19135

Assessment – restaurant business founded by A in 1996 – taken over as going concern by B Ltd – A not a director – but became company secretary after lapse of time – dishonesty – invigilation – calculation and assessment from 1996.  Period restricted to the time of operation of company – and assessment reduced accordingly.

Whether to best judgement – allegations about conduct of Customs officers in general and in particular – rejected.

Penalty – proved dishonesty of A at the time of a particular invigilation – extent of time in which A had engaged in dishonest conduct – no evidence before company formation:  penalty restricted. 

EDINBURGH TRIBUNAL CENTRE

SHOMAR UDDIN/GREENLEAF (LOTHIAN) LTD
T/A EASTERN EYE	Appellant

- and -

HER MAJESTY’S REVENUE AND CUSTOMS	       Respondent

		Tribunal:	 (Chairman):  T Gordon Coutts, QC
				 (Members):   Mrs Helen M Dunn, LL.B.
						  Riaz Ahmad, BA., LL.B., C.A.

Sitting in Edinburgh on Thursday 18 & Friday 19 November 2004 and Wednesday 9, Thursday 10 and Friday 11 February 2005.

for the Appellant		Mr T Nawaz, MBA, FCA

for the Respondent	Mr Andrew Scott, Shepherd & Wedderburn, WS

© CROWN COPYRIGHT 2005.

DECISION

Introductory
The disputed decisions before the Tribunal were assessments to tax and a penalty for dishonest conduct arising out of investigations made of the trading, books and records of the Appellant.  The Eastern Eye is an Indian Restaurant and Take-away situated in the burgh of Haddington.  Mr Shomar Uddin took the step of opening such a restaurant there in 1995.  From the records produced the restaurant is a busy one and it is also known to enjoy a high reputation in the area.  It came to the attention of the Respondent as a result of a general investigation, known as a post-code sweep.  The restaurant was observed, noted to be busy and seating assessed.  A menu was collected and an evaluation of potential turnover made.  That aroused the suspicion that there were discrepancies in the returns and declarations which had been made to the Respondent throughout the course of trading from opening until 30 April 2001.  

History of Appellant’s Trading
Mr Shomar Uddin opened the Eastern Eye and began trading in December 1995.  At some stage Mr Anhar Uddin came and worked in the premises as a chef.  On 24 August 1999 Mr Shomar Uddin transferred the Eastern Eye business to Greenleaf (Lothian) Ltd as a going concern.  Mr Anhar Uddin was the Director and Mr Shomar Uddin’s wife Company Secretary.  She remained Company Secretary until 29 December 1999 when Mr Shomar Uddin took on that position himself.

Contrary to what was stated by the Appellant’s then representative Mr Shomar Uddin is not and never was a Director of Greenleaf.  Accordingly the only person with directorial responsibilities was Mr Anhar Uddin throughout.  He said at interview on 6 June 2002 that he continued to work as a chef and took very little if any part in the running of the business.  Apart from that interview there was no evidence of any of Mr Anhar Uddin’s direct role or responsibilities or how he fulfilled his duties as a Director.  Greenleaf (Lothian) Ltd no longer trades although it still exists.

Evidence before the Tribunal
The Tribunal heard oral evidence from various officers of the Respondent, in particular officer Matthews (who was in charge of the investigation) officer Small, officer Munro, officer Shearer and officer Rarity.  A witness statement from officer Carty was agreed.  This evidence was about the visits to the premises to check the Appellant’s trading.

The only oral evidence from the Appellant was from Mr Shomar Uddin himself.

In addition there were produced the said officers notebooks, which were spoken to, and the record of interview with Mr Shomar Uddin and the Director of the Appellant company Mr Anhar Uddin.  Mr Anhar Uddin did not give oral evidence nor did the company’s accountant or book-keeper Mr Dempster.  

History of Appeal
Various problems in relation to the matters under appeal arose.  The original assessments required amendment.  Ultimately a Statement of Defence was produced to which reference will be made.

The Appellant’s accountant Mr Dempster although he had appeared earlier at an interview arranged so that the Respondents could collect books and records was superseded by a firm Hossain Moorehead and Co in July 2001.  They appeared to be acting as accountants and entered into some correspondence with the Respondent professing calculations and making representations.  In September 2003 the Appellant’s present representative a Chartered Accountant operating from Bradford took over the case for the Appellants.

In January 2004 a defence, long overdue, was lodged by Mr Nawaz.  In it the following sentences appear:

“However, given the Respondents’ typical method of acting as agent provacateurs it is averred by the Appellants that on 21 April there were a lot of new faces, paying cash, suggesting that the norm for such visits, of takings bolstered by Customs Officers or others consuming meals at their behest had been taking place”.

“There is a song-and-dance about a marked £20 note tendered by Customs officers in consuming a meal and this was found to be missing.  Within the interview notes is a suggestion from the assessing officer himself stating that when change of £100 in £5 notes was added by the proprietor he would have removed an equivalent amount in higher denomination notes.  When making the assessments and all the unnecessary remarks the officer conveniently forgets that as a possibility, quite apart from the cash being used for expenditure during the day”.

In the light of these somewhat extravagant expressions the solicitors for the Respondent at the commencement of the Hearing sought clarification in the light of the observations and guidance of Carnwarth LJ in Pegasus Birds Ltd v HMRC [2004] STC 1509 at para 38, of the extent and nature of the challenge to be made to the assessment.

Guidance to the Tribunal

38.	In the light of the above discussion, I would make four points by way of guidance to the Tribunal when faced with “best of their judgment” arguments in future cases:

i)	The Tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material 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 their judgment” grounds, it is essential that the grounds are clearly and fully stated before the hearing begins.

iii)	In particular the Tribunal should insist at the outset that any allegation of dishonesty or other wrongdoing against those acting for the Commissioners should be stated unequivocally; that the allegation and the basis for it should be fully particularised; and that it is responded to in writing by the Commissioners.  The Tribunal should not in any circumstances allow cross-examination of the Customs officers concerned, until that is done.

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.

It was indicated to the Tribunal by Mr Nawaz that it was to be contended that the assessments were not made to best judgement in the Pegasus sense and that there were allegations of dishonesty or other wrong doing by Customs officers.  Matters then proceeded as outlined in Guidance (iv).

It can be stated at the outset of this decision that no member of the Tribunal had the slightest hesitation in rejecting the attack on the honesty of the Customs officers.  In particular “new faces” would obviously be there according to the Appellants own explanation because he said it was a day in a holiday period giving rise to larger numbers of customers.  Worse still the Appellant himself did not speak to that averment.

So far from considering the matter of the marked £20 notes and their absence, which is discussed below as a “song and dance” the matter was relevant, proved and significant.  The consequences of that are again discussed below.  

Credibility and Reliability of Witnesses
For the reasons given below the Tribunal were unable to regard Mr Uddin as a credible or reliable witness even after making all the allowances which could be suggested for any language difficulty, confusion or lapse of memory due to the passage of time.  Again this was the unanimous view of the whole Tribunal.

So far as the officers were concerned certain minor discrepancies including an error in calculation were revealed in the course of the 5 days the case occupied, but these did not persuade the Tribunal that they were not entitled to rely upon the bona fides of the officers who gave evidence and their reliability and credibility on important matters of details.

Findings of Fact about the Respondents Visits to the Appellants Premises
The visits were of considerable significance not only in the general matter of whether an assessment was justified but also in relation to facts inferred and conclusions drawn from not only the evidence given by the Appellant but the books or records he had kept.  Because of the limited recording, the absence of any till roll and the somewhat casual methods adopted in relation to the payment of wages, of which more below, the Tribunal were unable to establish with any accuracy precise levels of takings, utilisation of cash or, at the end of the case, a precise level of suppression.

Saturday 21 April 2001
On this occasion officers Matthews and Small entered the premises at about 11pm to check the takings.  When asked about average Saturday takings and maximum Saturday takings Mr Uddin said the average was £1,500-£1,600 and the maximum on a Saturday £1,800.  However on the occasion in question the takings were £2,378.95, a 32% underestimation.  Meal slips were obtained from a spike at the serving counter.  There was some dispute about whether one or 2 spikes were involved but the matter is of little significance since Mr Uddin was present and could but did not offer any explanations other than indicating that some of the meal slips from late the previous evening.  However the Tribunal accepted the evidence that the lowest spiked document was a petrol receipt for that day which called into question the explanation given that some of the takings were attributable to the previous evening.  There were customers still in the restaurant who had not paid their bills.  Mr Uddin said that these were complimentary for a staff birthday and a friend.  Had that been true the takings for the day would have been even larger.  Officer Matthews accepted that statement and took no account of them in his subsequent calculations.

Thursday 26 April 2001
Officers Shearer and Carty purchased at lunch time a test meal and paid for it with a marked £20 note.  The same evening a test take-away meal was purchased by officer Warren again paid for with a marked £20 note.  There were various observed parties within the premises whose orders were overheard.

Officers Matthews and Small entered the premises at 22.20 and were given 2 spikes one with cash and one with credit takings.  Meal slips to the value of £105.30 were on the cash spike.  When the records were checked the slip for the test meal by officers Shearer and Carty totalling £17.65 was not present.  A further meal slip was presented while the officers were present for £37.10.

When the till was checked for cash the sum of £368.50 was found although meal slips were only found present to account for at best £142.40 cash takings..  It was accepted that £100 comprised a float for the till.  An explanation for the presence of a further £100 was given by Mr Uddin who said that because he had required £5 notes for change he had put £100 into the till.  There were only 3 £5 notes in the till.  Only 3 of the meal slips present could have required a £5 note as part of the change.  We had considerable reservations about that explanation.

Neither of the marked £20 notes was present.  Mr Uddin then presented officer Matthews with a bundle of 5 £20 notes from his back pocket but no marked notes were there present.  He had other money in another pocket but refused to demonstrate it.  He stated at that time that he had not used any cash from the till that day to fund purchases.  We accept the evidence on that matter given by the officers and noted by them in their notebooks at that time.

From that evidence the inescapable inference is that at least £40 had been removed from the till prior to cashing up and that at least one meal slip at least had been suppressed.

Various unconvincing explanations were suggested for those matters.  In his interview on 6 February 2002 Mr Uddin denied that he had showed the officer any notes and also repeatedly asserted that if the meal slip was not present then the officers could not in fact have been there or purchased the meal at lunch time.  We reject that explanation as incredible.  He also said in relation to the marked notes, “there must have been something bought”.

In addition Messrs Hossain, Moorehead in a letter 27 August 2002 said “it is possible that these £20 notes were given back to customers as part of their change, and it is also possible that the notes were used for cash expenditure”.  As to that, there was no evidence of cash expenditure, or indeed of expenditure of any kind, on the day in question and further there were no larger denomination notes present on the premises or the person of Mr Uddin on the day in question.

In his evidence to the Tribunal Mr Uddin varied his account and suggested that there might have been £10 notes in the hundred pounds he said he put in the till.  He again asserted that if there had been a purchase by officers the meal slip would have been present.  The only further speculation presented to the Tribunal, which came from Mr Nawaz, was that there was a possibility of a loss of the bill, or of some cash purchases.

Friday 1 June 2001
On their visit that day officers Shearer and Rarity again purchased a meal for £20.25.  Other diners were present.  On that occasion the meal was vouched by a slip at cash up although the officers observed a take-away meal being ordered and paid for which was not included on the meal slips on the spike.

Monday 25 June 2001  
A test take-away meal was ordered that day by officer Bennett all meals ordered by customers at that time were observed by him.  His meal was included in the meal slips secured later in the evening by officers.  On that occasion officer Matthews spoke to 2 of the waiters about their wages.  They said these were normally paid in cash on a Saturday or Sunday and had in fact been paid on 23 June 2001.  Mr Shomar Uddin was not present and Mr Anhar Uddin was in charge of the takings and records, wages and drawings.

The Asserted Method of Accounting and Payment of Wages
Mr Wallace Dempster was said to attend the premises each Monday to inspect the meal slips, do the book-keeping and banking, arrange cash withdrawals from the bank to fund any shortfall in drawings to pay wages which were due for payment that evening.  The evidence from Mr Uddin about the payment of wages was confused and confusing.  Albeit that the above procedure was said to be that in vogue he was unable at his interview to give any coherent account of when wages were paid or from what.  It would not be unusual as a matter of ordinary sense for employees to expect their wages at least on a Saturday, if casual workers, or if not at some fixed date once the banking had been attended to.  It is apparent that no standard system or procedure was in place.

Since the Tribunal heard no evidence from Mr Dempster they are unable to find that any proper, clear or satisfactory accounting system was operated.

Justification for Assessment
From the above visits, the records and the interviews the Respondent concluded that there had been suppression.  That marks the first stage in the process with which the Tribunal is concerned.  The Tribunal likewise had no hesitation in concluding that there had been suppression, that the responsibility for that in view of his position, lay upon Mr Shomar Uddin and that the company Greenleaf had not made true and accurate declarations of takings and turnover.

In such circumstances the task of the Tribunal is to determine what tax is due having regard to the whole evidence before it, written and oral and keeping in mind that it is the duty of the trader to provide accurate accounts.  Once it has been ascertained that this has not been done the matter of what tax is due requires to be assessed.  That is plain upon authority:-  Akbar v Commissioners [2000] STC 237; Rahman v Commissioners (No 2) [2003] STC 150 and Pegasus Birds Ltd, supra para 38(i).  The Respondents undertook this task in the under-noted manner.

The Respondents Calculation of Suppression and Assessment
From the above mentioned cashing-up visits and invigilation the Respondents compiled a table of the gross takings, cash takings and the percentage of cash to credit card takings.  They did so because the credit card takings could be accurately ascertained from the books and the banking records of the company whereas cash takings were either cheques or money.  There was no way that either the Respondent or the Appellant representatives could distinguish between the banking of the two.  The table forming the basis of the assessment was as follows:

Day	Date	Gross Takings	Cash Takings	Cash Percentage
	
Saturday	21/04/2001	2,378.95	1,340.50	56.35	
Thursday	26/04/2001	559.70	142.40	25.44	
Friday	01/06/2001	1,685.10	859.55	51.01	
Monday	25/06/2001	548.90	265.95	48.45	

From that percentage the Respondent set about calculating projected takings utilising the declared amounts in the records.  An uplift schedule was compiled which purported to calculate the additional output tax due from projected suppressed cash sales.  The amount of credit card sales was taken as the one true item within the declared sales because of the automatic nature of their recording and therefore as having all been declared.  The Commissioners then used the ratio of credit to cash sales found during the visit, a figure of between 46.27% and 53.73% and uplifted all the cash sales declared to a projected figure.

In adopting that percentage of uplift the results of Thursday 26 April 2001 were ignored.  They were however ignored only in relation to the calculation of the percentage.  In a letter of 1 July 2002 the Respondent gave reasons as follows:

“a.  On 26/4/2001 meal slips were retained on two spikes (Cash and Credit) whereas before only one spike was used.  This indicates to me that the recording system had changed to facilitate destruction of meal slips and removal of cash from the till.

b.  On 26.4.2001 two officers from this Department had a lunchtime meal (Table 2/2, cost £17.65) which they paid with a marked £20 note.  Also on 26/4/2001 an officer ordered a takeaway meal at 5.40pm costing £15.45 which was paid for using another marked £20 note.  When I checked the takings later that evening the lunchtime meal slip was not present within the records and neither of the £20 notes was found in the till.  Mr Shomar Uddin showed me money he said he had removed from the till but neither of the notes was present.  A check of the money in the till revealed a surplus of £126.  This indicates to me that meal slips paid for by cash had been destroyed throughout the day but that my arrival prevented the removal of the balancing cash from the till”.

By way of a check the Commissioners investigated so far as they could when and by how much wages were paid.  They had been told by staff on 25 June 2001 that their wages were normally paid at the weekend.  That contradicted the statement made by Mr Shomar Uddin that staff wages were paid every Monday.  That raised a doubt about the veracity and reliability of the cash reconciliation said to have been undertaken by Mr Dempster every Monday.  The Commissioners devised and produced a “cash deficiency schedule” which tended to show that in some weeks cash deficiencies were not compensated for by bank withdrawals until some weeks later thereby indicating that there was cash available to pay wages regardless of Mr Wallace’s reconciliations.  

Applying the percentage achieved and uplifting all the declared takings from the commencement of the business produced the assessment.

Throughout the progress of the case there had been much dispute and correspondence about the method adopted by the Respondent to arrive at the assessment.  In particular it was suggested that the takings were unusually high on 21 April because of a holiday period.  The significance however of the actual takings found was only that they were considerably in excess of Mr Uddin’s estimate and in excess of the highest declared takings on previous occasions, none of which followed upon a cash-up at close of business on the day undertaken by officers.  

In any event however the total amount of takings has only marginal relevance to the calculation since what was used was the percentage of cash to credit card drawings and none of the explanations i.e. unusually high takings, a holiday period or any other factor meaning that more persons dined that day would have any relevance to that calculation.  In the view of a Tribunal if anything the volume of business done on that day and the fact that there was a cash-up which was wholly unanticipated would tend to show that the amounts found and the percentage of cash to credit card were likely to be accurate.

One other day, the invigilation day of Friday 1 June, can also be taken to be accurate.  It equally showed a much higher percentage of cash to credit card takings than was otherwise disclosed.

Other criticisms of the Respondent’s methods were that in the type of business in question takings and equally cash to credit card takings might be expected to vary quite considerably throughout the week.  In an exercise conducted by Mr Nawaz going through various figures in the schedules prepared and produced by the Commissioners he sought to prove that there was this variation.  We accept that business fluctuates and takings vary from day to day as to amounts, and that they may vary as to the number of diners who used cash as opposed to a credit card.

The difficulty for the Appellant remained, however that on 2 days which can be taken as accurate the percentage was substantially higher than would have been disclosed generally over the whole trading history of the Appellant.

Argued for the Appellant
There was no evidence, and conceded to be no evidence, of any actual dishonest conduct prior to the takeover by the company.  The method of calculation adopted did not allow for the build up of trading and inadequately allowed for variations on a day to day basis and should be rejected.  If Mr Uddin were believed there was no evidence of dishonest conduct sufficient to hold that established on the balance of probabilities.  It was strongly contended that the assessments were improper and not to be judgment.  That we have rejected as noted above.

Argued for the Respondents
The Respondents are entitled to take when making an assessment of the amount of tax due the 2 substantially accurate recorded days, together with the evidence of dishonesty as established on Thursday 26 June 2001 to make the assessment and calculate a penalty.  Since there was dishonest conduct they were entitled to go beyond the normal 3 year cut off for assessment.

Decision of Tribunal
On their view of the evidence and the reliability of the witnesses the Tribunal had no hesitation in concluding that there had been suppression and that that suppression was dishonest.  However the evidence of actual dishonesty was confined, of necessity, to the particular visit on Thursday 26 April.  It was correct and fully justified for the Commissioners to ignore that day for the purpose of calculating the percentage between cash and credit card transactions since the record for that day was distorted by the dishonest conduct discovered.  The Tribunal was satisfied on the balance of probabilities that dishonest conduct had been established by the suppression of the meal slips and the matter of the marked notes.

The method adopted to calculate suppression was indirect in that it depended on inferences being drawn and assumptions being made about trading.  The Tribunal accepted that trading did indeed vary from day to day and that substantial variation could occur in the components of the takings.  On the other hand each of the 2 days in which there was a surprise cash up and a complete record of invigilation can properly be taken as accurate.  The responsibility for producing and keeping accurate and verifiable accounts is placed upon the Appellant by law.

A major factor, however, in the history of trading was the change from sole trader to limited company.  The Tribunal were left with a deplorable lack of evidence about how it was claimed by the Appellant that the company was run, or that it was run properly for any accounting being accurate.

In the whole circumstances the Tribunal thought it appropriate, in order to discharge their task of finding the amount of tax due, to adopt the Commissioners assessment but to make a reduction from it.

In addition because of the transition between the company and the sole trader, and despite the fact that the business, was, it was asserted, taken over as a going concern they decided that a line required to be drawn at time of changeover.  Anything else would be unsafe, particularly as there is a gap in theoretical responsibility between the take over and Mr Shomar Uddin becoming Company Secretary.

It was conceded in cross-examination by officer Matthews that he had no evidence of actual dishonest conduct prior to the change-over and in these circumstances we think it proper to restrict the time span for consideration of all matters relating to under-declaration and penalty to one commencing with the company taking over responsibility.  We uphold the assessment made upon the company but in the light of the available evidence (largely, of course, the responsibility of the Appellant) and taking into account the nature of the business and its variability consider that the amount of the assessment should be reduced to reflect and allow for such variations by 20%.  The final amended assessment upon the company was for £78,541 for the whole period from commencement of all trading.  The assessments from takeover which lie between period 10/99 which is £3,453 (£5,179 less one month) and the remaining periods.  Those totalled, on the detailed assessment issued in 2004 [item 11] £32,446.  Together these are in all £35,899.

Accordingly the Tribunal finds the tax due to be the sum of £28,719 being the above sum assessed on the Company less 20%.  

Penalty
There is no question in the mind of the Tribunal that a penalty is appropriate.  It will however be restricted to the time during which Mr Shomar Uddin, whose dishonesty was established, had legal responsibilities for the company.  On the evidence before the Tribunal that could not exist before 27 December 1999.  The penalty will be restricted by deleting the periods ending 01/00 and will cover the period between that date and 30 April 2001.

The Tribunal note that a discount of 80% was allowed for cooperation in relation to that penalty.  Although that whole matter is open to the Tribunal and although the Tribunal were of the view that such an allowance was extraordinarily generous the Respondents who conducted the investigation and the face to face enquiry could have formed that view at the time.  If we were to take into account the conduct of the Appellant subsequent to the assessment in assessing cooperation that percentage would also appear to be far too generous.  In the event however the Tribunal were content to leave the discount in the amount assessed by the Respondents.

Result
In the result the assessment on the company will be reduced as above noted to £28,719.  The penalty on Mr Uddin will be restricted to reflect that reduction and confined to the period while he held responsibility as Company Secretary, for which he was assessed at £7,410, but less £1,050 to reflect the period in which he held no office – i.e. £5,730.  Parties are at liberty to apply for an order for expenses if they deem that appropriate.  Any such application may be in writing.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  1 JUNE 2005

EDN/02/171