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Cite as: [2005] UKVAT V19031

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Sirpal Trading Company Ltd v Customs and Excise [2005] UKVAT V19031 (19 April 2005)
  1. ASSESSMENT — zero rating claimed for children's clothing — lack of records in verification — did the Commissioners act in bad faith — no — should assessment be upheld — yes — appeal dismissed



    - and -


    Tribunal: Lady Mitting (Chairman)

    John M Lapthorne (Member)

    Sitting in public in Birmingham on 19 October 2004, 20 October 2004, 10 March 2005 and 14 March 2005

    Mr E Saunders for the Appellant

    James Puzey of counsel for the Respondents




  2. The decision under appeal is that of the Commissioners to assess the Appellant, pursuant to Section 73 Value Added Tax Act 1994, in the sum of £32,684 plus interest. The assessment was notified on the 6 July 1999 and covers the period 1 May 1998 to 30 April 1999. The Assessment was raised to recover allegedly under declared output tax.
  3. On behalf of the Appellant, we heard oral evidence from Mr R L Sirpal and from the company's Accountant, Mr J D Vaghela. Mr Sirpal's evidence was given through an interpreter, Mr S K Hallan. On behalf of the Commissioners, we heard oral evidence from the assessing officer, Mr Neil Avery, Mrs Jenny Thomas-George, Mrs Dawn Nembhard and from Mr Sukded Singh, trading standards officer.
  4. Evidence
  5. The Appellant company carries on business as a manufacturer of adult and children's garments from premises at 188 Edward Road, Balsall Heath, Birmingham. The business commenced in 1978. There are two directors of the company, Mr Ram Lubhaya Sirpal and his brother Mr Naresh Kumar Sirpal. At the time of the assessment, the company employed some 29 full time and part time employees.
  6. The assessing officer was Mr Neil Avery. He was, at the time, specialising in the rag trade but, had had no previous involvement with the company before his first visit on 28 May 1998 but knew that the company had a history of reclaiming VAT. The purpose of the visit was part educational and part a routine control visit. It was Mr Avery's practice before such visits in the rag trade to send the trader and his representatives a standard letter, which in this case, was dated 19 May 1998. The letter drew a trader's attention to the records he would have to keep to verify a claim for the zero rating of any garments produced. For children's clothing, the letter advised the trader that each time he raised an invoice and did not charge VAT, he must have held the garment specifications, production record and orders. The letter also set out the documents which would be required to justify a claim for zero rating for goods to be exported or moved within the EC.
  7. Mr Avery made his appointment in the first place with Mr Vaghela, the Appellant company's accountant and representative. Mr Avery told us that Mr Vaghela must have told him that he would be dealing, in the main, with one of his staff, a Mr Haq, because the accountant's copy of Mr Avery's letter was addressed to Mr Haq at Mr Vaghela's business premises. Mr Haq, in the course of his employment with Mr Vaghela, acted as bookkeeper for the company.
  8. Mr Avery outlined for us the nature of the records which he would expect a trader to keep to justify a claim for the zero rating of children's clothing. The Commissioners needed to be able to monitor the flow of production of a garment from order, through cutting and machining, to ultimate delivery and billing. Such records would therefore include (i) proof of order, either on an official form from the customer or failing that, an entry in a sales order book; (ii) a cutting record - this would not be to any set format but would be sufficient record to enable the cutter to cut the correct specification of garment to the correct pattern in the correct quantity of the correct sizes in the correct material and colour; and (iii) the sales invoice showing the name and address of the recipient; the date of supply; a full description of the garment and their sizes.
  9. The visit of 28 May 1998 began at the offices of Mr Vaghela. Initially, Mr Avery spoke to Mr Vaghela and Mr Haq but Mr Vaghela then left Mr Avery with Mr Haq but returned later to drive Mr Avery to the business premises. Mr Avery's discussions with Mr Vaghela and Mr Haq were conducted in English. Mr R L Sirpal was present and on occasion he and Mr Haq conferred, also in English. Mr Avery told us that Mr Haq clearly appreciated the essence and sense of the letter of 19 May and they discussed the records actually kept and those required. Mr Avery established that 65 per cent of the sales recorded were zero rated and 35 per cent standard rated over the period July 1995 to January 1998. Mr Avery was told by Mr Haq that no stock or production records were kept; the majority of orders were made verbally by phone; no formal written record was kept of an order, although Mr Sirpal might write the number and size of garments on a scrap of paper; instructions to cutters were verbal; the bulk of sales were not covered by a delivery note and at no time was a delivery note number stated on a sales invoice.
  10. Mr Avery's note of this meeting records that Mr Sirpal agreed to obtain a sales order from all his customers and Mr Haq agreed to institute an order book to show and record all orders and the corresponding delivery notes and sales invoices, the delivery note number to be quoted on the sales invoice. Mr Avery had in mind a basic form of order book and he told us he sketched out on a plain piece of paper, which he left with Mr Sirpal the details which would be required.
  11. At the business premises, Mr Avery went round with Mr Vaghela. The premises were on two floors with production being carried out on each. Mr Avery noted 14 sewing machines on the first floor and 32 on the ground floor. He noted a considerable amount of stock on both floors, both new and old but very few children's garments. Mr Avery's note of the visit concluded with his recommendation for a follow up visit. He noted that he had advised Mr Sirpal and Mr Haq at length on the necessity of keeping sufficient production records and if these were not kept to validate zero rating then in future, assessments could be raised. His note requested that production records be inspected on the next visit.
  12. Mr Avery followed up this visit with a letter dated 2 June 1998. This letter set out in detail the information needed on tax invoices; the evidence needed in respect of zero rating for goods to be removed from the UK and repeated the necessity to keep order and production records in respect of children's clothing. The letter recorded Mr Haq's agreement to help Mr Sirpal in the setting up of a production record to track an order from receipt of an order, through production to sale. A number of miscellaneous items were included in the letter, including a record that one jacket labelled as size 32 in fact measured 44 inches and had therefore wrongly been classified as children's wear.
  13. As before, Mr Avery's letter went to Mr Sirpal, with a copy to Mr Haq at Mr Vaghela's. A reply dated 30 June 1998 was received from Mr Vaghela confirming, inter alia, that the information required on tax invoices would be followed and production records would be maintained from 1 August 1998.
  14. Yet another letter, dated 10 July 1998, was written by Mr Avery to Mr Sirpal, copied to Mr Haq, this time headed "Production Records" and stressing yet again the necessity to keep production records.
  15. Mr Avery's next visit was on 15 January 1999. On this visit, Mr Avery was accompanied by Mrs Jenny Thomas-George. This was an unannounced visit to check the records and observe the performance of the factory. Neither Mr Haq nor Mr Vaghela were present and the officers saw Mr R L Sirpal. Mr Avery asked to see the records which Mr Sirpal had promised to keep. He produced, we were told, and this is meticulously recorded in Mr Avery's visit report, three A4 sheets containing four columns headed Date; Sales Invoice Number; Value; Number of Garments. These were described by Mr Sirpal as his cutting records. From the premises, Mr Avery telephoned Mr Haq, who told him he had not yet assisted in formulating any sales order book because Mr Sirpal only ever received verbal orders. Mr Haq told Mr Avery that he believed that cutting records were now being kept. Further inspection of the records revealed that delivery notes were still not routinely kept. A tour of the premises again revealed very few children's clothes in stock and none in production. The visit concluded with a further call to Mr Haq who made an appointment to visit Mr Sirpal on 18 January in order to instigate the formation of a sales order book and cutting record.
  16. Mr Avery and Mrs Thomas-George visited again, this time by arrangement, on 6 May 1999 and saw Mr Sirpal and Mr Haq. As on the first occasion, the visit began at the offices of Mr Vaghela and the purpose of the visit was, yet again, to inspect the records. Yet again, no sales order book or cutting record could be produced. Again, Mr Avery spelt out the necessity for sales orders and cutting records to be kept and his note records that both Mr Haq and Mr Sirpal stated that "From now on they would do as requested". The percentage of recorded zero rated sales had by now risen to 82.06 per cent.
  17. Following this visit, Mr Avery wrote again to Mr Sirpal, dated 17 May 1999. This letter referred to Mr Sirpal's continued failure to provide any documentation to substantiate the manufacture of children's clothing. The letter reiterated the history of the earlier visits, earlier letters and the assurances given by Mr Haq and Mr Sirpal as to the introduction of proper record keeping. Mrs Thomas-George had prepared, from a computer print out, a complete list of those invoices dated from 1 May 1998 to 28 January 1999 which had claimed zero rating but for which no verification had been produced. Mr Avery set out the complete list in his letter and advised that if substantiation was not received, then an assessment would be raised.
  18. Mr Avery also, in this letter, took yet another opportunity to help in the setting up of a record by setting out again the headings, which could be used in a sales order book. The suggested headings which he gave were Customer; Sales Order Number; Description of Order; Quantity; Sizes; Price; Date Required; Delivery Note Number; Sales Invoice Number; Date of Invoice and Price.
  19. The three A4 sheets, which Mr Sirpal had shown Mr Avery on the 15 January had been described by Mr Sirpal as his cutting records. Mr Avery went on, in this letter, to explain that that would not suffice as a cutting record as it gave no indication to a cutter of pattern, size, quantity or material.
  20. Mr Vaghela replied to the letter on 8 June, pointing out that Mr Avery's requirements had to be put in perspective. The company was small and run by two uneducated brothers who were not capable of maintaining the suggested records although they were improving. To employ someone to keep the records could not be afforded.
  21. Before the assessment was raised, Mr Avery had raised a number of references, two after his first reference and ten after his final visit. These references related to suppliers to the company and were not regarded by Mr Avery as urgent or particularly relevant to his assessment, which was to be based on the correct rating of sales. No replies had been received by the time the assessment was raised which Mr Avery said, regrettably, was not unusual and some non-urgent references lay dormant for years.
  22. Nothing further was heard and Mr Avery raised the assessment.
  23. There were two documents, put in evidence, the origin and use of which were strongly disputed by the parties. One document was what we will refer to as "the blank production record". This form was headed "Sirpal Trading Company Limited – Production Record" and consisted of six columns headed Name, Order Date, Description, Sizes, Quantity and Cutting Date.
  24. The second document was a diary, or at least copy extract from two diaries covering 1998 and 1999. The first entry was on Friday, 3 July 1998 and the final one on Tuesday 27 April 1999, with several entries per month. A standard entry on a given date, which we were told would be the order date, would give the name of a customer; a total number of garments; a general description of the garment, for example "children's jacket" or "children's fleece" or "men's jackets". Occasionally, the entry would read "stock" in place of a customer's name. Finally the entry would give a breakdown of the sizes and the number per size. Both the blank production record and the diary made their first appearance in correspondence when Mr Vaghela wrote to the Commissioners on 9 January 2001 in the following terms:
  25. "With regard to your request for cutting records, we would advise that our client maintained them from 1 August 1998 in 1998 diary, which was inspected by Mr. Avery on a later visit.
    However, since 1 August 1999 our client is now using the attached schedule to maintain their cutting records."
  26. Mr Avery maintained throughout his evidence that he had never seen the blank production record before the hearing and it did not originate from him. In cross examination, Mr Saunders referred Mr Avery to a letter dated 16 November 2001 from the reviewing officer, Mrs Dawn Nembhard to Mr Vaghela. In her letter, Mrs Nembhard included the following paragraph:
  27. "The officer agrees that the sample 'Production Record' document given to Mr Sirpal during the visit was the format of the record the officer requested that Mr Sirpal should maintain."

    Mr Avery confirmed that he had had a telephone conversation with Mrs Nembhard in which they discussed the sketch he had made on his first visit of a possible format for a sales order book of which said sketch he had not kept a copy. It was incorrect, he told us, for Mrs Nembhard to refer to the subject of the discussion as the sample Production Record - he had been referring to his sketch.

  28. Mr Avery was also adamant that at no time during any of his visits was he ever shown or told about the diary entries and indeed there is no reference to the diary in any of his visit reports.
  29. In cross examination, it was put to Mr Avery that he was aware of the educational and language difficulties of Mr Sirpal and indeed Mr Saunders referred Mr Avery to his visit reports, on the front sheet of which Mr Avery had noted "has poor command of English". Mr Avery agreed that had he needed it, he would have had access to a Punjabi speaking officer but at no time did Mr Avery feel there was any problem of note or was he aware of any language problem. He described the meetings with Mr Sirpal and Mr Haq as amicable, pleasant and polite.
  30. It was put to Mr Avery that he did not have any written authority from Mr Sirpal, permitting him to discuss business with Mr Haq. Mr Avery accepted that this was so and Mr Saunders then further suggested that Mr Haq in fact had had no authority whatsoever to act and that in "instructing" Mr Haq to prepare documents, Mr Avery was breaching Customs guidelines as he was, in effect, engaging a third party to do something which Mr Avery had no power to order and he was thereby burdening Mr Sirpal with expense. Mr Saunders described Mr Haq as merely the company's bookkeeper and only Mr Vaghela was authorised to carry out any actions on behalf of the company. Mr Avery responded to the effect that he saw Mr Sirpal, Mr Haq and Mr Vaghela as a team. Mr Sirpal had been present at the meetings with Mr Haq and Mr Vaghela knew that Mr Avery was dealing with Mr Haq and never queried his right to do so.
  31. Mr Saunders also put it to Mr Avery that he had, in fact, prepared and given Mr Sirpal the blank production record, a document which contained fewer headings and columns than those suggested in his letter of 17 May. By increasing the amount of information required of the company, Mr Saunders accused Mr Avery of widening the goal posts to the end that he was giving himself carte blanche to raise an assessment. Mr Avery denied this, maintaining that his headings were for guidance only as a sales order book could be in several formats, provided it gave sufficient information to satisfy a visiting officer that zero rating could be verified.
  32. Mr Saunders also put it to Mr Avery that in 1998, Customs put pressure on their officers to raise assessments and it was to meet this expectation that Mr Avery raised a "maverick" assessment. Mr Avery strenuously denied this, pointing out that an officer could not just assess but was tightly controlled.
  33. Mrs Thomas-George told us that throughout her interviews with Mr Sirpal, they conversed in English. On her first visit on 15 January 1999, she inspected the sales invoices which she found unclear, it being difficult to decipher the description of the goods and the names and addresses of the customers. The majority of invoices had no delivery notes, this being in part, Mr Sirpal explained to her, because a fair number of customers would pick up their goods from the premises. Mrs Thomas-George found that the majority of invoices related to children's wear. She asked to see a sample but none were either in stock or in manufacture. She requested a pattern for the largest children's size jacket, which would have been a 32 inch chest. The pattern she was shown measured 44 inches. When she put this to Mr Sirpal, he told her that he cut them large and the sides were then stitched in to the required size. She confirmed that she and Mr Avery were shown the three A4 sheets already described by Mr Avery and she was adamant that Mr Avery did not give Mr Sirpal any documents resembling the blank production record, or indeed any other document.
  34. She described the visit of 6 May 1999 much as Mr Avery had done. She told us that a thorough inspection of the premises revealed, in relation to children's wear, only one cancelled order of between 300 and 400 fleece jackets and stated by Mr Sirpal to be approximately ten years old. Again, as on the previous visit, there were no current items of children's wear in stock or in manufacture.
  35. Mrs Thomas-George listed all the zero rated invoices. She verified and isolated all those relating to EU Despatches and the remainder on her list all related to children's wear for which no satisfactory evidence existed to support the claimed zero-rating. Mrs Thomas-George was adamant that the diary was never produced to her on any of her visits or its existence ever referred to. When she was later shown the diary, she reconciled the orders for stock and delivery against their related invoices and established that on each of her visits there should, if the diary entries were accurate, have been around 1,000 children's garments available to be seen.
  36. In cross examination, Mr Saunders questioned Mrs Thomas-George at length on Mr Sirpal's ability to understand and communicate in English. She confirmed she had read Mr Avery's notes and was aware of his comment about Mr Sirpal's "poor command of English". She was well aware that officers could and should source an interpreter when needed but whilst accepting that Mr Sirpal's English was not "of the best" she found no difficulty in communicating with him, understanding what he was telling her and making herself understood. She gave us an example. Whilst examining the invoices for EU Despatch, she found one on which the Irish customer's VAT number was not stated. She was able to explain to Mr Sirpal what the problem was. He understood, telephoned the Irish customer and explained in English who Mrs Thomas-George was and then put her on the line, thus enabling her to verify that invoice.
  37. Mr Saunders put to Mrs Thomas-George an internal document from the Birmingham Intel- Team, it was headed "Action Sheet" and consisted of a list of entries relating to the Appellant company. We were referred specifically to two entries. The first one, dated 8 February 1999, referred to an informant alleging that the company was manufacturing adult clothing with counterfeit labels and that £300,000 was being deposited in Swiss bank accounts. There was then a second reference dated 22 March 1999 which reads "dishonest evasion of VAT as a result of mis-description of sales contrary to Finance Act 1985 section 13(1)". Mrs Thomas-George confirmed that the company had never been prosecuted for dishonest evasion; she had written none of the entries on the sheets and had never seen it prior to her visits. She believed the sheet would have gone at some later stage to Mr Avery but she said that none of their actions resulted from anything in that report.
  38. Mr Saunders put it to Mrs Thomas-George that she could and should have verified the invoices with the customers and that to have failed to do so was incompetent and in breach of her duty to the trader. Mrs Thomas-George replied that the onus was on the trader to support his claim for zero-rating, not on the Commissioners and it would not have been a reasonable use of resources in the current climate to ask officers to visit the customers. In any event, unless the visit was almost immediate upon the invoice when the goods might still have been in stock, all the officers could have done would have been to check the paperwork which would merely have shown up the customer's copy of the invoice.
  39. After the assessment was raised, Mr Vaghela applied on 21 July 1999 for a local review which was carried out by Mrs Dawn Nembhard. Mrs Nembhard replied on 31 August saying she that she had examined the reasons for the issue of the assessment and that on available information there was insufficient evidence to enable a reconsideration. She had considered the contents of Mr Vaghela's latter of 8 June but none of the reasons given negated the requirement to maintain satisfactory records. She asked for further information and documents and agreed to suspend debt collection for 21 days for this to be obtained. What happened then was that Mr Vaghela wrote to the Commissioners on 22 September 1999, enclosing four "customer references". These consisted of letters from four of the Appellant's customers, the letters cross referred between them to 25 invoices covering the period 10 May 1998 to 31 January 1999 and confirmed receipt of children's garments as per the invoices. Unfortunately, this letter never reached Mrs Nembhard although exactly why not was never established. Mr Saunders accused the Commissioners of sitting on it but there was no evidence that this was the case and it may never have reached the Commissioners in the first place. Copies were passed to Mrs Nembhard by Mr Vaghela by letter dated 20 October 2000. Mrs Nembhard told us that she took internal advice on the references and was told that they were insufficient as all they did was cross refer to invoices already seen by the Commissioners. They did nothing to identify the goods sold. What Mrs Nembhard needed was an audit trail from receipt of the order, through cutting and manufacture, to delivery and invoicing. By letter dated 12 December 2000, Mrs Nembhard wrote, inter alia, and we quote this verbatim as it was much criticised by Mr Saunders:
  40. "The contents of your letters and the copy letters from your clients customers are duly noted, however I must advise you that the assessing officer was not satisfied that your client was able to demonstrate that they were manufacturing zero rated goods to the levels indicated in their records."
  41. Mrs Nembhard also requested in her letter evidence of the manufacture of the goods and copy cutting records with confirmation of whether such records were unique to a particular invoice.
  42. Mrs Nembhard received in reply the letter of 9 January 2001, which we have already referred to. The attached schedule was of no relevance to Mrs Nembhard as it was not used during the assessment period. In respect of the diary, however, she asked for sample copies with relevant invoices and by letter dated 6 April 2001, Mr Vaghela enclosed a copy of the diary with the entries cross matched to sales invoices. Having received these, Mrs Nembhard contacted Mr Avery and Mrs Thomas-George who confirmed to her that the diary had never been produced to them and all they had seen were the three A4 sheets. Mrs Nembhard replied to Mr Vaghela to this effect and also reiterating that the officers had not been satisfied at the level claimed of zero-rated children's wear. She concluded:
  43. "From the available information there appears to be discrepancies between the officer's record of events and the information provided by your clients and I am now unable to review the assessments further."
  44. Mr Vaghela replied by letter dated 9 October 2001 saying that Mr Sirpal had produced the diary on 15 January 1999 but had been advised by the officer that it "was not good enough" and the officer had given a sample production record to Mr Sirpal to use in future. Mr Vaghela went on to explain that over the last three or four years, the company had ceased making for stock and were only making to order which was why there was so little finished stock available on the visits. Mrs Nembhard's response dated 16 November 2001 was to uphold the assessment. We have already referred in Mr Avery's evidence to this letter and the apparent misunderstanding over what had been handed over to Mr Sirpal. Mrs Nembhard, in her evidence, confirmed the misunderstanding and that it had arisen because Mr Avery and Mrs Nembhard had spoken on the telephone and neither had seen the document to which the other was referring.
  45. In cross-examination, Mrs Nembhard agreed with Mr Saunders that her role as reviewing officer was to look at all the evidence available to her with fresh eyes and to reach her own objective and independent view. Mr Saunders put it to Mrs Nembhard that by her persistent references in correspondence to the assessing officer not being satisfied and to her apparent acceptance, whenever there was discrepancy, of the officers' version, she was not being objective. This was denied by Mrs Nembhard.
  46. In answer to questions from the Tribunal, Mrs Nembhard said that even if she had considered the diary to be authentic, it would never have sufficed on its own to justify the claim for zero rating because there was no audit link between the order and the invoice.
  47. Mr Singh was a trading standards officer who, on 21 October 1998, made a routine visit to the Appellant's premises. There he met Mr Sirpal and introduced himself to him, speaking at all times in English. He explained that this was a routine visit, the aim of which was to ascertain whether any counterfeit items were being produced. An inspection of the premises revealed a large number of counterfeit garments. They were all adult sized and bore labels "Adidas, Kickers, Ralph Lauren, Tommy Hilfiger and Reebok". In addition, neck labels bearing the designer names Nike and Calvin Klein were also found. Mr Singh saw no children's garments on the premises either in stock or in production.
  48. Mr Singh had seized 725 items but as well as these, there were several reels containing 1,000 neck labels each. Mr Singh brought to the tribunal four of the seized garments, all others having been destroyed by order of the Court. These were two complete items and two which were part cut. Through Mr Saunders, Mr Sirpal maintained that none of these items in fact originated from his premises and were not any of those seized. This in fact turned out to be a quite incorrect and false assertion as each garment had been marked with a unique exhibit number which we cross referred to the list of items seized. As Mr Singh explained, it was not possible for the goods to have become mixed up as all items were marked and referenced on seizure and were then securely stored and the references all matched up.
  49. The Appellant company was prosecuted for being in possession of counterfeit goods but not for selling them for a profit as it was Mr Sirpal's contention that he was holding them for a colleague whose identity could not be revealed.
  50. Mr R L Sirpal told us that he had been in business since 1978. He himself spoke Punjabi and Hindu but very little English and the vast majority of his customers were non English speakers. Most of his orders were taken by telephone. When visited by officers from Customs and Excise, they spoke to him only in English, at no time offering him any language facility and he did not understand what they were saying or what they wanted. His record keeping was poor and before the officers' visits, he kept only buying and selling records, no manufacturing or production records. In 1998, he was visited by Mr Avery and Mr Avery told him that he had got to keep manufacturing and cutting records and on either his first or second visit, Mr Sirpal could not remember which, Mr Avery handed him a blank but pre-printed form (the blank Production Record). He did not, however, use this form immediately and before doing so, he recorded orders in the diary, which we have already described. When the diary was put in evidence to us, the recorded entries had all been married up with a corresponding invoice, normally dated some three or four weeks later. Mr Sirpal told us that the date of the entry in the diary would be the order date and that garments would normally be cut on the day of the order, or if the order arrived late, then the following day. Occasionally, if he had to order in the fabric, there would be a delay in cutting of one or two days, never more. The date of delivery would be the invoice date, the average time from order to invoice being four or five days or very occasionally, a day or two longer.
  51. In cross examination, Mr Sirpal accepted that his bookkeeper, Mr Haq, spoke and read English and that Mr Haq was present throughout the first meeting on 28 May 1998 with Mr Avery. He said that he had not understood what Mr Avery was asking but could not remember whether or not he had asked Mr Haq to interpret for him. He accepted that the replies he had given to and which had been recorded by Mr Avery on the visit about his sales procedure were, as far as he could remember, correct. He began to record his sales on a sheet on 1 August 1999, before that using the diary. When asked about the blank Production Record, Mr Sirpal initially said that Mr Avery had given it to Mr Haq to give to him but when questioned more deeply, he admitted that he could not actually remember. He maintained that since being asked to do so, he had kept production records, having agreed with Mr Haq and Mr Vaghela what would be needed.
  52. Mr Puzey suggested to Mr Sirpal that the diary entry was in fact made up after the event and not as and when orders were recorded. Mr Sirpal maintained that it was made up at the time of the order. Mr Puzey went on to ask why there was such a long delay between the order date and delivery to which Mr Sirpal said he would only send the goods out when the customer demanded them. When we, the Tribunal, later asked a similar question as to why there was a delay of several weeks between the diarised order dates and the invoice date, we were told that work would not begin until current work had been completed.
  53. Mr Puzey asked why on 6 May 1999, Mr Sirpal had told Mr Haq he had no production records but would keep them from then on, if in fact he had maintained the diary. Mr Sirpal merely re-iterated that he had kept records, maintaining he had shown Mr Avery the diary but as Mr Avery had not been satisfied with it, he said that he would in future keep the sheets.
  54. In answer to questions from the Tribunal, Mr Sirpal accepted that in summertime, which would be a quieter time of year, he would be receiving one or two orders each day and he would have to advise the cutter as to the nature of garment, style, quantity, size, and fabric.
  55. Mr Vaghela's firm acted as professional outside auditors to the Appellant company. Mr Vaghela told us that he had known Mr Sirpal since approximately 1978 when they were both setting up in business at much the same time. He described Mr Sirpal as being hopeless with paperwork, anything of an official nature being consigned to a drawer, usually unopened. Mr Vaghela painted a vivid picture, which Mr Avery readily recognised, of life in the early days of the rag trade. These were businesses normally set up by first generation Asians, their customers would be 99 per cent Asian and their staff entirely Asian. Their business dealings would be conducted in Asian, the music playing on the premises would be Asian and they would all live and work in a totally Asian environment.
  56. We were told that Mr Haq had worked for Mr Vaghela for ten years until 1999 and had worked for the Appellant company as it's bookkeeper for some four or five years before he left. Mr Haq's first language was Urdu and his command of English was poor, although not so poor as Mr Sirpal's. Mr Vaghela accepted there was a large similarity between Urdu and Punjabi and that Mr Sirpal would have been able to understand the bulk of what Mr Haq was saying although he, Mr Vaghela, would communicate anything of major importance. He confirmed that had he been given any indication at any time that Mr Haq was not making himself understood, he would then intervene.
  57. Mr Vaghela confirmed that in 1998, he had told Mr Sirpal he had to keep cutting records, which Customs and Excise would need to see. Mr Sirpal's orders had been mainly verbal and at best they would have been jotted down on loose scraps of paper and it was therefore Mr Vaghela's suggestion, made in June 1998 that Mr Sirpal should keep a diary to record his orders. Mr Vaghela had himself inspected the diary in either late 1998 or early 1999. In cross examination, Mr Vaghela confirmed that he would "obviously" have told Mr Haq of the use of the diary and he, Mr Haq, would have been aware of it. Mr Vaghela also told us that he had told Mr Sirpal that the diary entry should record the cutting date but accepted that, for some reason, Mr Sirpal had not included this.
  58. Mr Vaghela told us the company had had a further VAT inspection in 2003, carried out by a Mr Hodgson. Mr Hodgson had inspected the records of the business, which were then being kept, including a record headed "Production Record". This was a form with six columns, headed, Name; Order Date; Description; Size; Quantity; and Cutting Date. To Mr Vaghela's mind, this form was almost identical to the blank Production Record purportedly given by Mr Avery to Mr Sirpal, the only additional information being the provision of a separate order and cutting date. Mr Vaghela was asked if Mr Hodgson was satisfied with this form, to which Mr Vaghela replied he had made no negative comments. Mr Vaghela confessed himself to be at a loss to understand that this form of information should suffice when the diary did not.
  59. In cross examination, Mr Vaghela confirmed he was present on Mr Avery's first visit in May 1998 and that he had by then received Mr Avery's letter of 10 May which he would have discussed with Mr Sirpal. He confirmed that he knew and would have explained to Mr Sirpal that Mr Sirpal's records had to demonstrate the production of children's clothing. Equally, on receipt of Mr Avery's letter of 2 June 1998, he would have spoken to Mr Sirpal about the necessity of keeping records. Mr Puzey asked Mr Vaghela why, in his letter of 8 June 1999, he made no reference to the diary, to which Mr Vaghela replied that there was no point, because Mr Sirpal had already told him that Mr Avery did not think it acceptable.
  60. Mr Vaghela was asked about stock and told us that as part of his annual audit, he personally counted the company's stock holding and he would therefore have within his records the exact quantities of children's and adult's stock held at that time. He had not produced these in evidence because he had never been asked for them and also he did not think they were that relevant as they would change from day to day.
  61. Submissions
  62. Mr Puzey took us through the chronology of the Commissioners' actions. He stressed the lengths to which the Commissioners had gone to assist in the keeping of proper records and how extraordinary it would be in a business of this size if in fact so few records were actually kept. It was the contention of the Commissioners that the diary had not been in existence at the time of any of the visits and, in any event, it was not adequate verification. There was no evidence that the officers had acted in any way which could lead to a conclusion that the assessment had not been raised to best judgment. To reach this conclusion, we would have to find that the officers had not made an honest attempt to calculate the tax owing and that they had deliberately shut their eyes to relevant evidence.
  63. We were referred by Mr Puzey to Pegasus Birds Limited v Commissioners of Customs and Excise (2004) EWCA Civ 1015. Mr Puzey referred us to paragraph 85 and Mr Saunders was later to refer to paragraph 84, so for convenience, we set out both paragraphs here
  64. "84. But, of course, the Tribunal may chose to make a finding that the assumptions made by the Commissioners were wholly unreasonable; as they did in the present case. The question, then, is whether it follows from that finding that the Commissioners did not make the assessment "to the best of their judgment". That is, in substance, the same question as the question which I addressed in Rahman (No 2) in the context in which it arose – an admitted miscalculation in computing the amount of VAT due arising from a double counting of purchase invoices and delivery notes. As I have said, it was in that context that I observed that the relevant question was whether the mistake was consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or was of such a nature that it compelled the conclusion that no officer seeking to exercise best judgment could have made it. The relevant question is much the same where the tribunal has found that the assumptions made by the Commissioners were wholly unreasonable; in that context the question is whether, in the particular case, the making of wholly unreasonable assumptions by the officer compels the conclusion that he was not doing his honest best. That, I think, is what Mr Justice Dyson had in mind when he said, in McNicholas ([2000] STC 553 at 581, paragraph 76), that:
    '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 the commissioners did not apply best judgment …'
    "85. In reaching the conclusion, in Rahman (No 2) and on the present appeal, that it is enough that the officer through whom the Commissioners act in making the assessment 'does his honest best', I have sought to construe section 73(1) of the Act in the sense which sits most easily within the statutory framework. There are two elements in the statutory scheme which seem to me to be of particular relevance. First, it is a pre-condition to the exercise of power to assess under section 73(1) that (i) there has been a failure to make returns, keep records or afford facilities for inspection, or (ii) it has appeared to the Commissioners that returns which have been made are incomplete or incorrect; that is to say (in the usual case), that the normal process of self assessment to VAT has broken down. Second, an assessment under section 73(1) of the Act engages, and is subject to, the appeal provisions in section 83(p)."
  65. It was Mr Puzey's submission that there had been a failure to keep and produce records and further that the returns would appear, in the light of all the evidence, to have been inadequate and incomplete. Both these factors gave a proper basis upon which the Commissioners were entitled to assess. He accepted that the issue of quantum was rather more difficult and that it was always possible some of the invoices did relate to children's clothing but nothing had been produced to enable the Commissioners to be satisfied that this was the case.
  66. Mr Saunders stressed the still prevalent old fashioned practices within the rag trade, as indeed had Mr Avery in his evidence. He submitted that to counter the adverse effect of the failure of manufacturing in the 1980s and 1990s, the Appellant had had to adopt new ways and methods to stay in business and he had adopted a "just in time" system. This involved working strictly to order and reducing stock to a minimum. Given this, it was not surprising that no evidence of children's wear was found in stock by any of the officers. This working system had at no time been referred to in evidence and indeed had not been mentioned at all up until Mr Saunders' closing submissions. Mr Lapthorne therefore put it to Mr Saunders that such a system required as an absolute pre-requisite, a high level of co-operation and interaction between supplier, manufacturer and customers and also required an extremely high level of data and record keeping because of the need to track and control orders, materials, production and delivery. Mr Saunders accepted this and said that the system was not in reality a true "just in time" system but he had been trying to demonstrate in simple terms the very quick turn around of orders.
  67. Mr Saunders saw no relevance in the evidence of Mr Singh, other than to confirm that there had been no prosecution for selling counterfeit items, in fact, it was Mr Saunders' contention that Mr Singh had been asked to attend to give evidence to create negative thinking in the minds of the tribunal.
  68. Referring to paragraph 84 of Pegasus Birds, Mr Saunders submitted that the Commissioners had acted so unreasonably and in such a disregard for the evidence that the pre-conditions for raising an assessment had not been met. The officers had had no interest in establishing the correct VAT liability but had chosen Mr Sirpal as an easy target and had used a myriad of complex technical letters to achieve an easy assessment. First, the officers had known of Mr Sirpal's poor command of English but had taken advantage of this by seeing him in isolation; refusing access to an interpreter and writing him letters of such great complexity in a language foreign to him that their only intention must have been to create a misunderstanding and to trap him into the necessity to raise an assessment. Secondly, the Commissioners had deliberately refused to verify the customer references. Not only had they sat on them for over a year but they had then used that very delay as an excuse for not taking them up. Thirdly, Mrs Nembhard had not acted objectively and independently in her review. She was led by, and allowed her views to be informed by, the investigating officers. She had adopted the assessing officer's view as her own. Fourth, Mrs Nembhard quite clearly accepts in her letter of 16 November 2001 that "something" allowing for the dispute as to what, was handed by Mr Avery to Mr Sirpal on 15 January 1999 and yet this had been flatly denied by Mrs Thomas-George. Fifthly, the entries on the Intel- sheet would have served to create a mindset within the officers. Sixth, in clear breach of Customs regulations, Mr Avery had arranged with Mr Haq to help instigate a sales order book and cutting record, thus putting a financial burden on the trader. Mr Saunders submitted this was yet another demonstration of the Commissioners' attitude of "damn the rule book".
  69. The officers had, in effect, consistently failed to do their honest best. They had not fulfilled their duties in the manner required of them and as a result the precondition for raising an assessment had not been met.
  70. Mr Saunders also put forward an alternative submission by reference to Extra Statutory Concessions 3.4 which is in the following terms:
  71. "3.4 VAT — Misunderstanding by a VAT Trader

    VAT undercharged by a registered trader on account of a bona fide misunderstanding may be remitted provided all the following conditions are fulfilled—
    (a) there is no reason to believe that the tax has been knowingly evaded;
    (b) there is no evidence of negligence;
    (c) the misunderstanding does not concern an aspect of the tax clearly covered in general guidance published by Customs and Excise or in specific instructions to the trader concerned; and
    (d) the tax due was not charged, could not now reasonably expected to be charged to customs and will not be charged.
    Where, at the time the misunderstanding comes to light, there are unfulfilled firm orders from customers, for which the price quoted has been mistakenly on the assumption that no VAT, or less VAT than properly due, would be chargeable, VAT undercharged may be remitted in respect of such orders provided conditions (a) – (d) above are met."
  72. Mr Saunders submitted that all four conditions had been fulfilled and further that the misunderstanding had been created by experienced and specialist officers. Given this, the Commissioners should have applied their concession in favour of the company.
  73. Conclusions
  74. As we understood his argument, Mr Saunders was putting his primary contention to us as, that for all the reasons outlined, the pre-conditions for raising an assessment were not met.
  75. Section 73(1) of the VAT Act 1994 provides:
  76. "Where a person has failed to make any returns required under 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 from him to the best of their judgment and notify it to him."
  77. As is set out in paragraph 85 of Pegasus, for the power to assess to engage there has to have been a failure to make returns, keep records or afford facilities for inspection or it has to have appeared to the Commissioners that the returns made were incomplete or incorrect.
  78. There is no suggestion here that returns have not been rendered but the Commissioners believed and maintained before us that there had been a failure to keep records and also that the returns were incomplete or incorrect. That there was a failure to keep proper records is, in our view, beyond doubt. It was the Commissioners' contention, and this was not challenged by Mr Saunders, that the records necessary to verify zero-rating would have to be sufficient to track a transaction from receipt of the order, through production, including cutting and manufacture, to delivery and invoicing. The only unchallenged records for the relevant periods produced by the Appellant were the sales invoices. Clearly, these were insufficient and Mr Saunders did not seek to suggest otherwise. These invoices were then supplemented at some stage by the diary which purported to record orders received from 3 July 1998 to 27 April 1999. Before we consider the authenticity of this document, we should make the point that the assessment is made up of 95 invoices, of which only 27 cross refer to diary entries. The total sales value of the assessed invoices was £219,463 as against related diary entries to a value of £98,566. We should mention that we have not double checked these calculations ourselves but they were put forward by Mrs Thomas-George and not challenged by Mr Saunders. There is, therefore, nothing other than a sales invoice in verification of the vast majority of the invoices and quite clearly in relation to these invoices there has been a failure to keep and provide sufficient verifying records.
  79. We share the Commissioners' reservations about the diary and we do not accept that it was a contemporaneously kept record of sales received. We believe it was created after the event, almost certainly working backwards from the invoices. We say this for a number of reasons. First, Mr Sirpal says he showed it to Mr Avery but Mr Avery dismissed it as being insufficient. In that event, we can see no reason why Mr Avery did not record the fact. His notes and records appear to be meticulous in their detail. He quite clearly refers to the three A4 sheets, equally inadequate, so why no mention of the diary? Secondly, if it was in existence and being contemporaneously kept, why should Mr Haq in January 1999, agree to instigate the formation of an order and cuttings book. Mr Vaghela confirmed in his oral evidence that Mr Haq knew about the diary. Thirdly, Mr Vaghela clearly fought his client's corner and yet at no stage in his correspondence with Mr Avery did he mention the existence of the diary or, if Mr Sirpal is to be believed and Mr Avery had seen and rejected it, seek to argue that in fact it did suffice. In fact, Mr Vaghela's correspondence give quite the opposite impression. Fourth, the diary contains several entries of manufacture for stock, whereas the evidence to the tribunal, and as pointed out by Mr Vaghela in correspondence, the company no longer manufactured for stock. Fifth, the pattern of the entries was not consisted with Mr Sirpal's oral evidence. We were told by Mr Sirpal that the entry in the diary would be on the date the order was received or in a few cases the day following if the order had been received late the previous day. The delivery date of the finished garment would be the invoice date. We were told that the turnaround would be very quick – put by Mr Sirpal at four or five days. However, the gap between order and matching invoice in the diary is invariably some three to four weeks and we were given conflicting reasons by Mr Sirpal in his evidence for this apparent discrepancy. We do not therefore accept the diary as an authentic and true record of orders received and we are back to the only verifying records produced by the Appellant to support its claim for zero-rating being the inadequate sales invoices. We therefore find that the Appellant did not keep and produce records necessary or sufficient to verify his returns and the Commissioners were therefore entitled to raise an assessment.
  80. It should, of course, also be pointed out that, in the view of Mrs Nembhard, even if legitimate, the diary would not be sufficient to verify the transactions and this must be right as the combination of order and invoice would still not verify the manufacture or production of any garment.
  81. Mr Saunders' attack on the officers does in effect amount to an allegation that they did not act to best judgment. We cannot accept any of these contentions which in fact constitute a serious attack on the professional conduct and judgment of the officers. We do not accept that Mr Sirpal was unable to understand or communicate with the officers, not only do both Mr Avery and Mrs Thomas-George say there was not a problem but Mr Singh's evidence was that on his inspection, Mr Sirpal did not appear to have any difficulty in understanding. It is a distortion to accuse the officers of deliberately writing letters to Mr Sirpal that he would not be able to understand. Each and every letter was copied to his professional advisors and we totally reject any suggestion that the officers had deliberately communicated in a technical and complex manner so as to trap him.
  82. We also reject the criticism of the Commissioners for sitting on the customer references. There is no evidence that Mr Vaghela's letter actually reached the Commissioners and it could, as can happen, have been lost in the post. Even if it had been received and misplaced, careless this would be but not dishonest unless done deliberately, of which there is no evidence. Further, it was almost certainly too late to have carried out stock checks at the customers' premises because the invoices were already between eight and sixteen months old when first submitted to the Commissioners.
  83. We can see no evidence that Mrs Nembhard did not act objectively. It is true that she did refer to the views of the assessing officer but this was to state as a fact what his view had been or to conclude that after a review of all the evidence, she agreed with that view. This is not a lack of independence. There is no evidence that she deliberately shut her eyes to evidence which she should have considered. We do accept that there was a degree of confusion between Mrs Nembhard and Mr Avery over the sketch which he gave to Mr Sirpal. We find, however, that the only document which was handed over was Mr Avery's sketch on the first visit. This therefore disposes of Mr Saunders' attack on Mrs Thomas-George who was not present at that meeting and she was therefore being entirely truthful to the tribunal when she told us that nothing was handed over in her presence.
  84. There cannot possibly be any justification in Mr Saunders' contention that the officers were influenced in raising the assessment by the contents of the Intel- sheet. For this possibility even to arise, they would have had to have seen it. Mrs Thomas-George told us that she had not and we believe her and it was not even put to Mr Avery.
  85. Finally, we reject the suggestion that Mr Avery was deliberately flouting regulations in agreeing that Mr Haq should help instigate an order book. All he was doing was trying to ensure with Mr Sirpal's authorised representatives, that proper records would be kept.
  86. In summary, therefore, we reject each and every contention that the officers acted dishonestly or in bad faith. Mr Avery in particular appears to us to have bent over backwards to assist the Appellant company. He could have, but did not, assess on his first visit. Instead, he tried repeatedly to instigate a system of proper record keeping, both on visits and by correspondence. He offered help in the format of such a document and it was only when met with a complete lack of co-operation that the assessment was raised.
  87. The onus is on a trader to verify, by reference to his records, any claim for zero-rating. This the Appellant just has not done. Additionally, the Commissioners had very good grounds for believing that the Appellant was producing nothing like, if at all, the quantity of children's wear which his returns were declaring – as much as 82%. Neither Mr Avery nor Mrs Thomas-George had found any significant amount of children's wear in stock and none in manufacture on any of their three visits. Mr Singh had not observed any on his visit. Also the pattern produced to Mrs Thomas-George as being a child's size, measured 44 inches. We find Mr Sirpal's explanation that this would then be stitched down to size quite unbelievable. Given the quantities of children's clothing apparently being produced, the amount of wastage so produced would be vast and totally unacceptable, especially in the light of the company's financial circumstances.
  88. There was no challenge by Mr Saunders to the calculation of the assessment and no alternative method or any alternative figure was put forward. The assessment is a precise calculation based on identified and specific invoices, for none of which has any satisfactory verification been produced. We accept the assessment as raised.
  89. Finally, we turn to the Extra Statutory Concession. Putting to one side the question of whether or not we the tribunal have any jurisdiction, we do not in any event accept that the conditions have been fulfilled. At the very least, there is clear evidence of neglect by the company in its attention to its records and returns and the company certainly received specific instructions from Mr Avery on precisely how they should keep their records. Equally, Customs guidance is quite clear on the nature of records which should be kept. This is not a case where the Commissioners could, in our view, have contemplated applying that Extra Statutory Concession.
  90. In summary, therefore, we reject the Appellant's appeal and uphold the assessment as raised. The Commissioners made no application for costs and we make no order.
    Release Date: 19 April 2005


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