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England and Wales High Court (Chancery Division) Decisions
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Cite as:  EWHC 23 (Ch)
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ON APPEAL FROM THE VAT AND DUTIES TRIBUNAL
Strand, London, WC2A 2LL
B e f o r e :
| LIAQUAT ALI
(T/A VAKAS BALTI)
|- and -
|THE COMMISSIONERS OF REVENUE AND CUSTOMS
Mr James Puzey (instructed by HM Revenue & Customs Solicitors Office) for the Respondent.
Hearing dates: 11, 12 October 2005
Crown Copyright ©
Mr Justice Hart:
i) a notice dated 27th April 1999 in the sum of £25,788 plus interest in respect of the trading period from 1st August 1997 to 31st December 1998 ("the first assessment");
ii) a notice dated 18th May 1999 in the sum of £6,971.95 in respect of the trading period 1st August 1996 to 31st July 1997 ("the second assessment"); and
iii) a civil evasion penalty, raised under section 60(1) Value Added Taxes Act 1994, in the sum of £36,062 covering the period 1st August 1996 to 31st December 1998.
i) had the first assessment and/or the second assessment been made to the best judgement of the Customs?
ii) Whatever the answer to the first question, were those two assessments in the correct sums?
iii) Had Customs been justified in making a civil penalty assessment? For this purpose Customs had the burden before the Tribunal of showing that the appellant had dishonestly done or omitted to take some action "for the purpose of evading VAT": see section 60(1) VATA.
iv) If the answer to iii) is affirmative, what was "the amount of VAT evaded… or sought to be evaded" by the dishonest conduct? That amount is the measure of the penalty under section 60(1), subject to mitigation under section 70.
v) What mitigation of the penalty was appropriate?
i) unfairness in the proceedings before the Tribunal;
ii) the failure of the Tribunal to appreciate the true nature of its role in relation to determining the quantum of the assessments and the consequent failure of the Tribunal to address the issues raised by the evidence before it; and
iii) technical arguments in relation to the second assessment and the penalty assessment for the year to 31st July 1997.
"1.Mr Liaquat Ali (hereinafter referred to as "the Appellant") carries on business as the sole proprietor of an Indian restaurant, catering for both eat-in and takeaway meals, know as "Vakas Balti", from premises at 64 Windmill Hill, Colleygate, Halesowen, West Midlands B63 2BZ ("the premises").
2. The Appellant is now registered for the purposes of value added tax under registration number 695 2458 93 with effect from 1st August 1996.
3. On 2nd July 1997, an Officer of Customs and Excise visited the premises and established that the Appellant was not registered for VAT.
4. During a further visit by the Officer on 1st August 1997, the Appellant informed her that he was not trading above the VAT threshold but intended to register for VAT. The Officer advised him that his level of trading would need to be established and issued him with a set of invigilation sheets, which the Appellant agreed to complete for the month of August 1997. These sheets were completed on a nightly basis with the Officer making unannounced visits to check on their completion.
5. In addition to the said Officer's visits, a number of Officers of Customs and Excise carried out test purchases at the Appellant's restaurant and also undertook observations.
6. The Commissioners discovered that the self-invigilation sheets failed to record all of the Officers' test purchases and that the Appellant's business records bore no resemblance to the number of customers observed.
7. The Appellant finally registered for VAT with an effective date of 1st August 1997. However, the application for registration stated that the threshold was exceeded on 1st August 1996 and, therefore, following further checks by the Commissioners, the effective date was amended to 1st August 1996.
8. On 4th March 1998, Officers of Customs and Excise visited the premises once again to discuss the Appellant's business activities and to examine the available records.
9. It was established that between 7th September 1997 and 21st December 1997, the Appellant had purchased a total of 150 order pads (containing 50 orders each). When the Commissioners analysed the invigilation sheets they discovered that the total orders stated to have been used between 1st August 1997 and 31st December 1997 equated to 34 pads; there was therefore a difference of 116. This represented a suppression rate of 77%.
10.On 15th May 1998, Officers carried out external observations at the premises, prior to making an unannounced 'walk in' visit to check takings and uplifting meal bills.
11.At approximately 01.30 hours on 16th May 1998, the said Officers counted the takings, in the presence of the Appellant, and ascertained that they consisted of £1,030 in notes and coins, including a £75 float, £65.65 in cheques (3 cheques in total) and £264.45 in credit/debit card transactions (8 such transactions in total). The total takings for the night (less the declared float) therefore came to £1,267.10. This was £820.05 more than the single highest ever declared takings on a Friday night since the original date of registration on 1st August 1997 and more than £1,033.30 higher than the average declared Friday takings between 1st August 1997 and 14th March 1998.
12.On the basis of these findings, the case was referred to the Commissioners' Local Fraud Unit and adopted for investigation.
13.On 20th May 1998, Officers of Customs and Excise attended the premises and interviewed the Appellant in the presence of his accountant Mr Amir H Raja. During the course of the interview, the Appellant admitted that the meal bills observed by the Officers on the night of 15th/16th May 1998 were for meals sold that night. The said meal bills alone confirmed that of the £1,267 takings observed at least £912.50 must have related to takings for that night. No other admissions were made in respect of evasion of VAT and very little co-operation was given.
14.Officers made further observations at the premises on 10th and 23rd March 1999.
15.On 24th March 1999, Officers once again attended the premises and conducted another interview with the Appellant, in the presence of his accountant. During the course of the interview the Appellant admitted that he had cooked more than two takeaway meals the night before despite having only declared two takeaway meal bills (Officers had in fact observed eight takeaway sales that night). He also admitted that he thought that an employee had destroyed some of the meal bills that night. He accepted that he had been aware of his VAT responsibilities. The Appellant gave little co-operation, however, and continued to deny suppression.
16. The Officers then informed the Appellant that they considered there to be sufficient evidence to issue an assessment. The Appellant stated that if the Commissioners sent him a reasonable estimate he would pay it.
17.On 27th April 1999, the Commissioners duly issued the Appellant with a Notice of Assessment for an amount of £25,788 (plus interest). In addition, a manual Notice of Assessment was issued on 18th May 1999, for £6,791.95; this assessment was subsequently amended on 18th June 1999 to £14,284.47 (this assessment was for the period 1st August 1996 to 31st July 1997 and was issued on VAT 152A because the Appellant failed to render the VAT 100 for this period, which he was issued with on 15th January 1998). The total arrears were therefore calculated to be £40,072 (based on a suppression rate of between 50% and 75%).
18.On reviewing all of the evidence the Commissioners also concluded that the conduct, giving rise to the net under-declaration of £40,072, involved dishonesty and on 2nd November 1999 they made an assessment under section 76 of the Act to a penalty under section 60(1). In recognition of the limited assistance given by the Appellant, the penalty was mitigated by 10% of the culpable arrears, to £36,062.
19.Subsequent to the issue of the assessments, the Appellant's accountants sought a local reconsideration on the grounds that they had undertaken an analysis of purchases by his client and, as a result, had calculated that the true arrears were £8,012.63.
20.The Commissioners duly undertook reconsideration and concluded that the accountant's calculations, based on supplier records, did not provide a reasonable basis on which to make a calculation. As a result the assessments were upheld in full.
21.The Commissioners rely on the following facts to prove dishonesty in this matter:
(a) The quantity of cash found in the till on the night of 15th /16th May 1998 was far in excess of the takings recorded for any other Friday evening. As pleaded above, Officers ascertained that the total takings for the night came to £1,267.10, which was £820.05 more than the single highest declared taking on a Friday night since registration. Furthermore, £1,267.10 was more than £1,033.30 higher than the average declared Friday takings between 1st August 1997 and 14th March 1998. The quantity of meal bills found on that night substantiates the fact that the amounts did represent takings and the Appellant confirmed in interview on 29th May 1998 that the meal bills observed by Officers were for meals sold that night.
(b) There are substantial discrepancies between meals recorded on the self-invigilation sheets and those seen by Officers who attended the restaurant between 1st August 1997 and 4th September 1997. Furthermore, the invigilation sheets failed to record all of the Officers' test purchases.
(c) Between 7th September 1997 and 21st December 1997 the Appellant purchased 150 order pads, whilst an analysis of the self-invigilation sheets suggests that the total orders used between 1st August 1997 and 31st December 1997 equated to 34 pads. In other words there was a difference of 116.
(d) The recorded credit card sales for some nights were in excess of the declared sales figures.
(e) In interview on 24th March 1999, the Appellant admitted that he had cooked more than two takeaway meals the night before, although only two takeaway meal bills were declared. The Appellant therefore knew that the declared figure was understated. The Appellant also stated that he thought that one of his employees had destroyed some of the meal bills that night. This is further evidence that he knew that the remaining meal bills did not equate with the number of meals actually sold.
(f) The Appellant was well aware of his obligations in relation to VAT (as he admitted in interview on 24th March 1999).
22.The Appellant's case, as set out in his Notice of Appeal dated 16th June 2000, is that:
"The assessment is based on estimated [figures], which are not realistic or achievable by the business of this size and nature. We have done a lot of work to calculate a reasonable figure to any output tax underdeclared due to Mr Ali's illiteracy or ignorance but HMCE is not willing to review their decision".
23. The Commissioners contend that:
(a) There is clear evidence in support of the assessments (the Appellant is referred to the matters pleaded in paragraph 21(a) to (d) above) and in support of the calculations and figures which underlie them. The Commissioners calculated a suppression rate of between 50% and 75% based on the average number of meal pads calculated to have been suppressed and on the takings recorded on 15th/16th May 1998 as compared to takings on other Fridays. Furthermore, the figures are perfectly realistic and achievable by a business of the size and nature of the Appellant's.
(b) In so far as it is alleged that the assessment was not issued using best judgment, there was sufficient and adequate information upon which to make such judgment and the Commissioners considered all of the relevant information before issuing the assessment. There is nothing to suggest that the Commissioners have not exercised best judgment in carrying out the assessment. The Appellant is required to show that the assessment was made either dishonestly, vindictively, or capriciously, or is a spurious guess or is wholly unreasonable in the circumstances. The Appellant has provided no evidence in support of such allegations and any such allegation is manifestly ill founded.
(c) In the circumstances, having regard to the matters pleaded in paragraph 21, the civil evasion penalty has been properly and lawfully imposed on the Appellant. Furthermore, the amount of mitigation allowed to the Appellant pursuant to section 70 of the Act is reasonable in light of the Appellant's very limited co-operation.
(d) In the premises, the Commissioners contend that the appeal should be dismissed."
Alleged procedural unfairness
The failure of the Tribunal to appreciate or properly to execute its true role
"the tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material available to it, the burden resting on the taxpayer. In all but very exceptional cases, that should be the focus of the hearing, and the tribunal should not allow it to be diverted into an attack on the Commissioners' exercise of judgement at the time of the assessment." [see para. 38(i) ibid].
It seems likely that what the Tribunal had in mind in drawing the authority to the attention of the appellant was that, if he intended to challenge the assessment as a whole on best of their judgement grounds:
"it is essential that the grounds are clearly and fully stated before the hearing begins." [para. 38(ii) ibid]
The Tribunal seems, therefore, to have been seeking to elucidate at that stage whether it was going to be asked to consider "best judgement grounds" separately from the question as to what was the correct amount of tax. Not only does the Tribunal's own reference to Pegasus Foods make it clear that it perfectly understood what its role was, but its reference to Pugh in paragraph 57 of the Decision also demonstrates that it was entirely at ease with the distinction between "best judgement" considerations and issues of quantum.
"Mr Khan… did not seek to contend the assessment had not been raised to best judgement but that it was grossly excessive"
"Mr Khan accepted the assessment was raised to best judgement and his challenge to it was focused on quantum – both as to the level of suppression assumed by the Commissioners and the period over which the Commissioners assumed the suppression had been taking place."
It seems to me impossible to say that the Tribunal did not understand that the issue before it was the issue of quantum.
i) Customs initially required returns to be made for the periods 1st August 1997 to 30th September 1997 and for 1st October 1997 to 31st December 1997;
ii) Subsequently, on 15th January 1998, Customs required a return to be made for the period 1st August 1996 to 31st July 1997. The figures supplied to Customs for that period showed VAT due of £6,971.95. That sum was then assessed by the second assessment (made on 18th May 1999);
iii) The first assessment (in respect of the period from 1st August 1997 to 31st December 1998) had been made on 27th April 1999. This was the assessment which proceeded on the assumption of the 70/50% suppression rate;
iv) After the first and second assessments had been made Customs re-visited the question of whether there had also been suppression in the 12 month period ending on 31st July 1997, and concluded that there was likely to have been such suppression. They used a 50% rate to calculate the amount of suppression, and on that basis concluded that the VAT due in respect of that period should have been £14,284 rather than the £6,971.95 which had been declared. They therefore purported on 18th June 1999 to amend the second assessment by the amended notice referred to at paragraph 3 of this judgment. Since there is no power to amend an assessment by increasing the amount payable, this purported amended assessment could not be relied on by Customs before the Tribunal. The correct procedure for Customs to have taken would have been to issue a further or supplementary assessment or to have withdrawn the earlier assessment and replaced it: see sections 73(6), 75(2) and 77(6) VATA. By the date when the mistake was realised, it was too late to cure it;
v) The civil penalty assessment was calculated on the basis that the figure contained in the "amended" assessment dated 18th June 1999 correctly reflected the amount of VAT which had been evaded in the period which it purported to cover.
"60 VAT evasion: conduct involving dishonesty
(1) In any case where –
(a) for the purpose of evading VAT, a person does any act or omits to take any action, and
(b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability),
he shall be liable, subject to subsection (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct"
Section 76(1) empowers Customs to assess and notify the penalty. Section 76(3) defines for the purposes of the following paragraphs what is meant by "relevant period", and in relation to a penalty under section 60 it is:
"the prescribed accounting period in respect of which the VAT evaded was due"
Section 76(5) permits, inter alia, a civil penalty assessment to be combined with an assessment under section 73 but the amount of the penalty has to be separately identified. An assessment under section 76 may be made at any time before the expiry of two years from the time "when the amount of VAT due for the prescribed accounting period concerned has been finally determined": see section 77(2).