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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Khaira (t/a Tony Fish Bar) v Revenue & Customs [2006] UKVAT V19527 (06 April 2006) URL: http://www.bailii.org/uk/cases/UKVAT/2006/V19527.html Cite as: [2006] UKVAT V19527

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19527

VALUE ADDED TAX – Assessment in default of proper returns by the taxpayer – Allegation by Commissioners that Appellant incorrectly apportioned supplies and suppressed takings – Assessment to the Commissioners best judgment – Value Added Tax Act 1994, s.73(1) – Appeal dismissed

CIVIL EVASION PENALTY – Evasion of tax – Conduct involving dishonesty – Value Added Tax Act 1994, s.60(1) – Appeal dismissed

LONDON TRIBUNAL CENTRE

MOHENDERJIT SINGH KHAIRA Appellant

T/A TONY FISH BAR (a Partnership)

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: DR KAMEEL KHAN (Chairman)

SHEILA WONG CHONG FRICS

ELIZABETH MacLEOD CIPM

Sitting in public in London on 16-20 January 2006

Mr and Mrs M S Khaira appeared for the Appellant

Shaheen Rahman, Counsel, instructed by Solicitors at HMRC, for the Respondents

© CROWN COPYRIGHT 2006


 


DECISION
1. The Appellant partnership appeals against a Notice of assessment to Value Added Tax ("VAT") in the sum of £85,912.00 (revised to £81,184.00) plus interest of £14,369.81 for the quarterly periods ending 31 March 1993 to 30 September 1998 and a Civil Evasion Penalty ("CEP") pursuant to s.60(1) of the Value Added Tax Act 1994 ("VATA 1994") in the sum of £77,308.00 (amended to £77,055.00) which includes a mitigation of 10% pursuant to s.70 VATA 1994.
2. The Appellant partnership ran a fish and chip shop known as Tony Fish Bar ("the Business") from 260 Kingshill Avenue, Hayes, Middlesex UB4 8BZ. There is some dispute as to the partners in the partnership, which is explained later. The initial business was set up as a partnership with Mohenderjit Singh Khaira ("Mr Khaira") and Mr Sukkdev Singh Nahal ("Mr Nahal") as partners. The Business was registered for VAT with effect from 21 December 1989 under VAT registration 531107983 as a partnership on the application of Mr Nahal following the transfer of a going concern. The VAT 2 Form shows both Mr Khaira and Mr Nahal as partners in the Business at its inception.
3. The Business is situated in a parade of small shops between a butcher's shop and a Londis general store. The opening hours are 11.30 to 14.00 and 16.30 to 22.30 Monday to Saturday. The Business is closed on Sunday. Mr Khaira has responsibility for the day to day running of the Business and makes all purchases. He is assisted by his wife, Bakshinder Khaira ("Mrs Khaira") who has a day job at another establishment and helps in the Business when not at work. Mr Nahal does not work in the Business but is an investor and silent partner who holds a 25% share in the Business. Mr Khaira holds the remaining 75% share.
4. The Business first came to the attention of Her Majesty's Revenue & Customs ("HMRC") on 4 December 1991 when Mr Harry MacLean, a local officer, VAT Office, Uxbridge, paid a visit to the Business. He had noticed that the percentage of zero rated sales declared on the VAT return was unusually high. (This type of business would normally have between 2% - 5% zero rated supplies whereas the Appellant had approximately 20%.) On 23 February 1992, Mr MacLean wrote to the Appellant and requested, in future, that a record of all zero rated sales must be made on a daily basis. An Assessment was issued on the Business at that time.
5. In 1998, HMRC considered that the level of declared zero rated takings were still very high and it was decided that the Appellant partnership should be visited. A visit to the Business by HMRC Officers, Mr M. Kelly & Ms N. Joseph, took place on the 10 September 1998. The Report of the visit (VAT 465B) which was undated showed that samples of "Z" readings (daily, weekly or monthly total of sales) were missing. It was also noticed that the Cumulative Grand Total ("CGT") shown at the bottom of the till recordings indicating the level of sales were in excess of that declared. It was decided that a number of invigilation days would be carried out. These were carried out in 1998 on Friday 23 October, Monday 23 November and Wednesday 2 December. A spread of days over time is normally taken with such visits. It was found from the invigilation visits that the sales figures were "substantially higher" than the declared takings in the VAT return for comparable past days. The percentage of zero rated sales was found to be significantly lower than that declared. Further, the purchase records showed that the amount of pitta bread purchased during the accounting period would have been insufficient to sustain the level of sales of kebabs observed during the invigilation days. During the invigilation days, the first invigilation officer, Mr Iain McInnes, noticed a notebook ("Takings Book") which seems to have recorded takings and purchases made. The book, which was taken away for examination, indicated sales figures which were different from those declared. After a review of the information held, Mr M. Kelly, HMRC, formed the view that the Business had suppressed sales and had done so dishonestly. The Takings Book and invigilation log of sales was made available in evidence to the Tribunal.
6. Mr & Mrs Khaira were interviewed at the VAT Office, Uxbridge, Middlesex on the 22 February 1999, in the presence of Mr Paul Williams, Officer, Local Office Enquiry Team, HMRC. The interview was not taped but notes (approximately 4 pages) were taken by Mr Williams which were made available to the Tribunal. The following points arising out of the interview should be noted:

(a) HMRC issued a Notice 730 – Civil Evasion Investigations: Statement of Practice – which explains the CEP investigation procedure. The interviewees stated that they understood the procedure.

(b) It was confirmed that Mr Nahal was a silent partner and the Business was run by Mr & Mrs Khaira.

(c) Mr Kelly asked why the CGT for some "Z" readings had been torn off from the till. No explanation was given. Mr Kelly asked why there were two "Z" readings taken daily and which had not been passed to HMRC when requested. Mrs Khaira said that they were advised to take a second reading by their accountant because their son played on the till and sometimes interfered with the "Z" reading key. (It should be explained that the till has a cash register with two banks of memory – a Z1 bank and a Z2 bank. The Z1 bank provides a cash report which is taken daily or frequently. Once taken, the bank is reset to zero. The Z2 is intended to be taken at longer intervals, usually weekly or monthly. The Z2 reading represents a total of all Z1 readings taken since the last preceding Z2 reading. Once taken, the Z2 also resets.)

(d) Asked to explain why sales on the days of invigilation were significantly higher than stated on the VAT returns, the Appellant said that increased Friday takings was due to half term and the increased sales on Monday and Wednesday were due to the build up to Christmas.

7. HMRC wrote to Mr Khaira on 3 March 1999 reminding him that "he had a responsibility to co-operate in establishing the true VAT liability of the business". On the 10 March, Tamsons, Accountants, acting for the Appellant submitted new sales figures for the period ending 30 September 1998. On 20 March 1999, Mr Khaira, at the request of HMRC, confirmed that all VAT returns submitted by the Business to date were correct. On 22 March 1999, Mr Kelly handed over a letter to the Appellant which expressed concern about the accuracy of submitted VAT returns. The letter provided a schedule based on the findings of the invigilation days which included details of the percentage rate of under declaration believed to have occurred. A comparison was made between the declared takings and the invigilation days takings and this produced an average under declaration of approximately 44% to 47%. The average zero rated sales on the invigilation days was 3.25%.

The letter went on to say:

"Before making any assessment the Commissioners wish to give you the opportunity to bring to their attention any further information which you consider relevant and to make any observations you have on the method adopted in the preliminary calculations and/or the figures those calculations produce".

Tamsons, Accountants, responded to the letter of 31^st March 1999 as follows:

"We mentioned in our letter regarding the Sunday sales, it appears that the Sunday sales were an additional sale of the week. We enclose herewith our calculation including the sales of Monday, Wednesday and Friday based on your takings for your attention. From this calculation we were told that the above client did not under declare sales".

On the 29 April 1999, HMRC again wrote to the Appellant requesting a proper response. The letter stated, inter alia, "you have not produced any further evidence which you feel may be relevant or made any observations on the method adopted in the preliminary calculations and/or the figures produced by those calculations". The Appellant was reminded that the degree of co-operation could affect the level of CEP that might be issued. The Schedule showed under declared VAT in the sum of £88,691.37 over a period from January 1993 to September 1998.

8. HMRC wrote to Tamsons on 29 April 1999 requesting information on the terms and period of their professional engagement, details of "Z" readings and how zero rated sales were recorded and information provided in completing the VAT returns. The reply on 13 May 1999 stated that they had acted for the Appellant since 3 August 1996 and prepared the VAT returns on information provided by the client. The information on takings was contained in an exercise book and the zero rated sales percentage was that used by the previous Accountant.
9. Mr & Mrs Khaira were interviewed by HMRC on the 10 June 1999 with Mr T. Rupan, Accountant, Tamsons, attending. (The tape recording transcripts (approximately sixteen pages) were provided to the Tribunal.) Some of the points arising from the interview are summarised below:

(a) It was confirmed that Mr Nahal had not been involved in the daily running of the Business for the past six years. A VAT 2 Form was provided by HMRC for completion to show the new partners. (This form was never actually completed.)

(b) Mr P. Rupan confirmed that he had not advised the Appellant to take two "Z" readings as the Appellant had stated.

(c) Mr Rupan said that the VAT Returns were calculated from the sales book and not from the "Z" reading.

(d) Mrs Khaira said that some "Z" readings were thrown away.

10. On 11 June 1999, Mr Khaira delivered the records for the Business for the period December 1998 to March 1999 for examination by Mr Kelly, HMRC. The "Z" readings were found to be sequential and supported the takings declared. HMRC did not, however, have an explanation for the inaccuracies of earlier returns and the apparent correctness of these two periods rested on whether all sales were rung into the till. HMRC made two test purchases, through Mr M. Copeland, Officer, Shadow Economy Team, on 19 and 24 June 1999. During the second visit, he observed that not all sales were rung through the till. HMRC wrote a warning letter on 7 July 1998 and an assessment was issued on 28 July 1999. HMRC invited three partners in the Business, Mr T. Singh (who could not attend since he was overseas), Mrs Khaira and Mr Nahal, to be interviewed.
11. Mrs Khaira was interviewed on 20 August 1999 (a copy of the tape recorded transcript (15 pages) was provided to the Tribunal.) The HMRC Officers conducting the interview were Paul Williams and Mike Kelly. The points arising from this interview can be summarised as follows:

(a) It was confirmed that the VAT returns submitted by the Business were true and correct and the partners in the Business were her husband and Mr T. Singh. Mr Nahal had not been involved in the Business since 1993.

(b) Mrs Khaira confirmed that not all purchases had been declared.

(c) Mrs Khaira said that the takings figure in the Takings Book were not for her shop.

(d) Mrs Khaira did concede that there was probably some under declaration of sales but only a small amount and which would even out over time. Mrs Khaira admitted that her husband may have described certain sales as zero rated when they were not.

(e) Mrs Khaira confirmed that she was in the shop about three times a week.

(f) Mrs Khaira confirmed that the additional "Z" reading had been taken due to her children playing on the till but had no explanation for the fact that the CGT had been torn off those readings.

(g) She had no comment on the test purchase made by Mr Copeland, who had observed that not all sales were rung into the till.

12. On the 25 August 1999 Tamsons, Accountants, wrote to HMRC enclosing a schedule worksheet of current sales (March 1993 to September 1998) showing discounts based on the Retail Price Index ("RPI"). They stated that they wished to appeal the assessment. The figures provided were in several columns including the accounting periods, total sales, zero rated sales (at 3.25%), RPI, output declared and underdeclared. The figures seem to have made an adjustment for under declaration for VAT in the sum of £2,641.33.
13. An interview was conducted with Mr Nahal on the 2 September 1999 with Mr Williams and Mr Kelly, HMRC. Mr Nahal confirmed that he was a "sleeping partner" and was related to Mr Khaira. He said he had worked in the Business but since 1993 had no involvement and received no money. He agreed to confirm that he was no longer a partner in the Business.
14. On the 6 September 1999, Mr Khaira was interviewed by Paul Williams and Anne Best, Officers, HMRC. The relevant points arising from this meeting can be summarised as follows:

(a) He had no partners in the Business and agreed to confirm this in writing.

(b) He confirmed that the submitted VAT Returns were correct and all sales had been rung through the till.

(c) He confirmed that the "Z" readings were taken each morning

and each night with the morning readings being thrown away and the evening readings being retained.

15. There were other correspondences between HMRC and A to Z Accounting Services, the Appellant's new accountants. These were between November 1999 and April 2000. In September 2000, HMRC instructed the Debt Management Unit to recover the debt due. HMRC believed that the Appellant had, for the purpose of evading tax due, failed to account for the full amount of tax due and the conduct of the partnership involved dishonesty.
16. The facts and matters on which the Commissioners will rely to show evasion and dishonesty as stated in the Statement of Case are:

(a) The high level of under declaration of VAT.

(b) The degree of control of Mr Khaira over the Business who had access to and operated the till most of the time.

(c) The CGT figures normally found at the base of 'Z' readings were torn off.

(d) Examination of the Business records identified missing 'Z' readings from the till. The CGT on those that were declared indicated that the missing 'Z' readings equated to approximately 45% of the takings.

(e) The CGT figures were torn off after investigations had begun and the Appellant partnership had become aware of the significance of the figures.

(f) Invigilation exercises carried out on three different days of the week in October, November and December 1998 showed that, on average, takings were 45% higher than that achieved previously on similar days.

(g) The takings recorded on the days of the invigilation exercises were the highest the Business had ever recorded.

(h) Returns submitted for the Business over the period which includes October, November and December do not reflect an increase in trade.

(i) A diary was found by Mr McInnes during one of the invigilation exercises with sales figures later confirmed by Mrs. Khaira as those of the Business. Although the figures contained in the book were 45% higher than those declared in the Business records, Mrs Khaira maintained the figures in the diary were for the previous owner for a period in the late 1980s.

(j) Both Mr Khaira and Mrs Khaira admitted purchases had not been recorded within the Business records (suppression of purchases being an indication of suppressed sales).

(k) Mrs Khaira admitted that purchases may not have been declared and errors may have been made with regard to the level of zero rated sales although this partial admission was later withdrawn.

(l) In December 1991 an officer visiting the Appellant partnership noticed the level of zero rated sales being recorded was high. He agreed a zero rated portion of no more than 5% with the partners and issued an assessment on this basis. The officer directed the partners to maintain accurate records of zero rated sales.

(m) The required records were not kept and the returns submitted for the Business continued to claim a level of zero rated sales of between 17%-30% of the takings. Mr Khaira has produced no evidence to support the percentage of sales claimed to be zero rated.

(n) The Appellant's Business is situated between a butcher's and a Londis supermarket which sheds doubt on any claim that the zero rated sales of the Business are increased by sales of meat, cold chicken and frozen pies.

(o) Invigilation exercises conducted on the Appellant's Business reveal a level of only 3% of the Business takings being zero rated.

(p) Both Mr and Mrs Khaira admitted that they had incorrectly described sales as zero rated but denied they had done so intentionally.

(q) The Appellant's accountant submitted a schedule of arrears for the Business based upon 3.25% of the takings being zero rated.

(r) Mr and Mrs Khaira stated at interview that their accountant had advised them to take two 'Z' readings each day yet this was strongly denied by the accountant both in writing and during one of the interviews.

(s) The level of mitigation the Commissioners considered was restricted to 10% because although Mrs Khaira made certain admissions, the admissions were later withdrawn. Furthermore, while Mr Khaira always maintained that the figures in his returns were accurate these proved to be incorrect after careful examination.

Legislative Provisions

17. Value Added Tax is charged on the supply of goods and services in the United Kingdom where the supply is a taxable supply made by a taxable person in the course or furtherance of any business carried on by them (ss.1 and 4 of VATA 1994). A person is a taxable person for the purposes of the Act where he is, or required to be, registered under the Act. The Act requires records to be kept and returns to be made in respect of the tax for which a taxable person is accountable.
18. Section 73 (1) VATA 1994 provides for the Commissioners to issue an assessment against a person who has failed to make returns or where it appears to the Commissioners that the returns are incomplete or incorrect. The section states:

"Where a person has failed to make any returns required under the Act (or under any provisions repealed by the 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."

19. Section 77 VATA 1994 provides that any assessment should generally be made within three years of the end of the prescribed accounting period. However, Section 77(4)(a), VATA 1994 provides that where VAT has been lost as a result of conduct falling within Section 60(1) of the Act this period is extended to twenty years from the end of the prescribed accounting period.
20. Section 60 VATA 1994 provides that:

(1) "In any case where –

(a) for the purpose of evading VAT, a person does any act or omits to take any action; and

(b) his conduct involves dishonesty (whether or not it is such to give rise to criminal liability)

he shall be liable, to a penalty equal to the amount of the VAT evaded, or as the case may be, sought to be evaded by his conduct."

Section 60(7) provides that:

"On an appeal against an assessment to a penalty under this section, the burden of proof, as to the matter specified in sub-section 1(a) and (b) above shall be upon the Commissioners."

21. Section 70(1) VATA 1994 provides:

(i) "where a person is liable to a penalty under Section 60 … the Commissioners or, on appeal, a Tribunal, may reduce the penalty to such amount (including Nil) as they think proper; and

(ii) in the case of a penalty reduced by the Commissioners under sub-section (i) above, a Tribunal, on an appeal relating to the penalty, may cancel the whole or any part of the reduction made by the Commissioners."

Best Judgment

22. The tax assessments under appeal must have been made to HMRC's best judgment within the meaning of Section 73(1) VATA 1994. Best judgment means to the best judgment of HMRC on available information. The leading case dealing with this expression is Van Boeckel v CCE [1981] STC 290. In explaining what the expression meant, Woolf J. (as he then was) said at page 292:

"… the very use of the word "Judgment" makes it clear that the Commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them. Clearly they must perform that function honestly and bona fide. It would be a misuse of that power if the Commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could possibly be payable and then to leave it to the taxpayer to seek, on appeal, to reduce that assessment.

Secondly, clearly there must be some material before the Commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment as to what tax is due.

Thirdly, it should be recognised, particularly bearing in mind the primary obligation, to which I have made reference, of the taxpayer to make a return himself, that the Commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due. In the very nature of things frequently the relevant information would be readily available to the taxpayer, but it would be very difficult for the Commissioners to obtain that information without carrying out exhaustive investigations. In my view, the use of the words "best of their judgment" does not envisage the burden being placed on the Commissioners to carry out exhaustive investigations. What the words "best of their judgment" envisage, in my view, is that the Commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the Commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them."

The Judge went on to say (at page 296) that:

"unless the situation is one where no material is before the Commissioners on which they can reasonably base an assessment, the Commissioners are not required to make investigations".

23. The guidance on best judgment formulated by Woolf J. was reviewed by Carnworth J. (as he then was) in Rahman v Customs & Excise Commissioners [1998] STC 826 who observed:

"…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".

24. The expression was also reviewed in the subsequent decision of Dyson J. in McNicholas Construction Company Limited v Customs & Excise Commissioners [2000] STC 553 at 558 where he states:

"…the words "to the best of their judgment" permit the Commissioners a margin of discretion in making an assessment; a taxpayer may only challenge the assessment if he can show that the Commissioners acted outside the margin of their discretion, by acting in a way that no reasonable body of Commissioners could do. 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 that the Commissioners did not apply best judgment, as explained by Woolf J. in Van Boeckel v Customs & Excise Commissioners"

25. In the more recent case of Customs & Excise Commissioners v Pegasus Birds Limited [2004] STC 1509 at 1518 Carnworth LJ said:

Para 27. "Although the Tribunal's powers are not spelt out, it is implicit that it has power either to set aside the assessment or to reduce it to the correct figure …"

Para. 29. "In my view the tribunal faced with a "best of their judgment" challenge should not automatically treat it as an appeal against the assessment as such, rather than against the amount. Even if the process of assessment is found defective in some respect ... the question remains whether the defect is so serious or fundamental that justice requires the whole assessment to be set aside, or whether justice can be done simply by correcting the amount to what the tribunal finds to be a fair figure on the evidence before it. In the latter case, the Tribunal does not require to treat the assessment as a nullity, but should amend it accordingly."

26. The function of the Tribunal is supervisory. The Tribunal must not engage in a process that seeks to look at the information afresh, but should be satisfied that the assessment is correct in the light of the available information.
27. Once it is established that HMRC were entitled to make the assessment, the amount of the assessment is for the Tribunal to decide. Carnworth L.J. in Rahman v. Customs & Excise Commissioners [1998] STC 826 said:

"Once the grounds for making an assessment are established, then the tribunal's primary function is to examine the amount. Since the assessment is a starting point for that exercise, the tribunal will need to consider whether the judgment made by the Commissioners was sound or not. If it is shown to have been wholly unreasonable or non bona fide there would be sufficient grounds for setting the assessment aside, because this would not be fair for a taxable person to be required to answer a case which has been formulated in that way. However, that kind of case is likely to be extremely rare. In a normal case it should be assumed that the Commissioners have made an honest and genuine attempt to reach a fair assessment. The debate before the tribunal should be concentrated in seeing whether the amount of the assessment should be sustained in the light of the material then available."

28. The three clear principles which emerge on best judgment are:

(a) The Commissioners must have exercised their judgment based on available information and material which is accurate.

(b) It is not the job of the Commissioners to calculate the amount of tax which is due since this is the work of the taxpayer. The Commissioners should make reasonable investigations before making an assessment. The investigations necessarily involve looking at the taxpayer's records and information.

(c) The Commissioners should make a value judgment on the available material which is before them. The judgment should be made on the intelligent interpretation of the information and calculations.

29. Let us look at the facts in this case. The initial suspicions in this case were raised by Mr H. McLean, an officer from the local VAT office in Uxbridge, in 1991. He noticed that the percentage of zero rated sales declared on the VAT returns were very high compared to similar businesses. In 1998, the Business was looked at again. This time there was a visit by two local officers, Mr Mike Kelly and Ms Navasha Joseph. On this visit, samples of 'Z' readings were taken which indicated that the CGT shown at the bottom of the till readings indicated sales to be in excess of that which had been declared on the VAT returns. Invigilation exercises took place on Friday 23 October 1998, Monday 23 November 1998 and Wednesday 2 December 1998. These exercises involve Customs being present at the place of business for the entire day in order to assess the sales records. The sales recorded during these exercises were £784.40, £406.60 and £404.60. These were higher than those declared by the Appellant for comparable days of the week in the past. HMRC used Monday, Wednesday and Friday in order to get a snapshot of the entire week's trading. The shop opens from Monday to Saturday from the afternoon to the late evening. There were no Sunday sales. The zero rated sales found at the days of invigilation were significantly lower than those declared on the VAT returns. We were made to understand that normal zero rated percentages for this type of business would be between 3% - 5% whereas this business had claimed approximately 20%. Further an examination of the purchase records showing suppliers to the Business show that the amount of pitta bread which was purchased during an accounting period would have been insufficient for the level of sales of kebabs observed during the invigilation period.
30. Based on the figures obtained during the invigilation days a rate of under declaration for Mondays of approximately 44.88%, Wednesdays 47.73% and Fridays 44.82%. This gave an average under declaration of 45.81%. The zero rated percentages using the invigilation figures were for Friday 3.88%, Mondays 4.29% and Wednesdays 1.58% giving an average of 3.25%. The figures and calculations compared declared takings to the figures from the takings observed during the period of invigilation, zero rated percentages for invigilation days and zero rated percentages provided by the business are given below.
TONY FISH BAR SCHEDULE OF UNDERCLARATION
531 1079 83

VAT Period 09/98	Takings
Mondays	£235.95
	£199.60
	£237.05
	£263.00
	£200.40
	£220.40
	£241.50
	£227.85
	£203.95
	£222.30
	£206.85
	£230.55
Total	£2,689.40
Average declared Monday takings in period = £2,689.40/12 = £224.11	Average declared Monday takings in period = £2,689.40/12 = £224.11	Average declared Monday takings in period = £2,689.40/12 = £224.11	Average declared Monday takings in period = £2,689.40/12 = £224.11	Average declared Monday takings in period = £2,689.40/12 = £224.11	Average declared Monday takings in period = £2,689.40/12 = £224.11	Average declared Monday takings in period = £2,689.40/12 = £224.11	Average declared Monday takings in period = £2,689.40/12 = £224.11
Actual takings observed on invigilation exercise = £406.60	Actual takings observed on invigilation exercise = £406.60	Actual takings observed on invigilation exercise = £406.60	Actual takings observed on invigilation exercise = £406.60	Actual takings observed on invigilation exercise = £406.60	Actual takings observed on invigilation exercise = £406.60	Actual takings observed on invigilation exercise = £406.60	Actual takings observed on invigilation exercise = £406.60
Rate of underdeclaration for Mondays = £406.60 - £224.11/£406.60 = 44.88%	Rate of underdeclaration for Mondays = £406.60 - £224.11/£406.60 = 44.88%	Rate of underdeclaration for Mondays = £406.60 - £224.11/£406.60 = 44.88%	Rate of underdeclaration for Mondays = £406.60 - £224.11/£406.60 = 44.88%	Rate of underdeclaration for Mondays = £406.60 - £224.11/£406.60 = 44.88%	Rate of underdeclaration for Mondays = £406.60 - £224.11/£406.60 = 44.88%	Rate of underdeclaration for Mondays = £406.60 - £224.11/£406.60 = 44.88%	Rate of underdeclaration for Mondays = £406.60 - £224.11/£406.60 = 44.88%
Wednesdays	£219.70
	£220.75
	£229.35
	£203.30
	£211.40
	£206.30
	£211.05
	£219.50
	£208.50
	£205.65
	£198.30
	£232.00
	£202.20
	£192.35
Total	£2,960.35
Average declared Wednesday takings in period = £2,960.35/14 = £211.45	Average declared Wednesday takings in period = £2,960.35/14 = £211.45	Average declared Wednesday takings in period = £2,960.35/14 = £211.45	Average declared Wednesday takings in period = £2,960.35/14 = £211.45	Average declared Wednesday takings in period = £2,960.35/14 = £211.45	Average declared Wednesday takings in period = £2,960.35/14 = £211.45	Average declared Wednesday takings in period = £2,960.35/14 = £211.45	Average declared Wednesday takings in period = £2,960.35/14 = £211.45
Actual takings observed on invigilation exercise = £404.60	Actual takings observed on invigilation exercise = £404.60	Actual takings observed on invigilation exercise = £404.60	Actual takings observed on invigilation exercise = £404.60	Actual takings observed on invigilation exercise = £404.60	Actual takings observed on invigilation exercise = £404.60	Actual takings observed on invigilation exercise = £404.60	Actual takings observed on invigilation exercise = £404.60
Rate of underdeclaration for Wednesdays = £404.60 - £211.45/£404.60 = 47.73%	Rate of underdeclaration for Wednesdays = £404.60 - £211.45/£404.60 = 47.73%	Rate of underdeclaration for Wednesdays = £404.60 - £211.45/£404.60 = 47.73%	Rate of underdeclaration for Wednesdays = £404.60 - £211.45/£404.60 = 47.73%	Rate of underdeclaration for Wednesdays = £404.60 - £211.45/£404.60 = 47.73%	Rate of underdeclaration for Wednesdays = £404.60 - £211.45/£404.60 = 47.73%	Rate of underdeclaration for Wednesdays = £404.60 - £211.45/£404.60 = 47.73%	Rate of underdeclaration for Wednesdays = £404.60 - £211.45/£404.60 = 47.73%
Fridays	£431.90
	£476.90
	£391.35
	£416.05
	£430.55
	£427.15
	£443.40
	£428.60
	£453.65
	£443.10
	£464.45
	£408.30
	£410.50
Total	£5,625.90
Average declared Friday takings in period = £5,625.90/13 = £432.76	Average declared Friday takings in period = £5,625.90/13 = £432.76	Average declared Friday takings in period = £5,625.90/13 = £432.76	Average declared Friday takings in period = £5,625.90/13 = £432.76	Average declared Friday takings in period = £5,625.90/13 = £432.76	Average declared Friday takings in period = £5,625.90/13 = £432.76	Average declared Friday takings in period = £5,625.90/13 = £432.76	Average declared Friday takings in period = £5,625.90/13 = £432.76
Actual takings observed on invigilation = £784.40	Actual takings observed on invigilation = £784.40	Actual takings observed on invigilation = £784.40	Actual takings observed on invigilation = £784.40	Actual takings observed on invigilation = £784.40	Actual takings observed on invigilation = £784.40	Actual takings observed on invigilation = £784.40	Actual takings observed on invigilation = £784.40
Rate of underdeclaration for Fridays = £784.40 - £432.76/£784.40 = 44.82%	Rate of underdeclaration for Fridays = £784.40 - £432.76/£784.40 = 44.82%	Rate of underdeclaration for Fridays = £784.40 - £432.76/£784.40 = 44.82%	Rate of underdeclaration for Fridays = £784.40 - £432.76/£784.40 = 44.82%	Rate of underdeclaration for Fridays = £784.40 - £432.76/£784.40 = 44.82%	Rate of underdeclaration for Fridays = £784.40 - £432.76/£784.40 = 44.82%	Rate of underdeclaration for Fridays = £784.40 - £432.76/£784.40 = 44.82%	Rate of underdeclaration for Fridays = £784.40 - £432.76/£784.40 = 44.82%
Average rate of underdeclaration over these days = 44.88% + 47.74% + 44.82%/3 = 45.81%	Average rate of underdeclaration over these days = 44.88% + 47.74% + 44.82%/3 = 45.81%	Average rate of underdeclaration over these days = 44.88% + 47.74% + 44.82%/3 = 45.81%	Average rate of underdeclaration over these days = 44.88% + 47.74% + 44.82%/3 = 45.81%	Average rate of underdeclaration over these days = 44.88% + 47.74% + 44.82%/3 = 45.81%	Average rate of underdeclaration over these days = 44.88% + 47.74% + 44.82%/3 = 45.81%	Average rate of underdeclaration over these days = 44.88% + 47.74% + 44.82%/3 = 45.81%	Average rate of underdeclaration over these days = 44.88% + 47.74% + 44.82%/3 = 45.81%

TONY FISH BAR
531 1079 83

Invigilation 1 – Friday 23 October 1998

Takings = £784.40

Zero rated sales = £30.50

Zero rated percentage = 3.88%

Invigilation 2 – Monday 23 November

Takings = £406.60

Zero rated sales = £17.45

Zero rated percentage = 4.29%

Invigilation 3 - Wednesday 2 December

Takings = £404.60

Zero rated sales = £6.40

Zero rated percentage = 1.58%

Average zero-rated percentage = 3.88% + 4.29% 1.58%

=9.75%/3

= 3.25%

No wastage of stock was observed during these invigilations.

TONY FISH BAR
531 1079 83 Zero-rating

12/96

31. 85 – 2989.39/4371.89 = 31.62%

09/96

32. 85 – 2978.73/4728.85 = 37.00%

06.96

33. 07 – 3113.13/4688.07 = 33.59%

03/96

34. 95 – 3001.13/4737.95 = 36.65%

12/95

35. 12 – 2798.98/4549.12 = 38.47%

09/95

36. 87 – 2742.95/3311.87 = 17.17%

06/95

37. 17 – 2169.40/2618.17 = 17.14%

03/95

38. 37 – 2485.14/3000.37 = 17.17%

12/94

39. 50 – 3289.85/3972.50 = 17.18%

09/94

40. 12 – 3327.23/4017.12 = 17.17%

06/94

41. 90 – 3287.76/3287.90 = NIL

03/94

42. 57- 3204.10/3438.57 = 6.81%

12/93

43. 20 – 3436.78/3651.20 = 5.87%

09/93

44. 15 – 3194.58/3986.15 = 19.85%

06/93

45. 00 – 2978.72/3787.00 = 21.34%

03/93

46. 80 – 3065.38/3229.80 = 5.09%
47. Mr Mike Kelly, Officer, HMRC stated in his Witness Statement of 28 May 2004, that

"during these invigilations, all sales were recorded at the time of the transaction. When I examined sales figures recorded on these exercises, I found them to be consistently higher than those of the corresponding days for previous VAT periods. When I examined zero rated sales recorded on these exercises, I found them to be significantly lower than those declared on previous VAT periods. I undertook an examination of the purchase records and found that the pitta bread purchases were insufficient to sustain the level of sales of kebabs that had been observed during the invigilations. Based on a view of all the information in this case, I formed the opinion that the business had suppressed sales and had done so dishonestly".

The Appellants nor their accountants provided any satisfactory explanation to explain the difference in the figures. The accountants confirmed that no suppression had taken place.

48. During the first invigilation the officer, Mr Iain McInnes, found a Takings Book, which was marked up with "In" and "Out". This book was described in Mr McInnes' Witness Statement of 27 May 2004 as follows:

"….I also noted a cupboard open which appeared to contain various documents and other items. One of these items was a personal telephone book, which I asked Mr & Mrs Khaira if they would show me. They agreed and the book was found to contain handwritten figures headed "In" and "Out", with days of the week. The figures recorded against the dates appeared to be a takings record and purchases record. The book was uplifted from the premises for further examination". (A copy was provided to the Tribunal).

49. The figures in this Takings Book indicated a level of sales which was consistent with that found on the days of invigilation as being the daily sales which appeared to have taken place. The Appellant said that this book belonged to the previous owner of the business though Mr McInnes suggested that it appeared to be the writing of Mrs Khaira. The sales takings in the book was consistent with that during the invigilation exercises.
50. Mr Kelly had asked for some explanation why the grand totals from some 'Z' readings had been torn off. He also asked why there were two 'Z' readings taken for each day and some of them had not been passed on when requested to do so. Mrs Khaira said that they were advised to take the second reading by the accountant because their son used to play on the till, the second reading was not retained and has always showed a nil sale. The accountant, Mr Rupan, confirmed that he had never asked for this to be done but had advised that all records be retained. This contradicted the evidence of the Appellant.
51. They were also asked why they thought the sales on the days of invigilation had been significantly higher than the VAT returns. The Appellants said that this was due to school half term holidays and that the Monday and Wednesday had been higher due to the build up to Christmas. HMRC said that only one day of the days was in the half term week and not many children were in the shop at that time. They also said that the Christmas period had not yet started since the 2 December is not the Christmas period and there is no evidence from previous takings that there were more sales during the Christmas period or half term. There was no historic evidence from previous sales that these periods created significantly higher turnover for the Business. The returns submitted by the Business continued to claim a level of zero rated sales of 17% to 30% of the takings. No evidence was presented to support these figures. A 20% zero rating of sales would represent a value in excess of £4,000 per quarter or over £300 per week which is not credible in this case.
52. Mr Kelly explained the uplift method, which was used by cash teams, was a tried and tested system used for assessing in the absence of reliable figures. Mr Kelly felt that this was the best way to do the calculations and given that there were a large number of missing 'Z' readings it would have been difficult to use only the 'Z' readings. Rather a large number of 'Z' readings were taken and a cumulative total of the 'Z' readings were obtained using this together with the invigilation figures which show the percentage of suppression which had taken place. Comparing the days of invigilation with the cumulative totals on the 'Z' reading would give a rough percentage of suppression based on examination. A further set of allowances were made for seasonal changes in orders, illnesses and absences, and a percentage of zero rating for similar businesses in the area. (He explained he could not actually identify the businesses as this was a matter of confidentiality.)
53. The Appellant said that using only three days figures would be unfair. He would have preferred to have an observation over a longer period. Mr Kelly explained that the three day invigilation is standard practice since this shows a consistent level of suppression. As the figures vary greatly more work would have been done and invigilation would have taken place over a longer period. This was not cost effective in the circumstances. Mr Kelly confirmed that more than three days invigilation would only be done if the figures provided from the observations varied greatly. Mr Khaira also felt that using the figures across the Board in this matter would be unfair. Mr Kelly said that the rate of suppression is always the same so the uplift always applies across the board. Mr Khaira said this was unfair since no two quarters are the same.
54. It was also stated in evidence that Mr Copeland, an officer of HMRC, had made a test purchase at the shop and observed that not all sales were run through the till. Mr Khaira, on the 6 December, was also interviewed and he confirmed that not all sales were rung through the till.
55. The missing 'Z' readings provided a prima facie case that there was some suppression of takings. The fact that there was inconsistency between the reason given by the Appellant for taking the 'Z' readings was because the accountants requested it and the fact that their accountant, Mr Rupan, confirmed that he never gave such advice to his client, gives cause for concern. The fact that the 'Z' readings were taken daily and that the Appellants said that their children had played with the till so causing the readings to be thrown away is not necessarily conclusive of suppression having taken place. However, the invigilation days clearly shows that there was suppression. Whilst the Appellants gave their permission to the invigilation, it is clear that Mr Kelly, an officer well versed in invigilations and the calculation of uplift was using a well tried and tested method used by VAT officers across the country in cases of suppression. The three days figures would have shown a pattern in the trade's turnover and when these figures were compared to declared takings these would have provided good evidence of suppression. All calculations used by HMRC in making the comparison were arithmetically correct.
56. The cumulative totals on the till corroborated by the invigilation days shows that there was suppression. Further, in order to check the 'Z' readings provided, these were combined with a test purchase by HMRC which showed that the till was not being operated properly. The 'Z' readings were therefore not a reliable measure for sales. It was also found that in looking at the figures of the trade over a period of time since the business was established since 1988 there were no major fluctuations due to seasonal variations. Further, the assessment was not raised arbitrarily but the schedule was provided to the Appellants to comment and no reasonable and sensible comments were received. The uplift method is an established method of calculation. All uplift figures were checked internally and signed off and the calculations were also similarly signed off by Mr McInnes. A reconsideration would have been done by a Reconsideration Officer (Mr Carpenter) who would have checked the calculations and in one case he found an error which was corrected. This, together with supporting evidence about the purchase of pitta bread, the test purchases and the missing 'Z' readings suggest that the best judgment was used. The figures arrived at were arithmetically correct and the information on which the judgment was made was properly collected and assessed. The calculations and the collecting of information was honestly done and the value judgment and the information before the HMRC was to the best of their judgment. The officers involved did not pluck a figure out of the air, but sought to conduct an interpretation of the information which was properly checked at different levels within HMRC.
57. Let us now turn to the quantum.

Quantum

58. The Tribunal has to consider whether the amount of the assessment was correct. The Appellants have provided no real evidence to show that the amount of zero rating should not be more than 3.25%. The Appellant says that the assessment was based on 3 days invigilation which was not fair and a longer period should be taken in order to arrive at a proper figure. They said that there were seasonal variations due to Christmas and school holidays, but no evidence was presented to support this position. The accountant for the Appellants, Tamsons, on 25 August 1999 provided a working sheet based on current sales and applied the retail price index to March 1993 to those figures producing 8 columns of workings showing figures which the Tribunal nor HMRC nor the Appellants could provide any sensible explanation of. The figures were not properly explained by the accountants and, in particular, no explanation was provided of the last column of the working sheet detailing VAT under-declared and over-declared which seems to suggest that the previous amounts declared by the Appellants on the VAT returns were incorrect. No reliance has been placed on these figures by the Tribunal since they were not properly explained and were unclear.
59. In the absence of the Appellants providing real evidence to show that the zero rated supplies calculated by HMRC was incorrect, we are unable to accept that HMRC's calculations were incorrect. Similarly, no evidence was presented by the Appellant to explain why the sales on the days of invigilation were over 40% higher and why the business recorded its highest sales during that period. We feel that the VAT due was properly calculated by HMRC.

CIVIL EVASION PENALTY

The Law

60. The Tribunal must decide by the ordinary standards of reasonable and honest people whether what the Appellant did was dishonest. Under s.60(7) VATA 1994, the burden of so proving fell on the Commissioners. They must prove that the Appellant had done or omitted to take any action "for the purpose of evading VAT" and that "his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability)". The standard of proof is on a balance of probabilities rather than the criminal standard proof beyond reasonable doubt (see 1st Indian Cavalry Club Limited and Chowdhury v Customs & Excise Commissioners [1998] STC 293. Lord Nicholls of Birkenhead in Re H [1996] AC 563 at 586-587 observed that "the more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established". This gives further guidance on the standard of proof.
61. In the case of R.V. Ghosh [1982] All E.R 689, Lord Lane LJ said:

"It is dishonest for a defendant to act in a way which he knows ordinary people consider to be dishonest even if he asserts or genuinely believes that he is morally justified in acting as he did".

62. A person (which includes partners in a partnership) is liable to civil penalties if they do an act or omit to take any action for the purpose of evading tax and the conduct involved dishonesty. It is therefore required to establish that the Appellant knew that the omissions would be regarded as dishonest according to standards of reasonable and honest people. If the behaviour by those objective standards is considered to be honest, then a jury must decide whether, in the particular circumstances of the case, the Appellant themselves must have realised what they were doing was dishonest by those standards of dishonesty. This test was approved in the recent case of Khan v Customs & Excise Commissioners [2005] EWHC 653.
63. HMRC assert that the Appellant methodically suppressed the takings from the Business over a number of years going back to 1991. In addition to this suppression of figures, they deliberately mis-described sales made as zero rated in their liability on VAT returns submitted. They say that these actions were deliberate and intended to deceive. The Appellants have denied that they underdeclared their VAT or obstructed the investigation. They say that they were advised by their accountants to take two "Z" readings, which they did, and in any event they had no knowledge of what they were doing was wrong and there was no intention to do wrong. They say that they took professional advice and did what the professionals advised. They had no idea that the zero rating claims were high since this was not pointed out by their accountant. They said that they would be happy to repay any overstated amount since their actions were unintentional.
64. The Tribunal believes that the Appellant's dishonesty can be inferred from their conduct. Their actions suggest that they were dishonest and by standards of an ordinary person should have realised that this was the position. They were given several opportunities to "come clean" and to provide accurate information, but these were not taken.
65. There was suppression of the figures. The examination of the trader's records identified missing "Z" readings from the till with an under declaration of approximately 45%. This was corroborated by the unannounced invigilation days visits by the Cash Team staff in late 1998. There is further evidence of suppression if one looks at the Takings Book discovered by Ian McInness in close proximity to the till which contain in and out figures. These were later confirmed by Mrs Khaira as takings from the Business but they were figures for a period in the late 1980s when the shop was being run by its previous owner. The Khairas' during their interview with HMRC confirmed that purchases may not have been recorded although this was not intentional. We believe that the suppression was organised and deliberate.
66. The invigilation days by the Cash Team demonstrated that zero rated sales accounted for approximately 3.25% of takings. Whilst the Appellants admitted that they may have described sales as zero rated incorrectly, they deny this was done intentionally. The failure to maintain records and to provide clear evidence of the zero rated sales over such a long period suggests that there was an intention to deceive. Further, the claim that zero rated sales on the VAT returns were approximately 20%, with no evidence to support that figure, cannot be believed.
67. In terms of actual dishonesty, there is evidence that the partners told lies during the interview stating that their accountant had advised them to take two "Z" readings each day. This was strongly denied by the accountant (Mr. Rupan) both in writing and also during one of the interviews. The Takings Book found on the premises, which was acknowledged by Mrs. Khaira as containing sales figures, is further evidence of the dishonesty of the Appellant. The dishonesty lies in the keeping of the true sales figures in the Takings Book and the declaration of different sales figures in the VAT returns. It is the view of HMRC that the figures deception may have been going on even during the period of the previous owner. The fact that Mrs. Khaira knew what the previous owner did or did not do before they became involved with the Business would suggest that there is some continuity of the deception. It is fair to infer that the Takings Book was used on a daily basis since it was kept in a handy place and available to the people serving in the shop. Some of the partners (Mr and Mrs Khaira) attempted to destroy some of the evidence by tearing off the CGT from the bottom of the "Z" readings provided to the Cash Team when they were required for a second viewing. HMRC had copied the original and so were able to make a comparison of the figures between those which had been torn and the originals. The schedule provided by the accountants in their worksheets which use zero rated figures of 3.25% would suggest that they knew the submitted returns were incorrect.
68. The Tribunal finds that dishonesty can be inferred from the conduct of the Appellant. On the basis of the entirety of evidence presented to us, it is our finding that the allegation of dishonesty with the intention to evade tax was proved for the period covered by the assessment.

Mitigation

69. In investigating a civil evasion of VAT, there is a procedure which is followed by HMRC. This is outlined in VAT Notice 730. The procedure involves an investigating officer setting up an interview and explaining the CEP procedure and then asking for co-operation of the Appellants in establishing the VAT liability of the business. The officer will explain in some detail why HMRC believe that under-declaration arises from dishonest conduct and will provide an opportunity to the Appellant to offer an explanation as to why this is the case. HMRC will also provide an opportunity to the Appellant's advisers to provide information to rebut the assessment. HMRC would be willing to listen to a satisfactory or alternative explanation of the facts. In looking at a CEP, the penalty figure starts at 100% of the VAT alleged to have been underdeclared and this is reduced if the Appellant co-operates. An early and truthful explanation of the events will give a 40% reduction of the penalty, co-operation in establishing the true amount of arrears will give a 25% reduction and attending interviews and producing records and information will give a 10% of reduction of the penalty. The maximum reduction is 75% of the VAT underdeclared which is provided in exceptional cases.
70. In this case, this procedure was explained to the Appellants and there is a record in the interview transcript that this was understood. The Appellants chose to co-operate, provide information, attend interviews and involve their advisors in explaining the facts.
71. In accordance with the Notice 730 provisions HMRC gave a 10% reduction in the penalty. We believe this was fair.

Fairness

72. At the start of the Hearing, the Appellant (Mr and Mrs Khaira) asked for an adjournment to arrange legal representation. This adjournment was given and the Tribunal also explained that Legal Aid may be possible, but this was means tested. After the adjournment, the Appellant said that legal representation is costly and they did not have money for such representation. Counsel for HMRC asked that the Skeleton Arguments be given to the Appellants for study during a further adjournment. This was done. After the adjournment, the Appellants made a decision to represent themselves. The Appellants were asked if they needed an interpreter and this was declined. At all times during the Hearing, attempts were made to explain the procedure to the Appellants and they were given time and intervals during the Hearing.

Partnership

73. The Tribunal was asked to advise on partners in the partnership since the assessment is levied against all partners in the partnership jointly and severally. A chronology in this matter would be helpful.
74. On 2 January 1990, the VAT 1 and VAT 2 forms were completed and provided to HMRC. Section 4 of the VAT 1 form had been completed to show that the Business is a partnership. Mr Nahal was indicated to be a partner and signed the VAT 1 form. Mr Nahal and Mr Khaira completed the accompanying VAT form. Both partners have signed and dated the form as of 2 January 1990. A certificate of VAT registration was issued showing the legal entity to be a partnership. On 4 December 1991, Mr H. MacLean visited the Appellant who confirmed that there was a partnership where Mr Nahal had a 25% share and Mr Khaira a 75% share. Correspondence on 20 February 1992 and 11 September 1992 to HMRC indicated that Mr Nahal and Mr Khaira were partners. Mr Nahal was identified as a "sleeping partner" in a meeting with HMRC on 22 February 1996. On 22 February 1999, Mr and Mrs Khaira attended a meeting with Mr. Mike Kelly and Mr. Paul Williams, HMRC, and during the interview they advised that the Business is a partnership and that Mr Khaira was the controlling partner. On 28 May 1999, Mr. Mike Kelly, HMRC, spoke to Mrs Khaira who said that Mr Nahal had not been involved in the Business for seven or eight years and that the partnership now consisted of Mrs K. Singh (Mrs Khaira) and Mr T. Singh. During the tape recorded interview with Mr. Mike Kelly on 10 June 1999, both Mr and Mrs Khaira described themselves as partners in the Business and they confirmed at that time that Mr Nahal had not been in the Business since the early 1990s. On 20 August 1999, Mrs Khaira confirmed that she was a partner in the Business together with her husband and Mr T. Singh.
75. On 6 September 1999, Mr Khaira attended a tape recorded interview with Mr. Paul Williams and Ms. Anne Best, HMRC, where Mr Khaira confirmed that he had no partners in the Business and also confirmed that Mr Nahal was a partner from 1989 to around 1993 or 1994. Mr Nahal wrote to Mr. Paul Williams, HMRC, on 3 September 1999 to confirm that he had not been in the Business since January 1993. To confirm this position, the accountants were provided with a VAT 2 form for completion. This form was never actually completed by the parties. The accountant to the Appellant telephoned the Newry VAT Registration Unit to discuss the legal entity. A form of acknowledgment was sent to him which was signed by Mr Khaira in order to correct the legal status of the Business. Mr Khaira signed this form on 10 February 2000 as a sole proprietor. On 18 February 2000, an amended certificate of VAT registration was issued showing the legal entity as sole proprietor. On 16 November 2000, Mr. David Neal, HMRC, wrote to the accountants advising that he considered the change of legal entity was incorrect and that

"the actions taking during February 2000 would be disregarded as a misunderstanding of a form letter issued by Newry VAT Registration Unit. The Business would be transferred as a going concern from the partnership to Mr Khaira trading as a sole proprietor with effect from 10 February 2000. The VAT registration number would be reallocated from the partnership to the sole proprietor with effect from the same date."

76. On 25 February 2000, Mr. David Neal, HMRC, wrote to the accountants stating:

"I am pleased to see that you have confirmed that the Business was a partnership from the date of registration, namely 21 December 1989 and not as sole proprietor as you had previously suggested incorrectly. You state that Mr Nahal ceased being a partner of the Business from 1993. However, this again is inaccurate and Mr Nahal has declared himself a partner in the Business up until 5 April 1997 including receiving 25% of the profits. I am not absolutely sure what this refers to? Mr T. Singh joined the partnership with effect from 1 July 1997 and, I presume, remained a partner until his death in August of last year. May I take this opportunity to offer my condolences to the relevant parties on receipt of advice of his passing. Mrs Khaira's position is still unclear. She has on a number of occasions represented herself as "partner of the Business" and stated that the partnership documentation has been signed by her and has been left with their accountant. The Newry VAT Registration Unit, following correspondence sent by you, amended the registration details in December 2000 incorrectly changing the legal entity to a sole partnership from the date of registration. I responded to this letter on a number of occasions and requested that you advise the registration unit of the correct details. However, none was received. If the Business is to be continued following Mr Singh's death, you will need to confirm the details of the legal entity post-August 2001 in writing to Newry VAT Registration Unit".

77. The accountants wrote to the Newry VAT Registration Unit on 20 February 2003 stating that the company had ceased trading on 31 March 2003. On 25 February 2003, Newry VAT Registration Unit wrote to the Appellants stating that their VAT registration was cancelled on 31 March 2003. It should be noted that between 1989 to 1998, the accountants posted accounts to HMRC stating Mrs. Khaira and S. Nahal trading as Tony "Fish Bar".
78. In English law, a partnership, or firm, is not a legal entity but is defined as "the relation which subsists between persons carrying on business in common with a view to profit" (see Partnership Act 1890, s.1(1)). In this case, it is clear that Mr. S.S. Nahal and Mr Khaira are partners since they have been registered as partners under the VAT 1 form and VAT 2 form. It is also correct that Mr T. Singh became a partner in the Business some time around 20 May 1999 until his death in August 2001.
79. While the Appellants argue that Mr S.S. Nahal ceased being a partner in the Business since January 1993, a person who has ceased to be a partner continues to be regarded as a partner for VAT purposes (and certainly for the purposes of VAT liability) until the date on which the change is notified to HMRC (see s.45(2) VATA 1994). It is clear, therefore, that Mr Khaira, Mr T. Singh (until his death) and Mr S.S. Nahal were partners in the Appellant. They are therefore jointly and severally liable for all debts and jointly and severally liable for the obligations of the firm which arise whilst they were members. On the death of Mr T. Singh, his estate would be severally liable for such debts so far as they remain unsatisfied.
80. We do not believe that Mrs Khaira was a partner in the Business since her role was akin to that of an employee. She did represent herself at various times as a partner. We understand that it is possible to argue that she was "held out" as a partner at certain times in the dealings between the Appellant and HMRC. However, if one looks more closely at the relationship between herself and her husband and Mr Nahal and Mr Singh, it would be correct to classify her role as that of an employee who ran the shop, operated the till and dealt with the accountants after completing her day job. She was more proficient in English than her husband and her role appeared to be that of a liaison person between advisers and her husband. We do not therefore believe that she was a partner in the Business for the purposes of this assessment.

Conclusion

81. For the reasons given above, this appeal should be dismissed. Any issue of costs will be addressed in a separate application, if made.
DR KAMEEL KHAN CHAIRMAN RELEASED: 6 April 2006

LON/00/1111