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Cite as: [2004] UKVAT V18821

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M & K Wine Bars (Banks) v Customs and Excise [2004] UKVAT V18821 (29 October 2004)
    VAT ASSESSMENT Assessment based upon alleged cash suppression no cash suppression found on the evidence Appeal allowed


    M & K WINE BARS (BANKS) Appellant

    - and -


    Tribunal: Michael Tildesley (Chairman)

    Sheila Edmondson FCA (Member)

    Sitting in public in London on 13 September 2004

    Nigel Ferrington, Senior VAT Consultant for Abbey Tax Protection for the Appellant

    Jonathan Holl, Advocate for the Respondents


    The Appeal
  1. The Appellant is appealing against as assessment for VAT in the sum of 13,448 plus interest of 696.73 making a total of 14,144.73 for the period the quarter ending 11/01 to the quarter ending 05/03 issued by the Respondents on 3 September 2003.
  2. The grounds of the Appeal are set out in the Notice of Appeal dated 2 October 2003, namely that
  3. "There are no arrears of VAT. The sales are correctly stated".
  4. We heard the Appeal on 13 September. We received evidence for the Appellant from David Anthony Cobham FTVI, Guager and Stocktaker to the Licensed Trade, and Julie Lucas (formerly known as Julie Knell), a partner of M & K Wine Bars. Julie Barnes and Desmond Lewis, Customs and Excise Officers, gave evidence for the Respondents. Both parties produced their own bundle of evidence.
  5. The Legislation
  6. Section 73 (1) of the Value Added Tax Act 1994 provides that:
  7. "Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him".
  8. Section 83 of the 1994 Act provides that an appeal shall lie to the Tribunal in respect of an assessment under section 73 (1) of the 1994 Act or the amount of such assessment.
  9. The recent Court of Appeal decision in Pegasus Birds Ltd v Commissioners of HM Customs and Excise [2004] EWCA Civ 1015 makes it clear that the primary task of the Tribunal is to find the correct amount of tax, so far as possible on the material properly available to it.
  10. Facts Not in Dispute
  11. David John McCarthy, Andrew Leslie Hanktelow, Julie Terry Lucas and Simon John McCarthy were the partners to the limited liability partnership of M & K Wine Bars with a trading name of "Banks" operating from 76 Bank Street, Maidstone Kent ME14 ISJ. The partnership was registered for VAT from 1 September 2001 under the registration number 776 6690 69.
  12. The partnership carried on a business of a wine bar and restaurant. The premises were open from 10.30am to 3pm, Monday to Saturday, from 7pm to 11pm on Thursdays and from 7pm to 12 midnight on Friday and Saturday. Food was now only served at lunch times. When the business opened, meals were provided in the evenings but they were not commercially viable and the practice was discontinued. The beers and the alcopops for the business were provided by Punch Taverns, whilst Matthew Clark supplied the spirits and wines.
  13. The premises comprised of two floors with one bar upstairs (known as the cocktail bar) with a front and rear bar downstairs. The premises had five cash registers which had been purchased from Invicta Tills, Ramsgate. Only one of the registers was in operation full-time, the other registers were used only on Friday and Saturday evenings.
  14. Julie Lucas managed the business receiving an annual salary of 34,447 for the year ending 31 August 2003 and resided on the premises. The other partners were not involved in the daily running of the business, although Mr McCarthy had signed the VAT returns for the periods 11/01, 2/02, and 5/02. Ms Lucas had previously worked as a barmaid and pub manager at other premises and had not been registered before for VAT.
  15. At the start of the business the partnership engaged Mr Cobham F.T.V.I, a Guager and Stocktaker to the Licensed Trade, to assist Ms Lucas to keep an eye on the stock and to protect the interests of the other partners. Mr Cobham had 43 years experience of stocktaking in the licensed trade and in the past instructed Customs and Excise on how to carry out stocktakes. Essentially his role was to perform a reconciliation between the amount of stock used and the amount recorded in actual sales to verify the correctness of the declared sales. He undertook stocktakes at the wine bar approximately every month, although in the early days of the business the frequency of the stocktake would fluctuate from monthly to eight weeks. Mr Cobham fixed the timing of his visits to the premises to suit his convenience normally giving Ms Lucas two to three days notice. He carried out a 100% stocktake of the liquor trading account and an overview of the food trading account by recording purchases and takings.
  16. Mr Cobham found no major discrepancies between stock and sales in the stocktakes of the business. The liquor stocktaking result for the period 22 January 2003 to 10 March 2003 showed a 0.28% variance between actual receipts and estimated receipts after making 4% allowances in total for wastage, staff drinks, complimentary and special promotion nights. He identified to Ms Lucas one issue with the cocktail bar which resulted in the termination of employment of a member of staff.
  17. The partnership instructed M N Jenks & Co Ltd, Chartered Accountants, 72 Commercial Road, Paddock Wood, Tonbridge, Kent TN12 6DP to prepare and publish its annual accounts. The profit and loss account for the period 10.8.2001 to 31.8.2002 declared a gross profit of 187,360 which represented 55% of the total transactions and a 121% mark up. The year ending 31.8.2003 declared a gross profit 324,631 amounting to 66% of the total transactions and a 197% mark up.
  18. The partnership failed to submit its VAT returns for the periods 08/2 and 11/02 which prompted an unannounced non-compliance visit to the establishment on 20 March 2003 by Mr Lewis and Ms Barnes, Customs and Excise Officers. They found that Ms Lucas did not retain historical till rolls and Z reports and was instructed to keep entire audit rolls with immediate effect. The Officers were provided with the Z readings for the various tills for the past week. They noted the high incidence of no sales recorded on one particular till and that one of the Z readings (Z175) was missing, which Ms Lucas supplied following a request from Mr Lewis.
  19. Mr Lewis examined a total of a 113 Z readings for the period week commencing 22 January 2003 to week commencing 12 March 2003 and found that eight were missing for Friday and Saturday takings, split between two tills with five missing Z readings from the till to which Z175 related.
  20. The Respondents decided not to pursue an allegation of dishonesty against the Appellant so no proceedings were instigated for a penalty under section 60 1994 Act.
  21. The Appellant at the hearing did not challenge the legal grounds for issuing an assessment under section 73 of the 1994. Further, the Appellant did not raise the issue about whether the assessment was to best judgement.
  22. The Issues
  23. The Respondents contended that the Appellant suppressed the value of its sales at a rate of 10.24% with the result that there was an under declaration of VAT, which was disputed by the Appellant. In the alternative the Appellant challenged the accuracy of the quantum of the assessment.
  24. The issues to be decided by the Tribunal are as follows:
  25. a) Whether the Appellant suppressed the value of its sales?
    b) If there was a suppression of sales, whether the amount of the assessment was the correct amount of VAT for which the Appellant was liable?
  26. It is for the Appellant to establish on the balance of probabilities that there was no suppression of sales and that the tax assessment of 3 September 2003 was incorrect and should be reduced.
  27. Facts in Dispute
  28. The Respondents' allegation of suppression of sales was in their opinion supported by the following facts:
  29. •    Ms Lucas' failure to produce the Z report (Z175) until requested.

    •    The relatively high value of sales of 1,241.94 recorded on Z175.

    •    The missing eight Z reports for the period week commencing 22 January 2003 to week commencing 12 March 2003 which when taken together including Z175 demonstrated a pattern of sales suppression at the busiest times of the week, namely Friday and Saturday evenings.

    •    The missing Z reports were not zero nor nil reports due to the number of ticket transactions recorded by the till.

    •    Ms Lucas had not complied with the verbal instruction given to her by Mr Lewis on 20 March 2003 to retain the entire till audit role by the time of the second visit on 10 April 2004.

  30. Mr Lewis assessed the suppression rate at 10.24% by dividing the value of the missing Z readings (including Z175) with the "true" takings ( the declared takings for the period of missing readings plus the value of the missing readings). The value of the missing Z readings was calculated by multiplying the number of sales adjusted for void sales with the average transaction value of the subsequent Z reading. Mr Lewis applied the suppression rate of 10.24% to the output tax declared in the VAT returns from period 11/01 through to and including period 05/03 producing an assessment of VAT due of 13,451.85. Mr Lewis did not assess the "abnormally" high level of no sales recorded on one of the tills.
  31. The assessment of 13,451.85 if correct would mean that sales of 90,294 were suppressed during the period in question or approximately 1,000 per week. Mr Cobham found no evidence in his stocktakes of the Appellant's liquor trading account to support suppression of sales, particularly of the magnitude suggested by the Respondents. He accepted in cross examination that it was possible to manipulate the stocks to correspond with the sales and that he did not inspect Ms Lucas' living quarters at the premises. However, Mr Cobham was adamant that he would have discovered any wrongdoing. He had complete access to the premises except for the private quarters. He was satisfied that the business was being run properly.
  32. Ms Lucas did not accept that she attempted to hide the Z175 reading from the Customs and Excise Officers. She kept the Z readings on a notice board in her office which had separate sections for each day of the week. Z175 had fallen off the pin board which she did not notice when first requested to supply the Z readings. Once she was told that it was missing she went back to search her office and produced it within about five minutes. Officers Lewis and Barnes recollected the notice board and noted that Z175 was not pinned on it. Mr Lewis doubted Ms Lucas' explanation that it had fallen off, however, neither Mr Lewis or Miss Barnes accompanied Ms Lucas back to her office to look for Z175.
  33. The takings during the week of the 12 18 March 2003 to which Z175 related were higher than average. Mr Lewis put this down to the fact that the sales on Z175 had been uncovered. Further he pointed out that this was only the week when five tills had been used. In his view this supported his contention that sales had been suppressed on previous weeks because it was implausible that five tills had not been in operation on other evenings during the period investigated. Ms Lucas, on the other hand, gave evidence that the higher than average turnover was due to a one off sales promotion celebrating St Patricks Day which involved a reduction in the price of combined drinks, a pint of Guinness with Port. According to Ms Lucas the business rarely participated in promotions. The Respondents were sceptical about Ms Lucas' explanation. They had not been supplied with any marketing material which confirmed the existence of the promotion. Mr Lewis was not prepared to accept that January and February tend to be quiet months for the licensed trade, pointing out that the premises were in the centre of Maidstone. He was also unimpressed with the documents produced by the Appellant's representative demonstrating that takings for a sample of three separate weeks were not constant varying from 8,811.91; 11,687.50; 13,135.43.
  34. Ms Lucas told the Tribunal that she was not aware of the importance of the till rolls. She readily accepted that she had not retained them. Ms Lucas asserted in evidence that she complied with the verbal instructions of Mr Lewis about keeping the till rolls from 20 March. However, her assertion was contradicted by her correspondence with Mr Lewis dated 2 September where she accepted that she had not kept the till rolls from 20 March to 10 April 2003. She also allowed her children to play on the tills and members of her staff to use one till as a secure draw to keep their valuables in when at work. Such use of the tills accounted for the high level of no sales recorded on one of the tills. Officers Lewis and Barnes accepted that they saw a limited number of personal items in the till but it was not full of personal belongings.
  35. Ms Lucas accepted that there were missing Z reports but this was because some of them related to staff training whilst the rest recorded the value of drinks provided to employees, partners and selected friends at occasional private parties held at a weekend after the premises closed for business. Mr Lewis found it strange that staff training would take place on the busy evenings. Ms Lucas pointed out that there was a high turnover of evening staff, organised on a three-shift system and that there was no other time when they could be trained. Mr Lewis requested employment records to support Ms Lucas explanation that new staff would routinely undergo training. Ms Lucas was adamant that she had supplied the records requested by Mr Lewis, namely application forms. However, Mr Lewis had written to the Appellant on the 20 January 2004 pointing out that the forms were undated and gave no indication whether the individuals concerned were actually employed by the business. In that letter he requested prime wage records as evidence of their employment and also for evidence of replenishment of stock used for the private parties. In respect of the latter Ms Lucas would record on the till the value of the drinks handed out so that she could calculate the cost price of the goods and personally replace the stock by shopping at Sainsburys. Ms Lucas did not keep the receipts for these purchases. She did not mention what happened at the private parties to Mr Cobham
  36. Ms Lucas saw her role as building up the business and getting the customers through the doors. Although she accepted responsibility for maintaining the accounting records for the business, she had no prior knowledge of VAT and was not capable of completing the VAT returns. Her assistant manager had prior training in accountancy and took on the responsibility for maintaining the accounting records. When he left, Ms Lucas tried to assume more control of the accounts, however, at about the time of Mr Lewis' first visit she engaged a firm of accountants to look after the accounts.
  37. Only Ms Lucas and her assistant manager had the keys to the tills. They would reconcile the takings in the till with the Z reading at the end of the lunch time and evening sessions. The takings were then recorded on the weekly sheets which formed the primary accounting records for the business. On their unannounced visit Officers Lewis and Barnes found no major discrepancies in their test reconciliation between the cash in the till and the Z readings.
  38. Ms Lucas has consistently denied that she or her partners have been involved in any suppression of sales
  39. The Appellant's representatives submitted that if the Tribunal was satisfied of the suppression of sales then the correct suppression rate was between 5.09% and 8.6% not 10.24%.
  40. Submissions of the Parties
  41. Mr Ferrington on behalf of the Appellant submitted that the Respondents' allegation of sales suppression to the magnitude of 1,000 per week was not credible when viewed against the results from the regular stocktakes and the information contained in the published accounts. The Appellant's accounts for 2003 revealed a 66% percentage for gross profits/ total transactions which was higher than the norm of 50% for the licensed trade. This level of performance would not have been achieved if there had been systematic suppression of sales. Mr Ferrington contended further that the stocktakes would have revealed the revenue loss to the business. Thus if the Respondents were correct with their allegation, either the stocktaker must have been involved in the suppression or thousands of pounds of stock have been purchased for cash and hidden from him. Mr Ferrington considered that Ms Lucas had given a true account of the reasons for the eight missing Z readings and for not initially supplying Z175 to Mr Lewis.
  42. Mr Holl for the Respondents contended that there were flaws in Ms Lucas' evidence. She had not provided satisfactory documentary evidence about the training of new staff and the private parties. She did not call nor produce statements of witnesses who had attended the parties. Mr Holl stated that the Respondents did not challenge the expertise of Mr Cobham nor necessarily his evidence on the results of the stocktakes. The Respondents accepted the published accounts for what they were. However, Mr Holl contended that the suppression on the level alleged by the assessment would have occurred outside the declared records and the stocktake. Thus the evidence provided by these two sources did not undermine the Respondents' case which depended upon the pattern painted by the analysis of the missing Z reports and the incorporation of Z175 in the takings for the week ending 18 March 2003.
  43. Our Findings of Fact and Reasons
  44. We are being asked by the Respondents to confirm an assessment which is based on the proposition that although no dishonesty is alleged there has been a deliberate systematic attempt on the part of the Appellant to suppress sales to the tune of 1,000 per week as revealed by the missing Z reports. This is not a case where the Respondents are saying that the Appellant has been careless with the completion of the sales figures for the business. We recognise that the onus is upon the Appellant to establish on the balance of probabilities that no suppression of sales took place.
  45. The initial trigger, which aroused Mr Lewis' suspicions about the business, was the failure on the part of Ms Lucas to produce initially Z175. The Respondents interpreted her failure as a deliberate attempt to withhold key sales figures which when taken together with the missing Z readings demonstrated a consistent pattern of suppressing sales. Ms Lucas, however, disputed the Respondents' interpretation of her behaviour. She told the Tribunal that she had no intention to hold back Z175 from Mr Lewis. She genuinely believed that she had given him all the Z readings for the week requested as they were pinned to the notice board. When told about its omission from the batch she immediately returned to her office, found it on the floor and gave it to Mr Lewis within about five minutes of it being requested. On balance we are inclined to believe Ms Lucas' account of the events surrounding Z175 particularly as the Officers involved cannot challenge directly her statement that it had fallen off the notice board.
  46. Ms Lucas explained to the Tribunal that the missing Z readings were not retained because they related to private parties and staff training. The Respondents challenged this explanation principally on the ground that it was not corroborated by independent evidence. Ms Lucas was of the opinion that she had provided Mr Lucas with the information requested regarding members of staff. However, she did not give the Tribunal an adequate explanation why she failed to comply with Mr Lewis' request for prime wage records in his letter of 20 January 2004. She informed the Tribunal that she had not been asked to supply witness statements from persons attending the private parties. The frequency of the missing Z reports was about one a week over a period of eight weeks. The Respondents say the frequency supports their argument of a systemic suppression of sales. Equally the relatively small number of missing Z reports was consistent with Ms Lucas' explanation of private parties and staff training.
  47. We are, however, not being asked by the Appellant to judge the plausibility of Ms Lucas' explanation for the missing Z reports on her evidence alone but to view it in the context of the whole evidence presented by the Appellant. The Respondents did not seek to question the bona fides of Mr Cobham nor the accuracy of his stocktakes. Instead they suggested that the Appellant deliberately withheld information from him which prevented him from capturing the whole picture in relation to the running of the Appellant's business. We found Mr Cobham's evidence convincing and his credentials of 43 years experience in the licensed trade impressive. The magnitude of the sales suppression suggested by the Respondents' assessment and the lengthy period of time it was perpetrated would in our view impacted upon stock levels. Having heard from Mr Cobham we are satisfied that he would have discovered the magnitude of wrongdoing alleged by the Respondents. We, therefore, place considerable weight on his conclusion that the suppression of sales alleged by the Respondents was not taking place at the Appellant's premises.
  48. We are concerned that Ms Lucas did not appreciate the importance of retaining till rolls for the purposes of VAT accounting and her failure to submit the VAT returns on time. On the other hand we do consider that the business was organised overall on sound principles. This was demonstrated by the early appointment of an independent stocktaker to carry out regular stocktakes of the liquor trading account and the payment of a significant salary to Ms Lucas to run the wine bar. The partnership also engaged professional accountants to do the accounts, albeit about 12 months after the start up of the business but before Mr Lewis' investigation. The level of gross profits generated after two years trading gave added credence to the soundness of the business.
  49. We are satisfied that Ms Lucas was a truthful witness when her testimony is assessed in conjunction with the whole evidence for the Appellant, in particular Mr Cobham's contribution to the hearing. We consider that her explanation for the missing Z readings was plausible. We are, therefore, satisfied that the Appellant has established on the balance of probabilities that there was no deliberate attempt on its part to suppress the sales figures. In which case the Respondents' assessment for unpaid VAT fails and we, therefore, allow the appeal.
  50. Our decision to allow the appeal implies no criticism of Mr Lewis. The Appellant did not raise the issue of best judgement and accepted that the Respondents had grounds for making the enquiries in view of the missing Z readings. We have reached a different conclusion from Mr Lewis on the evidence presented to us at the hearing.
  51. We order the Respondents to pay the Appellant's costs in connection with the Appeal. The amount to be agreed between the parties and in the absence of agreement the parties are at liberty to apply to the Tribunal to determine the amount.
    RELEASED: 29 October 2004


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