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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Silvertop Restaurants Ltd v Customs & Excise [2003] UKVAT V18224 (11 July 2003) URL: http://www.bailii.org/uk/cases/UKVAT/2003/V18224.html Cite as: [2003] UKVAT V18224

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ASSESSMENT in default of proper returns by taxpayer – Assessment to best of the Commissioners' judgment – Restaurant business – "Drinks to total" calculation – Held assessment made to best of judgment – VATA 1994, s.73(1) – Amount of assessment – No oral evidence received on behalf of the Appellant – Customs officer cross-examined – Whether Appellant had discharged the burden of proving amount of the assessment was too high – Held it had – Whether any material to enable the Tribunal to substitute a lower figure – Held there was – Appeal allowed in part – Appeal against civil penalty under VATA 1994, s.63 accordingly also allowed in part

LONDON TRIBUNAL CENTRE

SILVERTOP RESTAURANTS LIMITED Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MR JOHN WALTERS QC (Chairman)

MR R G GRICE

Sitting in public in Birmingham on 10 and 11 April 2003

Mr Terence D Bayliss, FFA, for the Appellant

Mr David Bettoney, Advocate of HM Customs and Excise Solicitor's Office, for the Respondents

© CROWN COPYRIGHT 2003


 


DECISION
1. Silvertop Restaurants Limited (which trades as "The Nawab") (the Appellant) appeals against an assessment of tax made under section 73(1) VAT Act 1994 ("VATA") (Failure to make returns, etc.) for the period from 28^th February 2000 to 31^st August 2001 – an assessment relating to under-recorded sales – and an assessment of civil penalty for misdeclaration or neglect made under section 63(1) VATA.
2. The grounds of appeal stated in the Notice of Appeal criticise as "unreasonable and disproportionate" the methodology applied by the Commissioners "in assessing potential underdeclarations of sales and subsequent output tax". It emerged early in the hearing that the Appellant did not contest the fact that there had indeed been underdeclarations of sales, but complained about the quantum of the assessments of tax and penalty.
3. Although the Notice of Appeal does not in terms challenge the assessments as not being made to the best of the Commissioners' judgment as required by section 73(1) VATA, Mr. Bayliss, for the Appellant, in his submissions mounted an attack on this basis and the Tribunal heard argument on the point waiving any breach or non-observance of the Tribunals Rules (rule 19(5) refers).
4. The Tribunal was provided with a bundle of documentation and we received oral evidence from Mrs. Elizabeth Cudd, the officer of Customs and Excise who issued the assessments in this case. No witnesses appeared on behalf of the Appellant. From the evidence we find the following facts.
5. The Appellant trades as a restaurant known as "The Nawab" from premises in Newbury. It was registered for VAT with effect from 28^th February 2000. It has one director, a Mr. Alkasur Rahman. The Appellant took over the business on a transfer of a going concern from a Mr. Abdul Kashim.
6. Mrs. Cudd, a Customs officer who specialises in restaurants and take-aways in the Reading area, lead a team of Customs officers carrying out test purchases at the Appellant's restaurant in the evening of Friday 27^th July 2001. She also led a team of officers carrying out a further series of test purchases of take-away meals during the evening of Friday 31^st August 2001. The night of Friday 27^th July 2001 was a very quiet night and the trade at the restaurant was slow.
7. The objective of the test purchases on 27^th July 2001 was to ascertain whether the sales of the restaurant were being underdeclared for VAT purposes. This exercise was carried out by comparing the observations of officers and their own purchases to the records retained by the restaurant as the basis for the VAT returns. These records were examined at or after a meeting arranged by Mrs. Cudd with the management of the Appellant, which in fact took place on 4^th September 2001. These comparisons did reveal underdeclarations of sales, and in the appeal Mr. Bayliss accepted that there had indeed been underdeclarations of sales.
8. Once Mrs. Cudd had established that there were underdeclarations of sales, she thought it likely that sales had been underdeclared over a number of periods. In order to establish a figure of undeclared takings as the basis for an assessment, she carried out a "Drinks to Total" exercise.
9. The Tribunal understands the methodology of a "Drinks to Total" exercise to be as follows. First, it is possible from an examination of the bills issued by a business, on which the takings declared for VAT (outputs) are based, to ascertain the proportion of all takings represented by sales of drink. In this case the proportion was ascertained to be 18.4%, and the accuracy of this figure is accepted by Mr. Bayliss on behalf of the Appellant.
10. The second step is to ascertain the mark-up achieved from sales of drink. This is done by comparing the retail prices achieved for drink (as per the declared bills) with the objectively ascertainable costs incurred on the provision of drink (inputs). This involves ascertaining how many sales units (drinks supplied to customers) are obtained from a single purchase unit (bottle of spirits, gallon of beer, etc.). In this case the overall drinks mark-up ascertained by Mrs. Cudd's team of officers was 196% before adjustment for wastage, and, apparently 191.36% after such adjustment. These figures are contested by Mr. Bayliss.
11. The third step is to ascertain the cost to the Appellant of drinks supplied in the declared bills, by reducing the sales price obtained for drinks by the ascertained mark-up percentage.
12. The fourth step is to ascertain the total cost incurred by the Appellant on drink in the periods being examined and apply to that cost the mark-up percentage ascertained at the second step. The figure achieved should represent the true total of sales of drink achieved (outputs).
13. The fifth step is to apply the "drinks to total" percentage ascertained at the first step to the figure of sales of drink arrived at, at the fourth step. The resulting figure should represent the true total of sales of food achieved (outputs).
14. The sixth step is to compare the figures arrived at, at the fourth and fifth steps with the outputs declared for the periods being examined and so to calculate the underdeclaration of outputs for assessment.
15. We understood Mr. Bayliss to accept the validity of the methodology of a "Drinks to Total" exercise as a way of ascertaining the amount of an underdeclaration of sales in a restaurant business. (However he contended that the application of the methodology in this case was flawed.)
16. Mrs. Cudd's calculations, when forwarded to the Appellant under cover of her letter dated 30^th November 2001, showed that £236,778.45 of takings (representing £35,264.64 of VAT) had not been declared since 28^th February 2000. Mrs. Cudd's letter invited the Appellant's comments.
17. A meeting between Mr. Bayliss and Customs officers at the Commissioners' Reading office on 17^th January 2002 resulted. In consequence, the calculation of undeclared output VAT was reduced from £35,264.64 to £34,094.34.
18. The assessment appealed against (in the amount of £34,090) was subsequently notified to the Appellant for the VAT accounting periods from 05/00 to 08/01 inclusive (subject, apparently, to a clerical adjustment of £148, reducing it to £33,942). The civil penalty assessment in the amount of £5,110 was also made and notified to the Appellant on 14^th March 2002.
19. Mr. Bayliss's letter to Mrs. Cudd dated 22^nd March 2002 asking for a departmental review of the assessment pointed out as follows:

"Whilst the statistical content of your assessment may well be true, I do find it difficult to accept that HMC&E are of the opinion that takings amounting to 62% of declared turnover have been suppressed. You will recall that your detailed observations of 31/7/01 [presumably 27/7/01 was meant] showed a notional suppression in the region of 20%."

20. As we have noted above, Mr. Bayliss did not himself call any evidence. However, as Mr. Bettoney for the Commissioners had called Mrs. Cudd to assist the Tribunal, Mr. Bayliss was able to cross-examine her.
21. In his cross-examination he concentrated on her application of the "drinks to total" methodology in this case.
22. He was able to establish, first, that in ascertaining the total cost incurred by the Appellant on drink (for the purposes of the fourth step outlined at paragraph 12 above) Mrs. Cudd had taken no account of any closing stock figure (stock on hand at the end of the period being examined – 31^st August 2001.
23. Mrs. Cudd responded by saying that she had not taken into account any opening stock (stock on hand at the start of the period being examined – 1^st March 2000) either, and assumed that, given the reasonably constant level of takings in the period that the opening and closing stocks were of the same amount.
24. 1^st March 2000 was the Appellant's first day of trading, following the transfer of the business as a going concern (see: paragraph 5 above) and there were no purchase invoices to vouch the value of stock of drink on hand at that time.
25. This line of cross-examination elicited an admission from Mrs. Cudd (and from the Commissioners through Mr. Bettoney) to the effect that inaccuracy in ascertaining the total cost incurred by the Appellant on drink in the period examined would make a difference (which we infer could be significant) to the final calculation of underdeclared takings.
26. Mr. Bayliss also put to Mrs. Cudd an alternative calculation based not just on the Appellant's daybook figures for purchases of drink (as Mrs. Cudd's calculations had been) but also on the Appellant's daybook figures for purchases of food (for the six months ended 31^st August 2001). By applying a mark-up percentage of 191.36% (apparently the same percentage as that calculated by Mrs. Cudd at step two of her calculation – see: paragraph 10 above) he arrived at figures which were for one quarter (to May 2001) slightly more than the takings declared (a VAT inclusive figure of £65,382 compared to the declared VAT inclusive figure of £63,653) and were for one quarter (to August 2001) slightly less that the takings declared (a VAT inclusive figure of £55,587 compared to the declared VAT inclusive figure of £58,228).
27. Mrs. Cudd said in evidence that she did not understand Mr. Bayliss's figures, although she also said "I can see what you have done". Her objection was to the use of the Appellant's daybook figures for purchases of food, which were unreliable because food is zero-rated for VAT, and therefore would not give rise to deductible input tax. In re-examination she accepted a point put to her by Mr. Bettoney, that it was impossible to calculate an accurate mark-up percentage for a dish served at a restaurant (because of the costs of cooking, wastage, etc.).
28. Mr. Bayliss's second attack was on the magnitude of the assessed underdeclarations. He pointed out to Mrs. Cudd (and she accepted) that the assessments assumed suppressed takings of £227,920, amounting to £417 for every trading day in the period assessed. As stated in Mr. Bayliss's letter of 22^nd March 2002 (quoted from above at paragraph 19) in percentage terms this represented suppression at the rate of 62% of declared takings, which contrasted with an observed suppression rate (albeit on a single (unrepresentative) evening, in imperfect conditions) of about 20%. Mrs. Cudd accepted that she had not considered how suppressions of the magnitude assumed by the assessments had been achieved in practice. She accepted that suppressions of that magnitude would corrupt the profit margins of the Appellant and we understood her to accept Mr. Bayliss's point that in order to avoid this there would have had to be suppressions also of purchases – although she said she had not considered this. She had not seen any annual accounts of the Appellant. She also accepted that she had not approached any of the Appellant's suppliers for supporting evidence of the figures of purchases relied on, and that, if she had, the Commissioners' case would have been strengthened.
29. On the evidence, the Tribunal was impressed by the points Mr. Bayliss made, namely that the Commissioners' calculations were susceptible to significant error if the wrong figure for purchases of drink was taken, and also that the end result of the Commissioners' calculations both seemed in overall terms to show an improbably high level of suppression of takings, and also had not been corroborated or subjected to any overall credibility checks, which it is reasonable to expect might have been applied. If they had been applied it seems to the Tribunal that a lower assessment would probably have resulted.
30. Mr. Bettoney referred the Tribunal to the Tribunal decision in the case of Curry Inn Restaurant v Commissioners of Customs and Excise (Tribunal Chairman: Dr. A.N. Brice; Release date: 25^th September 1998), in which the then current authorities were reviewed, and also to Rahman (trading as Khayam Restaurant) v Commissioners of Customs and Excise (No. 2) [2002] STC 73, and Spillane v Customs and Excise Commissioners [1990] STC 212.
31. As to the best judgment issue, the question (in the formulation of Lawrence Collins J in Rahman (No. 2)) is whether the assessment was arrived at "dishonestly or vindictively or capriciously, or was wholly unreasonable" (ibid. at paragraph 20). The Tribunal unhesitatingly declines to find that it was. Although Mr. Bayliss put it to Mrs. Cudd that she had not been impartial, she denied that, and we accept that she was impartial. As Simon Brown J (as he then was) pointed out in Spillane (ibid. at page 218), there is a wide bracket represented at the top end by the very most which could possibly be payable if all the factual doubts were resolved against the taxpayer, and at the bottom end by the least sum payable, assuming the taxpayer were to win on all points. In such a case there is no reason why the Commissioners should decide on some figure beneath the upper end of the bracket.
32. The Appellant accepts that there have been underdeclarations of sales. In such circumstances it would not be just to quash the assessment. We hold that it was made to the best of the Commissioners' judgment within section 73(1) VATA.
33. The second issue concerns the quantum of the assessment. Here the Tribunal has not been assisted by the failure of any witness for the Appellant to appear to give evidence. There has also been a lack of any documentary evidence, which might have provided specific support to some of the points put by Mr. Bayliss to Mrs. Cudd in cross-examination (for example as to the level of stock of drink held on hand at 1^st March 2000, or 31^st August 2001).
34. Nevertheless we are mindful that, as was pointed out by Collins J in Murat v Customs and Excise Commissioners [1998] STC 923 at p.929, on this issue we have an original appellate jurisdiction, that is to say, we must consider the material put before us and decide for ourselves whether the assessment should be changed.
35. As we have indicated above, at paragraph 29, we are impressed by the points Mr. Bayliss made, namely that the Commissioners' calculations were susceptible to significant error if (as is quite likely) the wrong figure for purchases of drink was taken, and also that the end result of the Commissioners' calculations in overall terms showed an improbably high – and uncorroborated – level of suppression of takings. We hold that the Appellant has discharged the burden of proving that it is overcharged by the assessment.
36. The difficulty the Tribunal faces is the absence of specific evidence pointing to a particular, lower, figure, which would represent the correctly assessable undeclared takings. Mr. Bettoney submitted that it was not open to the Tribunal to "guess" the right figure. If by that he meant that we could not act on the basis of no evidence at all, we accept the submission. We reject various suggestions put to us by Mr. Bayliss as to the right figure, because they were based on his "guesses" as to the percentage of takings suppressed on particular days of the week.
37. However on even the limited material available to us, we have decided that the assessment is too high. It follows in our judgment that we can express a view based on that material as to the factor by which it seems to us (on the balance of probabilities) that it is too high, without any specific evidence indicating what that factor is. This will do better justice than confirming an assessment in an amount which we have found to be too high. On this basis we find that the assessment ought to be reduced by a factor of one eighth (12½%) and we allow the appeal to that extent. The appeal against the civil penalty will be allowed to a like extent.
38. Both sides indicated that they each would not make any application for costs. Accordingly we make no order as to costs.
JOHN WALTERS QC CHAIRMAN RELEASED:

LON/02/611