	The main reason for Mr O’Connell’s visit to the company office in February 2006 was to inspect the bills that had been declared for the test day in December.  He found that of the seven test purchases made, only two were shown on the records.  The tests had been carried out by seven parties of two officers going into the restaurant, recording the number of people who come in after their arrival (except for the first officers there who counted the people in the restaurant as well as those who arrived) they would also record the number of takeaway meals, that is to say they would not count the individual bags taken, but would record the number of people seen paying for takeaway meals.  The internal observations record is a comprehensive questionnaire which one of each pair of officers would fill in and the other would witness and sign.  Home deliveries were also recorded to the extent that each time the motor cycle delivery man left or returned to the restaurant was recorded.  Full details of the meals eaten by the officers were recorded.  It was noted that the bill did not show the number of covers, nor did it have a VAT registration number.

15.	When at the company’s offices Mr O’Connell reconciled the weekly cash receipts to the bankings for VAT periods 03/05 to 12/05.  This showed cash declarations at approximately 23% over the period.  He compared the number of observations with declared sales for the day of the test purchases.  Of the 81 bills that should have been declared, only 56 were declared, which indicated a suppression rate of  31%.  

16.	On 14 June 2006 Mr O’Connell arranged for a supervised cash up at the restaurant.  The cash percentage that day was recorded as 64%.  On that occasion Mr Mak was working at the restaurant and he assisted with the cash up.  Three days’ worth of takings were still at the restaurant.  The bills were kept on a spike and also in the locked boxes, but those boxes were overflowing.  Cash was kept in packets in a locked cupboard.  The bills for Monday 12 June, collected on 14 June, showed daily gross takings of £284.30 with cash bills being £208.  This represented 84% cash.  For Tuesday 13th the daily gross takings were £599.40 with cash bills totalling £296.80, representing 49% cash.  For Wednesday 14th the daily gross takings were £1,092.30 with cash bills amounting to £708.70, being 64% cash.  This gave an average cash percentage over the three days of 65%.  Mr O’Connell subsequently issued the assessment in the sum of £64,580.54, using the suppression rate of 31% derived from the suppression rate on the day of the test purchases and observations in December.  Following the issuing of the assessment an arithmetical error was noticed and therefore the amended assessment was issued in the sum of £59,294.  

17.	Following the calculation of the assessment, Mr O’Connell had a meeting on 4 July 2006 with Mr Amihyia and Mr Mak, another Customs officer was present.  At that meeting Mr Amihyia and Mr Mak confirmed that they were happy with the cash controls that were in place and reiterated that any additional burdens would not be cost effective for the business.  They were both happy that the copy customer meal bills declared on the records for 2 December 2005 represented the true takings for the day.  All Mr O’Connell’s findings were then put before them but neither wished to comment.  They were asked to explain the apparent discrepancies between the weekly taking sheets and the daily gross takings record, and Mr O’Connell agreed to await a reply after they had consulted with the restaurant’s owners before he issued his assessment.  A letter of the same date recording the meeting was sent to Mr Amihyia.  It was in response to this letter that Mr Ramdhun wrote the letter of 10 July 2006 referred to above.  In addition to the passage cited above, Mr Ramdhun asserted his faith in the integrity of both Mr and Mrs Mak and no explanation, other than an apparent recognition that maybe there was pilfering by the staff, was made.  

18.	By a letter dated 15 August 2006 Mr Amihyia wrote to Mr O’Connell and after some reference to the various duties of Mr and Mrs Mak, he wrote as follows:

“Regarding your visit on Wednesday 14 June 2006, if you compare the sale of the three days with other weeks, there has been a big drop.  Mr Mak was asked to help as most people were staying home to watch football.  The regular customers had asked for foods to be delivered.  Obviously, payment was in cash and not by credit card that could be an explanation of having more cash than otherwise.  Mr Mak had not bothered to even collect the cash despite being requested to do so on a daily basis.  
…

“I would like you to reconsider your assessment as there is no way the owners can agree to it nor will they pay for the dishonesty of others, if the same is at all involved.  The business will be closed leading to loss of employments.  I am, however, quite prepared to recommend all the controls and administration you consider advisable and proper and equally advice dismissing staffs that you feel or saw acting dishonestly.   As you were present on the material date, it will help if you could give an indication as to who were on duty on that day.”

The Appellant’s case

19.	Mr Amihyia criticised the Commissioners for failing to provide sufficient evidence of suppression and failing to indicate which staff were on duty on the material dates.  It was submitted that account should have been taken of the fact that the owners were resident overseas.  The officers who carried out the observations were criticised (despite their presence not having been required by the Appellant at the hearing of the appeal in order that they might be cross-examined as to this) for incorrectly accounting for the takeaway food, failing to consider that one person could be paying for two tables or more, failing to examine the boxes kept inside the restaurant with copies of each receipt inside, failing to consider that the owners were hardly ever present and the director could not be present at all times to supervise theft, and failing to consider that the suppression of receipts was a criminal act and those guilty of it should be punished and not the owners. 

20.	On the day when the cash up was observed the officer was criticised for failing to take into account the usual total sales for a whole day, failing to consider that there was more cash on that day than usual because there were extra credit card sales due to extra takeaways on that day, failing to take into account that there was an international football match taking place and thus regular customers ordered takeaway food and paid cash as there was no credit card facility, failing to take account of the fact that the person responsible for collecting the cash and the cheques handed over the previous days takings although he was not asked to do so, and if all the sales of the two days were considered, that would show that there was no great discrepancy compared with other weeks, and he had failed to consider that there was no seating business that day.

21.	Mr O’Connell was criticised for having a subjective view of the matter, rather than imposing an objective test, which aroused doubt and suspicion in the mind of the owners that serious theft was taking place and this caused them to consider quitting the business.

22.	In principle the Appellant’s case was that there was a burden on the Respondents to identify who in the restaurant was responsible for any theft that might have taken place, and that this was the job of the Commissioners not of the owners.  

Reasons for decision

23.	In this appeal the burden of proof is upon the Appellant to satisfy the Tribunal that the assessment was not made to best judgment and that the amount of the assessment was fair.  

24.	With regard to whether or not the assessment was made to best judgment, the Appellant has to show that, in the words of Carnwath J (as he then was) in the case of Rahman (t/a Khayam Restaurant) v Customs and Excise Commissioners [1998] STC 826, the assessment was reached dishonestly or vindictively or capriciously; or was a spurious estimate or guess in which all elements of judgment were missing; or was wholly unreasonable.  This approach was upheld by the Court of Appeal in the case of Rahman (No.2) [2003] STC 150.  In the latter case it was said per curiam that the underlying purpose of the legislative provisions is to ensure that the taxable person accounts for the correct amount of tax.  We bear that in mind.  

25.	The Appellant has produced no evidence before us to show that this assessment was not made to best judgment.  He has provided no evidence that the assessment does not properly reflect the amount of tax due.  

26.	We have seen the observation sheets prepared by the officers who carried out the observations in December 2005 and there is nothing to suggest that the officers did not properly record the number of bills that they saw issued.  The fact that only two out of the seven bills which the officers themselves had paid on that night were declared of itself leads to the inescapable conclusion that there was suppression.  The Appellant seems to have been completely unaware that it is his responsibility properly to account for value added tax and to ensure that there is no suppression of takings.  It is not for the Commissioners to check up on the criminal or otherwise activities of the staff employed.

27.	Despite having been told in 1998 that there were poor cash controls, and having been advised that pre-numbered bills should be used, and despite the fact that there had clearly as appears from Mr Ramdhun’s letter of 10 July 2006 been previous problems with staff theft, nonetheless the Appellant chose not to follow this advice and did not incorporate any of the recommendations made by the officer who visited in 1998.

28.	There appears to have been no one person in charge of running the restaurant, neither Mr nor Mrs Mak appears to have been there full-time, although there was a certain amount of confusion and conflict in the evidence as to precisely what there roles were, and there was absolutely no method of ensuring that all the bills were retained and the cash properly accounted for.

29.	In all the circumstances there is nothing that has been put before us to show that the assessment of the tax due from this Appellant is in the wrong amount and was not made to the Commissioners’ best judgment.  This appeal is dismissed with no order for costs. 

MISS J C GORT
CHAIRMAN

RELEASED: 16 April 2008

LON 2006/1042