[2009] UKFTT 244 (TC)

TC00193

VAT — Indian restaurant — assessments to tax allegedly undeclared — whether assessments to best judgment – yes- whether quantum should be reduced — on facts — yes —appeal substantially dismissed
Civil evasion penalty — penalty mitigated by 10 per cent for Appellant’s co-operation in determination of true liability to tax — whether HMRC established on balance of probabilities that appellant dishonestly evaded tax in failing to declare true value of takings — yes — mitigated penalty as reduced in line with tax assessment confirmed — appeal substantially dismissed

FIRST-TIER TRIBUNAL (TAX CHAMBER)

 	MAKHISUR RAHMAN t/a
					  THE VICEROY INDIAN RESTAURANT	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:  Judge David Demack 
                   Alban Holden
                   Susan Stott FCA, CTA	 
					
Sitting in public in Manchester on 15 October 2007 and 19 May 2009							

Mr Taher Nawaz, charted accountant, of Bradford for the Appellant 
 
Mr Jonathan Cannan  of counsel instructed by the General Counsel and Solicitor to Her Majesty’s Commissioners for Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2009
DECISION

1.	This is an appeal by Makhisur Rahman (“Mr Rahman”) who during the period relevant to this appeal carried on the business of a restaurant and takeaway under the style of The Viceroy Indian Restaurant, at Golden Hill Lane, Leyland, Lancashire, against a notice of assessments to VAT and against an assessment to a civil evasion penalty.  The assessments to tax are in the sum of £49,677 and the penalty assessment in the sum of £44,704, the latter sum representing 90 per cent of the tax assessed.  Mr. Rahman was awarded 10 per cent mitigation in the full penalty assessment of 100 per cent of the tax allegedly evaded for his co-operation in the determination of his true liability to tax.
2.	In the statement of case served on 29 June 2003, the Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”), set out the grounds upon which they made their decision to assess Mr Rahman to tax as follows:
“3.	Officers of Customs and Excise initially visited the Appellant’s [Mr Rahman’s] premises on 29 January 2001 to draw up a seating plan of the restaurant. A programme of test purchases was then undertaken on Friday, 16 February 2001 and Saturday, 28 April 2001. During the officers’ test purchase visits, observations were recorded in the officers’ logs.
4.	An officer subsequently visited the Appellant on 18 June 2001, during which the Appellant was interviewed and a “restaurant questionnaire” was completed by the Appellant. During the meeting the Appellant advised that he was usually responsible for control of the takings and that he completes the business records and signs the VAT returns.
5.	Following the visit, on 20 June 2001, the Appellant’s records were uplifted for analysis by the Commissioners. The declared meal bills for 16 February 2001 and 28 April 2001 were compared to the officers’ observations and test purchases on those dates, the results of which were as follows:
(a) 16 February 2001 – the officers had observed 79 sit-in meals including their own (which amounted to 10) and 11 takeaway meals, of which the Appellant had declared 48 sit-in meals (including 4 of the officers’ purchases) and 3 takeaway meals
(b) 28 April 2001 – the officers had observed a total of 141 eat-in meals (including 10 officer purchases) and 16 takeaway meals, of which the Appellant had declared 50 sit-in meals (including 2 officer purchases) and 5 takeaway meals.
6.	Further test purchases were subsequently completed on Wednesday, 15 August 2001 and Thursday, 20 September 2001, following which the declared meal bills for those dates were analysed. It was established from the analysis that: 
(a) on 15 August 2001, of the 20 sit-in meals (including 10 officer purchases) and 5 takeaway meals observed by the officers, the Appellant had declared only 10 sit-in meals in total (including 6 of the officers’ purchases) and no takeaway meals
(b) On 20 September 2001, of the 19 sit-in meals (including 11 officer purchases) and 2 takeaway meals observed by the officers, the Appellant had declared 11 sit-in meals (including all of the officers’ purchases) and no takeaway meals
(c) In addition to comparing declared meal bills to the officers’ observation, the officer also analysed 6 separate weekly declarations of takings to establish the average cost of an eat-in and takeaway meal.
7.	The Appellant attended for interview on 15 May 2003 and signed a question sheet stating that all the books and records relating to the business were correct, all the VAT returns rendered by him were correct and that no transactions had been omitted from the records. During the course of the interview the Appellant did not offer any explanation for the irregularities found by the case officer
8.	From information obtained by the Commissioners it appeared to them that the returns rendered by the Appellant were incomplete or incorrect in that output tax was underdeclared.
9.	Consequently on 20 June 2002, on the basis of all the information available and otherwise in exercise of their best judgement, the Commissioners issued an assessment to VAT for the period 1 February 1999 to 31 October 2001 in the sum of £49,677.
10.	Subsequently, the Commissioners issued a Notice of Assessment to Penalty on 28 January 2003 in the sum of £44,704, allowing for mitigation of 10%”
3.	By section 60 of the Value Added Tax Act 1994 (“the 1994 Act”), under which the penalty assessment was made, it is for the Commissioners to prove dishonest evasion of tax on the part of Mr Rahman.  The allegations they make in that behalf, as contained in the statement of case, are as follows:
	“11.	The Commissioners rely on the following facts to prove dishonesty in this matter:
(a)	the extent and nature of the underdeclared sales as evidenced by the test eating programme undertaken by officer of the Respondents;
(b)	the extent and nature of the underdeclared sales as evidenced by the observations made by officers of the Respondents;
(c)	the close control exercised by the Appellant over the business;
(d)	the close control exercised by the Appellant over the business records;
(e)	the Appellant is solely responsible for cashing up and completes the daily record sheets himself;
(f)	the Appellant has stated that on most nights he has sole responsibility for reconciliation of the meal bills with the monies in the till drawer;
(g)	the information used for completion of the VAT returns is passed to the accountant by the Appellant; 
(h)	the Appellant has confirmed that he has not identified any problems in respect of theft by members of staff.”
4.	In its Notice of Appeal against the tax assessments, given on 17 July 2002, Mr Rahman claimed that “The Assessment seems to be based on observations which defy logic. Only the briefest details have been received so far and further comments may be made when further evidence is provided by the Respondents.”
5.	The Defence was served on 21 August 2004. The relevant parts of it read as follows:
“2.4  The commissioners do not indicate what precisely leads them to believe that they have the correct numbers of diners declared or that people coming into the restaurant were diners and definitely had full meals as is being implied when it is often the case that large numbers of people come in, possibly for a takeaway and get counted both as takeaway customers and diners, or come in to discuss arrangements for a future party, or just come in to accompany others, as is a not too frequent occurrence.
2.5 The Commissioners have been repeatedly asked for the original notes made by the officers of diners in the restaurant. Instead, we have questionnaires which were inevitably completed afterwards. This causes prejudice to the appellant who cannot check the voracity (sic) of the evidence being presented. For instance, there have been many occasions where Customs officers have managed to observe two to three times the capacity of the restaurant as dining within it. Such aspects cannot be examined in the instant case.
2.6 There are instances where customers for takeaways sit and wait at a table, perhaps with a complimentary drink and it is inevitable that such people will not only have been included as potential diners but also duplicated as takeaway customers.
2.7 Customers going out with “doggy bags” containing leftovers will have been counted as takeaway customers potentially because they were taking out a carrier or container.
2.8 The questionnaires suggest the possibility of duplication and it is not clear which officers have included Customs officers and which have not. There are apparent differences, which cannot be checked as there are no details as to which party has been deemed to have consumed a meal.
2.9 There is no evidence to suggest that anyone has been excluded when it is obvious that suppliers (and others) calling in for payment or orders may be invited to have a complimentary starter or even a meal whilst they wait for payment.
2.10 The respondents generally assume that the numbers noted on meal bills equate to “declared” customers. That is not only palpably false but in this instance the appellant advised them, at interview, that meal bills declared parties, not diners. It is often the case that a couple can arrange to meet another at a restaurant. The first couple, possibly unsure as to when the other party might join, would agree to go to their table and the waiter would insert “2” as being the number of diners. When the other party joins the waiter is unlikely to alter the “2” to “4”. Such an instance has been seen in the case of two customs officers joining another two, to have a meal which they acknowledge was consumed by four people, yet the meal bill continued to reflect the original two that were there.
2.11 The appellant puts the commissioners to strict proof and asks them to provide full proof of wrongdoing.
3. On the four days of observation Customs meals amount to over 20% of the projected value. Indeed, on two of the days, Customs’ meals accounted for 58.91% and 65.57% of the projected value of the meal bills – more than half, or potentially two-thirds of the entire custom for the day! There does not appear to be a provision to exclude such meals.
4. As the assessments are not agreed the penalties are disputed.”
6.	Mr Rahman served an Additional Defence in which, inter alia, he claimed that invigilation would have proved a much more accurate way of calculating any underdeclations of takings; that officers had denied finding any irregularities beyond those said to have been revealed by the observations exercise; that the results of the exercise were “completely incredible”, and took no account of the large number of non-diners visiting the restaurant; that since the officers meals accounted for 25 per cent of those served on the dates of observation and were paid for in cash, it gave “that much more opportunity for any less than honest member of staff to do away with takings on exceptional days”; the officers could not possibly have overheard takeaway orders as there was music in the restaurant; and it could not possibly have had full sittings as suggested mainly by officers visiting just before it closed; and that “there would be many occasions when there would be visitors such as suppliers coming to discuss orders or for payment as they could only do so during opening hours.  Often they would be accompanied and there would be many occasions when they would be asked to sit at a table and given a complimentary drink, or a starter or even a whole meal. This would also apply to jobseekers, friends of staff or those of the appellant and salesmen who might have wished the appellant to see their merchandise”. 
7.	Before us, Mr Rahman was represented by his accountant, Mr Taher Nawaz, and the Commissioners by Mr Jonathan Cannan of counsel.  They presented us with three bundles of copy documents, and we took oral evidence on oath from the following witnesses:
Ronald Edward Grace, Susan Worsley, Michael James Downer, David James Johnson, Yvonne Bridget Gerrard, Keith Park, Antony Harold Bradshaw, Gordon Ernest Smith, Alan Ward, Helen Coar, Yvonne Bridget Gerrard, Stephen Rimmer, Alan Ward, Angela Smith and David Warwick all of whom are, or were in 2001, officers of what was then HM Customs and Excise; and Mr Rahman, the appellant.
We also had the benefit of the witness statements of the following officers of the Commissioners, the officers in question not being required to attend the hearing: 
Peter Joseph Shorrock, Kristina Jane Partington, Paul Dean Critchley, Philip John Harold, June Elizabeth Forster and  Susan Victoria Pratt
8.	We now turn to deal with the evidence, and to make findings of fact based thereon.
9.	The Viceroy is a single storey restaurant which would appear in the past to have formed part of the adjoining public house, The Queens Hotel. At all times material to this appeal, Mr Rahman was its sole proprietor. He had been its owner, or at times part owner, since 1987, and had had experience of the catering industry for some 10 years before that.  The Viceroy fronts to Golden Hill Lane, Leyland, in an area of the town containing quite a number of  restaurants and takeaways. The Viceroy opened 7 days a week, the opening hours being 17.00 to midnight each day, except for Fridays and Saturdays when it closed at 1am. Mr Rahman held a restaurant licence which allowed him to serve alcohol to those partaking of food until 23.00 on nights other than Fridays and Saturdays, and on those two nights to midnight.  Mr Rahman maintained that it was necessary to close the tandoors half an hour before the restaurant closed to enable them to cool down, and during that half hour the only food served  was cooked by electricity. Consequently, he claimed that only snacks were served in that time, such snacks including chips. We shall deal with that claim later in our decision.
10.	The Viceroy was (and is) capable of seating 74 diners at 19 tables. In the standard arrangement, the tables were arranged in three rows running the length of the restaurant. Two rows, containing 4 and 9 tables, ran alongside the internal walls; the third ran down the centre of the restaurant, and (including two tables at the rear which were placed alongside a wall) contained 6 tables. In that arrangement none of the tables was capable of accommodating more than 6 people, so that to seat larger parties and on occasion simply to accommodate customers the tables were re-arranged to some extent.
11.	Immediately beyond the vestibule inside the front door to the right was the bar, which also served as the cash desk. And nearby, to the left fronting to Golden Hill Lane, was a lounge area containing a single table used to accommodate waiting customers and others. The kitchen was at the rear of the restaurant, as were the toilets. Between the second and third tables on the right hand side was a small cloakroom.
12.	Between the bar and the lounge, at the head of the centre row of dining tables was a waiter station or counter. It had a canopy whose supports might, to a very limited extent, have obstructed the view of some observing officers. Mr Rahman claimed that a potted tree or shrub positioned between the second and third tables in the centre row would also have substantially obstructed the observing officers’ views of customers. Even if there was such a tree or shrub, and we are not satisfied on the evidence that there was, we doubt that it would have obstructed the views of the officers to the extent that it affected their observations.
13.	The tables running alongside the walls of the restaurant were separated by partitions about 4 feet high. Much was made of their height by Mr Rahman, he claiming that it would have been very difficult for the observing officers to have counted the numbers of customers in what he described as cubicles. He further claimed that where two customers occupied such tables they invariably sat against the wall. Miss Stott disclosed that she found it difficult to accept that that was always the case, saying that if she were to be seated in such a cubicle she would place her handbag on the seat against the wall for security purposes and occupy the outer one. We accept that the partitions may have made the officers’ job more difficult, but nothing more.
14.	Orders were taken by waiters on order pads. The pads contained order forms in duplicate, the first copy eventually becoming the meal bill, and the second being sent to the kitchen as the instructions for preparation of meals. The second copy of each bill was subsequently destroyed. On each meal order form the waiter noted the table number, the number of covers, and the meals ordered. The same order pads were used for takeaway sales, such sales being identified by the order being marked “Out”. We note, and find, that if a customer were to take his meal bill with him, Mr Rahman would have had no documentary record of the meal provided.
15.	Mr Rahman accepted payment for supplies made in cash, by cheque and by credit or debit card. All the observing officers paid for their meals in cash and on leaving did not take their meal bills with them.
16.	He had no till. All monies taken were placed in a drawer in the bar area together with the meal bills. Slips for “snacks” were kept in the drawer but, after aggregation every few days, were destroyed.
17.	Mr Rahman’s sales records were rudimentary in the extreme. They consisted of the bills referred to at [14] above, all of which were unnumbered and undated, and  weekly sheets of takings. The numbers of covers on the bills sometimes agreed with the true numbers of diners to which they related, as confirmed by the officers’ observations and/or the content of the bills themselves. On other occasions, the content of the bills clearly indicated that they related to a number of diners different from that recorded. Mr Rahman maintained, but we do not accept, that the numbers of covers on the bills related to the number of the party. The bills contained no mention of Mr Rahman’s VAT registration number.
18.	As part of his cashing up process, Mr Rahman recorded the total of each day’s bills on the final bill for the day by noting the figure on its reverse side together with a figure for “bar” sales. “Bar” sales did not represent sales of drinks, but rather sales of takeaway snacks for which no invoice had been prepared.
19.	At the end of each week Mr Rahman recorded his total purchases and sales for the period on a sheet prepared by his then accountants, THR, which resembled a page from a Simplex D cash book. 
20.	A visiting officer noticed that Mr Rahman’s purchase records differed from the sales records of two of his suppliers. Consequently, in his capacity as the officer responsible for the Viceroy, Mr Bradshaw decided that the Commissioners should undertake a programme of covert observations and test eats at the restaurant. In order to prepare for that exercise, Mr Bradshaw arranged for officers A Smith and K Park to visit the Viceroy on 29 January 2001 and directed them to prepare a seating plan for use in future observations. 
21.	Mr Bradshaw then organised such a programme. It included both observations and also required visiting officers to partake of meals so that checks could later be made to see whether all such meals had been declared.  Each group was required to note on a copy of the seating plan the number of persons at each table, and to complete a questionnaire entitled “Internal Observations Record” containing information about the visit. At question 36 of the Questionnaire the observers were asked, “Did you observe anyone occupying a table but NOT taking a meal?” Mr Nawaz submitted that that was hardly the equivalent of asking whether all dined. In our judgment, the question was put quite fairly and dealt with those who might be in the restaurant but not partaking of food.  Each group entering the restaurant were instructed to count themselves as customers and to continue counting those entering and taking seats to dine until the following pair of officers entered and were seated, whereupon the following pair would continue the count. All were to pay for their meals in cash.
22.	  The notes on the seating plans and the questionnaires were usually completed by different officers, and all were noted as having been completed and signed shortly after the officers left the Viceroy. In addition a few officers made entries in their notebooks but most did not, relying upon their memories and the recollections of their colleagues to complete the required documents. Most of the officers involved in the exercise were well used to carrying out observations and test eats of the type undertaken.
23.	On 16 February 2001, a Friday, five groups of officers operating in pairs dined at the Viceroy. Each pair was provided with a copy of the seating plan prepared after the January visit and a questionnaire. As we have mentioned, the officers were particularly instructed to note any persons observed in the restaurant who were not partaking of food.  Officers R Grace and S Worsley entered at 17.16 and left at 18.55. Whilst they were there no ordinary customers, i.e non-Customs officers, entered to dine, but they noted 2 takeaway sales. They were followed at 18.35 by officers K Park and G Smith who stayed until 20.25. During their stay they noted 9 ordinary customers entering to dine and 4 takeaway sales. The third group of officers, K Partington and Y Gerrard, entered at 20.05 and left at 22.00. They recorded 6 diners as entering and one takeaway sale. A Ward and D Warwick formed the fourth group of officers to attend that night. Their time of entry was 21.45, and that of departure 23.32. They noted 22 ordinary dining customers as having entered, but observed no takeaway sales. The final group of officers involved in observations, M Downer and D Johnson, entered at 23.20 and left at 00.55. They noted 26 diners as having entered, and 4 takeaway sales. All the officers paid for their meals in cash.  Subsequent examination of Mr Rahman’s bills for that night showed that of the officers’ bills only that for officers Park and G Smith’s meal had been declared. The bill for officers’ Downer and Johnson qualified for a Hilife discount of £13.90. (Mr Nawaz was later to claim that the Commissioners’ failure to produce this bill when Mr Rahman was interviewed prevented him, Mr Rahman, being able to challenge the bill as having been endorsed by himself as qualifying for discount. There was nothing to prevent such challenge taking place in tribunal, but the opportunity was not taken advantage of).  None of the officers noted persons entering and taking seats who did not partake of a meal.
24.	The observation record for Saturday, 28 April 2001, was the one on which Mr Nawaz focused most of his attention, claiming that the total number of diners recorded, 141 (including all the officers concerned), was so high that Mr Rahman found it impossible to believe. As the number proved so contentious, we include in a Schedule to our decision an analysis of the officers’ observations prepared by Mr Nawaz.  The analysis is self-explanatory. Again all the officers paid for their meals in cash.  On this occasion, subsequent analysis of Mr Rahman’s records showed that only one of the five officers’ bills had been declared, again that of officers Downer and Johnson.  None of the officers noted persons entering and taking seats who did not partake of a meal.
25.	On 18 June 2001 Mr Bradshaw visited the Viceroy and interviewed Mr Rahman. Whilst there he also completed what he described as a cash team questionnaire. Amongst the questions put to Mr Rahman was one relating to cashing up. Mr Rahman claimed that that operation was carried out either by himself or a “trusted waiter”. Although the questionnaire made provision for Mr Rahman to sign it, it appears that he was not invited to do so. We do not regard that omission as serious.  Mr Rahman was on notice as a result of that visit that the Commissioners were interested in his affairs.
26.	On 20 June 2001 Mr Bradshaw attended the offices of Messrs THR, Mr Rahman’s then accountants, in Preston in order to inspect Mr Rahman’s books and records and to analyse the VAT declarations he had made. It became obvious to Mr Bradshaw during that visit that there were major discrepancies between what the observing officers had recorded on the two nights of observation and the bills declared by Mr Rahman.
27.	As a result, Mr Bradshaw decided to extend the programme of covert observations at the Viceroy and, in order to establish a fair representation of the extent of the true discrepancies, he decided that two further nights of observation should take place on days likely to be less busy than Fridays and Saturdays. Consequently, he chose a Wednesday and a Thursday. 
28.	On Wednesday, 15 August 2001, four groups of officers visited the Viceroy, again operating in shifts, and on this occasion covering the period from 17.35 to midnight. Only three of the groups observed any genuine customers, and then the total number was a mere 10. They also observed 5 takeaway sales. Once more all the officers bills were paid in cash.  Subsequent examination of  Mr Rahman’s records showed that only two of the four officers’ bills had been declared.
29.	The fourth day of observations, Thursday, 20 September 2001, was even quieter than the third day. Four groups of officers observing between 17.45 and 00.03 noted but 8 genuine diners and two takeaway sales. Yet again the officers’ bills were paid in cash. On this occasion all the officers’ bills were subsequently declared by Mr Rahman, but not one of the ordinary customers’ bills.
30.	Mr Rahman accepts, and we find, that the officers’ bills which were not declared were suppressed. He maintains that suppression was due entirely to thefts of cash by his employees. We shall deal with his claim in that behalf later in our decision.
31.	On 3 January 2002 Mr Bradshaw again visited the offices of Messrs THR to inspect Mr Rahman’s books and records, and to analyse his VAT declarations. He advised the accountants that he had identified apparent discrepancies and that the Commissioners would be uplifting the records for further analysis. Uplifting of Mr Rahman’s records for periods 07/01 and 10/01 took place a few days later. (With the exception of bundles for the weeks commencing 13 August 2001 and 17 September 2001, which the Commissioners retained, the remaining documents uplifted were returned to Mr Nawaz on 18 November 2002).
32.	On 15 May 2002 Mr Rahman was interviewed under Notice 730 by Mr Shorrock in the presence of his then accountant, Mr Humphrey Johnson, at the last mentioned’s  offices. Mr Rahman was told that he was being invited to co-operate with the Commissioners in the determination of his true liability to tax, that he need not co-operate, and was free to leave the interview at any time. Mr Shorrock was in some difficulty in carrying out the interview in that Mr Bradshaw was away sick at the time and had not passed on to Mr Shorrock certain records that he, Mr Shorrock, should have had. Mr Rahman was also told that the Commissioners would disclose the information they had which pointed to his having suppressed takings. Mr Rahman denied having suppressed takings and expressed incredulity at the number of diners recorded as having been present in the restaurant on 28 April 2001. He informed Mr Shorrock that he was responsible for cashing up, and was not aware of any of his employees having stolen any money from the restaurant. A point was made of the fact that some of Mr Rahman’s records produced by Mr Shorrock were photocopies of the originals. We do not regard that fact as being of importance. 
33.	Analysis resultant on detailed examination of Mr Rahman’s records led to the Commissioners making the tax assessment now under appeal. It is based on the application of an uplift factor applied to Mr Rahman’s declared takings. The factor was established by Mr Bradshaw multiplying the average price of a declared cover (meal for one) calculated by reference to Mr Rahman’s own takings declarations over a six week period by the number of non-declared covers he had determined. In order to be fair to Mr Rahman, where officers’ meals had not been declared, Mr Bradshaw took the actual value of those meals, and not the established average price, for introduction into his calculation of the uplift factor.  
34.	To arrive at the average cost of a meal and takeaway sale, Mr Bradshaw took  Mr Rahman’s declarations for the six separate weeks ended on 18 February 2001, 29 April 2001, 5 August 2001, 26 August 2001, 9 September 2001, and 28 October 2001, presumably choosing them at random. The meals supplied in those weeks were declared at £11,468.25, and the number of covers 943. Dividing the former figure by the latter, and rounding it down to the nearest whole number, Mr Bradshaw arrived at the average cost of a meal of £12. The takeaway sales declared totalled £1500.85, and their number 96. Again dividing the former figure by the latter, and rounding it down to the nearest whole number, Mr Bradshaw calculated the average cost of a takeaway at £15. We note that in making those calculations Mr Bradshaw ignored declared bar takings of £545.55. (But even had he added that figure to the declared meal takings before dividing the aggregate by the declared number of diners, the rounded down figure would just have remained at £12). Mr Bradshaw calculated that 84.86 per cent of Mr Rahman’s supplies were represented by diners meals, and 11.11 per cent by takeaway sales. 
35.	As we mentioned earlier, Mr Nawaz focused much of his attention on the observation records of 28 April 2001. It is, therefore, appropriate that we too devote special attention to those records. At Annexe 4 of his calculation of the tax assessed, Mr Bradshaw calculated the uplift factors he was to use on the value of supplies made on that date, as follows:
	“			OBSERVED RATE OF SUPPRESSION 28.04.01
	A	Number of covers observed (including HMC&E)		141
	B		Number of HMC&E included in A				10
	C	Number of covers declared (including HMC&E)			60
	D	Number of HMC&E covers not included at C			8
	E		Total value of declared meal bills				£767.40
	F		Actual value of HMC7E meals at D				£127.35
	G	Projected value of off record meals (none HMCE) A-(C+D)*£12	£876
	H	Total value of off record meals			F + G		£1,003.35
	I		Projected actual value of declaration		E+H		£1,770.75
	J		Projected rate of suppression			H/I		56.66%
	K	Rate of declaration				E/I		43.34%
	L		Uplift factor					1/K		2.307
						TAKE AWAYS
	M	Number of takeaways observed					16
	N	Number of takeaways declared					5
	O	Total value of declared take aways				£96.55
	P		Projected value of off record take aways		M-N*£15	£165.00
	Q	Projected actual value of declaration		O+P		£261.55
	R	Projected rate of suppression			P/Q		63.09%
	S		Rate of declaration				O/Q		36.91%
	T		Uplift factor					1/S		2.71”
36.	Then, applying a method identical to that he used on the records of 28 April 2001 to the records of the remaining three days of observation, and taking the average of the declarations for all four days, Mr Bradshaw determined an uplift factor for meals of 1.992 and for takeaways of 3.59 to calculate the tax which was subsequently assessed on Mr Rahman. 
37.	Subsequent to Mr Rahman’s interview on 15 May 2002, Mr Shorrock recommended that a section 60 penalty be imposed on Mr Rahman but be mitigated by 10 per cent for his attendance at interview and production of his records. The section 60 penalty assessment, notified on 28 January 2003, was made on the recommended basis. 
38.	Next, we deal with the law applicable to the tax assessments in cases such as the instant one. Where it appears to the Commissioners that a taxpayer has made incomplete or incorrect VAT returns, by section 73 of the 1994 Act they may assess the amount of VAT due from him to the best of their judgment and notify it to him.  For many years the tribunals adopted a two-stage approach  in dealing with appeals against such assessments; they dealt first with the question of whether the Commissioners had exercised  best judgment  in making the assessment and, only if they had, did they go on to deal with the quantum of the assessment. That approach appeared to be the consequence of the judgment of Woolf J in Van Boeckel v Customs and Excise Commissioners [1981] STC 290. However, the approach was strongly condemned by Carnwath J in Rahman (trading as Khayam Restaurant) v Customs and Excise Commissioners [1998] STC 826 at 835 where he said that the tribunal should not treat an assessment as invalid merely because it disagreed as to how the Commissioners’ 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’... Short of such a finding, there is no justification for setting aside the assessment.”
39.	The judgment of Woolf J in Van Boeckel  was referred to with approval by the Privy Council in Bi-Flex Caribbean Ltd v Board of Inland Revenue (1990) 63 TC 515, in which the Council  said :
“The element of guess-work and the almost inevitable inaccuracy in a properly made best of judgment assessment, as the cases have established, do not serve to displace the validity of the assessments which are prima facie right and remain right until the taxpayer shows that they are wrong and also shows positively what corrections should be made in order to make the assessments right or more nearly right. It is also relevant, when considering the sufficiency of evidence to displace an assessment, to remember that the facts are peculiarly within the knowledge of the taxpayer.”
40.	At paragraph 29 of his judgment in Rahman (t/a Khayam Restaurant) v Commissioners of Customs and Excise (No.2) [2003] STC 150, Chadwick LJ opined:
“Therefore it is important to come to a conclusion as to what are the obligations placed on the commissioners in order properly to come to a view as to the amount of tax due, to the best of their judgment. As to this, 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 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 will be readily available to the taxpayer, but it will 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 of carrying 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.”
41.	At paragraph 36 of his judgment in Rahman (No 2) Chadwick LJ added:
“But the fact that a different methodology would, or might, have led to a different—even to a more accurate—result does not compel the conclusion that the methodology that was adopted was so obviously flawed that it could and should have had no place in an exercise in best judgment.”
42.	In 2004 that judgment was followed by further advice from Carnwath LJ in Pegasus Birds Ltd v Customs and Excise Commissioners [2004] STC 1509.  He said:
“..I would make four points by way of guidance to the Tribunal when faced with ‘best of their judgment’ arguments in future cases;
i)	The Tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material proerly available to it, the burden resting on the taxpayer. In all but very exceptional cases, that should be the focus of the hearing, and the Tribunal should not allow it to be diverted into an attack on the Commissioners’ exercise of judgment at the time of the assessment.
ii)	Where the taxpayer seeks to challenge the assessment as a whole on ‘best of their judgment’ grounds, it is essential that the grounds are clearly and fully stated before the hearing begins.
iii)	In particular the Tribunal should insist at the outset that any allegation of dishonesty or other wrongdoing against those acting for the Commissioners should be stated unequivocally; that the allegation and the basis for it should be fully particularised; and that it is responded to in writing by the Commissioners. The Tribunal should not in any circumstances allow cross-examination of the Customs officers concerned until that is done.”
(We need not deal with the fourth point).
43.	It is against that legislative and jurisprudential background that we now turn to deal with the submissions of Mr Nawaz. He submitted that the table plans as endorsed with customer numbers and the questionnaires completed by the observing officers were unlikely to be a true record of events, most of the officers not having made a contemporaneous note of their observations and actions.  He further maintained that their recollections were unlikely to be accurate so that their notes should be treated with great caution.  We should say at this point that the evidence of the officers varied from very good to reasonably good; but in our judgment all of them were honest and went about their observation and test eating duties strictly in accordance with the instructions given to them. There were discrepancies in their evidence, but only such as we might have expected where the observations were carried out in some cases 6 years and in other cases 8 years before the officers came to give evidence.   (We record that on a number of occasions in cross-examination Mr Nawaz accused officers of being dishonest. We indicated that we were not prepared to allow cross-examination on that basis (see the judgment of Carnwath LJ in Pegasus Birds Ltd supra)). The officers’ evidence of their observations having been tested in cross-examination, and been found to be supported on every occasion it could be related to one of Mr Rahman’s own bills (so that the officers’ recollections of events were substantially confirmed to be correct) on the balance of probabilities we find the table plans and questionnaires truly to reflect the officers’ observations.  In so concluding we have taken account of Mr Nawaz’s submission that the Commissioners’ records may have contained errors. We accept that they probably did so.  Indeed,  in two cases, errors were freely acknowledged: in the one case by the officers responsible for a  table plan for 15 August 2001 (page 92 of the bundle) who altered it and initialled the alteration; and in the other, it is plain that the officers marked the wrong table as having been occupied, and corrected their error (page 195).  However, as the Privy Council observed in the Bi-Flex case, the assessments are prima facie right and remain right until the taxpayer shows that they are wrong, and they are bound to contain an element of guesswork and almost unavoidable inaccuracy.  We have also taken account of Mr Nawaz’s claims that the restaurant had a variety of visitors who could not be classified as its customers. None of the evidence adduced points to his claims in that behalf having any foundation. We have also taken account of submissions that it would have been impossible for Mr Rahman to have served as many as 141 persons on a Saturday since the restaurant would have been” fully occupied”  had it been 55  per cent full.  Mr. Nawaz’s argument in that behalf took the following form. A full sitting is not one where all the seats are occupied; that almost never happens as strangers do not like sharing tables with others. In practice a full sitting is one where between 50 to 60 per cent of the seats are occupied, 55 per cent being the average. No justification for that claim was put forward by Mr Nawaz and, whilst accepting that people do not in general wish to share tables with strangers, we do not accept that Mr Nawaz’s average is any basis for calculation of the numbers in the Viceroy on 28 April 2001. He also claimed that on busy nights at weekends two hours per customer must be allowed for consumption of a meal. Again, he produced no evidence to support the claim. Using those figures, together with the assumptions that the Viceroy did not cater for customers arriving after “pub closing hours” (which we totally reject on the basis of the officers’ evidence) and that most people would have placed their orders before midnight (which we too reject on the basis of the officers’ evidence), Mr Nawaz sought to demonstrate that 141 customers could simply not have been accommodated on that evening. In contrast, we have Mr Nawaz’s own analysis of the officers’ observations on that evening which clearly demonstrates to our satisfaction that 141 customers could have been, indeed were, accommodated.  
44.	As we mentioned earlier in connection with the contents of the Additional Defence, Mr Rahman claimed that the officers’ observations took no account of visitors to staff living on the premises, suppliers, customers calling to make party bookings, persons provided with complimentary drinks and food, and other non-diners.  In his submissions, Mr Nawaz repeated Mr Rahman’s claims in that behalf. Mr Nawaz also repeated claims that other visitors did not partake of meals, many shared meals, and it was implicit that yet others simply purchased and consumed drinks. In the last mentioned connection, we note that Mr Rahman held a restaurant licence which allowed for the supply of alcoholic drinks only to those partaking of food. Consequently, in our judgment, if officers observed a person in the restaurant consuming a drink, they were entitled to assume that he or she was a genuine customer.  Further, Mr Nawaz submitted, the observing officers had noted no customers taking “doggy bags”, so that some such parcels must have been confused with takeaway meals.  We reject Mr Rahman’s evidence in that behalf finding on the balance of probabilities that no such persons were included in the Commissioners’ officers’ counts. We ignore the observations of the last two nights of observations in dealing with this submission as the number of persons observed in the restaurant on those days was so few as to be unlikely to have included anyone mistakenly identified as a diner or takeaway customer. As to the remaining nights, when the restaurant was very busy, we find it impossible to believe that visitors, suppliers and anyone else not qualifying as a true customer would have been welcome; they would have proved an unnecessary hindrance to the operation of the restaurant. Further, we consider the possibility of persons such as suppliers and their representatives calling to take orders or collect monies due to them on Friday or Saturday evenings, as Mr Nawaz submitted happened, as so unlikely as to be unworthy of serious consideration. On the basis of what was said to have been an invigilation exercise carried out by Mr Rahman himself in 2003, Mr Nawaz claimed that 23.48 percent of people entering the restaurant would not have taken meals. We are unwilling to accept Mr Rahman’s evidence in that behalf, it being unsubstantiated and the Commissioners having had no opportunity either to check its genuineness or as providing a true method of calculation of non-diners.
45.	Mr Nawaz also made numerous submissions as to the impact of the Commissioners exercise on Mr Rahman’s trading results on the four days of observation. He maintained that it was abnormal for the officers to have been eating at the Viceroy in such large numbers or at all, and that the takings would have been substantially higher as a result. Having observed that the officers’ meals on the four days totalled £677.10, he compared that figure with what he described as the “normal” takings. He noted that on the days of observation the officers’ bills represented 25.77 per cent of Mr Rahman’s projected takings. On the basis of an analysis he, Mr Nawaz, had carried out he estimated that credit card takings represented  50.44 per cent of  Mr Rahman’s total takings and assuming, on what he referred to as a “reasonable” basis i.e. without any firm foundation,  the remaining 49.66 per cent represented cheques and cash takings in equal shares. From there, he went on to calculate that the officers meals generated an additional 57.87 per cent cash on the days of observation, which would have resulted in 61.17 per cent more cash than normal. And, he continued, the additional cash could have been removed without anyone noticing “much of a difference from normal takings”. Had Mr Rahman had a proper system of keeping records and cash, it would have been obvious that cash takings had increased substantially. In any event, since Mr Rahman admitted cashing up himself and being on the premises for at least part of the periods of observation, in our judgment he must have known that his cash takings had increased. Mr Nawaz continued, “The waiters were certainly not paid the handsomest of wages and staff loyalty was not great…They did not have much to lose if caught but it is evident that they were not caught”. No waiters were sacked for having stolen monies from Mr Rahman, nor did he ever report any staff thefts to the police. Further, since one copy of each order went to the kitchen and was, presumably retained there at least for a short period, as Mr Cannan observed, for thefts to have occurred and been covered up at least two employees of staff would almost certainly have had to have been involved. In the absence of any positive evidence that Mr Rahman suffered from staff thefts, we find that he did not do so.
46.	Mr Nawaz also calculated that the officers’ meals were “nothing like normal in terms of pricing”.  Compared with an average declared meal price of £11.16, the average price paid per officer was £16.51, i.e. 47.94 per cent higher. He submitted that it could not be regarded as “fair” to treat the figures produced by the officers’ activities as “normal”, and then to use them “as a pivot to assess going back more than three years as reasonable”. As will appear a little later in our decision, we regard this to be a submission with foundation and upon which we shall act. 
47.	In “normal” circumstances it might be justifiable to remove the officers’ meals from the calculation of the tax assessed on a person such as Mr Rahman, but, in Mr Nawaz’s submission, “this is not such a case”. Mr Rahman accepted that there must have been some thefts, but not on the scale suggested by the officers’ observations. The observation results were “seriously flawed” and gave a thief or thieves an opportunity to steal £677 on four days when the cash taken was far above the normal level. “To then assess the appellant on this basis cannot possibly be regarded as a fair process”. If the tribunal were to accept that submission, Mr Nawaz contended that the parties could be directed to “quantify the difference accounted for by thefts”. There was “not a jot of evidence to suggest any wrongdoing”, nor was there evidence on the “supply side or anything such as bankings or credit cards or anything that might lead to the conclusion that there was suppression in this case”. We accept that the observation exercise carried out by the Commissioners paid no regard to purchases by Mr Rahman, or to his bankings or credit card sales, but do not regard those facts as being of any assistance to Mr Rahman. The Commisioners’ exercise was based solely on sales.
48.	Mr Nawaz went on to suggest an alternative method of calculation of the tax assessed taking account of :
a)	 the fact that any “omitted” takeaways would have been covered by bar takings and/or by confusion with “doggy bags”;
b)	 understated covers on meal bills could be used to adjust average meal prices;
c)	 the numbers of covers declared could be adjusted (presumably by removal of the officers’ bills);
d)	non-diners as calculated by Mr Rahman could be removed  from the calculation.
On that basis, Mr Nawaz maintained that the tax assessments should be reduced to £13,718.35
49.	Alternatively, if the officers’ bills were removed from the calculations in their entirety, “this has the impact of reducing the assessable amount to £7,545.09”. In Mr Nawaz’s submission “the tribunal [should] consider this as the maximum figure assessable”, to which might perhaps be added the VAT due on the officers’ meals totalling £677.10.
50.	There are three factors that weigh very heavily with us in dealing with the appeal against the tax assessments. First, there is the fact that on two separate nights of observations Mr Rahman, on his own admission, failed to declare four out of five of the officers’ bills i.e. 80 per cent by number, and on the third of four such nights he failed to declare two out of four bills. Second, there is the fact that in using unnumbered, undated bills he provided no audit trail whatsoever that the Commissioners (or for that matter the tribunal) could follow in trying to ascertain the true rate of suppression of takings; the rate could have been any figure across the spectrum. (That Mr Rahman’s accountants at the time appear to have been content to accept that situation we note with concern, but it is not a matter that we need consider). Third, and leading on from the lack of an audit trail, there is the fact that if a customer took away his bill on leaving the restaurant, Mr Rahman had no evidence of the supplies made to him, and declared only supplies for which he held a meal bill. Taking those three factors alone, there is substantial evidence of suppression of takings on a massive scale. And when that evidence is added to the remaining evidence with which we have dealt, and particularly the fact that Mr Rahman himself cashed up each day, we find that takings were suppressed and, since there is no evidence whatsoever of any thefts by employees for his underdeclarations and no other possible explanation being offered, that it was Mr Rahman who suppressed the takings.   (Essentially, we were invited to conclude by a simple process of elimination for which there was no evidence whatsoever that the takings suppressed were the result of staff thefts.  We are not prepared to do so). 
51.	That said, we do not accept that the Commissioners should have included their own officers’ bills in the calculation of the tax assessed; they were not genuine customers of the Viceroy, and their bills should have been omitted. So too should the cost of their meals in calculating the average price of a meal; the average cost of their meals was substantially higher than that of other diners, as declared, and their inclusion distorted the calculation. We therefore reduce the tax assessments and direct the Commissioners to recalculate the tax using the same method of calculation as originally used but ignoring the officers’ bills and omitting their cost in calculating the average price of a meal. Such recalculation is to be carried out and sent to Mr Rahman’s representative and to the tribunal no later than 16 October 2009. By 30 October, Mr Nawaz shall inform the tribunal whether or not he accepts the correctness of the new calculation. If he does not, we direct that the appeal be listed for a pre-hearing review to enable the tribunal to decide its future progress.
52.	Finally Mr Nawaz submitted that the penalty assessment should be discharged as there was no indication that Mr Rahman was involved in any deliberate suppression.
53.	The statutory provisions relevant to the civil evasion penalty are to be found in sections 60 and 70 of the 1994 Act.  Subsections (1) and (7) of section 60 provide as follows:
	“(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 as to give rise to criminal liability)
he shall be liable, subject to subsection (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct.
	(7)	On an appeal against an assessment to a penalty under this section, the burden of proof and to the matters specified in subsection (1)(a) and (b) above shall lie upon the Commissioners.”
52.	And subsections (1) and (2) of section 70 provide as follows:
“(1)	Where a person is liable to a penalty under section 60, 63, 64 [, 64 or 69A] [or under paragraph 10 of Schedule 11A], the Commissioners or, on appeal, a tribunal may reduce the penalty to such amount (including nil) as they think proper.
(2)	In the case of a penalty reduced by the Commissioners under subsection (1) above, a tribunal, on an appeal relating to the penalty, may cancel the whole or any part of the reduction made by the Commissioners.” 
54.	Although the standard of proof in evasion penalty proceedings is the civil standard, namely the balance of probabilities, since the assessment involves the grave charge of dishonesty, the tribunal should be satisfied with nothing less than a high degree of probability (see the judgment of Dyson J in Akbar v Commissioners of Customs and Excise [2000] STC 237 at page 251).
55.	The two elements of the penalty, evasion and dishonesty (albeit in a criminal law context), were the subject of consideration by the Court of Appeal in R v Dealy [1995] STC 217 where McCowan LJ cited, implicitly with approval, the following direction on law of His Honour Judge Crabtree to the jury:
“Well, what does ‘evasion’ mean? Evasion is an English word that means to get out of something. If you evade something, you get out of its way, you dodge it …  
What is dishonesty in English Law? It is a common English word and it carries its ordinary English meaning.  You [the Jury] must decide for yourselves, first of all, whether ordinary, right-thinking people would describe what Mr. Dealy did as dishonest. If the answer is “No, ordinary, sensible people would not regard what he did as being dishonest” then he is not guilty. However, if you decide that ordinary, reasonable people would see his conduct as dishonest, you must then go on to decide what he thought about it. If you come to the conclusion that Mr. Dealy might have thought, quite honestly, that he had a perfect right to do as he did, and that no-one would regard it as dishonest, then he is not guilty. If he was convinced, throughout, that he was doing the right thing, and that other people would agree with him, that is not dishonesty.”
56.	We have most carefully considered all Mr Nawaz’s submissions in relation to the penalty assessment, and particularly those relating to the allegations of theft by Mr Rahman’s employees. As we pointed out earlier, Mr Rahman offered no evidence of theft by his employees, he never dismissed an employee for theft, and never reported any theft to the police. Against that background, the fact that suppression of takings took place on a scale that Mr Rahman must have been aware of, and on the basis of the whole of the evidence presented to us, as we have already found, it was he who suppressed the takings, we are satisfied to the high degree of probability required that he dishonestly evaded the tax we have determined to be due.
57.	We therefore confirm that Mr Rahman is liable to a penalty under section 60 of the 1994 Act. However, the penalty assessment must be reduced in line with the tax assessments. The original penalty was mitigated by 10 per cent for Mr Rahman’s co-operation in the determination of his true liability to tax and for providing his records. We are satisfied that such mitigation represents the extent to which the amended assessment should be reduced, and we confirm it in whatever sum that may be. Again, we direct the Commissioners to recalculate the figure.
58.	Mr Nawaz further submitted that the Commissioners had assessed Mr Rahman to tax in relation to period 04/99 outside the three year period for which section 77 (1) of the 1994 Act provides, so that both the tax assessment for that period and the proportion of the section 60 penalty applicable to it should be discharged. That submission fails to take account of section 77 (4) which extends the three year period for assessment to tax to 20 years where tax has been lost “as a result of conduct falling within section 60 (1)”. Having held that Mr Rahman dishonestly evaded tax within section 60 (1), it follows that we reject the submission.
59.	Mr Rahman’s appeal having been substantially dismissed, we accede to an application by Mr Cannan for the Commissioners’ costs of and incidental to and consequent upon the appeal, but since the appeal has been partially successful, we direct that he be responsible for only 80 per cent thereof. If the costs cannot be agreed, we direct that they be assessed by a costs judge of the High Court. 
60.	In closing, we should mention that we have taken full account of all Mr Cannan’s submissions, and thank him for the help he has given us in dealing with the appeal.
DAVID DEMACK
JUDGE
Release Date: 25 September 2009
MAN/2002/490
		The Schedule
OFF.1	OFF.2	TIME IN	TIME OUT	Wait	Table No	No of covers	Amount	Tip	Total cust	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	T/A	
																														
Saturday 28/4/01																														
K Partington	G Smith	1730	1900	10	2	2	28.3	£1.70	6				SW/RG											5	4	2c	6	1C	3	
R Grace	S Worsley	1830	2025	5	4	2	33.66	£2.35	30+30	2	KP/GS		SW/RG	2	3					2	2	HC/AS+2							5	
A Smith	H Cear	2005	2205	15	13	2	33.5	£3.50	18	2	2		1+2c	2	2		2	2		DW/AW	3	HC/AS				12			5	
A Ward	D Warwick	2140	2332	10	11	2	31	£3.10	34	2		DJ/MD+2		2	4					DW/AW	2	2							2	
M Downer	D Johnson	2318	2425	5	3	2	26.6	£3.40	44		2+4	DJ/MD+2	4	3	4	2	2			4			7	6	6				1	
							154