20529

REGISTRATION DATE – suppression rate calculated based on average of one Wednesday and three Fridays and three Saturdays – changed to separate rates derived from the Wednesday applied to half and the rate derived from the Fridays and Saturdays to the other half resulting in different registration date – appeal allowed

LONDON TRIBUNAL CENTRE

	AHMADUR RAHMAN T/A ADIBS INDIAN TAKEAWAY	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
					ROBERTA S  JOHNSON 

Sitting in public in London on 23 and 30 October 2007

Richard Barlow, counsel, instructed by Miah and Co (London) Limited, for the Appellant

Suzanne Lambert, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Mr Ahmadur Rahman appeals against (1) an assessment made on 9 May 2007 to VAT of £75,792 in respect of the period 1 April 2001 to 18 April 2006, (2) a late registration penalty imposed on 17 April 2007 of £10,933.50 adjusted down to £9,840 at 15 per cent in respect of the period 1 April 2001 to 26 January 2006.  The Appellant was represented by Mr Richard Barlow, and Customs by Ms Suzanne Lambert. 
2.	The issue in this appeal at the time of the hearing was the correctness of the compulsory registration date, validity of the assessments and the quantum of them.  During the hearing Mr Barlow, for the Appellant, attacked the validity of the assessment to tax and Ms Lambert very understandably asked for time to take instructions and consider the arguments.  We directed Mr Barlow to put his arguments in the form of a skeleton argument, which he did.  As a result Customs withdrew the assessments (the penalty assessment automatically following the withdrawal of the tax assessment).  Ms Lambert requested us to determine the correctness of the registration date. 
3.	We had bundles of documents from both parties.  We heard evidence from the Appellant and the officer concerned Mrs Susan Bush.  We find the following facts:
(1)	Adib’s Indian Takeaway, 113 Croydon Road, Beckenham, Kent started as a new business in about 1998 and operated for the first two years as a partnership and since than it had been owned by the Appellant as a sole trader.  The business is open every day except Tuesdays from 5 pm to 11 pm (or 11.30 pm on Fridays and Saturdays) but might occasionally be closed on days where there is no demand, such as over Christmas.  
(2)	The till does not record sales separately and is just used to hold the cash.  Cheques and cash are banked together weekly (or more frequently) without distinguishing them.
(3)	The Appellant had a full-time job based in Shepherds Bush which is a considerable distance away.  He spent little time running the business which was in charge of his brother-in-law, Mr Moynal Islam.  The Appellant visited the business on weekday evenings about twice a week and assisted in busy times over the week-end.  The Appellant did not normally cash-up; this was done by Mr Islam.
(4)	The Appellant was trying to sell the business.  Correspondence was produced showing negotiations to do so between September 2004 and October 2004, during which there was a rent review causing uncertainty.   The business was eventually sold on 18 April 2006 to an unrelated person.  Correspondence showed that negotiations took place at a price of £10,000 of which the purchaser took over liabilities of £4,000 but we did not see the agreement for sale.
(5)	Mrs Bush was checking registrations of local businesses in Beckenham and found that the Appellant’s business was not registered.  She visited the business premises unannounced with another officer at 21:55 hours on Friday 27 January 2006.  She met the Appellant and saw three other employees.  That day’s 45 meal bills totalled £855.45.  This should be compared to the declared takings on Fridays from 15 April 2005 onwards of between £131.35 (30 December 2005 which might be atypical) and £425.84 (the previous Friday, 20 January 2005). Most figures recorded are around £200.00; the actual average, including the takings of 27 January 2006, being £270.02.
(6)	As she was leaving she noticed three brown paper bags behind the counter which she was told contained the kitchen copy of the meal bills.  She took the bags away and found that in eight cases they also contained handwritten figures which were either on separate sheets or on the back of the bills.  In seven of those cases, figures that corresponded to the cheque and credit card figures for days for which she had daily gross takings, showing these separately, were deducted from a starting figure.  The starting figure did not correspond to the total figure in the daily gross takings.  For example, one of these sheets showed a starting figure of £979.35 from which is deducted £60.70 (being the cheque figure in the daily gross takings for 14 January 2006) and then £147.45 (being the credit card figure for that day) followed by two further deductions of £140 and £100.  The daily gross takings for 14 January 2006 in the records, including cheques and credit cards, were £401.40.  The seven cases were identified from the cheque and credit card figures as being: Friday 6 January 2006, Saturday 7 January 2006, Wednesday 11 January 2006, Friday 13 January 2006, Saturday 14 January 2006, Friday 20 January 2006, and Saturday 21 January 2006.
(7)	Mrs Bush wrote on 3 February 2006 asking for bank statements and purchase records for January 2006, which were provided.  
(8)	Mrs Bush interviewed the Appellant on 23 February 2006.  Her note in the Trader Audit Report states:
“Mr Rahman sated that the business rent & rates were approx £300 per month.  He could not put a figure on the Utilities costs for gas, electricity, water or phone.  He estimated that he spent £50-£60 per week on advertising.
… Mr Rahman states that his takings are approx £1,600 per week.
I showed copies of the takings records [found in the brown paper bags] to Mr Rahman.  He said that the handwriting was his brother-in-law’s, Mr Moynal Islam.  I explained that they could be correlated to & compared with his declared takings.  He said that he did not know what they were.  He said that his brother-in-law usually cashed up, and dealt with the day to day running of the business.
[After setting out the estimate he had given for staff costs] I explained to Mr Rahman that I had compared the declared takings to the declared purchases.  Simple arithmetic gives a nominal gross profit of approx £500 per week.  I asked Mr Rahman to explain how he managed to pay all his expenses from this figure.  He could not explain.  I told Mr Rahman that my results showed that he should be VAT registered.  He told me that he was extremely busy at work and asked for time to check his records.  I allowed 4 weeks to submit his calculations and VAT 1.”
The rent and rates figure is wrong.  The Appellant’s accounts show rent of £10,500 and rates of £2,034 in the year to 31 March 2006.  Mrs Bush’s letter of 6 April 2006 (see below) quotes a figure for rates of £69 per week, which is £300 per month, and so the Appellant may have given her a figure for rates alone.  Mrs Bush was not told about the correction until the hearing.  Takings of £1,600 per week would mean that the Appellant was over the registration limit.
(9)	She telephoned the Appellant on 3 April 2006 not having heard anything and was told that he had instructed his accountant to reply.  She said that the registration form would be completed as a pro forma if she had not heard by the end of the week.  After speaking to the accountant on the same day she promised to write setting out the position by 7 April 2006.
(10)	On 6 April 2006 Mrs Bush wrote to the Appellant setting out that she had taken the daily gross takings for the seven days for which she had figures from the brown paper bags, which she considered to be the true figures, and worked out the suppression rate on the basis of the difference between these and the declared takings.   The suppression rate amounted to 64, 70, 52, 65, 66, 62, and 64 per cent for those seven days respectively.  She then took the figures returned to HMRC for income tax from 6 August 2000 to 31 March 2005 and marked the up by 60 per cent (it is not clear why she used that rate).  This showed that the Appellant should have registered on 1 May 2001.  
(11)	On 11 April 2006 the accountant spoke to Mrs Bush on the telephone suggesting a compromise of registration from January or February 2006, which she refused.  On the following day she spoke to the Appellant on the telephone who asked her to reconsider he findings.  She replied that she was prepared to consider any fresh evidence and if she did not hear from him in the next week she would compulsorily register him.  She completed a registration form on his behalf on 19 April 2006 showing 1 May 2001 as the registration date and £75,000 as the expected turnover in the next 12 months.  On 20 April 2006 she wrote to the Appellant saying that he had been compulsorily registered from 1 May 2001 and saying that he would receive a return from that date to the end of the period shown on the return (she did not have the date because this would be shown when the return was produced).  A return was duly sent to the Appellant for the period 1 May 2001 to 31 July 2006 which he never completed.
(12)	Mrs Bush found some errors in her figures and recalculated the registration date as 1 June 2001 using the same method and a suppression rate of 60 per cent.  She informed the Appellant in a letter of 19 June 2006.  On 18 July the Appellant was issued with a certificate of registration from 1 June 2001.  At some point (which must be before the next recalculation of the registration date) the Appellant was sent a final return form covering the period 1 June 2001 and 18 April 2006 (the date of sale of the business).  That form was never completed by the Appellant.  The Appellant was assessed on 9 November 2006 in respect of this period to VAT of £52,713.  The method of calculation was to mark up the turnover returned for income tax by 60 per cent up to 27 January 2006 (the date of the visit) and from that period taking a daily proportion of the turnover in the registration form of £75,000 pa.  The VAT was calculated on the basis of the flat rate scheme of 12 per cent which takes inputs into account.
(13)	The Appellant’s accountant pointed out to Mrs Bush that in calculating the suppression rate she had added the cheque and credit card takings to the calculated takings when these were already included in the figure, thus overstating the rate.  She recalculated the rate as 54.06 per cent.  She revised the figures again and her final calculation showed a registration date of 1 April 2001.  She informed the Appellant by letter of 4 December 2006.  The letter includes the following figures:
Date	Calculated daily gross takings £	Returned daily gross takings £	% Under-declared	
Fri 6 Jan 2006	  534.00	  221.80	58.46	
Sat 7 Jan 2006	 1073.60	  417.30	61.13	
Wed 11 Jan 06	  245.10	  154.45	36.98	
Fri 13 Jan 06	  633.15	  267.80	57.70	
Sat 14 Jan 06	  979.35	  401.40	59.01	
Fri 20 Jan 06	  844.85	  425.85	49.59	
Sat 21 Jan 06	  865.60	  385.05	55.52	
Totals	5175.65	2273.65	Factor=2.27 	
The factor of 2.27 is equivalent to a suppression rate of 56 per cent, both being based on the totals.  The calculated figure should also be compared to the takings observed at the visit by Customs on 27 January 2006 of £855.45.  
(14)	No return for the period starting 1 April 2001 was sent to the Appellant.  The assessment of £52,713 was withdrawn and a new assessment made on 9 May 2007 in respect of the period 1 April 2001 to 19 April 2006 of £75,792.  This is the assessment that has been withdrawn since the hearing.
(15)	On 5 December 2005 the Appellant introduced a loyalty card scheme sending cards, valid for one year, to those to whom it had delivered takeaways in the past, entitling them to a free tenth order of £20 after spending a minimum amount of £10 on nine orders.  The Appellant advertised by insert in free newspapers delivered in the area (an invoice for £105.75 for producing 6,000 copies of a leaflet for the Bromley News Shopper was produced) and by advertising in the paper on 21 and 28 December 2005 (£141 for each).  An invoice for 50,000 leaflets, plus 800 reward cards and 500 business cards, amounting to £1,184.18 was produced, making the total advertising £1,571.93.  The accounts to 31 March 2006, however, showed a total spent on advertising of £732 and stationery and printing of £205.  We are unable to find as a fact whether it is the invoices that have been overstated or the expenditure in the accounts understated, although we consider that the latter is more likely (and we do not accept Mr Barlow’s suggestion that the accounts were produced on a cash basis and part of the expenditure was paid later).  Mrs Bush was aware of the advertising and loyalty card scheme, although it is not referred to in her notes of the meeting. 
(16)	The Appellant produced the following figures which are limited to cheque and credit card payments (on the basis that Customs could not dispute their amount, as they could for cash) to demonstrate that there had been an increase in turnover just before the visit on 27 January 2006.  These showed (pence ignored):
Turnover	2003-4 £	2004-5 £	2005-6 £	
October	2,301	1,480	1,669	
November	2,069	1,144	2,112	
December	1,794	1,166	2,465	
January	1,653	1,384	2,505	
(17)	However, the figures also show that credit card and cheque figures in 2005-06 were better than the corresponding month in the previous year in every month from March onwards.  The annual turnover shown in the Appellant’s accounts was £50,007 (2004), £46,135 (2005) and £55,862 (2006).
4.	Mr Richard Barlow, for the Appellant, contends:
(1)	There was no suppression.  Customs had made their visit at the time the turnover was increasing due to the advertising and loyalty card scheme.
(2)	The takings declared on the days used for calculating the suppression rate were above the average for those days of the week for 10 April 2005 onwards, thus demonstrating that turnover had increased at the time of the visit.  The averages for Wednesdays was £96.97, Fridays £270.02 and Saturdays £310.18.  
(3)	If there was suppression there was no evidence that this had occurred throughout the period assessed.
(4)	The Wednesday for which figures for apparent suppression were available was out of line with the other days, which were Fridays and Saturdays where suppression was likely to be a higher percentage since there was more cash available.
5.	Ms Suzanne Lambert, for Customs, contends:
(1)	There was clear evidence of suppression that should be treated as continuing throughout the period.  Customs had little information and had used all available explanation in calculating the assessment, including taking into account representations on behalf of the Appellant.
(2)	Mrs Bush offered to consider any further facts but the Appellant supplied nothing.  Customs are not obliged to make enquiries.  The quantum of the assessment is that obtained by applying reasonable assumptions.
(3)	There was no evidence of increased turnover around the time of the visit on 27 January 2006.  The Appellant provided figures for cheques and credit cards but since the amount of cash can fluctuate this did not prove anything.
Reasons for our decision
6.	Although the validity of the assessments is no longer in issue we still have to consider the correctness of the takings figures in order to determine the registration date.
7.	We do not find that the figures in the table in paragraph 3(16) above demonstrate that the advertising and loyalty card scheme resulted in an increase in turnover around the time of Customs’ visit.  Although cheque and card receipts may be indicative of the trend in total takings, it is difficult to know whether these differences are masked by differences in cash takings because on the Appellant’s figures the cash takings (which Customs contend are understated) are normally greater than the card figure and the cheque figure is small.  For example, on 6 January 2006 (one of the days in the table in paragraph 3(13) above) card and cheque takings were £75.10 compared to declared cash takings of £146.79 (making the card and cheque takings 34 per cent of the total takings, or 14 per cent of the total takings on the sheet in the brown paper bags); and on the following day 7 January 2006 (also a day in the table) the figures were £294.85 and £122.45 respectively (making card and cheque takings 71 per cent of the total takings, or 27.5 per cent of the total takings on the sheet in the brown paper bags).  We would not therefore place much reliance on cheque and card figures alone.  Even if one did, the above figures show an increase in November 2005 compared to a fall from October in the previous two years, but the loyalty card scheme started in early December 2005 and the advertising in late December 2005.  One would expect the main benefit of the advertising to be felt in January but the January 2006 figure is only slightly above the December 2005 figure.  While these months are all better than 2004-05 there were high figures in October and November 2003.  The credit card and cheque figures taken alone show that the turnover in 2005-06 was better than in the previous year in every month from March onwards.  If the turnover did increase because of advertising and the loyalty card scheme it does not explain why the turnover on the day of the visit, 27 January 2006 was more than twice the turnover on any previous Friday from 15 April 2005 onwards.
8.	We agree with Mr Barlow that the figures declared on the days for which we have figures in the brown bags are higher than the averages that he calculated but this does no more than confirm that turnover was higher in 2005-06 than the previous year.
9.	We infer from the figures found in the brown paper bags that they are the true takings for the seven days that can be identified from the figures for the cheque and credit card payments.  No other explanation of these figures has been provided. Indeed, the Appellant told us that he had not even discussed them with his brother-in-law.  Even if we had accepted (which we did not) that there was an increase caused by advertising and the loyalty card scheme, it does not explain the figures found in the paper bags.  Accordingly we find there has been substantial suppression of takings.  We also infer that this is likely to have been the case throughout the period assessed.  While we would not make that assumption for a new business, the business had then been going for several years and there is no suggestion of any sudden shortage of funds that might have led to the start of suppression.  We also find that it is likely to have continued throughout the period at the same percentage level.
10.	Even if one accepts an increase in turnover caused by advertising and the loyalty card scheme, the figure for the takings on the day of the visit, Friday 27 January 2006 of £855.45 is not out of line with the calculated takings for the Fridays of 6 January 2006 £534.00, 13 January 2006 £633.15, and 20 January 2006 £844.85, but is completely out of line with the declared takings of £221.80, £267.80 and £425.85 respectively.  In our view this supports the suppression rate calculated from the brown bag figures.
11.	We are, however, troubled by the fact that of the seven days for which we have figures found in the brown paper bags, six of them relate to successive Fridays and Saturdays and only one to a Wednesday.  The suppression rate for the Wednesday of 36.98 per cent is completely out of line with those for the other days, which are all between 49.59 and 61.13 and mostly above 55 per cent.  The effect of the preponderance of Fridays and Saturdays has the effect that the weighted average suppression rate is largely determined by those days and then applied to other days.  As a rule of thumb, for which we accept there is no evidence here but we are relying on our experience of other cases, we believe that a takeaway might do half its weekly turnover on Fridays and Saturdays, in which case figures for suppression derived from those days may not be representative of the rest of the week.  It is likely to be the case that on days when the cash takings are higher there is more scope for suppression and this factor accounts for the big difference in the rate for the Wednesday compared to Fridays and Saturdays.  Accordingly instead of applying the 56 per cent suppression rate (or factor of 2.27) throughout, we apply the rate of 57 per cent that is arrived at by excluding the Wednesday completely to half the turnover, and the rate of 36.98 for the Wednesday to the other half.  This equates to a 48.89 per cent suppression rate, which we round down to 48 per cent.  We are conscious that using half is arbitrary but we consider that it was likely to result in an answer that is closer to the truth than including the figure derived for the Wednesday which is completely out of line with the other days in calculating the average suppression rate and applying it to all days.  If this is done we calculate that the registration date would be 1 May 2001, as shown on the Schedule below.  
12.	Accordingly, we determine the correct registration date to be 1 May 2001.  In so far as it is necessary to do so we allow the appeal against the assessments that have been withdrawn since the hearing.  We direct Customs to pay the Appellant’s costs of, incidental to, and consequent upon the appeal calculated on the standard basis to be determined in default of agreement by a Tribunal Chairman.

JOHN F AVERY JONES

CHAIRMAN
RELEASE DATE: 9 January 2008

LON/06/0856

THE SCHEDULE

Including Wednesday				
Date	Calculated daily gross takings	Returned daily gross takings	% Under-declared	
Fri 6 Jan 2006	534.00	221.80	58.46	
Sat 7 Jan 2006	1073.60	417.30	61.13	
Wed 11 Jan 06	245.10	154.45	36.98	
Fri 13 Jan 06	633.15	267.80	57.70	
Sat 14 Jan 06	979.35	401.40	59.01	
Fri 20 Jan 06	844.85	425.85	49.59	
Sat 21 Jan 06	865.60	385.05	55.52	
Total	5175.65	2273.65	0.5607	
				
Excluding Wednesday			
Fri 6 Jan 2006	534.00	221.80	58.46	
Sat 7 Jan 2006	1073.60	417.30	61.13	
Fri 13 Jan 06	633.15	267.80	57.70	
Sat 14 Jan 06	979.35	401.40	59.01	
Fri 20 Jan 06	844.85	425.85	49.59	
Sat 21 Jan 06	865.60	385.05	55.52	
Total	4930.55	2119.20	0.5702	
Calculation of new suppression rate (half Wednesday rate; half Friday and Saturday rate)	
Friday and Saturday rate (half)	116.33	50	0.5702	
Wednesday rate (half)	79.34	50	0.3698	
Total	195.67	100	0.4889	
		Rounded down to	0.48	
Registration date				
	Declared	Increased		
6-Aug-00 to 31-Mar-02	77409	148863	517 trading days   £287.94 per day	
				
	Trading days	Monthly (increased)	Rolling total		
Aug-00	22	6335			
Sep-00	26	7486	13821		
Oct-00	26	7486	21307		
Nov-00	26	7486	28794		
Dec-00	26	7486	36280		
Jan-01	26	7486	43766		
Feb-01	26	7486	51253		
Mar-01	27	7774	59027	Exceeds limit 52K	
Apr-01	26	7486	66513		
May-01	26	7486	74000	Register 1-May-01