[2009] UKFTT 369 (TC)

TC00307
                                                                                                  Appeal number MAN/06/0260  
VAT – assessment on alleged under declaration - misdeclaration penalty - assessment alleged not to best judgment and /or excessive - amounts reduced on appeal - appeal allowed in part.  

FIRST-TIER TRIBUNAL 

TAX 

			         LANCERS RESTAURANT LIMITED                                Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
				 REVENUE AND CUSTOMS (VAT)	Respondents

Tribunal: 	ELSIE GILLILAND  (Judge )
		SUSAN STOTT  (Member)

Sitting in public in MANCHESTER on 24 and 25 APRIL 2008 , 11 and  12 May 2009 and on  30  September 2009

TAHER NAWAZ chartered accountant for the Appellant

JAMES PUZEY counsel , instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2009
DECISION

Introduction.

1.	This is an appeal by Lancers Restaurant Limited (the Appellant) against an assessment to Value Added Tax (VAT) in respect of the periods 05/03 to 05/05 inclusive. The assessment is dated 29 March 2006 and is in the sum of £116,359 together also with an additional sum of £14,355 by way of interest. Subsequently on 20 December 2006 a misdeclaration penalty in the sum of £17,067 was assessed on the Appellant on the basis that the Appellant had under-declared the amount of VAT for which it was accountable in respect of the periods 05/03 to 02/05. The Appellant has also appealed against the misdeclaration penalty and that appeal is also before us.
2.	The assessment to VAT was made by Mr. Anthony Reynolds (Mr. Reynolds) an officer of the Respondents, following 3 material visits to the Appellant’s premises at 20 High Street, Bawtry, Doncaster at which the Appellant has carried on a restaurant and take away business under the name of Lancers Indian Restaurant since it registered for VAT in 1998.
Visits. 
3.	The first visit was made on 1 April 2005. This was a routine inspection visit and had been arranged with the Appellant’s accountants, Islam & Co. Mr. Reynolds attended accompanied by Mr. Nick Baker on behalf of the Respondents. Ms. Naz Ali from the accountants was present at this visit as was Mr. Sajidur Rahman (Mr. Rahman). Mr. Rahman is the director of the Appellant and an equal shareholder with his brother Mr. Safiqur Rahman who is the chef. Mr. Safiqur Rahman was not present at any of the 3 visits. The second visit took place on 13 June 2005 when Mr. Reynolds was accompanied by Mr. Colin Smithson (Mr. Smithson). There is an issue whether Mr. Rahman was interviewed by Mr. Reynolds on this visit. Mr. Reynold’s evidence was that he did interview Mr. Rahman on this visit and that Mr. Rahman had provided some information about wastages and allowances for drinks at the restaurant. Mr. Rahman’s evidence was that he had only handed over the meal bills for April and May 2005  which Mr. Reynolds had requested in his letter dated 4 April 2005 following his visit on 1 April, that he had stayed for only about 10 minutes and that there had not been any interview at all although he does recall having received a telephone call on his mobile from Mr. Reynolds whilst he had been driving but that he had not discussed any matters with Mr. Reynolds because he had been advised by his accountants that all queries about the business should be dealt with through the accountants. The third visit took place on 23 November 2005 when Mr. Reynolds collected further meal bills for July from the restaurant. Mr. Rahman had left the meal bills in a bag outside the side door of the restaurant. There is no dispute that Mr. Rahman was not present when Mr. Reynolds collected these further documents which he had earlier requested.
Case for the Respondents.
4.	The Respondents case is that the Appellant had been under-declaring the amount of VAT for which it was accountable for over 2 years up to May 2005. It is clear from the documents and calculations before us that the Respondent’s case is based essentially upon the premise that the Appellant had been under-declaring its sales at the restaurant. However the present case is not one where there is any direct evidence that the Appellant has been suppressing sales invoices. Although the Appellant prior to the first visit did not have any till rolls recording its takings no discrepancies have been found between the amounts paid into the Appellant’s bank account and the amounts returned by the Appellant in its VAT returns. The VAT returns were prepared and signed by the Appellant’s accountants who were provided with the Appellant’s meal bills. No trial purchases had been made by the Respondents. This is a case which depends upon the validity and accuracy of the calculations which have been made by the Respondents of what it estimates the Appellant should have received from its sales of meals and drinks and the assessment was based upon the difference between the expected sales and the amounts of the sales as recorded in the VAT returns. 
5.	The Respondents’ case involves a number of distinct calculations. First the amount attributable to the purchase of drinks for resale has to be ascertained. Prima facie this should involve an analysis of the Appellant’s purchases for the relevant period so as to exclude from the calculation any non drinks items. The analysis should use the VAT exclusive cost of the purchases. This analysis will produce a “cost of goods sold” figure (COGS). From this figure a deduction will have to be made for any wastages and also for any drinks not actually sold to customers, for example drinks consumed by members of staff or provided free of charge. Next a calculation of the Appellant’s average or weighted mark up on drinks has to be made so as to arrive at the value of drinks sold. Next, the meal bills have to be analysed to establish the drinks to meals ratio (or parts to total ratio) which can then be used to calculate the projected sales of both drinks and food for each quarter. Finally, a comparison is then made between the VAT on the total projected sales and the VAT declared on each of the returns. Any under-declaration will then be incorporated into the assessment. No issue arises in the present case as to the methodology of the calculation of any under-declared VAT. The issue in the present case is whether the Respondents have correctly calculated the relevant figures.
Calculations
6.	There is in our view no doubt the original calculations carried out by Mr. Reynolds and which gave rise to the assessment significantly overstated any alleged under-declaration. On the first day of the hearing on 23 April 2008 the Respondents produced a revised calculation showing a total under-declaration of £57,780.23. This was a reduction of £58,758.77 or 50.5% from the original assessment made by Mr. Reynolds. Among the differences were a reduction in the COGS figures for the relevant periods, an increase in the wastages allowance to £190 from £120, a reduction in the weighted mark up from 226% to 206% and the drinks to meals ratio was increased from 16.09% to 18.22%. This revised calculation appears to have taken into account some at least of the points which had been made by Mr. Nawaz in his letter dated 21 January to the Respondents. That letter had been sent without prejudice as it contained a without prejudice offer to settle the Respondents’ claim but that offer was not accepted. The Appellant has waived privilege in respect of the contents of the letter. 
7.	On 25 April 2008 at the close of the second day of the hearing the appeal was adjourned part heard. On 30 April 2008 Mr. Nawaz sent an open fax to the Respondents commenting on a number of aspects of the Respondents revised calculation of under-declared VAT and enclosing his calculations of drinks purchases. At the resumed hearing which took place on 11 and 12 May 2009, Mr. Smithson who gave evidence for the Respondents accepted these calculations. They have not been challenged before us and we accept them. The consequence is that based on the revised figures for COGS provided by Mr. Nawaz, there should be a further reduction in the assessment from £57,780.23 to the figure of £39,819 which can be found in Schedule A attached to Mr. Nawaz’s written submissions. Mr. Nawaz made his submissions in writing because there was insufficient time on 12 May for his oral submissions to be heard. Mr. Puzey, having seen this document which was only provided after Mr. Puzey had closed his oral submissions on 12 May 2009 has not objected to the Tribunal having regard to this document. Having looked at it, we are satisfied that it does no more than adjust the revised assessment to take account of the figures for drinks purchases which had been provided by Mr. Nawaz to the Respondents by fax on 30 April 2008. However for the sake of completeness we should refer briefly to them.      
8.	The method of ascertaining the amount of the Appellant’s drinks purchases used by both the Respondents and by Mr. Nawaz for the periods 05/03 to 02/05 inclusive has been to start from the Appellant’s figures for input tax for the relevant periods. This is a common practice and is based on the premise that the taxpayer is in general unlikely to understate the amount of the VAT which he has been charged and also that there will normally be VAT invoices available against which the total amount of input tax claimed in the VAT returns for a particular period may be checked. In the case of a restaurant, since purchases of food are zero rated, most of the input tax paid is likely to be attributable to the purchases of drinks. Mr. Nawaz in his calculations attached to his fax dated 30 April 2008 has gone through the VAT invoices for the relevant periods and has adjusted the total amount of the VAT for each quarter so as to agree with the VAT invoices and he has excluded invoices which he says have been duplicated and also those which relate to other periods. Full details of the invoices in question are set out in the six pages of attachments at pp. 159j to o in section 3 of the bundle where the figures for input tax for each of the 9 quarters have also been totalled. 
9.	 However it cannot be assumed that all the input tax is attributable to the purchases of drinks and an adjustment will have to be made to the amount of the input tax so as to exclude any non drinks items. In the present case it is not in dispute that the Appellant’s purchases which attracted VAT included ice cream. Mr. Reynolds, as appears from his letter dated 21 March 2006, calculated that the amount of purchases of non drinks items such as ice cream came to £105 or 2.08% of the total input tax of £5023.96 and this is the percentage figure by which he has reduced the total input tax for the relevant quarters to arrive at the input tax relating to the drinks purchases. Mr. Smithson on the other hand had noted that the ice cream purchases came to £451.45 or some 9% of total purchases. Mr. Nawaz in his fax  dated 30 April 2008 stated that he had calculated the amount of the ice cream purchases was £473.40 or 11.85% of  total purchase figure of £3993.67. However, having analysed the invoices for all the quarters, Mr. Nawaz’s conclusion was that non drinks purchases from Heath & Smith  and from Bookers Cash and Carry came to 4.94%.He also provided invoices showing non drinks purchases from these suppliers. In his fax, Mr. Nawaz invited the Respondents to consider the figures he had produced for the total purchases and also figures for non drinks purchases and that if the Respondents were minded not to accept his figures, the figures could be gone through at the resumed hearing. As we have already stated, the figures for purchases were accepted by Mr. Smithson and they have not been challenged by the Respondents at the resumed hearing. In Schedule A which Mr. Nawaz has attached to his final written submissions, Mr. Nawaz has used the revised VAT input figures for 8 quarters and has  reduced the total input figures by 5% so as to ascertain the input tax attributable to the drinks purchases. The figure of 5% is 4.94% rounded up. The amount of under-declared input tax for the 8 periods is calculated at £37,150.63 to which has been added £2668.88 for the period 05/05 thereby producing a total under-declaration of £39,819.32. The figure of £4861.02 for COGS on Schedule A for the period 05/05 has been calculated in the same way, based on the gross VAT figure of £895.45 appearing on p. 159o of the bundle. It is to be noted that these calculations by Mr. Nawaz of under-declared VAT for the 9 periods in question are based on the use of the figures of £190 for allowances and the weighted mark-up of 206% used by the Respondents in their revised assessment which appears at p.80b of the bundle. Mr. Nawaz has challenged these figures and we consider them later in this Decision. The reduction in the assessment from £57,780.23 to £39,819.32 is due entirely it seems to us to the reduction in the value of the Appellant’s drinks purchases for the 9 periods in question.
The Appellant’s case.
10.	The Appellant’s case is that the figures used by the Respondents in their calculations of the alleged under-declaration of tax are incorrect and also that the assessment has not been made by the Respondents to “the best of their judgment” within s.73(1) of the Value Added Tax Act 1994 (“the Act”). So far as the figures are concerned, there are 2 issues which have to be considered. The first is what is the correct amount to allow in any calculation of any under-declared VAT for  wastages etc.? The second is what is the correct figure to apply by way of a weighted mark up?  We shall consider these questions first before proceeding to consider the submission that the assessment was not made to best judgment.
11.	By wastages we are referring to all those drinks which have not actually been resold to customers and they will include, for example, drinks consumed by those working at the restaurant  as well as beer which has been drawn off and poured away as part of the process of cleaning the beer lines. The calculations giving rise to the figure of £109 used by Mr. Reynolds in making the original assessment were based, he said, upon answers which Mr.Rahman had given to questions he had asked him during his second visit to the restaurant on 13 June 2005.
Evidence relating to the visits. 
12.	 Mr. Reynolds has produced copies of the handwritten notes which he said he had made during this visit and in which he said he had recorded the replies Mr. Rahman had given when he had asked him about what drinks wastages there had been at the restaurant. There is no dispute that on his first visit on 1 April Mr. Reynolds had been asked to put in writing any queries he might have about the business and that they should be put through the accountants. It is unfortunate that Mr. Reynolds did not follow this procedure as there is now a dispute about what if anything Mr. Rahman did actually say to Mr. Reynolds about wastages during the second visit. It was apparent from Mr. Reynolds answers in cross-examination that Mr. Reynolds decided not to follow this course because he thought it was more useful to ask questions orally.
13.	 Mr. Reynold’s notes of the second visit, somewhat surprisingly, record the visit as having taken place on 13/6/06 and not in 2005. The figures 06 on the notes have subsequently been altered to 05 and initialled by Mr. Reynolds against which Mr. Reynolds has written the date 9/5/06. It was his evidence that he had altered the year to 05 on 9 May 2006 on reviewing his notes. This of course was after the assessment had been made and nearly a month after the appeal had been lodged. It is in our experience unusual to make a mistake in the year when making notes, except perhaps at the beginning of a new year. Any mistake of this nature does however in our view raise questions about the degree of care with which Mr. Reynolds made his note as well as its accuracy.
14.	In his cross-examination of Mr. Reynolds, Mr. Nawaz suggested that the note was not a contemporaneous note and had been written up after the second visit, possibly in May 2006. Mr. Rahman’s evidence was that on the second visit there had been no discussion as such with Mr. Reynolds about the business and that all he could recall was that there had been a subsequent telephone call on his mobile phone in which Mr. Reynolds had wanted to discuss matters like staff drinks. Mr.Rahman said, correctly, that it had been requested at the first visit on 1 April 2005 that any queries about the business were to be made in writing through his accountants. His evidence was that there had been no discussion as such on the second visit and that he had handed over the documents which had been requested and had stayed only for about 10 minutes. Mr. Rahman said he had been driving at the time he had received the telephone call, did not have a hands-free telephone and that he had declined to become involved. He again referred to the arrangement for queries to be made through the accountants. That a telephone call was made to Mr. Rahman on his mobile after the second visit is probable since a note of Mr. Rahman’s mobile telephone number appears at the foot of the first page of Mr. Reynold’s notes.
Consideration of  and conclusions on the evidence relating to the visits.
15.	If Mr. Rahman’s evidence is correct and he did not have any discussion with Mr. Reynolds about matters such as staff drinks, it must follow that the references in Mr. Reynolds notes of the second visit to staff drinks and other wastages have been fabricated since it was Mr. Reynold’s clear evidence that he had only allowed the wastages which Mr. Rahman had told him about on the second visit. We have seen both Mr. Rahman and Mr. Reynolds give evidence in chief and be cross-examined. Neither was in our view a good witness and their recollections of what had actually been said in June 2005 were, not surprisingly, uncertain. However we are satisfied and find that Mr. Rahman and Mr. Reynolds were each honest witnesses. We do not consider that Mr. Reynolds’ notes of the second visit were made up or concocted subsequently and on the balance of probabilities we find that Mr. Reynolds did ask Mr. Rahman some questions about wastages during the second visit and that Mr. Rahman did give some replies which Mr. Reynolds sought to record in his notes. The notes we find are a contemporaneous record and that was corroborated by Mr. Smithson, who was clear in his evidence in chief that Mr. Rahman had been asked questions by Mr. Reynolds and that Mr. Reynolds had noted down Mr. Rahman’s replies. Mr. Smithson said that he had been seated at a table with Mr. Rahman and Mr. Reynolds. He was not shaken on this in cross-examination and we accept this evidence.  
16.	Although Mr. Reynolds has referred to having interviewed Mr. Rahman on the second visit and his notes do start by saying “interviewing Mr. Rahman”, having heard the evidence, we do not regard what took place on 13 June 2005 as being an interview in the ordinary sense of that term. An interview normally connotes a degree of formality and is something which has been arranged beforehand. That was not what happened in relation to the second visit. Although Mr. Reynolds said in evidence in chief that the purpose of the visit was to interview the trader and to review the purchases and sales records and meal bills, it is clear from the letter dated 26 May 2005 confirming the arrangement for the second visit on 13 June that the stated  purpose of the visit  was “to examine your books and records in connection with VAT”. There is no hint in that letter that Mr. Rahman had been asked to be present in order to be interviewed. The second visit was arranged in order to examine the Appellant’s sales records and this is what Mr. Reynolds and Mr. Smithson did. We are satisfied that Mr. Rahman had not been asked to be present so that he could be asked questions about the business. Indeed that is something which in the light of what had been said on the first visit should have been arranged through the accountants. Although Mr. Reynolds said that he had prepared questions in advance of the second visit and Mr. Smithson also said that Mr. Reynold’s questions had been prepared in advance, no copies of any written questions have been produced and there is nothing to indicate that any questions Mr. Reynolds asked Mr. Rahman about wastage followed any structured pattern. When Mr. Reynolds was asked in cross-examination what he had asked Mr. Rahman, his response was that he had asked Mr. Rahman to say where no money had been received for drinks and he said that he had given him the opportunity to say what wastages there had been. What is recorded in the notes appears to be what Mr. Rahman said about drinks for which he had received no money.
17.	 We are satisfied and find that what actually happened was that when the 2 officers arrived at the restaurant, after Mr. Rahman produced the meal bills he had been asked for and before the meal bills and purchase invoices for the period 05/05 were examined, Mr. Reynolds took the opportunity of asking Mr. Rahman in general terms about what drinks he had not received payment for. Although he was aware of the Respondents’ guidance notes on possible sources of wastage, Mr. Reynolds did not for example take Mr. Rahman through the list of possible sources of wastage set out in that guidance and the clear impression we have gained from the evidence is that Mr. Reynolds left it to Mr. Rahman to say what wastages he had and that Mr. Reynolds was not proactive in asking Mr. Rahman about possible sources of wastage. Thus for example, although froth and spillages are fairly common sources of wastage in beer, we are satisfied that Mr. Reynolds did not raise the questions of froth or spillages and no allowance was made in the assessment for these items. The only allowances he in fact made were for line cleaning and for staff drinks. When asked why he had not made any allowances for items such as froth and spillages, Mr. Reynolds said it was because Mr. Rahman had not mentioned them. Although the notes make reference to line cleaning, no inquiry appears to have been made about the length or bore of the lines although this information would be relevant to an accurate calculation of the amount of beer lost as a result of cleaning the lines. It is clear that Mr. Reynolds did not actually inspect the premises. So far as staff drinks were concerned, Mr. Reynolds had already been told on the first visit that there were 5 staff but he allowed for only 3/4 in his assessment . 
18.	It is not in issue that at the time of the second visit, Mr. Reynolds was still under training and it would seem that he had not previously carried out a check of a restaurant’s VAT returns. He had been working as a VAT assurance officer only since September 2004. Mr. Smithson was a much more experienced officer but he was not involved in putting any questions about wastage to Mr. Rahman. Also, having seen Mr. Rahman give his evidence we are far from persuaded that Mr. Rahman actually understood that Mr. Reynolds was asking to be told about all the possible sources of wastage of the wet stock at the restaurant. He had not been asked to think about this before the second visit and the time taken up with any questions about wastage was fairly short. Mr. Rahman put his attendance at the second visit at 10 minutes. Mr. Reynolds thought it had been a little longer and estimated 30 minutes but on any view there was not to our mind any detailed inquiry into the likely sources of wastage of wet stock during the second visit. Indeed in his evidence in chief, Mr. Reynolds said that there had been some out of date stock but that was not mentioned in his notes and no allowance had been made. We are not satisfied that what Mr. Reynolds has recorded in his notes was either an accurate or an exhaustive list of the wastages which did occur at the restaurant and we can place little reliance upon them as an accurate record either of what Mr. Rahman said or what were the actual wastages at the restaurant. Although Mr. Reynolds had had previous experience as a bar manager at a hotel and had also served as a barman while a student at university, he did not in our opinion have any relevant experience of how a licensed restaurant operated.
Evidence as to wastages            
19.	In his witness statement Mr. Rahman has referred to wastages in pipe cleaning, draw-offs before opening to get rid of stale beer in the pipes from overnight, staff drinks including drinks for himself and his brother, spillages, both deliberate to get rid of froth and accidental when the barman is called to attend to other matters and the pump continues to overflow. He has also referred to free drinks being given to customers such as when regulars are celebrating birthdays or anniversaries, or when food has been delayed or where there have been complaints. Mr. Rahman has also attached a schedule to his witness statement referring to these and other sources of wastage. He refers as well to staff thefts and to other thefts, although these, in our view, are not likely to have been significant sources of wastage since Ms. Ali is recorded as having said at the first visit that there had been no major losses from theft. In his oral evidence in chief, Mr. Rahman referred to the brewery recommendations that the beer lines should be cleaned at least every 7 days and he said that he had followed the recommendation and in hot weather that the lines had been cleaned twice a week. He said that there were also breakages. He said that wastages of coke would occur when a one and a half litre bottle was opened but not all was used. A bottle would serve 5 glasses. However any remaining coke in the bottle could go flat and the remainder would have to be thrown away. This could occur if only 2 or 3 glasses of coke were ordered or if a bottle of coke was opened to serve bacardi and coke or whisky or brandy and coke. He also said no charge was made for coke in a bacardi, whisky or brandy and coke. In cross-examination it became clear that Mr. Rahman had kept no records of wastages and he was unable to say how much stock had been lost because of froth or theft or had gone missing. As to spillages, Mr. Nawaz in his opening had said that 6 pints would be lost a night and over 5 nights that would be 30 pints. Mr. Rahman confirmed that this was correct. A keg of beer contains 88 pints and Mr. Rahman said that it was possible that a third of a keg had been lost each week.  Mr. Puzey in cross-examination suggested that because the beer was keg beer and had been pressurised, it would not go off but Mr Rahman disputed this. He said that there had been problems with the cooler and that it was necessary to clean the pipes more frequently as the cellar would become warm in the summer. He also referred to there being too much froth if this was not done. He said that in addition to himself and his brother there were 5 staff and that they each drank a one and a half litre bottle of coke a day. The figure of 5 staff had been given at the first visit but we are satisfied that that figure, as Mr. Rahman said, did not include Mr. Rahman himself or his brother. On the other hand, it is unlikely in our view that all 7 worked at the restaurant 7 nights a week. A more realistic figure to use for the number of staff is in our view the figure of 5.5 which Mr. Nawaz put forward in his letter dated 21 January 2008 and which Mr. Nawaz said was supported by the Appellant’s accounts for the period. We note that Mr Nawaz in this letter also put forward a figure of 6 pints of beer lost a night in drawing off warm or stale beer. Mr. Reynolds said that that figure of 6 pints a night had been accepted and that this had given rise to the increase of the allowances in the revised assessment from £120 to £190. The Respondents have relied upon the evidence of Mr. Reynolds as to the nature and amount of any wastages and have sought to maintain the figure of £190. 
Conclusions on wastages. 
20.	The figure of £190 which has been allowed by the Respondents for wastages is in our view unreasonably low. Allowances have only been made for line cleaning, staff drinks and drawing off warm or stale beer. In addition to these, allowances should in our view be made for the following: spillages, froth, coke going flat after the bottle is opened, free drinks given to pacify customers, mix ups in orders, breakages, out of date drinks. We also accept that there is likely to be more wastage of beer in the summer months and some allowance should be made for this in the calculation of the wastage figure. A small allowance should also be made for theft.
21.	The evidence before us as to the amount of the wastages is limited. In his evidence, Mr. Rahman has referred to some figures and quantities but these are, as we have already said, in the nature of estimates. The Respondents have not led any direct evidence apart from that of Mr. Reynolds and that we have found to be of limited assistance. In these circumstances, it is, we consider, for the Tribunal to make its own assessment of the reasonable amount of the wastages which we are satisfied have occurred and in doing so, the Tribunal is entitled to use its own experience and judgment as to what is reasonable.
Objection by the Respondents to documents attached to the Appellant’s closing submissions. 
22.	As we have already said, because of lack of time, Mr. Nawaz made his closing submissions in writing after Mr. Puzey had concluded his submissions. Attached to Mr. Nawaz’s closing submissions are a number of documents. Amongst these is a calculation by Mr. Nawaz of wastage allowances giving a total figure for wastages of £1250.59. Mr. Puzey has objected to this document and also to the figures for wastages which Mr. Nawaz has put forward in paragraphs 5.20 – 5.34 of his closing submissions. Objection has also been taken to 3 of the attached schedules. These schedules follow the format of the calculation of under-declared VAT which had been used by the Respondents in their calculations of underpaid tax. Schedule A to which we have already referred adjusts the figures used by the Respondents for drinks purchases in accordance with the information which had been provided to the Respondents by the fax dated 30 April 2009. Schedule A reduces the under-declaration to £39,819.32. Schedule B makes a further adjustment to the calculations by reducing the weighted average mark-up from 206% to 192%, thereby reducing the under-declaration to £33,952.90. Schedule C makes a further adjustment by increasing the amount of wastages from the £190 allowed by Mr. Reynolds to £1250.59 and this produces an under-declaration of £7,182. Schedule D makes a further adjustment for alleged opening stock thereby reducing the amount of under-declared tax to £3,115.34. Schedules B, C and D are cumulative in the sense that each builds upon the figures as adjusted in the previous schedule and are themselves based on the figures in Schedule A. 
23.	Schedule A, as we have said earlier, has not been objected to since its calculations were accepted at the hearing. By a Notice dated 8 June 2009 the Respondents formally objected to Schedules B, C and D, to a spreadsheet entitled “Impact of Customs Assessment on Seating Capacity of Restaurant” as well as to the figures for wastages. Objection was also taken to the use of a weighted mark-up figure of 192% in the closing submissions and which is also adopted in the calculations in Schedule B. The basis of the objections was that the Respondents had not had an opportunity to consider these documents or the figures which had only been produced after the close of the hearing. The Respondents submitted that the Tribunal should exclude these matters. The Tribunal was also reminded that on 12 September 2008 the Appellant had been ordered to disclose not less than 28 days before the hearing any calculations and schedules on which it proposed to rely but that the Appellant had not produced these documents.
24.	The Tribunal considered these objections at the hearing on 30 September when we heard submissions from the Respondents and from the Appellant. Our conclusion is that Schedules B and C should be admitted because they do not in substance raise issues which have not already been raised at the previous hearings of the Appeal. The figure of 192% for the mark-up which is used in the calculations in Schedule B is not a new figure. It had been raised in correspondence before the hearing and during the hearing. Whether that figure can be supported on the evidence is a different matter which we consider later in this Decision. Schedule C uses the figure of £1250.90 for wastages. This is a new figure but the quantification of the wastages is not a new issue. It was submitted on behalf of the Respondents that it would be necessary to recall Mr. Reynolds to give evidence on the amount of the wastages but we do not agree. The Respondents have had a full opportunity to cross-examine Mr. Rahman and have put their case to him. Their case was that the correct figure was £190 and they have not led any positive evidence as to the correct value of the wastages which Mr. Rahman said in evidence he had incurred. The position, it seems to us, is that the Tribunal in the circumstances has to make its own assessment of what would be a reasonable estimate of the amount of the wastages which it is satisfied the Appellant has incurred. It does not follow that the figure of £1250.59 put forward by Mr. Nawaz or his breakdown given in paragraphs 5.20 – 5.34 of his closing submissions are correct or should be accepted. Mr. Nawaz’s calculations showing how the figure of £1250.59 has been arrived at should also be admitted. This document is based on the evidence given by Mr. Rahman in chief and in cross-examination and is not a document which could have been produced before that evidence was given and is not within the scope of the order made on 12 September 2008.
25.	Schedule D however is in a different category. It purports to make a further adjustment in respect of opening stock. This is a new matter which was not raised during the hearing and is unsupported by any evidence. Likewise the spreadsheet entitled “Impact of Customs Assessment on seating capacity of Restaurant” raises matters not considered previously. These latter 2 documents should be excluded.
Assessment of the wastages          
26.	We have considered the evidence and submissions and we assess the wastages at £986.60.  A convenient starting point for our assessment of the wastages is the sheet of wastage/allowances produced by Mr. Nawaz and attached to his closing submissions. In this sheet he has listed the various wastages which he submits should be allowed and he has provided the figures for which he contends. The wastages listed are supported by the evidence of Mr. Rahman and we accept that those wastages have been incurred and should be allowed for. We accept the figure of £384.05 for wastages in relation to the cleaning of the pipe lines, the drawing off of beer and for spillages. The quantities set out are in our view reasonable for 2 beer lines. We also accept the figure of £17.33 as a reasonable allowance for beer lost due to froth at the end of the barrel, taking into account that more froth is likely to occur during the summer months. The figures for staff drinks and for free drinks set out on Mr. Nawaz’s sheet are however are in our view unreasonably high and should be reduced. A reasonable allowance for staff drinks on the evidence which we have heard would be £315.31 based on an average of 5.5 staff being present 7 days a week for 13 weeks and each drinking 3 pints of soft drinks a day. All 7 persons working at the restaurant are unlikely to have been working 7 days a week and an average of 5.5 is in our view more realistic. The figure of £401.31 on the sheet should be reduced to £315.31. Mr. Nawaz submitted that an allowance should be made for free drinks of 2 bottles of wine a week at £10 per bottle. A more reasonable estimate in our view would be 1 bottle on average per week. We also consider the figure of £10 is too high. That appears to be the sale price of the best wine. A reasonable figure would be the price of a more average wine such as liebfraumilch at £6.31 per bottle and that is the figure we estimate would be a reasonable figure for free drinks given to customers. Thus £82 and not £260 should be allowed under this head. The remaining figures of £65, £75 and £47.91 per quarter are in our view reasonable estimates for the remaining items listed by Mr. Nawaz. The result, as we have said, is that an allowance of £986.60 should in our view be made for wastages when calculating any under-declaration of VAT. This figure should be deducted from the COGS figure in Schedule A in place of the figure of £190. 
The mark-up.
27.	So far as the mark up is concerned, although the figure of 206% applied by the Respondents is on its face not unreasonable for drinks sold in a restaurant, we have not been able to check its correctness. There are no calculations of the mark-up of 206% in the papers before us to show how the weighted mark-up of 206% in the revised assessment produced on the first day of the hearing was arrived at. Mr. Puzey was unable to assist when we asked for a breakdown. We have only the WAMU figures for the original calculation of 226%. We were concerned as to the accuracy of that figure. Our concern was with the selling prices used by Mr. Reynolds when calculating the mark-up. The evidence indicated that the prices were taken from a price list which Mr. Reynolds had picked up from the counter on the second visit. He then gave that price list to Mr. Smithson and that is what appears to have been used when calculating the selling prices of the drinks. No copy of that price list has been produced by the Respondents. There is however in the bundle at pp.146 to 148 a priced wine list which Mr. Rahman said in his evidence was the wine list applicable in May 2005 which is the relevant period used to calculate the mark-up. We see no reason to disbelieve Mr. Rahman’s evidence on this point. If Mr. Reynolds’ original WAMU sheets are looked at, it is apparent that many of the prices are higher in the WAMU sheets than those given on the wine list. For example, Jacobs Creek chardonnay is £14.50 on the wine list but £17.50 on the WAMU sheets. See pp.3/17, 18. These are the sheets which gave rise to the original mark up of 226%. That mark up was reduced to 206% in the revised assessment but there is no satisfactory evidence to show on what basis that reduction was made. Mr. Nawaz has said that this reduction was due to the inclusion in the revised calculation of a number of lower priced invoices which had been omitted from the previous calculation. See Para. 5.15 of his closing submissions. Some support for this is provided in Mr. Nawaz’s fax to the Respondents dated 3 September 2008 where he says that his adjustment to the prices would produce a figure of £39,819. That of course is the figure which appears in Schedule A and is based on the reduction in the COGS figure. If however the revised mark up calculation of 206% was still based on prices different from those in the May price list, the revised mark up figure could require adjustment. Although Mr. Nawaz has suggested alternative figures of 196% and 192% he has not produced any detailed schedules to justify either of these figures. He did submit that we could “extrapolate” the figures but we do not have copies of the relevant invoices and it is impossible for us to make an accurate calculation.. We would need copies of the invoices in order to calculate and check the correct average weighted mark-up to use.
28.	In the absence of satisfactory evidence showing how any of the figures of 206%, 196% or 192% have been calculated, we are left in the unsatisfactory position of accepting the figure of 206%. The burden is on the Appellant to produce evidence to show that the Respondents’ figures are incorrect and what the correct figures should be. Although invited at the hearing on 30 September 2009, Mr. Nawaz was not able to provide us with any further assistance as to what the correct figure for the mark up should be. The consequence is that on the evidence and materials before the Tribunal, it has not been shown that the mark up of 206% is wrong and the assessment of under-declared VAT should be calculated on the basis that the mark up is 206%. Taking into account the adjustment for wastages, the result is that the assessment falls to be reduced to £18,747.90. We have attached our calculation in the Appendix to this Decision.
Appellant’s submission assessment not made to best judgment
29.	The remaining issue is Mr. Nawaz’s submission that the whole assessment should be discharged on the grounds that the original assessment was not made by the Respondents to “the best of their judgment” within s. 73 of the Act 1994. It is settled law that any assessment made by the Respondents in pursuance of their powers under the Act must be made honestly and bona fide and that it is not open to the Respondents to make an assessment in an amount which they knew or thought was in excess of the amount which could possibly be payable and then leave it to an appellant to seek on appeal to reduce that assessment. It is also clear that the Respondents must have before them some material on which they can base their judgment since otherwise it would be impossible for them to form a judgment. It is also well settled that in view of the primary obligation being upon the taxpayer to make the return, the Respondents are not required to do the work of the taxpayer in order to be able to form a conclusion as to the amount of tax which to the best of their judgment is due. See Van Boeckel v Commissioners of Customs and Excise [1981] 2 All ER 505, 507, 508 per Woolf J. As was pointed out by Woolf J in that case, it is in the very nature of things that the relevant information will be available to the taxpayer but that it will be very difficult for the Respondents to obtain that information without carrying out exhaustive investigations. In Van Boeckel Woolf J said that what was envisaged by the words to the best of their judgment was that the Respondents “will fairly consider all material placed before them and on that material come to a decision which is reasonable and not arbitrary as to the amount which is due. As long as there is some material on which the [Respondents] 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”. See p.508.
30.	Mr. Nawaz has also drawn attention to Pegasus Birds [2004] EWCA Civ 1015 [2004] STC 1509. In that case Carnwath LJ said: “In my view, the tribunal faced with a best of their judgment challenge should not automatically treat it as an appeal against the assessment itself, 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 is not required to treat the assessment as a nullity, but should amend it accordingly”. STC [2004] 1509, 118, 119. At p 1521 of the report Carnwath LJ made 4 points by way of guidance to the tribunal. “(i) The tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly 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 judgment grounds, it is essential that the grounds are clearly 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 and the basis for it should be fully particularised and that it is responded to by the Commissioners. The tribunal should not in any circumstances allow cross-examination of the Customs officers concerned until that is done. (iv) There may be a few cases where a best of their judgment challenge can be dealt with shortly as a preliminary issue. However, unless it is clear that time will be saved thereby, the better course is likely to be to allow the hearing to proceed on the issue of amount, and leave any submissions on failure of best of their judgment and its consequences, to be dealt with at the end of the hearing”.         
31.	Mr. Nawaz in his closing submissions has said that he had wished to raise the issue of best judgment at the outset so as to save time but was not allowed to develop his argument. However in our view, the present case was not one which was suitable for raising the issue of best judgment as a preliminary issue. There was not, so far as we could see from the papers, any clear allegation of dishonesty or other wrongdoing on the part of the representatives of the Respondents and there had been no prior particularisation of any alleged lack of best judgment. The Appellant’s case in substance from the correspondence appeared to be that the Respondents had got their figures seriously wrong and had failed to identify or explain clearly how they had arrived at their assessment. On any view, it was apparent that the figures would have to be gone into in some detail and the case was not in our view suitable for a preliminary issue. Accordingly we decided that the hearing should proceed. That this was the correct course is clear having heard the evidence since the Appellant’s case on this point is that the Respondents did not properly consider the evidence which was presented to them and that the assessment was based upon arbitrary figures. Complaint is also made that the Respondents failed to respond to legitimate queries raised by Mr. Nawaz as to the basis upon which the assessment had been made. Mr. Nawaz’s submissions may be found in Paragraphs 6.8 to 6.13 of his closing submissions.  The first is that the amount of the reduction in the original assessment is a cause for concern. He has submitted that a reduction of more than 10% in the original assessment has been regarded by tribunals as a cause for concern. We consider that any significant reduction may be a cause for concern, but regard has to be paid to the reasons for any reduction. In the present case, it is clear that the original assessment appealed against was reduced following information supplied by Mr. Nawaz in relation to the value of the purchases of drinks and the amount attributable to spillages. It may be said that the Respondents should have made their assessment based on these matters in the first instance because information was available to them but it does not follow from this that the assessment was not made to best judgment. It is of some concern that Mr. Reynolds took the figure of 2.08% as the appropriate deduction to make in respect of standard rated items when Mr. Smithson had calculated a figure of 9% (see p. 3/81of the bundle) but it was in our judgment open to Mr. Reynolds to rely upon his own calculations and it is relevant that Mr. Smithson approved the assessment before it was sent out. It is apparent that the figure of 2.08% was too low but that is not the point and bad faith in this respect on the part of Mr. Reynolds has neither been suggested nor established.
32.	Mr. Nawaz has submitted that there was no basis at all for making any assessment in the first place because there was no evidence to suggest any wrongdoing by Mr. Rahman who had provided the information he had been requested to provide. Again this is not in our view any indication of a failure to exercise best judgment or that the Respondents were not entitled to make inquiries or raise an assessment. On the first visit it had become clear that there were no records of till rolls to substantiate the amount of the Appellant’s receipts and the Appellant did not have copies of the meal bills. The evidence is that the Appellant had given the meal bills to his accountants and that they had prepared the VAT returns. The meal bills for earlier periods were not available on the first visit and it was for this reason that Mr. Reynolds on 4 April wrote to Mr. Rahman indicating that his retention of records was unsatisfactory and requiring him to maintain meal bills, credit card slips, end of night credit card prints, appointment books and diaries. It is clear that Mr. Reynolds was concerned that adequate records of the takings had not been maintained against which the VAT returns might be checked. This, again in our view, was a matter which was open to Mr. Reynolds and it was not unreasonable for Mr. Reynolds to wish to check that the figures in the returns for output tax were correct. On the first visit Mr. Reynolds had noted some inaccuracies when comparing the invoices with the returns but these were essentially minor in nature, consisting of some ineligible claims for input tax as well as an over-declaration of output tax. However nothing turns on this. The real concern of Mr. Reynolds was whether the amount of the sales was correct since he did not have available to him documents backing up the figures in the returns. The evidence is that Mr. Rahman did seek to comply with Mr. Reynolds’ requests in relation to documentation. 
33.	In paragraphs 6.10 to 6.12 of his submissions Mr. Nawaz has submitted,  correctly in our view, that the figures incorporated into the original assessment by Mr. Reynolds for purchases, for allowances for waste and for mark-ups were wrong. It does not however follow that the figures in the assessment were without any basis or were arbitrary or that Mr. Reynolds did not believe that they were justifiable. We agree that the figures for purchases were wrong and that it was not until Mr. Nawaz produced his analysis of the invoices that the Respondents somewhat belatedly corrected the figures. We consider that the apparent errors by Mr. Reynolds in this respect were probably due to his relative inexperience but that is not any evidence of a failure to exercise best judgment. The highest the matter could be put is that Mr. Reynolds failed to exercise sufficient care and should have reached different figures based upon the invoices he had examined or were available to him. Mr. Smithson may also have failed to check that the original figures were justified but again that is not any real evidence of a failure to exercise best judgment. The prices taken for sales adopted in the mark up calculation fall in our view into a similar category. We accept that Mr. Reynolds did pick up a price list on his second visit in June but unfortunately he failed to check that this was the price list current in May 2005. More criticism may be levelled at Mr. Reynolds in respect of the allowances he made for wastages. He appears not to have inquired actively into what wastages had actually occurred and to have left it to Mr. Rahman to say what were the drinks for which he had not received payment. The precise language he used is not clear and no previous opportunity had been given to Mr. Rahman to think carefully about what were all the wastages which had in fact occurred at the restaurant. Again we consider that this was a matter of inexperience on the part of Mr. Reynolds rather than a failure to exercise best judgment. Whatever Mr. Rahman may actually have said on the second visit we are satisfied that Mr. Reynolds thought that what he had recorded Mr. Rahman as having said was correct. In the event, having heard the evidence, we are satisfied that the notes are not a correct record of all the wastages. We are also surprised that Mr. Reynolds did not on the second visit raise questions about spillages which as a person with some experience of the bar trade must have known were a possible source of wastage. It may be that he did not think that he should be proactive when asking questions about wastages but that is in our view only properly justifiable where it has been made clear beforehand that the taxpayer is being asked to detail all the wastages which have in fact occurred. That was not the situation in the present case.
34.	Although Mr. Nawaz has submitted that the only conclusion which can be drawn is that the assessment was arbitrary and not made to best judgment, we cannot accept that submission. We accept that Mr. Reynolds could and should have done a better job than he did but that is not the same thing as saying that he did not make the assessment exercising best judgment. There was some evidence upon which he could conclude that there had been a significant under-declaration of output tax and the Appellant had failed to keep proper  records. Mr. Reynolds was in our view incorrect in his assessment but he did not act in bad faith or without some basis in fact for his view. Accordingly we reject the submission that the assessment was not made to best judgment.       
35.	Mr. Nawaz in his submissions has made a number of other points. Thus he observes that the Respondents were slow in responding to his requests for clarification of how the Respondents had calculated their figures for purchase prices and it was not helpful that the Respondents only produced their revised assessment on the first day of the hearing although the information upon which it was based had been provided by Mr. Nawaz sometime beforehand. Again, following the first 2 days of the hearing the Respondents were slow in responding to his calculations set out in his letter dated 30 April 2008. It was not until the resumed hearing that any real consideration was apparently given by the Respondents to the question of what were the proper purchase prices of drinks for the relevant quarter. The remaining points in that letter do not appear to have been fully addressed. However none of these or the points raised by Mr. Nawaz satisfy us that the Respondents did not make the original assessment to best judgment.
36.	For the sake of completeness we would also mention that we have considered the point, which was not expressly raised by Mr. Nawaz, that the original assessment was made in the amount it was because of the imminent expiry of time limits for making an assessment going back to 05/03. See 3/81. It is also to be noted that in his letter dated 21 March 2006 Mr. Reynolds said that he had raised an assessment but would allow a period of 28 days for the Appellant to present its response. The assessment was raised on the same day without allowing any time for a response. This does not however in our view establish any lack of bona fides in raising the assessment or that the figures on which it was based were arbitrary. The circumstances that it was considered that a time limit was about to expire or that the taxpayer was not actually afforded 28 days within which to provide a response before the assessment was made do not show that the assessing officer did not act in good faith or that the officer actually thought that his figures were incorrect.
37.	Accordingly we hold that the assessment was made to best judgment within s. 73 of the Act.
Misdeclaration penalties.
38.	Under s.63 of the Act a misdeclaration penalty may only be raised in relation to an understatement of the amount of VAT where the tax under-declared equals the lesser of £1,000,000 or 30% of the gross amount of VAT for the relevant period. On the figures contained in the original assessment, it is clear that the tax under-declared exceeded 30% of the gross amount of VAT which should have been stated on the relevant returns. However on the basis of the figures which we have determined this condition is only satisfied in relation to the period 02/05 where the amount of VAT under declared is £6205.23. See the Appendix to this Decision. Under s. 64 of the Act the relevant figure is 10% and not 30%. On the figures we have determined, this condition is satisfied for all the periods with the exception of the period 05/03. However there is no evidence before us to show that any penalty liability notice as required by s. 64 (2) of the Act was ever served upon the Appellant and the penalty can only be supported under s. 63 of the Act. We have considered whether the Appellant had any reasonable excuse for the under-declaration for the period 02/05. Mr. Nawaz in his submissions has not suggested any circumstances giving rise to a reasonable excuse and we can find none in the evidence before us. Accordingly the penalty is upheld for the period 02/05 but in the reduced sum of £930.75, being 15% of the under-declared VAT.
39.	Mr. Nawaz has attached to his closing submissions a document headed “Concerns arising from procedural problems at the hearing”. In this document he has made some of criticisms of how the Tribunal dealt with a number of matters at the hearing. We have noted what is said but these matters do not affect the calculation of the amount of tax involved. It is not in our view appropriate for the Tribunal to revisit procedural matters which have already been dealt with.
Decision.
40.	The order of the Tribunal is that the assessments for under-declared tax are confirmed in the sums totalling £18,747.90 set out in the Appendix to this Decision and the penalty in the sum of £930.75. The Respondents have not sought any direction as to costs. Mr. Nawaz has submitted that the Appellant should have its costs of the appeal. Although the Appellant has been successful in reducing significantly the amounts of the assessments and the penalties, it has not succeeded in showing that no tax or penalties are due. The Appellant however has been successful on the issue of the calculation of the purchases set out in Schedule A and also in relation to wastages. On the other hand, it has failed on the issue of the mark-up. A direction as to costs based on issues would not in our view be appropriate as the issues are closely intertwined and there is no clear disparate issue which can readily be separated from the others. In these circumstances the proper direction, in our view, is that each party should bear its own costs and accordingly we make no direction as to costs.
41.	The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.                         
MAN/06/0260

ELSIE GILLILAND
TRIBUNAL JUDGE
Release Date: 16 December 2009
 
Appendix
LANCERS RESTAURANT LIMITED										
Recalculation of Parts to total overview (A) using £986.60 allowances							
	Period 05/05	02.05	11.04	08.04	05.04	02.04	11.03	08.03	05.03		
COGS (from Sch A)	4861.02	6189.33	4876.81	5140.37	5464.07	4881.21	5459.3	5326.13	3138.75		
											
Allowances	986.60	986.60	986.60	986.60	986.60	986.60	986.60	986.60	986.60		
											
	3874.42	5202.73	3890.21	4153.77	4477.47	3894.61	4472.7	4339.53	2152.15		
											
Mark up 206%	11855.73	15920.35	11904.04	12710.54	13701.06	11917.51	13686.46	13278.96	6585.58		
											
Parts to total 18.22%											
Predicted sales	65069.84	87378.45	65335.03	69761.45	75197.90	65408.93	75117.79	72881.24	36144.78		
											
OT on predicted sales	11387.22	15291.23	11433.63	12208.25	13159.63	11446.56	13145.61	12754.22	6325.34		
											
Output tax declared	11059.80	9086.00	9574.00	9967.00	10851.00	9655.00	10695.00	10799.00	6717.00		
											
Output tax difference	327.42	6205.23	1859.63	2241.25	2308.63	1791.56	2450.61	1955.22	-391.66		

Total potential underpayment	18747.90