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Cite as: [2008] UKVAT V20707

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Mr J and Mrs Buttigieg (t/a The Cottage Cafe v Revenue & Customs [2008] UKVAT V20707 (06 June 2008)
    VAT assessment following single day's invigilation whether to best judgment yes whether assessment to be amended to allow for some increase in turnover yes subject to this, appeal dismissed



    - and -


    Tribunal: JOHN CLARK (Chairman)


    Sitting in public in London on 13 and 14 March 2008

    Carol Fraser of counsel, instructed by Cymans Chartered Certified Accountants, for the Appellants

    Pauline Crinnion of the Solicitor's Office of Her Majesty's Revenue and Customs, for the Respondents


  1. This appeal is against an assessment to tax made after an unannounced inspection visit and a subsequent formal invigilation visit, as a result of which the Respondents ("HMRC") concluded that there had been significant suppression of takings by the Appellants over a three year period.
  2. The law
  3. Section 73 (1) of the Value Added Tax Act 1994 provides:
  4. "(1) Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are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."
    The facts
  5. The evidence consisted of a bundle of documents, including witness statements from eight officers of the Respondents ("HMRC"). Oral evidence on behalf of the Appellants was given by John Buttigieg and by Christopher Papadopoulos of Cymans, the Appellants' accountant. On behalf of HMRC, oral evidence was given by Dean Walton, currently a Higher Officer of HMRC, and Anthony Davis, an Officer of HMRC. Following the hearing, various additional items of evidence in support of the Appellants' contentions were served by Cymans on the Tribunal; the date of service was recorded as 26 March 2008. From the evidence we make the following findings, but where there were conflicts of evidence, we deal with those later in this decision.
  6. The Appellants were registered for VAT with effect from 1 December 1995, in accordance with their application. Their main business activity was described as "Sandwich Bar/Cafe". The trading address was, and has continued to be, 21 Pitfield Street, London N1 6HD.
  7. The Appellants submitted all their VAT declarations up to and including period 09/06. (Subsequent declarations are not in point for this appeal.)
  8. Mr Davis was an officer in HMRC's cross-tax evasion team at Euston Tower assigned to look at traders in the catering trade whose returns appeared to be incomplete; one question requiring review was that of inaccurate splits between categories of supply. In November 2005 Mr Davis became involved in reviewing the Appellants' business. The risk target team had selected a number of businesses for review. The reason for examining the Appellants' business was that the splits did not look credible and the takings looked low.
  9. Mr Davis examined the Appellants' returns to see how much VAT was declared on the declared takings. Based on his local knowledge, he thought that the split between zero rated supplies and standard rated supplies was very seriously in error. The average declared standard rated sales were approximately 25 per cent of the total takings, which was extremely low for an eat-in cafe and takeaway of hot and cold food. It did not seem credible for a cafe business where he considered that all of the drinks served and most of the food supplied would be either hot and/or served for consumption on the premises, and therefore standard rated. He decided that a 'cold call' visit should be made to the Appellants' premises.
  10. On Thursday 17 November 2005, Mr Davis and Mr Walton visited the Appellants' premises. The reason for the 'cold call' was to see the business as it really was, not as the trader might want it to be seen. The format of the visit was that the enquiries were based on a questionnaire and the observation of the premises, looking at the food sold. The purpose was to see about the split between standard and zero rated and the possibility of underdeclaration.
  11. Mr Davis and Mr Walton interviewed Mr Buttigieg. He stated that the opening hours were 6.30 am to 4 pm Monday to Friday and 7 am to 2 pm on Saturday. Both Mr Buttigieg and his wife worked full time, and there were two part-time kitchen staff. There were 38 seats for consumption of food on the premises. He indicated that the zero rated items sold were cold sandwiches, rolls and salads to be taken away. The percentage of zero rated sales was 60 per cent.
  12. There was one Geller EX 300 till used for all the sales. There were two keys on the till to distinguish between the two rates of tax, ie Key No 1 for hot food, and Key No 2 for cold and take-away goods. Mr Buttigieg told the officers that he took a daily z reading at closing time and retained the z readings, which were then forwarded to his accountant for preparation of a record of daily takings kept in a book at the accountant's premises. The till did produce audit rolls, but Mr Buttigieg indicated that these were not retained. Mr Davis noted on the questionnaire that Mr Buttigieg was told to retain audit rolls in future. Mr Buttigieg confirmed that there were no credit sales. Mr Buttigieg signed and dated the questionnaire.
  13. Mr Davies then put further questions to Mr Buttigieg. From the responses, Mr Davis formed the view that Mr Buttigieg did not appear to have a very good knowledge of which transactions were standard rated and which qualified as zero rated. He indicated that he treated the takeaway drinks as zero rated. Based on what Mr Davis considered as this ignorance on Mr Buttigieg's part, Mr Davis thought that identification of the different rates at the point of sale was not being carried out effectively and accurately.
  14. As there was a question as to the split between standard rated and zero rated sales, and also a possible underdeclaration of takings, Mr Davis offered Mr Buttigieg the choice of either a self-invigilation exercise using his own staff, or allowing HMRC to carry out an invigilation exercise. The purpose would be to establish the split of standard and zero rated sales and the daily gross takings for the period under invigilation. Mr Davis explained what each would involve, and Mr Buttigieg raised no objection to HMRC carrying out its own invigilation if necessary.
  15. As it was approaching closing time, Mr Davis asked Mr Buttigieg to take an x reading from the till. This was to show the total sales from 6.30 am to the time of the reading. Mr Davis did not ask for a z reading as the business would still be trading until 4 pm. Mr Buttigieg took an x reading from the till and handed it to Mr Davis to take away, together with the audit roll from the till. The x reading showed sales to 15.02 hours as 580.35. Mr Davis noted that this was more than double the average declared daily takings on the Appellants' previous three returns for 03/05 to 09/05. He also noted that all the entries for the day had been made using Key No 1, although Mr Buttigieg had explained that the respective keys were used to denote the different tax rates. Mr Davis did not consider that Mr Buttigieg was able to give him a satisfactory explanation for the use of only one key.
  16. On the question of the day's takings, Mr Buttigieg explained that he had had a very good day, as there was a lot of building going on in the area, and this had resulted in a lot of builders being in the cafe that day. He was unable to identify the particular projects involved. He also said that the takings were higher because (as Mr Davis acknowledged) the weather that day was very cold, and because in the last two weeks he had increased prices by between 15 and 20 pence across the range of menu items. In addition, he mentioned that he had lost a number of his old working class customers as a result of the gentrification of the area.
  17. Mr Davis did not accept these explanations. There would have been many cold days in period 3/05, but the declared takings for that period were lower than in period 9/05. The effect of the price rises would probably be neutral because, although a number of regular customers might be prepared to pay the increased prices, there could be resistance from some who would go elsewhere. The loss of traditional working people type of local customers would probably also tend to lower takings.
  18. Mr Davis and Mr Walton examined the audit roll. They considered that this also showed irregularities. Mr Buttigieg confirmed the total for the previous day (16 November 2005) as 698.10. They noted that according to the audit roll, all the entries making up this total had been keyed into the till using Key No 1. However, for the same day there were two transactions of 97.95 and 210.40 recorded through Key No 1 and Key No 2 respectively. Mr Buttigieg was unable to offer any explanation for these entries. These were followed by a further z reading totalling 308.35. Again, Mr Buttigieg was unable to offer any explanation.
  19. Similarly, for each of the four previous days there were two z readings. In the same way as for 16 November, for each day other than the Saturday the first z reading was in line with the x reading just taken, showing daily gross takings of more than 500, which was double what the Appellants had been declaring for each day's takings. (For the Saturday the takings were 304.35.) In each case this z reading was followed by two amounts being keyed in under Key No 1 and Key No 2 respectively, and then a second z reading showing an amount of approximately 300. (In his notes attached to the questionnaire, Mr Davis states: "From examination of audit roll it was noted that the z readings are not numbered . . ." We consider below whether this is consistent with other information provided to us.) Mr Davis asked Mr Buttigieg why two z readings were being taken, and he replied that he did not know. In evidence, Mr Davis pointed out that the attribution between Key No 1 and Key No 2 corresponded to a split of 30 per cent standard rated and 70 per cent zero rated supplies.
  20. Mr Davis indicated to Mr Buttigieg that before the invigilation could take place, it would be necessary for him to provide Mr Davis with details of all his previous daily gross takings figures. Mr Buttigieg explained that these were with his accountant. Mr Davis gave Mr Buttigieg a receipt for the x reading and the audit roll, and the officers then left the Appellants' premises.
  21. On the following day Mr Davis wrote to Mr Buttigieg to request details of daily gross takings for periods 03/04 to 09/05, to remind him to retain the receipt for the till roll, and confirming the advice given the previous day that all audit rolls should be retained for six years. On 17 January 2006 Mr Papadopoulos of Cymans supplied the required details of daily gross takings.
  22. On Wednesday 8 February 2006 HMRC carried out an invigilation exercise at the Appellants' premises; no advance notice of this visit was given, nor was there any suggestion that their accountant could have been asked to attend. Mr Davis and Mr Walton arrived just after 6.30 am for the first shift. Mr Davis explained the purpose of the visit to Mr Buttigieg, who raised no objection. The cash float was verified at 06.35 hours as 66.90. The various officers involved in the exercise recorded sales from 07.01 hours to 15.55 hours inclusive. At the end of trading, officers Alison Smith and Nicola Leak observed and noted the cashing up. This recorded total cash in the till of 614.95; after deducting the float of 66.90, the total receipts for the day were 548.05. A z reading was taken; this recorded sales for the day as 554.85. The respective amounts making up this total were 525.25 and 29.60. The officers' invigilation sheets totalled 548.90, of which 536.05 was standard rated supplies and 12.85 zero rated supplies.
  23. Following the invigilation exercise, Mr Davis reviewed the results. In his VAT Audit Report he recorded the total gross takings as recorded on the officers' transaction sheets as 541.05. Because it was always possible for officers to miss the occasional transaction when trade became very busy, he took the view that the true gross takings figure for the day would be higher than the amount shown on the transaction sheets. However, to allow for the possibility of over-rings and in order to be fair to the trader, Mr Davis took the till takings figure as the true takings figure for the day at 548.05.
  24. On 14 February 2006 Mr Davis wrote to Mr Buttigieg to explain the results of the investigation into the Appellants' declared output tax, takings and split as declared on the VAT returns. He mentioned the issues arising from the first visit, and explained that he considered the cashing up figure of 548.05 was likely to be the accurate figure for the gross takings for the day. Out of the 541.30 takings, only 12.85 had been found to be zero rated. This was only 2.4 per cent of that total.
  25. Mr Davis explained that he had compared the takings figure for the day of the invigilation with the average declared takings figure for a Wednesday taken and calculated from the figures for daily gross takings supplied by the Appellants' accountant. From this Mr Davis had calculated a discrepancy rate of percentage, and applied this to his calculations to arrive at tax considered to have been underdeclared over the last three years. He enclosed his schedule of assessment of the underdeclaration, which he considered to have been arrived at in "best judgment". This showed a discrepancy rate of 86.5 per cent for periods 03/03 to 09/05 inclusive, and 37.5 per cent for period 12/05. After rounding down to the nearest pound in each tax period, the total calculated to have been underdeclared came to 51,790. He indicated that if Mr Buttigieg or his accountant wished to comment, challenge or discuss these findings, they should contact Mr Davis by 7 March 2006, failing which an assessment would be issued.
  26. On 20 February Mr Papadopoulos contacted Mr Davis. He expressed concern that Mr Davis had not taken into account the information given to him by Mr Buttigieg at the initial visit. This was that the takings had increased because of more building work in the area, resulting in considerably more builders coming into the cafe. Mr Davis indicated that he could accept a rise in takings from this of perhaps 50 a day, but not an increase of 250 per day. He also said that he could not accept that it was a pure coincidence that this massive increase in turnover occurred exactly at the time when HMRC had started investigating this client. As Mr Papadopoulos was not satisfied with Mr Davis' responses, he asked that Mr Davis should get his superior to speak to him about this.
  27. As a result, Mr Burley, the Team Manager, agreed to extend to 31 March 2006 the time limit set out in Mr Davis' letter for a response to HMRC. By 3 April 2006 no comments had been received from the Appellants or their accountant, and after discussion with Mr Burley Mr Davis issued the assessment based on the schedules previously issued to the Appellants on 14 February 2006.
  28. On 24 April 2006 Cymans wrote to Mr Davis to set out the facts as they saw them; they would not discuss the theories which Mr Davis had invented or use them as a basis for any negotiations. Cymans referred to discussions with Mr Buttigieg concerning the viability of the cafe business and possible changes to the nature of the premises and the mix of food being sold. They also referred to major building works begun in that area in the same period, and to the comparative position of competitors. The evidence showed that the takings had increased by an average of one third. Cymans complained that material facts and evidence had been ignored. It was acknowledged that some minor errors had occurred in relation to takeaway drinks. The matter must now be taken to the Tribunal, so that the evidence could be considered.
  29. On 27 April Mr Davis responded with comments on the facts of the case. He offered Cymans and the Appellants a meeting to discuss the matter and to present any further evidence for HMRC to consider. He acknowledged the Appellants' right to appeal immediately to the Tribunal, and indicated where to obtain the necessary form.
  30. On 10 May 2006 a meeting took place at Mr Davis' office. Mr Papadopoulos and Mr Buttigieg represented the Appellants, and Mr Burley and Mr Davis attended on behalf of HMRC. Mr Papadopoulos admitted that there had been an error in relation to the liability on some takeaway drinks sold. Mr Buttigieg said that that the premises had been improved and painted, and that he had bought a fryer. He had an invoice for the fryer, but no invoices for the work on the premises. Various new hot food dishes had been added to the menu. There were no printed menus to show the changes in prices and additional items, as the menu was displayed on the wall behind the counter.
  31. Mr Buttigieg confirmed that the Appellants maintained a full and accurate record of purchases as declared on the VAT returns. The officers put the argument that if there had been refurbishment of the premises, increased hot food offered for sale, and an increase in sales because of building projects in the area resulting in more builders coming into the cafe, there would have been an increase in purchases and inputs; however, there had been no change in purchases and inputs declared on the returns as compared with earlier periods in 2003 to 2005. The officers did not consider that Mr Buttigieg or Mr Papadopoulos addressed this argument. Copies of statements from builders concerning local building projects were supplied to the officers.
  32. Mr Buttigieg agreed to produce the z reading slips and audit rolls for periods 12/05 and 03/06. Mr Davis referred to his analysis of the audit roll retained after the initial visit, which appeared to show that two z readings were taken each day. One z reading each day appeared to be genuine as it was made up from the transactions which appeared on the audit roll, but the second z reading appeared to Mr Davis to be completely false and fabricated consisting of a figure under Key No 1 of the till (standard rated) and a larger figure under Key No 2 (zero rated). Neither of these figures was substantiated by the actual sum of the transactions shown on the audit roll. Mr Buttigieg denied any knowledge of the additional z readings, but indicated that a part-time young Polish female employee employed from about September to November, and now long gone, might have had something to do with this. Mr Buttigieg explained that he normally did the z readings but occasionally left this to one of his staff.
  33. Mr Burley indicated that he believed the assessment issued by Mr Davis was valid and fully justified in the light of all the evidence before the officers. His offer of a negotiated settlement of the liability was not taken up, and the meeting terminated without agreement.
  34. On the same day Cymans wrote to HMRC commenting on the meeting and setting out the arguments against the assessment. Unless the assessment was revised to take account only of the adjustment of the split between takings, the matter would have to be taken to the Tribunal. Copy documents were enclosed, showing the amount of rent being paid, and details of purchases. Following examination of this letter and enclosures, Mr Davis wrote on 22 May to indicate that there was no reason to withdraw or reduce the assessment.
  35. On 19 July 2006 Cymans wrote again to HMRC. They argued that it had been wrong for Mr Davis to state to Mr Burley that for a certain period the takings were all recorded as zero rated. This had only happened for four days and Cymans had corrected the error when preparing the VAT records for the relevant quarter. Using past statistics and the relationship between the two categories, Cymans had come to a fair split. Mr Papadopoulos and Mr Buttigieg had explained that the error had happened during the four days that a trainee girl was managing the till. Cymans also commented on the level of purchases and on changes to the premises.
  36. On 22 August 2006 Mr Davis responded in detail to Cymans' letter. The assessment was upheld.
  37. Following the Notice of Appeal, HMRC undertook an independent review. On 13 November 2006 Amanda Hawkes, the Review Officer, wrote to Cymans to set out the results of the review. Her main conclusion was that, based on the information available to Mr Davis at the time, his assessment was made to the best of his judgment and should be defended by HMRC. However, during the course of her review she had identified a couple of minor arithmetical errors and two points which needed further consideration. The cash-up figure was recalculated as 540.05. Further, the purchases made by HMRC officers during the day totalling 7.30 should have been extracted. The cash-up figure to be used in establishing the discrepancy rate was therefore 532.75.
  38. It was noted that Mr Davis had used an average daily gross takings figure for Wednesdays in 2004. He had calculated it as 293.83 when it should have been 294.47. In relation to price increases, Mr Davis had used the average daily gross takings figure for Wednesdays in 2004 compared with the observed takings on a Wednesday in February 2006. In the Review Officer's opinion, there would have been an allowance for at least one price increase in this two year period. Mr Burley had also considered this point and had informed the Review Officer that an average increase of 3 per cent a year could be allowed in the Appellants' case. The average Wednesday daily gross takings figure of 294.47 had therefore been increased by 6 per cent to 312.14.
  39. The result of these amendments was a reduction in the discrepancy percentage. For periods 03/03 to 09/05 inclusive it was 70.6 per cent, and for period 12/05 33.7 per cent. The assessment was therefore recalculated to produce a revised assessable amount of 46,678 plus interest. The amended assessment was issued on 14 November 2006. No interest was calculated on the tax assessed, pending the resolution of the appeal.
  40. Arguments for the Appellants
  41. Miss Fraser referred to the two reasons for HMRC alleging that there had been an underdeclaration of tax, namely the alleged incorrect attribution as between standard and zero rated supplies and the alleged falsification of the z readings. She noted that HMRC had not alleged dishonest or intentional evasion of VAT by the Appellants, nor had a section 60 penalty been imposed on them. This cast doubt on HMRC's allegations of dishonest conduct in falsifying the z readings and thus suppressing the amount of daily gross takings. She emphasised the Appellants' co-operation with HMRC and their good record for the period of almost ten years up to the time of the initial visit.
  42. She argued that the Appellants used to supply mainly cold takeaway zero rated food to customers, this being between 70 and 75 per cent of their outputs. However, following improvements made to the cafe in Autumn 2005, following improvements made to the cafe, advertising in leaflets and the local press and a change in market strategy to make the cafe more appealing as a "sit-down" restaurant serving hot meals, the business had since the last quarter of 2005 supplied mostly hot food consumed on the premises. This had resulted in a reversal of the standard rated/zero rated mix of the food supplies, being approximately 80 per cent standard rated and 20 per cent zero rated.
  43. HMRC had alleged that the Appellants had incorrectly accounted for the proportion of standard rated supplies, leading to underdeclaration of output tax for periods over three years, and also that because the Appellants had falsified z readings, they must have underdeclared their daily gross takings over those periods. Miss Fraser argued that HMRC had little evidence to support these allegations. The z readings relied on by HMRC related to five days only. HMRC had reviewed the audit rolls for periods 12/05 and 03/06; there was no suggestion that these were false.
  44. As a result, HMRC had applied a simple uplift to the periods in question and had also adjusted the mix between standard rated and zero rated supplies for those periods. The 86.5 per cent uplift applied by HMRC (subsequently adjusted on review to 70.6 per cent) had been arrived at by comparing the daily gross takings on the single day of the invigilation with the average takings declared by the Appellants during 2004-05. Similarly, the adjustment to 2.4 per cent for zero rated supplies (which she described as "astonishing") was based on the one day of the invigilation; HMRC had not accepted a proposal for an invigilation over at least a few more days or a few weeks in order to establish a more representative picture of the mix between standard and zero rated supplies. She contrasted Rahman v Customs and Excise Commissioners [1998] EWHC Adm 627, [1998] STC 826, in which HMRC had averaged out recorded results from six weeks of what the parties had agreed was normal trading.
  45. Although she accepted that the observations carried out on the invigilation day were, in themselves, accurate, she argued that the assessment was wholly unwarranted, inaccurate and untenable. Mr Davis had unreasonably rejected the Appellants' explanations for the higher turnover; the invigilation day had been wholly unrepresentative of earlier trading conditions. The Appellants admitted that there may have been a small margin of error in erroneously accounting for some takeaway drinks as zero rated rather than standard rated (resulting in, at most, a 10 per cent underdeclaration of VAT, as this was the proportion of drinks supplied by the Appellants). The assessment could not be justified in fact or in law. The daily gross takings recorded by the officers on Wednesday 8 February 2006 was not representative of average Wednesday takings for 2003 to 2005, and was much higher than the average calculated by HMRC. There were various reasons:
  46. (1) The invigilation day was an unusually cold day, resulting in increased numbers of customers coming into the cafe to warm up by purchasing hot items;
    (2) The daily gross takings had by then started to increase following the change in marketing strategy, the advertising and the refurbishment (paid for privately out of money given by Mr Buttigieg's father for refurbishing the Appellants' home);
    (3) The building work being undertaken locally, resulting in workers coming in for hot meals: Miss Fraser noted that although Mr Davis had been prepared to accept that this might make a difference of 50 per day, he had made no allowance for this in computing his uplift multiplier for the daily gross takings;
    (4) The increases in prices of items in the Appellants' menu by between 20 and 50 pence for each item.
  47. Miss Fraser contended that as the assessment had been based on the daily gross takings observed on only one invigilation date, these could not be taken as representative of the normal daily gross takings for the period from 2003 to 2005, and therefore the assessment was not made to the best of HMRC's judgment. It was inappropriate, unfair and unjustifiable to apply this to the three previous years of trading by the Appellants.
  48. Miss Fraser referred to the comments of Carnwath LJ in Pegasus Birds [2004] EWCA Civ 1015, [2004] STC 1509 at [16] to [23]. She argued that there had been no "honest and genuine attempt to make a reasoned assessment". She contended that the assessment should be set aside in its entirety.
  49. If this submission was not accepted, Miss Fraser further submitted that the Tribunal should make its own determination of the "fair and correct" amount of tax due to HMRC (Pegasus Birds at [22]). She referred to Mr Papadopoulos' alternative calculations, and asked for these to be substituted for HMRC's "wholly unreasonable and unjustifiable" calculations. She emphasised that if HMRC's calculations were correct, this would mean that the gross profit margin of the Appellants' business would have increased to over 86 per cent. This was an impossibly high gross margin, given that HMRC's Business Economic Notes (No 18) for restaurants and cafes serving hot food stated that the average fast food cafe/restaurant serving simple hot food did not normally have a gross profit margin exceeding 65 per cent.
  50. Miss Fraser commented on Mr Walton's refusal in evidence to answer her question on the usual or normal number of invigilation days undertaken in this type of case before the issue of an assessment; she suggested that many days' invigilation would be normal. She also criticised the behaviour of Mr Davis in the course of the hearing; we comment on this below.
  51. She contended that the appeal should be allowed with costs.
  52. Arguments for HMRC
  53. Mrs Crinnion referred to the reasons for the actions taken by Mr Davis. These had been based on the original evidence, namely the x reading taken on 17 November 2005 and the audit roll showing the four transactions leading up to that stage. Mr Davis had examined the audit roll and undertook the review of the Appellants' transactions.
  54. The copy letters from builders handed to HMRC at the meeting on 10 May 2006 did not relate to any projects beginning around 17 November, and so did not support the Appellants' contention that the increased number of building contractors in the area contributed to the sudden increase in turnover around that date.
  55. The invigilation had produced a full record of all the transactions observed. It had also been a means of establishing whether the 60 per cent attribution to zero rated supplies was correct. The process needed to be fair. The daily gross takings had not been enough to give the benefit of the zero rated sales.
  56. The Appellants and the accountant had been given the opportunity to consider Mr Davis' points, but there had been no reply.
  57. At the meeting on 10 May 2006 with Mr Buttigieg and Mr Papadopoulos it was agreed that the latter would supply the z reading till roll slips and the audit rolls for periods 12/05 and 03/06. The audit roll subsequently supplied related to 18 November onwards; there had been no audit rolls provided to show the position for previous dates. Mr Davis had been unwilling to accept that the audit roll reflected the true takings, as these were not monitored and were not consistent with the daily gross takings observed and noted at the invigilation. This had indicated a daily turnover of 500 or more.
  58. HMRC did not dispute that some decoration and refurbishment had taken place at the Appellants' premises and that this work might increase the turnover. However, such an increase was not a certainty, and if there had been one, for which the Appellants had produced no evidence, it would not have been sudden and significant. The advertising to which the Appellants had referred would not have enticed customers into the cafe in such numbers as to substantiate a large and sudden increase in turnover.
  59. Although there was no evidence to establish the Appellants' price increase, as the menu was only recorded on a whiteboard behind the till, HMRC had made allowance in the revised assessment for price increases. The reference to equipment relating to cold food remaining idle supported HMRC's contention that the declared percentage of standard rated and zero rated sales was incorrect; the Appellants had been declaring on average that 75 per cent of the sales were zero rated. The Appellants had admitted confusion on the liability of drinks, leading to a number being treated as zero rated when they should have been treated as standard rated.
  60. The Appellants had failed to maintain full business records, including a record of daily gross takings. They had stated that the audit rolls were not retained, which, HMRC contended, showed that the z readings were not a reliable record of the sales made.
  61. Mrs Crinnion accepted that Mr Davis should have requested the VAT workings for period 12/05 to see whether the amounts shown on the till rolls had been declared. He should have considered apportioning for the whole period.
  62. The Review Officer had upheld the assessment but with minor adjustments. The assessment had been made to Mr Davis' best judgment on the evidence available at that date. He could be criticised for not asking for the 12/05 working papers. The Appellants had made a hardship application based on their annual accounts; no hearing concerning that application had taken place, and HMRC had withdrawn their opposition to the application.
  63. Mrs Crinnion referred to Pegasus Birds at [38], in which Carnwath LJ had set out guidance to the Tribunal in respect of "best of their judgment" arguments for future cases.
  64. In relation to dishonesty, Mrs Crinnion explained that this had not been a case in which HMRC would have sought a section 60 penalty. As the policy relating to such cases had since changed, the position might have been different under the current regime.
  65. In summary, HMRC had proved best judgment on the basis of the information available in February 2006, as notified to the accountant. It was accepted that Mr Davis could be criticised for his approach to period 12/05. However, his assessment was based on evidence available to him; this was not merely the result of one day's invigilation, as he also had the till roll taken from the Appellants' premises on the occasion of the first visit. For these reasons, Mrs Crinnion submitted that the appeal should be dismissed.
  66. Discussion and conclusions
  67. De Voil Indirect Tax Service at V5.263 contains a convenient summary of the principles relating to the burden of proof in "best of their judgment" cases. This indicates that the burden falls on the Appellants. There are three questions to be answered, each on the balance of probabilities:
  68. (1) Have the Appellants established that their VAT returns for the relevant periods were substantially correct?
    (2) Have they established that the assessment was not made to the best of HMRC's judgment?
    (3) If the Appellants have not satisfied the test in question (2), have they established that the assessment was excessive and should be reduced?
  69. On the first question as to the correctness of their returns, the Appellants admitted that there had been errors in relation to the treatment of certain takeaway drinks; this had been mentioned by Mr Buttigieg at the initial visit. At the meeting on 10 May 2006 Mr Papadopoulos indicated that this had resulted in a "very small underdeclaration". (In later correspondence Cymans suggested that the level of error might have amounted to five per cent or at most, ten per cent of the zero rated supplies.) Whether or not minor, these errors, when viewed together with the other anomalies discovered on examination of the till audit roll at that visit, lead us to the conclusion that the returns were not "substantially correct".
  70. Thus it was appropriate for further investigations to take place in order to establish the amount of tax for which the Appellants were liable. These led to the assessment under appeal. The Appellants challenged the assessment on the basis that it was not made to the best of HMRC's judgment.
  71. The actual wording used in section 73(1) Value Added Tax Act 1994 is: ". . . they may assess the amount of VAT . . . to the best of their judgment". There is a tendency to use the shorthand expression "best judgment". We think it preferable to avoid this, as the use of the word "best" to qualify the word "judgment" implies a superlative standard. It is clear from the authorities such as Rahman, Pegasus Birds and Van Boeckel that the requirement is for the officer to do his best on the information available to him. There are other authorities on the adequacy of information necessary to carry out such an exercise. We consider below whether the materials available to Mr Davis were sufficient for this purpose.
  72. The Appellants' challenges to the assessment were based on:
  73. (1) their co-operation and their long previous compliance record ;
    (2) the change in the nature of their business shortly before the initial visit, including the work on the premises;
    (3) the exceptional nature of the trade at the time of the invigilation, with custom being increased as a result of a number of building projects being undertaken locally, and the exceptionally cold weather on that day leading to greater consumption of hot items.
  74. As a result they contended that the assessment was not made to the best of Mr Davis' judgment in that it applied the daily gross takings (including the split between zero rated and standard rated supplies) for the one single day of the invigilation to the whole of the three year period, in circumstances where a variety of factors had changed over that period.
  75. We think that the Appellants' compliance record is at best a neutral factor; there was no suggestion that the Appellants' business had been reviewed before Mr Davis' initial visit. Mr Buttigieg did co-operate both at the initial visit and on the occasion of the invigilation, but there were various points on which he was unable to provide information or explanations, so again we do not consider that this forms a basis for challenging the assessment.
  76. In relation to the argument as to change in the nature of the business, we have already mentioned that the Appellants supplied additional evidence to us after the hearing. This consisted of items relating to repairs to the premises, and items relating to advertising. In respect of repairs, there was an invoice totalling 1,000 inclusive of VAT in respect of their contribution to repairs to the premises, and a photograph of leftover materials from repairing the Buttigiegs' private house stated in evidence to have been used in repairing the business premises. In relation to advertising, there was an invoice dated 14 September 2005 for 16 for the printing of 800 leaflets which Cymans indicated were distributed in the area. The invoice does not specifically state the nature of the leaflets. In addition, there was an invoice dated 1 December 2005 for 100 plus VAT, being the deposit for an advertising feature in "Express By Holiday Inn", and the contract dated 2 November 2005 for that advertising. (The Holiday Inn is approximately 250 metres from the Appellants' premises.)
  77. We are not convinced that the work carried out on the premises was major. The 1,000 related only to a contribution. Similarly, if (as the Appellants contend) the materials pictured were used in repairing the business premises, the effects on those premises would have been modest. There was no suggestion that the layout of the premises was changed. We note that on the invigilation sheet the number of seats shown as being in the cafe was 38. The reference in the correspondence to other competitors shows that they had much smaller numbers of seats, one business having only eight seats. If the Appellants' premises had not been radically altered, this suggests that the number of seats on the premises would have been similar before the initial visit. This suggests to us that the "eat-in" element of the business would always have been relatively significant as compared with the takeaway part, whether or not the seats were always occupied. No copies of leaflets were provided for us to see any announcement of a "re-vamp" of the cafe, changing it to a restaurant; the advertising would have been equally consistent with a campaign to preserve the existing business. Our conclusion is that there was no major change in late 2005 in the nature of the Appellants' business.
  78. The remaining challenge was based on what the Appellants argued were the exceptional circumstances on the day of the invigilation. Mr Papadopoulos referred in evidence to the cold weather on that occasion, and stated that the HMRC officers had been wearing scarves. It is not clear to us how he was aware of this, as he was not present at the invigilation. However, Mr Buttigieg also referred to all the customers on that day being wrapped up and purchasing hot items. The officers' invigilation sheets contain their annotations of the weather conditions. Sheet 1 for the beginning of the invigilation until 08.12 shows: "Average cold for February, dry after rain in night". Sheet 2 from 08.14 to 09.50 indicates: "Average cold for February, dry, cloudy". The following sheets are marked respectively "Fine", "Fine, dry", [entry left blank], "Mild/dry", and "Bright + sunny". We think that more weight should be given to these contemporaneous notes than to the recollections of Mr Buttigieg and the comments of Mr Papadopoulos. We therefore conclude that the weather conditions were not exceptional.
  79. The other question was whether, on the day of the invigilation, the level of customers was exceptional. At the meeting on 10 May 2006 Mr Papadopoulos produced seven notes from builders or contractors indicating that they were carrying out works in the area. Two of these notes referred to works in October to November 2005; these works would have been completed before the initial visit. The remainder related to work carried out or visits made to the cafe by the contractors' personnel during the period in which the invigilation day fell.
  80. We accept that the number of customers on the invigilation day may well have been increased by some of the personnel working on these projects. This raises the question whether the effect on the assessment would have been such as to render it "wholly unwarranted, inaccurate and untenable", as Miss Fraser contended.
  81. We do not think that this possible increase in the number of customers on that day can have so substantial an effect on the calculation of the assessable amount as to prevent the assessment from having been made to the best of Mr Davis' judgment. An adjustment to the quantum may be required, but we do not consider it appropriate for the assessment to be set aside. In Rahman, Carnwath J (as he then was) said:
  82. ". . . there are dangers in taking Woolf J's analysis of the concept of 'best judgment' out of context. . . . the tribunal should not treat an assessment as invalid merely because it disagrees as to how the judgment should have been exercised. A much stronger finding is required; for example, that the assessment has been reached 'dishonestly or vindictively or capriciously'; or is a 'spurious estimate or guess in which all elements of judgment are missing'; or is 'wholly unreasonable'. In substance those tests are indistinguishable from the familiar Wednesbury principles (see Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223). Short of such a finding, there is no justification for setting aside the assessment."
  83. We do not consider that any such findings are appropriate on the evidence before us. It appears to us that in addition to the results of the invigilation, Mr Davis also took into account in combination with these the information obtained at the initial visit and the review of the materials uplifted at that visit. We regard it as significant that until he was told otherwise at the initial visit, Mr Buttigieg did not retain the audit rolls, and simply threw them away. In his evidence, he referred to writing information in a book which he retained rather than passing it to his accountant with the z readings; he did not continue writing up the book after the first visit. Mr Buttigieg was unable to provide any explanation at that visit for the additional z readings. He indicated subsequently that he was the only person who knew the amount of the float; we think it unlikely that anyone else would have been asked to deal with the z readings if they could not have completed the process of cashing up because of ignorance as to the amount of the float. As a result, we do not find credible his later explanation based on the z readings having been made by the Polish female trainee.
  84. Our view is that on balance, having regard to this combination of information, the assessment was made to the best of Mr Davis' judgment, despite the calculation being based on one day's invigilation and being applied to a three year period. We wish to point out that we consider it barely adequate to have relied on a single day's invigilation to arrive at takings for an extended period, and feel that it would have been better to carry out a further day's invigilation at another stage to ensure that all relevant information was, and was seen to be, taken into account. However, in addition to the day of the invigilation, Mr Davis was taking into account the sales recorded on the day of the initial visit and those shown on the till audit roll covering five previous days. As mentioned above, he indicated that the z readings were not numbered. Having reviewed a number of the Appellants' till rolls which we directed HMRC to provide to us at the hearing, it appears to us that the z readings were numbered, and thus could have formed the basis for a further investigation. Although it might have been preferable for Mr Davis to carry out this and further investigations, his omission to do was not in our view so fundamental to the process as to call into question the basis for making the assessment.
  85. In his evidence, Mr Papadopoulos indicated that, if correct, the assessment would imply that the Appellants' financial position would have been significantly better than it in fact was. He referred to the concession under which their landlord was, for some time, accepting a 50 per cent reduction in the rent payable. We did not find this evidence persuasive, as it would have been necessary for us to review a much greater amount of evidence as to the Appellants' finances. Mr Papadopoulos also referred to an increase in the level of the Appellants' purchases; again, we were not convinced that this had been significant.
  86. There are two respects in which we think that the assessment was excessive. The first is that, in a telephone discussion with Mr Papadopoulos on 20 February 2006, Mr Davis indicated that he was prepared to accept that building works in the area had led to some increase in turnover. He did not accept that the level had increased by as much as 250 per day, but he did indicate that he would accept an increase of 50 per day. However, no such allowance was made in arriving at the amount of the assessment. Despite Mr Davis' comment in evidence that he thought the area to be one where building work would always be going on, we think that an allowance should have been made for the effects of these projects on the Appellants' turnover.
  87. The second respect in which we regard the assessment as excessive is that an uplift of 33.7 per cent has been applied to the period 12/05. In response to the Tribunal's questions, Mr Davis confirmed that he believed the higher z reading from the till roll on 16 November 2005 to have been used in the completion of the VAT return for that period. We consider that, being aware of HMRC's scrutiny of their VAT compliance, the Appellants would not have been likely to attempt any material suppression for the period in which the initial visit took place; it appears to us that it was for this reason that the declared takings for this period showed a marked increase over those for earlier periods. We therefore regard the discrepancy percentage of 33.7 per cent for this period as too high.
  88. As mentioned above, for tax periods 03/03 to 09/05 inclusive, the Review Officer arrived at a discrepancy percentage of 70.6 per cent. This was calculated by subtracting from the cash up figure of 532.75 the average daily gross takings for Wednesdays in 2004 of 312.14 and dividing the result by the latter figure of 312.14 (incorrectly described in the Review Officer's letter as "Average DGT for 12/05", although the correct figure was in fact used). The result was multiplied by 100 to arrive at a percentage.
  89. In order to take account of the increase in turnover to recognise the effects of the building works in the area on the Appellants' business, we have adjusted the Review Officer's calculations by 50 per day. The effect is to produce a revised discrepancy percentage of 54.66 per cent for periods 03/03 to 09/05 inclusive.
  90. In respect of period 12/05, the gross declared sales remain unaltered at 28,689.25. However, to recognise the reallocation of part of the zero rated sales to standard rated, using HMRC's ratio of 2.4 per cent of zero rated sales, our calculations result in a standard rated sales figure of 28,000.71. This gives an output tax liability of 4,170.32. After deducting the output tax already accounted for in the sum of 2,978.25 and rounding down, we find the additional output tax due for period 12/05 to be 1,192.
  91. The result of our adjustments to the assessment is to reduce it from 46,678 to 40,345. As already indicated, interest will have to be calculated on the latter amount.
  92. On Miss Fraser's point that HMRC did not seek any section 60 penalty, we accept the comments of Mr Davis and Mrs Crinnion that on the basis of HMRC's policy as it applied before September 2007, this would not have been appropriate in the Appellants' case. No conclusion can therefore be drawn from the lack of a penalty.
  93. Miss Fraser criticised Mr Walton for refusing to answer her question as to HMRC's practice in the context of invigilations. We do not think that he was being obstructive; certain information relating to HMRC's practices would be regarded as sensitive and not appropriate for publication in any form, as shown by various notes in HMRC's Manuals stating that certain material has been withheld. Miss Fraser also referred to Mr Davis' conduct at the hearing. We were aware that on various occasions Mr Davis was commenting out loud on statements being made by other parties. On more than one occasion we had to demand silence while evidence was being given. We considered whether it would be appropriate to exclude Mr Davis from the remainder of the hearing, but in the light of our repeated warnings this did not prove necessary. We must emphasise that it is inappropriate for an officer of HMRC to comment while other parties are giving evidence, whatever the officer may happen to think of that evidence. We leave it to HMRC to take any action they may consider appropriate in relation to this matter.
  94. Subject to the above amendment to the assessment, the appeal is dismissed. As we have upheld the majority of the assessment, we do not think it appropriate for costs to be awarded.
    RELEASE DATE: 6 June 2008


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