[2010] UKFTT 592 (TC)

TC00842

Appeal number: LON/2008/0448

VAT – ASSESSMENT – Appellant contended that the assessment should be reduced to nil – Tribunal satisfied that there had been a suppression of sales – quantum of the assessment reconsidered in the light of the available evidence – quantum reduced – associated mis-declaration penalties reduced accordingly.

FIRST-TIER TRIBUNAL

TAX 

	ARASH POULADDEJ	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	 MICHAEL TILDESLEY OBE (TRIBUNAL JUDGE) 
				MICHAEL TAYLOR CBE DL																
Sitting in public at St Catherines House, 5 Notte Street, Plymouth, Devon PL1 2TS on 23 August 2010. 

Richard Barlow counsel instructed by Bishop Fleming Chartered Accountants for the Appellant

Robert Wastell counsel instructed by the General Counsel and Solicitor to HM Revenue and Customs, for HMRC

The proceedings were adjourned part heard to receive closing submissions from the parties

© CROWN COPYRIGHT 2010

DECISION
The Appeal
1.	The Appellant appealed against an assessment for unpaid VAT relating to the accounting periods from 07/04 to 04/07 save for period 07/05 and mis-declaration penalties. The original assessment dated 16 August 2007 was issued in the sum of ₤33,607, which had been reduced to ₤19,203 as at the date of hearing. Four mis-declaration penalties totalling ₤1,858 were imposed on 6 September 2007 in respect of periods 10/04, 01/05, 01/07, and 04/07.
2.	The Appellant was the sole proprietor of a food takeaway outlet in Torquay which traded under the name of “Pappas Takeaway” selling such foods as pizzas, kebabs, burgers, fried chicken and chips.
3.	The Appellant denied that he had under declared the VAT on the sales from “Pappas Takeaway” during the relevant periods. The Appellant argued that the assessment should be reduced to nil. Although the Appellant accepted that the disputed assessment was made to best judgment, he contended that the assessment was fatally flawed and afforded no basis for assessing an amount of VAT as under-declared. HMRC had not alleged any dishonesty on the Appellant’s part. The Appellant submitted that the Tribunal had a positive obligation to consider quantum in the light of all the material before it.
4.	HMRC argued that the Appellant had under declared the VAT on the sales from “Pappas Takeaway”.  HMRC submitted that the assessment was raised to best judgment and that it was a fair and reasonable assessment of the amount of VAT due.  HMRC acknowledged that the Tribunal should consider the assessment in the light of the material before it and can substitute its own figure.
5.	The dispute was, therefore, one of fact: whether the Appellant had under declared the VAT on the sales from “Pappas Takeaway” and if he had, what was the correct amount of VAT due.   
6.	The Tribunal heard evidence from the Appellant and Mr Dean Graham, the Appellant’s son, who managed Pappas Takeaway on a day-to-day basis. Mr Raymond Rimes and Mr Leslie Bingham testified for HMRC. Mr Rimes was responsible for the assessment. Mr Bingham was the review officer. An agreed bundle of documents was admitted in evidence. On 23 August 2010 there was insufficient time to complete the hearing which meant that the parties made their closing submissions in writing.
Overview of the Evidence
 HMRC
7.	On 10 April 2007 Mr Rimes made a routine compliance visit of the Appellant’s business by attending the address of Mrs Rogers, the Appellant’s book-keeper, where he inspected the business records for Pappa’s Takeaway. Mrs Rogers advised Mr Rimes that the business was closed for approximately two months in May 2005 following a fire at the premises.
8.	Mr Rimes decided to concentrate his attention on trading in the post fire period to check spending on renovations and investigate why the post-fire declarations and mark ups were so modest.  He first attempted to trace the trail of cash to the declarations in the VAT return for the 07/06 quarter which he was unable to complete because the till tails for that period were blank. Mr Rimes then turned his attention to the period 1 November 2005 to 31 December 2005, and noted the following discrepancies for Till 2:
(1)	Missing entry in the cash book for 27 November 2005 takings of ₤591.13 as indicated by the Grand Totals on the Z readings.
(2)	The Z reading for 30 December 2005 was a negative figure (-₤6,047.72) which had reduced the Grand Total.
(3)	The Z reading for New Year’s Eve was taken at 00:06hrs on 1 January 2007, with a value of ₤286.26 compared to the previous year when the till had been used to 04:03 hrs. 
(4)	The average sale value of ₤1.19 for 2,383 transactions between 3 and 31 December 2005 was significantly lower than the average value of ₤4.46 for the 1,995 transactions for the period 31 December 2005 to 29 January 2006.
(5)	A check of Z readings from Till 1 for the same quarter showed similar missing Z readings (2, 3 and 4 November 2005) or print not legible (31 December 2005 to 2 January 2006).
9.	In view of the discrepancies Mr Rimes carried out an alternative credibility check on the amount of packaging purchased. This check revealed that sufficient packaging for approximately 22,600 dishes had been purchased in 01/07 quarter which together with an average spend of ₤3 per transaction produced an expected gross turnover of ₤67,000 compared to the declared gross turnover of ₤38,513.
10.	On 26 April 2007 Mr Rimes visited the business premises and spoke to the Appellant. Mr Rimes established that
(1)	The business was open every day from 17:00 to 02:00 hrs.
(2)	The price list had not altered for two to three years, and was highly competitive with other similar businesses operating in the area. The relatively cheap prices and the competitive environment meant that the Appellant had no scope to offer discounts and promotions on his products and was unable to increase prices.
(3)	The Appellant offered free delivery to customers with orders over ₤4. The Appellant’s members of staff delivered the order using their own vehicles for which the Appellant paid a mileage allowance. According to the Appellant cash from customer’s deliveries were run through the tills on the driver’s return.
11.	On 15 May 2007 Mr Rimes carried out a more detailed investigation of the purchase invoices. This time he took a sample year from 1 August 2005 to 31 July 2006 and analysed the total purchases of each packaging line and used the price list to identify a typical average price for each line.   Mr Rimes concluded from his calculations that the Appellant had under declared his sales. On 23 May 2007 he put his findings in writing to the Appellant requesting his comments. Mr Rimes noted in his letter the large volumes of packaging purchased which was difficult to reconcile with the amount of sales declared.  On 16 July 2007 Mr Brown of Bishop Fleming, the Appellant’s advisers, responded to the letter giving details of stock, wastage, special offers and own consumption  which should be incorporated into the calculation. Mr Brown challenged the basis of Mr Rimes’ average prices, which he qualified with the statement that it was not of great consequence.
12.	Mr Rimes took the following decisions in respect of Mr Brown’s comments:
(1)	He agreed to make an allowance for the opening and closing stock, and wastage.
(2)	He took no account of the suggested discounting of the published prices because of the previous information supplied by the Appellant. Mr Rimes, however, accepted the estimates of free and discounted meals given to local business people and taxi drivers.
(3)	He agreed that the average prices applied in the calculation were not an arithmetical average of the prices for specific categories of meals. In Mr Rimes’ view, an estimated price based on an arithmetical average would in most cases disadvantage the Appellant.
(4)	He agreed to Mr Brown’s proposal regarding the average prices for the chicken meals.
(5)	He did not accept that five members of staff were consuming three cans of drink every day. Mr Rimes drawing on his experience inserted an estimate of 5 per cent of total drinks for free drinks consumption by staff.
(6)	He rejected a discount for meals consumed by staff because they were eaten immediately and did not require packaging. 
13.	On 27 July 2007 Mr Rimes sent Mr Brown a pre-assessment schedule based on his original calculations modified in the light of the additional information supplied by Mr Brown. Mr Rimes pointed out that he believed that the assessment erred on the side of caution, particularly as he took no account of several unquantifiable sales. Mr Rimes calculated a suppression rate of 48 per cent based on the estimated sales for the year 1 August 2005 to 31 July 2006 and applied this to the VAT quarters from 07/04 to 04/07 inclusive except the 7/05 quarter when the business was closed. On 27 July 2007 Mr Rimes issued an assessment in the sum of ₤33,607.
14.	On 10 September 2007 Mr Brown requested a review of the assessment. Mr Bingham, the review officer, requested Mr Rimes to carry out a short invigilation exercise. The purpose of the exercise was to clarify specific points raised by Mr Brown in respect of till readings and use of packaging but not to verify the assessment itself. The exercise was conducted by Mr Rimes and Ms Hadaway on Wednesday 3 October 2007 between the times of 23:58 and 02:25 hours when there were three members of staff including Mr Graham and a delivery driver present. During the evening there were ten customers, all of whom paid cash, whilst the driver made two trips from the premises delivering five orders.  Mr Rimes observed that Mr Graham did not use two chip trays per portion. Further several customers were given additional free toppings or extras but this did not involve discounting the basic price charged nor did it require additional packaging. One member of staff had a pizza but no packaging was used. Mr Rimes was unable to obtain the audit rolls from the tills. The Appellant did not use the audit roll facility for the tills which meant that there was no independent means of verifying the individual transactions that make up the end of day Z readings. Mr Rimes and his colleague did not witness members of staff taking food home which was confirmed by members of staff who told him that as a rule they did not do so. 
15.	On 5 December 2007 Mr Bingham responded to Mr Brown’s request for a review. Mr Bingham challenged the Appellant’s submissions on the allowance for free drinks to members of staff. Mr Bingham pointed out that the Appellant had admitted that members of staff were limited to two or three drinks, although he seldom enforced the limit. Further Mr Rimes had discussed the drinks consumption with one member of staff who informed him that they were allowed no more than two free drinks. Mr Bingham, however, took on board some of Mr Brown’s representations, and requested his views on the revised figures which Mr Brown did on 3 January 2008. Mr Bingham responded on 1 February 2008 stating that he had taken the opportunity to review the case again in a bid to bring this long-running dispute to a conclusion. With this in mind Mr Bingham decided to accept Mr Brown’s figures on cans of drink and staff consumption of meals. Despite his concession Mr Bingham emphasised that he was of the opinion that Mr Rimes’ basis for calculating the average selling price gave a fair and reasonable outcome. Mr Bingham reduced the assessment to ₤19,610. Mr Bingham’s amended assessment, however, repeated the error in Mr Brown’s calculation of 8,000 for burger boxes, rather than 10,300.
16.	At the hearing Mr Bingham submitted a revised calculation for the assessment which was ₤19,203.  The revised calculation corrected the error with the number of burger boxes, and took account of the Appellant’s submissions on the quantity of chippy trays which was reduced to 14,350. Unfortunately with the revised calculation Mr Bingham transposed the quantities for the 10 and 12 inch pizza boxes which had the effect of depressing the assessment.
The Appellant
17.	The Appellant had been in business at “Pappas Takeaway” for 21 years. The Appellant asserted that he did not suppress sales, and that he had accounted for the correct VAT due in the disputed periods.  The Appellant explained that over the counter sales were either rung through the tills or the credit card machine. The sales from home deliveries were recorded in the tills when the driver returned to the shop with the takings. The Appellant insisted that he instructed his staff to enter all sales through the tills and not to use the no sale button. The Appellant stated that he or a member of his family was present in the shop throughout the opening hours to ensure that his instructions were carried out. The Tribunal formed the view that the Appellant was present in the shop from time to time but that his son, Mr Graham, acted as the day to day manager of the takeaway.
18.	According to the Appellant, the Z readings for the tills and the total of credit card sales were taken at the close of business for each day. These records were then kept in the office above the takeaway and collected weekly by the Appellant’s book-keeper. The daily cash takings were placed in the safe and banked at the end of the week.  The book-keeper used the records of the daily cash takings to compile the quarterly VAT return which was signed by the Appellant. The book-keeper also performed a regular reconciliation of the takings with bank statement. 
19.	Mr Rimes discovered that the Appellant did not use the audit facility on the tills. This facility would have recorded individual transactions including no sales and refunds. The Appellant acknowledged his inattentiveness over the keeping of audit till rolls. Mr Graham considered the tills antiquated, particularly as it was necessary to feed the paper through the till to print the Z readings. Mr Graham confirmed that the tills did not have dedicated buttons for specific meals. In those circumstances it was necessary to ring the cash value of the sale in the till. The Appellant did not retain records of home deliveries. Normally the Appellant wrote the order on slips which had carbonised copies with one slip given to the customer, with the other returned to the shop and destroyed after one week. Mr Rimes, however, observed Mr Graham writing the deliveries on scraps of paper on the night of the invigilation, which according to the Appellant was because he had run out of the carbonised slips.
20.	Mr Brown for the Appellant supplied HMRC with two alternative calculations dated 16 July 2007 and 10 September 2007 based on the packaging which contradicted the conclusions reached by Mr Rimes. In the 16 July 2007 calculation Mr Brown adjusted the quantities for stock, decreased the number of Linpac chippy trays by half and reduced the number of kebabs sold by 3,500. Mr Brown adopted a lower average price for each meal category than that applied by Mr Rimes.  Mr Brown then made a series of deductions for the consumption by the Appellant and his staff of meals and drinks, for returns and for discounted meals given to hotel porters and taxi drivers. As a result the 16 July calculation produced a notional takings figure of ₤162,000 which was almost the same as the declared takings of ₤161,000.   
21.	The 10 September 2007 calculation followed a detailed interview between Mr Brown and the Appellant which altered some of the assumptions made in the July calculation but still produced a similar notional takings figure, namely ₤161,830.  The Appellant accepted Mr Rimes’ estimate of 6,000 kebabs, having checked the numbers of kebabs (123) sold the previous week. The Appellant, however, adjusted the values ascribed to discounted meals for taxi drivers and for free meals given to staff and reduced the average price for each meal category. Mr Brown’s calculations contained several arithmetical errors which depressed the notional takings. The errors concerned the quantities for burger and chicken boxes, and the average meal price which formed the basis for discounted meals and staff meals.
22.	On 19 November 2007 Mr Brown provided details of the takings for nine Wednesdays from 22 August 2007 to 17 October 2007, ostensibly to demonstrate the random nature of the Appellant’s business which was highly dependent on outside factors, such as the weather and specific events. The total takings for those Wednesdays were ₤3,666.93 with average daily takings of ₤407.43.
23.	The Appellant challenged the validity of Mr Rimes’ concerns about the Z readings. The Appellant pointed out that Mr Rimes accepted that the Appellant’s book-keeper was accurately recording and accounting for the declared takings from the till Z readings. Further Mr Rimes acknowledged that the book-keeper had used the Grand Totals for Z readings to calculate the daily takings where the Z reading was missing or illegible. Mr Rimes, however, indicated to the book-keeper that he may return to carry out further checks as he had queries regarding the amount of packaging purchased.  The blank till slips arose because the ink had faded.
24.	Mr Brown explained that the Appellant told his book-keeper that some-one had mistakenly entered the large sum of ₤6,047 as a refund which appeared as the negative Z reading on 30 December 2005. According to the Appellant, the correct figure was ₤647.72 which represented the daily takings for the day. The book-keeper applied the correct figure in the VAT return. In cross examination the Appellant and Mr Graham, however, denied knowledge of the negative Z readings.
25.	The Appellant stated that he closed the premises early on New Years Eve in 2006 because he did not want to hire a doorkeeper which was a new requirement imposed by the local council on premises open late. 
26.	Mr Brown pointed out that the low average sale value of ₤1.19 for the transactions between 3 and 31 December 2005 was due to the inclusion of the large negative Z reading of ₤6,047 in the Grand Total from which the average was calculated. If the negative reading was replaced with the correct figure of ₤647 the average sale value rose to ₤4.60 which was in line with the figure for the previous year.
Consideration
27.	The dispute between the parties concerned the correct amount of VAT due for the accounting periods from 07/04 to 04/07 save for period 07/05. The Tribunal’s task is to find the correct amount of tax, so far as possible on the material properly before it, with the burden on the balance of probabilities resting on the Appellant. 
28.	The Appellant’s case was that he had declared and accounted for the correct amount of VAT, and thus the assessment should be reduced to nil. The Appellant’s position consisted of two distinct but linked arguments. The Appellant asserted that he kept accurate records of the takings from his business as represented by the till Z readings and the credit card slips. Moreover the assumptions underpinning the assessment were fatally flawed. The Appellant had provided credible answers to Mr Rimes’ concerns with the Z readings. The purported assessment derived from the Appellant’s use of packaging materials was unreliable which was demonstrated by the number of alterations made to the assessment by HMRC.
29.	 The Tribunal is not impressed with the oral testimony given by the Appellant and Mr Graham. Although they supplied believable reasons for the blank till slips and the anomaly with early closing on 1 January 2006, they did not give plausible explanations for the missing and negative Z readings identified by Mr Rimes, and for their failure to maintain audit till rolls.  Their slipshod attitude to record keeping was also demonstrated by Mr Graham writing details of delivery sales on scraps of paper on the night of invigilation. According to Mr Brown, Mr Graham used scraps of paper because the Appellant had run out of supplies of the carbonised slips. The Tribunal considers the excuse offered by Mr Brown was another example of the Appellant finding excuses for not keeping accurate records. The Tribunal is satisfied that the Appellant demonstrated a total disregard of the record keeping requirements for retail sales. In those circumstances the Tribunal considers the Appellant’s reliance on incomplete Z readings to corroborate his assertion that no suppression of sales took place highly problematical. 
30.	Equally the Tribunal finds unsatisfactory the Appellant’s argument that the errors in the Z readings were corrected by his book-keeper by using the Grand Totals in the Z readings when preparing the VAT returns. The efforts of the book-keeper did not remove the concerns about how the Appellant ran his business posed by his poor record keeping. Further it was not possible for the book-keeper to correct all errors by reference to the Grand Total. According to Mr Brown in a letter dated 6 November 2008 the Appellant instructed his book-keeper to correct the negative entry of ₤6,047 on 30 December 2005 by substituting it with a positive figure of ₤647.  This situation demonstrated that the book-keeper in the absence of good record keeping had no independent means of verifying the correctness of the figure of ₤647, and was reliant on what she was told. The Tribunal also notes that the Appellant in his evidence could not recall the large negative entry which was another anomaly in his case.
31.	Initially the Appellant in evidence indicated that he was present at all times in the shop giving the impression that he maintained constant supervision of the activities in the shop. This impression was undermined by his later evidence that he took a day off and did not work throughout the night. Mr Brown in correspondence with HMRC dated 10 September 2007 stated that the Appellant and his wife work in the shop from time to time so there was always someone there with authority to give a discount. The Tribunal formed the view from the evidence that Mr Graham was the constant presence in the shop. The Appellant’s contradictory accounts of his attendance at the shop added to the Tribunal’s disquiet about the reliability of his evidence.
32.	The Tribunal considers that Mr Rimes had solid grounds for his conclusion that the VAT in respect of the sales from “Pappas Takeaway” had been under-declared. The solid grounds were the unreliability of the Z readings, and the credibility checks carried out by Mr Rimes which indicated a significant suppression of sales. In short the Appellant could not substantiate his declared sales with a meaningful audit trail. Given those circumstances Mr Rimes was justified in raising an assessment for unpaid VAT against the Appellant. 
33.	The Tribunal’s findings on the inadequacies of the Z readings and the contradictions in the Appellant’s evidence seriously weakened the Appellant’s challenge to the assessment. He adduced no alternative evidence to the discredited Z readings to substantiate the purported level of sales from his business. Instead the Appellant argued that the method adopted by HMRC to assess the under declared VAT was fatally flawed and afforded no basis for assessing an amount of tax as under-declared. This argument was not about whether the assessment was made to best judgment but went direct to the question of quantum, and if upheld supported the Appellant’s assertion that no suppression of sales took place in “Pappas Takeaway”. 
34.	The argument on the method of assessment comprised several lines of attack. First the Appellant suggested that a calculation based on packaging was shown to be inherently incorrect by the fact that Mr Rimes gave up any attempt to estimate the usage of newsprint.  Mr Rimes indicated that he had used quantities of packaging many times in the past as an effective proxy for sales. In this Appeal Mr Rimes had based his assessment on twelve months worth of purchases of packaging, the details of which were taken from the Appellant’s purchase invoices. In the Tribunal’s view there was a clear relationship between the specific types of meals sold by the Appellant and the different forms of packaging used in the shop except  the newsprint. In his assessment Mr Rimes recognised that newsprint had multiple uses and decided it represented 1500 kebab sales per quarter.  Mr Brown for the Appellant in his letter dated  10 September 2007 accepted that Mr Rimes’ estimated kebab sales were in line with the number of kebabs sold in a sample week chosen by the Appellant. At the hearing the Appellant contested Mr Rimes’ assumption regarding the allocation of newsprint to the sales of kebabs. Newsprint constituted just one of the eight packaging types applied by Mr Rimes in his assessment. Having regard to the relationship between meal categories and packaging types, and the large sample used (12 months purchases) the Tribunal is satisfied that Mr Rimes’ choice of packaging as a basis for assessment was reasonable, and had the potential to provide a reliable guide to the number of sales subject to the evidence. The Appellant suggested no other proxy for sales.
35.	Mr Rimes used the Appellant’s price list to identify a typical average price for each meal category associated with a particular type of packaging. Mr Rimes had established beforehand with the Appellant that the prices on the list were correct and current. The Appellant also stated that the prices had not changed for two to three years because of local competition keeping prices down. The Appellant criticised Mr Rimes’ use of an average price. The Appellant pointed out that it was simply an estimate and that Mr Rimes had made no attempt to weight the price estimate according to the number of different types of meals actually sold. The Tribunal considers the Appellant’s criticisms somewhat hollow. Mr Rimes adopted the concept of average price because the Appellant did not keep proper records of his sales. The Appellant was best placed to provide information regarding the numbers and types of meals actually sold. Throughout the history of the assessment the Appellant has been given opportunities to challenge the assumptions regarding average price but at no stage has the Appellant supplied statistical information on this topic. Instead Mr Brown for the Appellant put forward various theoretical arguments disparaging average price, and proposed reductions in the price without any factual basis other than bald assertions that the average price was too high.  Mr Rimes took a view from the price list of what he considered to be a reasonable average purchase rather than the strict arithmetical average price for  the range of  meals in that group. Mr Rimes pointed out that the reasonable average purchase worked to the Appellant’s benefit because the resulting calculation was significantly lower than one based on an arithmetical average. The Tribunal noted that the range of prices for the various products on the price list was not wide, and that Mr Rimes generally adopted an average price at the lower end of the range. The Tribunal considers that reasonable average purchase was not an arbitrary hypothetical concept but one derived from the Appellant’s price list and Mr Rimes’ judgment. The Tribunal finds that the use of a reasonable average purchase was an acceptable starting point for determining the value of typical meals within each product range.
36.	The Appellant questioned the value of the invigilation exercise, pointing out that the Officers observed just eleven sales in total excluding deliveries. Further the Officers were only able to ascertain the prices in six of the eleven sales. Mr Rimes explained that the purpose of the invigilation was to review some of his conclusions about the Appellant’s business not to verify the assessment.  The Tribunal considers that the Appellant’s concerns about the invigilation were material to the evidence on quantum but not to the principles underpinning the assessment of which the invigilation played no part. 
37.	The Appellant placed great store on the successive reductions in the amount of unpaid VAT assessed which in his view demonstrated the inherent unreliability of HMRC’s approach. Initially on 23 May 2007 Mr Rimes suggested that the value of the under declared sales in any one year was ₤102,000 which would have given rise to an assessment of ₤41,775. On 16 August 2007 Mr Rimes issued an assessment in the amount of ₤33,607. Mr Bingham in his capacity of review officer then took over decreasing the amount assessed to ₤26,786 (5 December 2007), ₤19,610 (1 February 2008) and ₤19,203 (HMRC’s skeleton argument). The Tribunal makes the following observations:
(1)	The nature of the decisions taken by Mr Rimes and Mr Bingham were an inevitable and correct consequence of the assessment process with the Officers sharing their initial view with Appellant and taking on board his representations. Thus the amounts proposed by Mr Rimes and Mr Bingham on 23 May 2007 and 5 December 2007 respectively were their provisional figures based on the material before them, which were subsequently amended having regard to the Appellant’s submissions. Finally Mr Bingham corrected some arithmetical errors in his assessment on 1 February 2008 which resulted in the revised figure of ₤19,203 in the skeleton argument. 
(2)	Mr Bingham was acting in the capacity of a review officer and by the nature of that position required to come to an independent view of the assessment.
(3)	There was no difference between Mr Bingham and Mr Rimes on the substantive principles (packaging quantities and reasonable average purchase) underpinning the method of assessment. Mr Bingham stated that he was still of the opinion that Mr Rimes’ basis for calculating the average selling price gave a fair and reasonable outcome.
(4)	The principal variation between the two Officers was Mr Bingham’s treatment of the ancillary matters, in particular the cans of drink and own consumption. 
(5)	Mr Bingham expressed an intention to bring the long running dispute to a conclusion which in the Tribunal’s view led him to adopt a more conciliatory approach than Mr Rimes on the ancillary matters and repeat the arithmetical errors made by Mr Brown in his computations.
The Tribunal is satisfied that the successive reductions in the assessed amount were a natural consequence of the Officers exercising their responsibilities rationally and bona fide. The successive reductions did not demonstrate that the assessment was fatally flawed.
38.	The Tribunal now considers the question of quantum on the available evidence before it. The Tribunal has already indicated that it considers the quantities of the different packaging types as identified from the Appellant’s purchasing records as a reliable starting point for determining the number of meals sold. The Tribunal accepts the Appellant’s adjustments for stock as set out in Mr Brown’s letter dated 16 July 2007, which were 200 boxes at any given time and 600 cans of drink, except the chippy trays when a figure of 400 for stock adjustment was fixed.
39.	Mr Rimes applied the concept of the reasonable average purchase derived from the Appellant’s price list to determine the typical value of a meal under the various categories. Mr Brown for the Appellant in his letters of 16 July and 10 September 2007 supplied two different sets of values for typical meals. Mr Brown did not supply an explanation for the two different sets except that he considered the values chosen by Mr Rimes too high. The Appellant in evidence stated that the values proposed by Mr Brown were based on his experience. The Appellant, however, was unable to say which of the two sets were accurate. Finally the Appellant supplied no statistical evidence of the numbers of the different types of meals sold to substantiate his assertion that a weighted average value might produce a different result from that arrived at by the Appellant. The Tribunal intends to weigh up the competing values against the evidence under each of the categories.
40.	The Appellant purchased 6,550 12 inch pizza boxes and 6,100 10 inch pizza boxes which the Tribunal reduced to 6,350 and 5,900 respectively to take account of the adjustments for stock. The Appellant indicated that each box would be used for one pizza. Garlic bread would also be put in a pizza box. Mr Graham stated that pizzas with plain offerings were the most popular seller. The price list revealed that the price for small pizzas ranged from ₤4 to ₤7, whilst large pizzas ranged from ₤5.50 to ₤8.50. The comparative figures for garlic bread were ₤2.50 to ₤3 (small), and ₤3.50 to ₤4 (large). The Appellant supplied no evidence of the amount of garlic bread sold except that complimentary bread was given in respect of orders in excess of ₤10.
41.	The values proposed by the Appellant were ₤4.50 (small); and ₤5.50/ ₤6 (large). Mr Rimes suggested ₤5 (small) and ₤6.50 (large). The average figures for the complete range were ₤4.89 (small); and ₤6.32 (large) and ₤5.25 (small) and ₤6.75 (large) for pizzas excluding garlic bread.  The Tribunal on balance decides that the value for small and large pizzas was ₤4.50 (small); and ₤6 (large) respectively having regard to the evidence that the cheese tomato pizza was the most popular seller and the lower price allocated to garlic bread.
42.	The Appellant purchased 10,500 burger boxes which the Tribunal reduced to 10,300 to take account of the adjustments for stock. The Appellant indicated that burger boxes were used for kebabs not sold in pitta bread, kebabs with a portion of chips, jacket potatoes, and chips and cheese. Mr Graham indicated that there was an even split between small and large burgers.
43.	According to the price list small and large burgers retailed at ₤2.30 (small); and ₤3.30 (large).  A supplement of 20 pence was charged for cheese. The retail price of jacket potatoes ranged from ₤1.50 to ₤2.50; chips and cheese at ₤2.50, meat kebabs ₤3.50 (small) to ₤6 (large), and ₤5 for kebab and chips.
44.	The Appellant put a composite figure of ₤2.50/₤3 for small and large burgers, whilst Mr Rimes adopted a figure of ₤3.  The Tribunal decides on a composite price of ₤2.80 to reflect Mr Graham’s evidence that there was an even split between the sales of small and large burgers. The Tribunal has disregarded the other uses for the burger boxes which in the Tribunal’s view would in all probability increase the value of the composite price. 
45.	The Appellant purchased 2,100 medium and 2,750 large chicken boxes which the Tribunal reduced to 1,900 and 2,550 respectively to take account of the adjustments for stock. The Appellant stated that he would use the medium box for two pieces of chicken and chips, the large box for three pieces of chicken and chips. The larger portions would require two boxes. Mr Brown for the Appellant in his letter 10 September 2007 suggested that the chips would be separately packed in trays in the chicken boxes. Mr Graham, however, stated that the chips would go straight into the chicken boxes. The Tribunal prefers the evidence of Mr Graham as he was in day to day management of the store. Mr Graham also said that the chicken boxes were also used for chicken curry and chips, ribs and chips, cod and chips and sausage/saveloy and chips.
46.	The price list showed that the prices for two, three, six and eight pieces of chicken and chips were ₤3.40, ₤4.60, ₤9 and ₤11.00 respectively. The prices for the alternative uses ranged from ₤2.50 for sausage and chips to ₤6.50 for large ribs and chips. The Appellant contended for a value of ₤2.40/ ₤3 and ₤3.60/ ₤4.50 for medium and large chicken meals respectively. Mr Rimes decided on a value of ₤3.40/₤5 for medium and large chicken meals respectively. Mr Rimes reduced his original estimate of value having regard to Mr Brown’s representations.
47.	 The Tribunal decides that ₤3.40/₤5 for medium and large chicken meals respectively constituted a reasonable value for the price of those meals. The value of chicken meals using two boxes would be higher than a multiple of two of either ₤3.40 or ₤5. The Tribunal was not convinced on the evidence that there was a significant use of chicken boxes for other meals, the value of which in any event would fall within the range of ₤3.40 and ₤5.
48.	The Appellant purchased 10,000 Spacesaver trays which the Tribunal reduced to 9,800 to take account of the adjustments for stock.  Mr Brown in correspondence suggested that the trays were mainly used for chips, and fish and chips. Mr Graham, however, indicated that the trays were utilised for the English food with chips which corresponded with Mr Rimes’ view that they provided the packaging for the large English meals. The Appellant suggested that two trays were invariably used for packaging meals. Mr Graham gave a different account stating that two trays were only used if the customer specifically asked for it or for deliveries. Mr Rimes on the invigilation did not observe the use of two trays, instead the tray was wrapped in greaseproof paper (newsprint) which followed the normal commercial practice. 
49.	The price list for the English food with chips ranged from ₤2.50 for sausage and chips to ₤5 for chicken curry and chips. Cod and chips cost ₤3.50. The Appellant suggested a value of ₤2.25/ ₤2.75, whilst Mr Rimes proposed a value of ₤3.25.  The Tribunal prefers Mr Rimes’ value of ₤3.25. In the Tribunal’s view the price of ₤3.50 for fish and chips provided a helpful benchmark for the value of typical meals in the English food category.  The Tribunal considers on the evidence that the use of two Spacesaver trays for one meal was not a regular occurrence. Also the Tribunal formed the view that the overwhelming majority of meals packed in Spacesavers would  be sold over the counter and not delivered to homes. The price of English food with chips was below the ₤4 minimum for free deliveries. Deliveries would consist of the more expensive meals on the menu with the chips packed separately in the chippy trays. The Tribunal allows a notional reduction of 500 to account for the occasions when two trays were used.
50.	The Appellant purchased 19,000 Linpac chippy trays, which Mr Rimes reduced by 400 to take account of the adjustments of stock. Mr Bingham restricted the stock adjustment to 200 in his February 2008 adjustment. The Tribunal prefers a stock adjustment of 400 which represented about one week supply of chippy trays.
51.	Mr Rimes assumed that the chippy trays were used for small English meals with prices ranging from ₤1.50 to ₤3.50 which included pies and fish and chips. Mr Rimes proposed a value of ₤2.50 for a typical meal.  The Appellant indicated that the trays mainly held portions of chips which retailed at ₤1.50 for a small portion and  ₤1.80 for a larger portion. The Appellant suggested a typical value of ₤1.50/₤2.50. The Tribunal prefers the evidence of the Appellant on the use of the trays and considers that the mid point between the respective prices of small and large portions of chips of ₤1.65 represented a reasonable value for a typical meal in this category.
52.	The principal disagreement under this heading concerned whether the chips would be packed in two trays or one. The Appellant asserted that two trays were invariably used. Mr Graham indicated one tray unless the customer asked for another tray or the order formed part of a delivery. Mr Rimes considered that one tray wrapped in greaseproof paper (newsprint) would normally be used. The Tribunal concludes that it would be unusual for portions of chips to be packed in two trays except maybe for deliveries. The Appellant supplied no evidence on the number of deliveries and their proportion in relation in total sales. Mr Rimes observed on the invigilation five deliveries out of 16 sales which represented approximately 30 per cent of sales. Using the 30 per cent as a rough guide the Tribunal considers that a 20 per cent reduction in the quantity of chip trays was a fair representation of the number of times that two trays would be used. The Tribunal did not consider that every delivery would have a portion of chips separately packaged, having regard to the facts that not all meals would have chips and some meals include the chips in the same packaging. The Tribunal decides on a quantity of 14,880 for packaging the chips.
53.	The final category of packaging was newsprint. Mr Rimes accepted that newsprint had multiple uses including wrapping food trays and cleaning up spills.   The newsprint also wrapped kebabs in pitta bread. Further Mr Graham indicated that sales of sausages and saveloys were sometimes packed in the paper. Mr Rimes decided that the quantities of newsprint had no meaningful relationship with the meal categories advertised in the price list. Since kebab sales were not covered under the other packaging categories, he opted for an estimate of 1500 kebab sales per quarter at an average price of ₤5 per kebab, which completed the picture of the principal sales from the Appellant’s business. Mr Brown for the Appellant at first disputed the quantity of kebabs sold but later accepted the figure as reasonable after the Appellant had conducted a survey of the number of kebabs sold.  The evidence indicated that kebabs without pitta bread were sold in different packages. The Appellant, however, supplied no estimate of such sales. In the absence of convincing evidence to the contrary the Tribunal confirms the original agreement of 6,000 kebab sales at an average price of ₤5 per kebab. 
54.	The Appellant purchased 21,168 cans of drink which the Tribunal reduced to 20,568 to take account of the adjustments for stock. The published price for a can of drink was 70 pence. The Appellant argued that his members of staff consumed 96 cans of drink without charge each week which translated to 4,992 cans per annum. The 96 cans equate to three cans for each member of staff per day (four members of staff Monday to Wednesday; five members of staff Thursday to Sunday). Mr Rimes rejected the Appellant’s submissions arguing that staff consumption representing 25 per cent of the drinks sales was not credible. Mr Rimes allowed 20 cans per week equating to 5 per cent of sales. 
55.	Mr Rimes at the invigilation was informed by a member of staff that they were only allowed two free drinks. The Appellant acknowledged in correspondence that he had imposed a limit of two to three free drinks which he rarely enforced. Mr Bingham conceded the Appellant’s submissions on staff consumption of drinks. HMRC counsel at the hearing withdrew the concession arguing that the evidence demonstrated that the consumption of free drinks was much lower than that contended by the Appellant. Counsel suggested that Mr Rimes’ original estimate of 5 per cent of sales was more appropriate. Appellant’s counsel in response submitted that the consumption of two cans in a full shift in a hot restaurant did not provide the member of staff with sufficient hydration. In counsel’s view a higher figure than two cans was both credible and likely.
56.	The Tribunal disagreed with the submission of the Appellant’s counsel.  The Tribunal was concerned with the number of free drinks allowed by the Appellant not with the appropriate number of drinks to provide sufficient hydration. The member of staff has the choice of purchasing additional cans or drinking water. The Tribunal considers the Appellant’s proposal that members of staff consumed 25 per cent of the available sale stock made no business sense. The Tribunal accepts the evidence of the member of staff regarding the restriction of two free cans per shift, which worked out at 64 cans of drink without charge each week or 3,328 cans per annum.
57.	Mr Rimes agreed to the Appellant’s representations on wastage which constituted ten returns per week mainly in winter (16 weeks). Mr Brown’s calculation on behalf of the Appellant contained an error in that he transposed the figures for the average value of a meal. Mr Brown’s estimate of the average cost of a meal was ₤3.47 which he transposed to ₤4.73. The Tribunal has recalculated the average cost at ₤3.45 using the figures found for the quantities of meals sold and the total takings on those meals. Thus the Tribunal finds that the value allocated for wastage is ₤555.20.
58.	The Appellant contended that an allowance should be given for free meals for staff. Mr Brown suggested that the staff had three free meals a shift typically a burger when they started work, a meal during the shift and something to take home at night. The staff members would use a type of packaging to eat their meal. Mr Rimes refused an allowance for staff meals on the grounds that the assessment was based on the use of packaging and that meals for staff did not involve packaging as they were eaten immediately. Mr Bingham allowed a discount for staff meals which was based on the calculations provided by Mr Brown of 64 free meals a week at an average cost of ₤4.73 a meal. The Appellant and Mr Graham gave evidence that they had meals at the shop cooked by the Appellant’s wife which were usually served on plates. Mr Rimes observed a member of staff eat a pizza without packaging on the night of the invigilation. Mr Rimes also testified that a member of staff told him that they did not normally take meals home. 
59.	On balance the Tribunal accepts the Appellant’s submission that members of staff received two free meals a day with packaging which was consistent with the Tribunal’s finding on the number of free drinks. The Appellant’s submission acknowledged that the original suggestion of three free meals was an over-estimate. The Tribunal, however, substitutes its own finding on the average cost of a meal which produces an allowance for staff meals of ₤11,481.60.  
60.	The change in the average cost of a meal reduced the allowance given for free meals to hotel porters and the 50 per cent discount given to taxi drivers. Thus the new values for hotel porters and taxi drivers are ₤538.20 and ₤3,148.12. 
61.	The Appellant argued that some credit should be given for complimentary offers, such as free garlic bread with sales over ₤10, and discretionary discounts which he gave from time-to-time. The Tribunal decides that these practices were not material. The Tribunal agreed with Mr Rimes’ assessment that the prices charged by the Appellant were relatively low and gave limited scope for further discount. Also any reduction in value from these practices would be offset by the value of incidental sales not included in Mr Rimes’ assessment, such as sauces and desserts.
62.	The Tribunal sets out its findings and detailed calculations in Appendix one. The Tribunal decides on a figure of ₤193,821.88 for annual takings which represents a sales suppression rate of 20 per cent.   The application of a suppression rate of 20 per cent results in an under-declaration of sales to the value of ₤91,760.20 for the accounting periods from 07/04 to 04/07 save for period 07/05 and an assessment for  unpaid VAT in the sum of ₤13,661.41. The Appellant offered no evidence of mitigation or reasonable excuse in respect of the mis-declaration penalties. The Appellant acknowledged that the amount of the penalty would depend upon the Tribunal’s finding in respect of the substantive matter. In those circumstances the Tribunal fixes the penalty for the four disputed periods at ₤756. The Tribunal’s detailed calculations in respect of the assessment and the penalty are found at Appendix 2.
Decision
63.	The Tribunal’s task was to decide upon the quantum of the assessment on the evidence available to it. In view of how the Appellant presented his case it was necessary to breakdown the analysis into identifiable chunks to address the specific points raised by the Appellant. It is, however, necessary to revisit the Appellant’s principal submission that the assessment was fundamentally flawed in the light of the whole picture. The Appellant submitted that the constant reductions in the amount of the assessment discredited the principles underpinning it and that the eventual figure decided upon was within the margin of error. The Tribunal’s decision to reduce the assessment yet again would appear   to give credence to the Appellant’s submission. 
64.	The Tribunal disagrees. The Tribunal does not consider that a suppression rate of 20 per cent is within the margin of error. Further as the Tribunal explained the assessment process is not a perfect process, inevitably involving an element of informed guesswork and unavoidable inaccuracies in a properly made best of judgment assessment. The onus is on the Appellant to prove his case on the balance of responsibilities. In this respect the Appellant’s reliance on the discredited Z readings was misplaced. He failed to produce convincing evidence to substantiate his principal submission that there had been no under-declaration of VAT. Mr Rimes was correct in his conclusion that there was a prima facie case of sales suppression. The quantities of packaging and average meal purchase were derived from the Appellant’s business records and bore a clear relationship to the value of the Appellant’s sales. They were not arbitrary concepts plucked out of the air. Mr Rimes presented his findings to the Appellant’s representative and seriously considered the representations made. As did Mr Bingham when he reviewed the assessment. The Tribunal was obliged to consider the assessment afresh in the light of the available evidence which it has done. The Tribunal decides that the Appellant has failed to prove on the balance of probabilities that there was no under-declaration of VAT but that on the evidence the quantum of the assessment should be reduced.
65.	The Tribunal holds that
(1)	The assessment for the accounting periods from 07/04 to 04/07 save for period 07/05 is reduced to ₤13,661.41.
(2)	The mis-declaration penalties for periods 10/04, 01/05, 01/07, and 04/07 is reduced to ₤756.
66.	The Tribunal allows the Appeal in part.
67.	The Appellant reserved its position on costs. With the intention of avoiding additional legal costs the Tribunal expresses a preliminary view that it would not be minded to order HMRC pay the Appellant’s costs or part thereof. The Tribunal acknowledges that the Appellant has been partly successful in securing a reduction in the assessment. The Tribunal, however, was satisfied that the Appellant had under-declared VAT, which in the Tribunal’s view goes against an award of costs. If the Appellant wises to pursue his application for costs, the Tribunal would consider it on its merits despite its preliminary view. The Application for costs should be lodged with the Tribunal and HMRC within 28 days from release of the decision. HMRC will have a right of reply which must be submitted to the Tribunal and the Appellant within 56 days of the date of release. The Tribunal will determine the Application for costs, if submitted, on the basis of the written representations.
68.	Appendices One and Two form part of the decision.    
69.	 This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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.

TRIBUNAL JUDGE
RELEASE DATE: 24 November 2010

Appendix One: Tribunal’s Findings on Annual Takings 

Subject Areas	Quantities	 Av. Price 	 Takings 	
Pizza Boxes 12"	6350	 £    6.00 	 £  38,100.00 	
Pizza Boxes 10"	5900	 £    4.50 	 £  26,550.00 	
Burger Boxes	10300	 £    2.80 	 £  28,840.00 	
SF Chicken Boxes Medium	1900	 £    3.40 	 £    6,460.00 	
SF Chicken Boxes Large	2550	 £    5.00 	 £  12,750.00 	
Spacesaver Trays 	9300	 £    3.25 	 £  30,225.00 	
Linpac Chippy Trays	14880	 £    1.65 	 £  24,552.00 	
Newsprint	6000	 £    5.00 	 £  30,000.00 	
Drinks Cans	17240	 £    0.70 	 £  12,068.00 	
Total (A)			 £209,545.00 	

Allowances
Returns			 £       555.20 	
Taxi driver discounted meals		 £    3,148.12 	
Porters Free Meals			 £       538.20 	
Own Use			 £  11,481.60 	
Sub-total (B)			 £  15,723.12 	
				
Calculated Gross Revenue (A-B)			 £193,821.88 	
Declared Sales on VAT return			 £161,669.65 	
Difference			 £  32,152.23 	
Suppression Rate			20%	

		
Price of Meals minus Drinks			£197,477.00	
Number of Meals minus drinks	
		    57,180	
Average Meal Price	 		     £ 3.45	

Appendix Two: Assessment and Mis-Declaration Penalty

Quarter               Declared Takings	Un-declared	 VAT Due 	Penalty	
Q07/04	 £45,609.00 	 £  9,121.80 	 £  1,358.57 		
Q10/04	 £45,340.00 	 £  9,068.00 	 £  1,350.55 	 £  202.58 	
Q01/05	 £41,855.00 	 £  8,371.00 	 £  1,246.74 	 £  187.01 	
Q04/05	 £41,681.00 	 £  8,336.20 	 £  1,241.56 		
Q10/05	 £39,299.00 	 £  7,859.80 	 £  1,170.61 		
Q01/06	 £39,261.00 	 £  7,852.20 	 £  1,169.48 		
Q04/06	 £38,491.00 	 £  7,698.20 	 £  1,146.54 		
Q07/06	 £44,674.00 	 £  8,934.80 	 £  1,330.71 		
Q10/06	 £40,499.00 	 £  8,099.80 	 £  1,206.35 		
Q01/07	 £38,515.00 	 £  7,703.00 	 £  1,147.26 	 £ 172.09 	
Q04/07	 £43,577.00 	 £  8,715.40 	 £  1,298.04 	 £  194.71 	
Total		 £91,760.20 	 		
VAT Due			 £13,666.41		
Penalty				 ₤756.39