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Cite as: [2011] UKFTT 198 (TC)

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Fresh Sandwich Bar v Revenue & Customs [2011] UKFTT 198 (TC) (23 March 2011)


[2011] UKFTT 198 (TC)




Appeal number:  TC/09/16729


Income Tax:  PAYE Regulations 2003:  Employee (PAYE) Assessment to Best Judgment – Decision One – Assessment to Best Judgment – Decision Two – Sum Due to Be Recalculated as Directed – Decision Three – Adjourned for Recalculation and Settlement.










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TRIBUNAL JUDGE: Mrs G Pritchard, BL., MBA., WS

Member: Mrs Helen M Dunn, LL.B.



Sitting in public at George House, 126 George Street, Edinburgh on Wednesday 23 February 2011



Mr G Curle, Chartered Accountant for the Appellant


Ms Ros Shields, for the Respondents






1.       This is an appeal against 4 determinations by HMRC under Regulation 80 (Reg 80) The Income Tax (Pay As You Earn) Regulations 2003 as amended (PAYE).  This appeal is governed by the First-tier Tax Tribunal Rules 2009.

2.       In terms of Reg 80(2) such determinations must be made by HMRC to the best of their judgment.

3.       The determinations were raised in respect of 4 periods 2002/03, 2003/04, 2004/05 and 2005/06.

The Hearing

4.       The Appellants Mr Arun Khanna and his wife Mrs Vijay Khanna traded as partners in the Fresh Sandwich Bar.  Only Mr Khanna appeared and gave evidence and will be referred to throughout this decision as Mr Khanna.  He was represented by Mr G G Curle, Chartered Accountant.  Miss Tina Marshall the HMRC officer who made the determinations, gave evidence.  HMRC were represented by Ms Ros Sheilds.

5.       The written pleadings consisted of 2 bundles, one produced by HMRC and referred to throughout the proceedings as the blue book.  It was divided into sections named ‘Folios’ within the book.  Each Folio was separately numbered.  Where reference is made to any page it will be referred to as Folio x1ppx and will be treated as repeated here.  Mr Curle produced the second bundle on the morning of the proof.  It was divided into 3 sections with alphabetical references.  Where reference is made to any section it will be A, B or C, with page numbers following and will be treated as repeated here.

The Law

(1)        Legislation

This can be found at Folio 8.  However in relation to the appeal procedures Reg 80 has been amended to allow appeals to the Tribunal under the amended legislation.

(2)        Case Law


Since the direct tax appeals have been introduced to the Tax Chamber a number of direct tax cases under legislation not dissimilar to indirect tax appeals have been heard.  As there is very clear guidance to Tribunals dealing with ‘best judgment’ appeals in indirect cases the Tribunal has applied this guidance here.  It is contained in the case of Pegasus Birds v HMRC [2004] EWCA Civ 1015, which followed both the Rahman decisions.

Mr Rahman challenged the then HM Customs & Excise on VAT assessments in two cases both of which involved ‘best judgment’.  They are Rahman (trading as Khayam Restaurant) (No 1) v CEC [1998] STC 826 and Rahman (trading as Khayam Restaurant) (No 2) [2003] STC 150.

Cases Referred to Particularly

(1) Rahman No 2

Chadwick LJ stated at paragraph 32 in regard to the question of the quality of the assessing officer’s decision on VAT:

“In such cases….. the relevant question is whether the mistake is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or if it is of such a nature that it compels the conclusion that no officer seeking to exercise best judgment could have made it.  Or there may be no explanation; in which case the proper inference may be that the assessment was indeed arbitrary”. 

(2) Pegasus Birds

Carnwath LJ (now Senior President, The Appeals Service) in the lead judgment stated:

“The Tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly 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 judgment at the time of the assessment.

Where the taxpayer seeks to challenge the assessment as a whole on “best of their judgment” grounds, it is essential that the grounds are clearly and fully stated before the hearing begins.

In particular the Tribunal should insist at the outset that any allegation of dishonesty or other wrongdoing against those acting for the Commissioners should be stated unequivocally; that the allegation and the basis for it should be fully particularised; and that it is responded to in writing by the Commissioners.  The Tribunal should not in any circumstances allow cross-examination of the Customs officers concerned, until that is done.

There may be a few cases where a “best of their judgment” challenge can be dealt with shortly as a preliminary issue.  However, unless it is clear that time will be saved thereby, the better course is likely to be to allow the hearing to proceed on the issue of amount, and leave any submissions on failure of best of their judgment and its consequences, to be dealt with at the end of the hearing”.

Procedural Matters

6.       There were a number of objections during the course of the Hearing to evidence being adduced with a counter motion for it to be heard.  These arose and have been determined as follows:-

(1)  HMRC objected to Mr Curle putting a letter dated 17.02.2011 at A1 of the second bundle, from Bryson & Co to Mr & Mrs Khanna on the ground that the statements in that letter were incorrect and not relevant to this appeal.  The statements covered the parts of the letter which stated that “an important point in the original arguments surrounded the intervention of the Counter Fraud Unit” which from the terms of the letter Mr Bryson believed had a bearing on the HMRC enquiry.  It continued “had there been any unresolved problems, you would most certainly have been held to account”.  The Counter Fraud Unit was a Department of Work and Pensions Unit (DWP).  It was engaged in checking the persons in employment not the Appellant or his wife.  They were concerned in enquiries about employees who may not have declared earnings whilst collecting benefit.  Ms Shields submitted the information obtained would be confidential to the DWP and employees concerned.  Mr & Mrs Khanna would not be informed of such confidential matters.  HMRC had always maintained the information was not relevant.

Mr Curle wished to introduce it to prove his clients the Appellants had had no problems with DWP.

Our decision was that the objection should be applied.  Our reason is that the information provided in A1 is flawed.  We can accept hearsay evidence which this is, but unfortunately we find the contents are a misconception by Mr Bryson of the position of DWP.

(2)  The second objection was by Mr Curle in respect of notes of meeting at Folio 7 P1 of the Blue Book.

He had brought out in the principal examination of his witness Mr Khanna that his first meeting with HMRC was on 20.05.09.  However Ms Shields wished to have the Appellant acknowledge he had met HMRC before that to discuss his tax.  Mr Curle’s objection was that that was about his personal tax returns and was an interview under the Personal Tax Provisions S9 Enquiries on Trading whereas this appeal is under Reg 80 of the PAYE Regulations so that extrinsic matters should be excluded.

Ms Shields submitted Mr Curle had opened the door to evidence with regard to meeting HMRC leaving the impression the Appellants had first had contact in 2009 which she wished refuted since the employee costs had been raised (Folio 7 P9) including missing P46s. 

The objection was not upheld.  Our reason is that the said note of meeting Folio 7 Pp3-12 were relevant to this Tribunal.

(3)  The third objection was raised by the Chairman when Mr Curle tried to have Miss Marshall identify the handwriting on Folio 8 P31.  Mr Khanna had in cross-examination by Ms Shields told the Tribunal the handwriting was his.  No further proof is required than the oath of the writer himself.  No challenge thereafter is possible.  Miss Marshall was not required to answer.

Findings in Fact from the Evidence

(1)        Mr Khanna was the principal organiser of the business known as the Fresh Sandwich Bar (FSB).  His wife who helped out occasionally was an interpreter elsewhere.  The FSB traded at 11 Tay Walk, Cumbernauld G67 1BU.

(2)        The FSB provided hot and cold food to take away or eat in.  It had a passing trade of shoppers and no regular customers.  It was open 7am – 5pm Monday to Saturday.  The staff were mainly female, schoolgirls or mothers, working part-time shifts.  They were paid at the hourly minimum wage.  They generally worked a maximum of 16 hours per week, with some extra staff being recruited for shorter hours during busier times such as Christmas.  Saturday staff worked for a flat rate payment.

(3)        The tax periods for this appeal were 02/03, 03/04, 04/05 and 05/06.  The business ceased trading on 7 June 2007.

(4)        The Appellant did not keep adequate records in respect of his business.  He failed in particular to send to HMRC where appropriate P46 tax forms for employees who did not provide him with a P45.

(5)        Where he was employing schoolgirls in particular it had been his intention to employ them for 16 hours per week at the minimum wage so as to keep them below the National Insurance (NI) contribution levels, and PAYE tax provisions, as there is only a requirement to report earnings once these are over the employee threshold.  This also only required him to retain P46s till the threshold was exceeded.  All staff were required to carry out all duties from food preparation to service and cleaning.

(6)        Mr Khanna had no office on the premises.  He kept all relevant business information in files in his briefcase.  He kept one sheet of paper for recording who worked each day and for how long, and made up a sheet at the end of the week with a total of each employee’s hours.  He paid cash which he put in an envelope, without a payslip.  He marked up the front of the envelope with hours and amounts, and the employee’s name.  He gathered his lists, invoices, receipts and a note of cash payments from the till to suppliers, his daily till takings and any rental payments/council tax, in his briefcase.  He kept no other records.  He did not transfer information into a set of account books.

(7)        Every 3 to 4 weeks he took all the papers to his then accountant Mr Charles Bryson who did his VAT and Tax accounts from these records.  These paper records were not available as evidence at this Tribunal.  We were advised they had been destroyed but no evidence or reason was provided as to why and no finding is therefore made in that respect.

(8)        Mr Khanna claimed to have been aware that when he engaged staff he needed to check their tax status, and either obtain a P45 from a previous employer or find out if a person had another job, and in particular where there was no other evidence have the employee complete and give to him a P46.  He also knew or at least in the witness box appeared to know the requirements of a P46, its purpose and function.  He persisted in the claim that since all his employees were employed for 16 hours per week at the minimum wage he was required only to retain these P46s until such time as an employee reached the tax threshold.  He said he did register an employee for PAYE purposes in 2005, namely his own son who was paid at a level which exceeded the tax threshold.  We make no finding on Mr Khanna’s claim that he carried out that registration in light of the claim by his then accountant Mr Bryson to have carried out the PAYE registration (Folio 7 P2).

(9)        The first stage of an enquiry into the Appellants’ tax affairs began before 20.07.07.  A meeting was arranged between an officer of HMRC and the Appellants on 26.07.07 and a note of that meeting is at Folio 7 P3.  Mr Khanna attended along with his then accountant Mr Bryson.  HMRC tax officers Miss L Grant, who was conducting the enquiry and Mr G McAlur were also present.  Amongst the matters discussed were employee costs at Folio 7 P9.

At that stage Mr Khanna was advised of lack of compliance particularly in relation to PAYE, and lack of information about his employees.  He was advised the matter had been reported to the Employee Compliance Section.  It was stated and not denied by Mr Khanna and we find that although P46 information was supplied for 2005/06 it was not supplied until 08.09.06 well after the end of the tax year.  Mr Bryson in his letter of 24.10.07 at Folio 7 P2 states that he carried out the PAYE registration and tax was deducted and accounted for for one employee.  That contradicts Mr Khanna’s claim to have carried out the registration and appears more credible given Mr Khanna’s habit of passing all his records to Mr Bryson.

(10)     HMRC were in position as at 26.07.07 of sufficient Accounts to note a wages claim for set off against gross profit of £54,088.  This is for the year 02/03 see Folio 4 P1.  However the partnership returns give employee costs claimed for the appropriate years at Folio 3, and show figures for 2002/03 at Folio 3 P4 of £36,628, 03/04 (Folio 3 P11) of 58,629, 04/05 (Folio 3 P21) of £61,794 and 05/06 (Folio 3 P31) of £65,799.  No account was given for the difference in the profit/loss account figures for 02/03 and the partnership return figures for 02/03.

(11)     At Folio 7 P2 Mr Bryson claims and we find that only records pre-April 2004 had been destroyed.

(12)     Following the meeting Mr Khanna produced no further paperwork with regard to his employees to HMRC.  He claimed in the witness box not to have knowledge of the difficulties with HMRC in respect of PAYE till 2008.  We find this was not correct.

(13)     The PAYE Compliance officer to whom Miss Grant had referred in her note was Miss Tina Marshall.  Miss Marshall had sought through Miss Grant specific information with regard to the Appellants’ employees.  She asked in particular for names and addresses and NI numbers.  She had found some NI numbers did not match the names and addresses provided.

(14)     On 15.11.07 she had a meeting along with her colleague the said Miss Grant and Mr Bryson, Mr Khanna’s then accountant.  She also produced a schedule which had been produced by Mr Khanna for Miss Grant showing names of 21 employees and 9 NI nos. (Folio 7 P15).  Only 1 NI number matched an employee.  A calculation of employee deductions for tax and NI contributions had been produced (Folio 7 P16).  Tax year 06/07 had not been pursued as P46s had been submitted online.  Miss Marshall stated that if the Appellants could substantiate the hours worked she would agree no NI contributions would be due as the employees would be under the threshold.

Mr Bryson provided Miss Marshall with employee records he held.  In the course of the interview Mr Bryson, the Appellants then accountant advised actual figures were available from the accounts to calculate income tax and NI due.

Further correspondence (Folio 7 Pp17-25) was entered into between HMRC and Mr Bryson and HMRC and Mr Khanna.  None of it was challenged or referred to in the oral evidence and all of the terms are accepted by this Tribunal.

It left the Appellants with plenty of suggestions as to how to mitigate the calculations if sufficient information could be provided to HMRC.

(15)     On 29.02.08 Mr Bryson provided to HMRC (Folio 7 P19) one reason for no deduction of tax being required namely that some employees were Saturdays only and still at school, and some employees were on work experience out of school.  He advised this took up 20% of the wage bill.

(16)     By 03/08 HMRC were becoming alarmed at the failure of the Appellants to directly supply any further information.  She asked in particular for sight of any further P46s relating to staff employed by the Appellants.

(17)     A further meeting was held on 05.06.08 and notes produced (Folio 7 Pp32-33).  Mr Bryson produced a sheet of wages for October 2002 which appears at Folio 7 P31 which became the focus of much of the oral evidence, and on which we make the following specific findings:

(a)        P31 was produced in or about March 2008 to represent a typical record of wages for a week.  It names most employees by first name only.  Mr Bryson had already provided a similar list for a week in February 2003 in November 2007 (Folio 7 P15).

(b)        Tina Marshall had checked the NI numbers already produced and found and we find that the

(1)  NI no NA404220B stated as relating to ‘Jackie’ actually related to a P Colbourne who lived in Birmingham (Folio 4 P46 refers).

(2)  The NI no 422041B stated as relating to ‘Lynda’ belonged to L Cordiner who lived in Glasgow (Folio 4 P26).  At Folio 4 P25 is the second page in the sequence and shows L Cordiner had at 06.04.06 started a main job and had had a second job since 18.08.03.  Therefore she may from 06.04.06 have used her personal allowances against her main job and the whole of her secondary income would be subject to tax from 06.04.06.  Folio 4 P24 is the P46 supplied by Lynda Cordiner with the NI number NH402042B dated 05.05.06 actually declaring she has other employment.  At Folio 4 P6 Lynda Cordiner advises her hours were only 16 per week.  We find she was not taxable prior to 06.04.06.  The Appellants should therefore have forwarded that P46 immediately which they had not.

(3)  NI no NP594212B stated as relating to Nicola does relate to Nicola Barclay (Folio 4 P47).  Her P46 is at Folio 4 P36.  She completed Box A which would allow the Appellants to retain her P46 and not deduct tax until she exceeded the tax threshold.  Although completed in 2006 it was given to Mr Khanna to supply to HMRC as a result of the inquiry and is correctly dated in 2006, when it would have been required to be sent to HMRC as she commenced a main job on 06.04.06.  The contents relate to her starting date.  We find she would not therefore have been taxable in 2003.  At Folio 2 P4 Nicola Barclay confirms her work hours were only 16 hours per week from April 2001-June 2007, with Mr Khanna.

(4)  NI no NS443416C stated as relating to Lesley actually relates to a Sharon Carr in Pudsey.

(5)  NI no NSNS464227B stated as relating to Linda R actually relates to a Mr J D Morgan in St Altan (Folio 4 P50).

(6)  NI no JW485950C stated as belong to Janice actually belongs to a Miss A Cameron of Alloa (Folio 4 P51).

(7)  NI no JE519490C stated as relating Linda McGanily actually relates to a Karen Beattie (deceased) (Folio 4 P52).

(8)  NI no NZ594110C stated as relating to Rosemary actually relates to a Miss Louise Simmonds of Glasgow (Folio 4 P53).

(9)  NI no JH841020A stated as relating to Mary Smith actually relates to Miss A Fletcher of Glasgow (Folio 4 P54).

(10) NI no YZ863338D stated as relating to Susan actually relates to a Mrs M Burns of Glasgow (Folio 4 P55).

(11) NI no JH857500A stated as relating to Linda Beattie actually relates to Mrs L Whitelaw of Kilsyth.

(18)     A number of P46s were also produced in relation to purported staff but the only one on which a positive finding is possible occurs at Folio 4 P11.  There is a completed P46 for Linda Rice with an NI no NS46422?B which is similar to the number stated by Mr Khanna at Folio 7 P31.  We had no evidence any other NI number in the sequence had been checked.  There was also produced by Mr Khanna at the Tribunal itself a letter from Linda Rice confirming her employment for 16 hours per week from 2000-2008.  She ticked Box A indicating no other job so could come within PAYE Regulation 46.  We find that Linda Rice was employed for 16 hours per week at the minimum wage from 24.06.02 to the end of the period under appeal and was not taxable.

(19)     In respect of all the other P46s produced we find all had serious errors so as to make any proof of the person completing the form not being taxable impossible.  Errors included a form dated in 2004 which had not been printed by HMRC till 2006 and another where the person did not tick Box A and should therefore have been subject to an emergency basic rate code, and similar such.  No findings of fact could be made as identities could not be confirmed, or addresses, or NI numbers.

(20)     On Folio 7 P31 there is reference to Saturday employees, being 5 in number, and who included Linda Beattie above referred to who completed a P46 with the wrong NI numbers.  Despite that action it appeared likely to the Tribunal that Mr Khanna’s evidence of employing Saturday only staff appeared to the Tribunal to be a likely possibility in a Sandwich Bar in Cumbernauld.  It also appeared to us that some allowance might have been made for these girls 4 noted as 16 years old not being taxable.

We find that a reasonable allowance for non-taxable staff working Saturdays only would be 4 in number.  This was in any event to have been allowed as a concession if an informal settlement had occurred.

(21)     A letter was produced on the day of the Tribunal by a Marie Gardiner about her employment in the FSB but lacked any specification about herself and had no address.  There was no P46 or other evidence of any sort in respect of her employment.

(22)     A letter by Mrs J Wright at Folio 2 P2 was also found to be lacking sufficient specification or corroboration.

(23)     The Appellants changed their agent in March 2009, however by then the case was closed so far as employee costs were concerned and the matter in dispute could therefore only come to a Tribunal.


7.       HMRC submitted that Miss Marshall in looking at the Appellants’ employee compliance had no well documented paperwork.  Mr Khanna had used a mainly cash system and provided records retrospectively.  With regard to the P46s it is the employers responsibility to ensure the records are correct, and to ensure the details in each form are properly recorded.  Even if Mr Khanna was paying below the thresholds he still required to ensure his employees had no other jobs.  He could not take it upon himself to decide tax was not due.  As either the NI numbers did not check out properly or persons could not be found at addresses given Miss Marshall could not take account of them.  The evidence produced was not robust.  By the time a new representative was appointed it was beyond Miss Marshall’s authority to recalculate any determination.

8.       Mr Khanna should have followed the PAYE Regulations properly which he had not done.  The Appellants failed to deduct tax.  No claim for NI is being pursued.

9.       Mr Curle submitted that no account had been taken of the payroll provided by the Appellants at Folio 7 P31.  They had not taken account of the type of employee being school children or mothers looking for a small job.  He considered some allowance should be made for some of the errors which had occurred in providing the retrospective information.  Mr Khanna had never realised his difficulties whilst Mr Bryson acted.


10.    As can be seen from the findings neither party was familiar with the case of Pegasus Birds.  However both in their own way addressed the issue of the determinations and both with a measure of success.  Mr Curle in particular did not accuse Miss Marshall of dishonesty or wrongdoing neither of which was in issue in this case but of miscalculation.

11.    We took all of the law into our consideration.  We came to the conclusion on the evidence that Miss Marshall, faced with no records, inadequate responses to her enquires, no agreement on an informal offer of settlement and making a good allowance in the Appellants’ favour not to collect NI in addition had taken all the evidence before her into consideration.  She had not acted perversely nor was it suggested by the Appellants or their representative that this was so.  In light of that and taking into consideration all the further evidence produced by Mr Khanna in his attempt to reduce the determinations, we were able to find at least some of the employees did exist, were employed and did work 16 hours per week at the minimum wage with no evidence of being employed elsewhere.  We also considered it reasonably likely as had Miss Marshall in her settlement offer as a concession that Mr Khanna employed 4 Saturday girls every Saturday throughout the year.


12.    The Appeal is refused in part and allowed in part, as follows:


The Appeal is refused in respect that Miss Tina Marshall made the determinations for the tax years 2002/03, 03/04, 04/05 and 05/06 to the best of her judgment as required by Reg 80 PAYE Regs 2003.


The Appeal is allowed in respect that in the determination of the sum due under the said determination the following reductions are allowed.

Sums to be calculated using the Retail Price Index back and forward where necessary in respect of the employment of (a) Lynda Cordiner, (b) Nicola Barclay and at the wage stated at P31 as their rate for 03/04 tax year and (c) 4 Saturday only employees at a flat rate of £21 for the day for 03/04 tax year also applying the flat rate payment made by Mr Khanna in each of the years in the assessment period, failing which using the retail price index back and forward for the whole period of the appeal and (d) Linda Rice from 24.06.02 to the close of the assessment period.


The Tribunal is adjourned to a date to be fixed within 3 months to allow the appropriate settlement figure to be agreed in respect of this calculation which should be intimated to the Tribunal so that a final decision on the amount of tax due can be issued.  In the event of dispute either party may request a further Hearing in respect of the calculations.

13.    This document contains full findings of fact and reasons for the decision.  Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.














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