VAT — ASSESSMENTS TO TAX — takeaway — assessments based on daily number of transactions recorded by appellant multiplied by average value calculated from transactions rather than sales — direction that appellant  produce missing till audit rolls to confirm declarations of sales made (in which case assessments reduced to nil — in event of his failing to do so  Commissioners to recalculate tax assessed in accordance with true sales figures — appeal allowed in full or to  limited extent that amount assessed reduced.
	VAT – misdeclaration penalty — penalty to be dealt with in line with tax assessments.

MANCHESTER TRIBUNAL CENTRE

 
 	MR MEHRDAD AKBARI AND MRS HEDIEH AKBARI
	T/A PIZZA NATALIA	Appellants

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Mr J D Demack (Chairman)
						Mr  C B H Gill  FCA	

Sitting in public in Manchester on the 21 and 22 August 2003

Mr Richard Barlow of counsel instructed by Messrs IVC for the Appellant

Mr Nigel Poole of counsel instructed by the Solicitor for the Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2003

DECISION

1.	 Mr Mehrdad Akbari and Mrs Hedieh Akbari, his wife or former wife (it was not made clear which), trading in partnership as Pizza Natalia, appeal against:
1) assessments to tax of £29611 (and interest) notified on 6 March 2001 for the period between   1 February 1998 and 31 October 2000 inclusive; and
2) an assessment to a misdeclaration penalty of £4108 notified on 21 March 2001 for the accounting periods 4/98 to 07/00, again inclusive.
2.	In the notice of appeal, given on behalf of Mr Akbari alone, he claimed that “tax has not been undeclared”.
3.	From the bundle of documents produced by the Commissioners  (labelled C1), a small number of papers produced by Mr Akbari, the parol evidence of Mr Akbari, that of Mr G A Lumb (a Customs officer) and Mr M C Elliott (a former Customs officer), we make  the following findings of fact.
4.	Mr and Mrs Akbari traded in partnership as a pizza takeaway under the style of Pizza Natalia from a shop at 107A Vesper Road, Leeds.  They were registered for VAT with effect from the end of June 1991.   They separated, and from 11 June 1995 the business was continued by Mr Akbari alone.  But whilst notice of the change in arrangements was later given to the Inland Revenue, it was not given to Customs and Excise, so that by s. 45(2) of the Value Added Tax Act 1994, Mrs Akbari continued to be liable for VAT.  She has played no part in the appeal and we proceed on the basis that Mr Akbari is the sole appellant.
5.	In order completely to dispose of  Mrs Akbari’s part in events, we now deal with s. 45(2) of the 1994 Act.  It is in the following terms:
“Without prejudice to section 36 of the Partnership Act 1890 (rights of persons dealing with firm against apparent members of firm), until the date of which a change in the partnership is notified to the Commissioners a person who has ceased to be a member of a partnership shall be regarded as continuing to be a partner for the purposes of this Act and, in particular, for the purpose of any liability for VAT on the supply of goods or services by the partnership.”
6.	Since Mrs Akbari failed to notify the Commissioners of the dissolution of the partnership, she remains jointly and severally liable for the tax and penalty assessed.
7.	 From a date unknown but claimed by Mr Akbari to be sometime in 2000, he added to the trade of  pizza takeaway that of an Indian takeaway. The only evidence adduced in support of that claim was a menu containing the dishes of both takeaways.  It contains no date, and we make no finding as to when the change did in fact take place.  The menu indicates, and we find, that Mr Akbari continued to use the style of Pizza Natalia, but also used that of Blue Elephant.
8.	Mr Akbari disposed of the business in or about September 2001.
9.	The shop at Vesper Road is situated  on a large estate of council houses, in a “bit of a rough area” to quote Mr Akbari.  It was one of a parade of shops, but all the others closed, at least for a time, and some were demolished.  Mr Akbari claimed that at the outset of trading his and one other were the only fast food shops within a 3 mile area, but that 35 other pizza shops had now opened.  We accept that a number of other fast food outlets opened in the area. 
10.	The extension of the original pizza business to include the Indian takeaway involved some changes to the interior of the shop, the obtaining of a second telephone line (ostensibly dedicated to the Blue Elephant but in practice simply a second line for the whole business), and the preparation of a new menu.  The changes to the shop consisted of a reduction in size of  the customer area and a corresponding increase in the kitchen area.  The new menu indicated Pizza Natalia /Blue Elephant opened 7 days a week, 5 pm till 11.30 pm; it contained  various special offers, e.g. a second pizza for £1 on purchasing any regular pizza from the menu; and it gave details of a free delivery service for all orders over £7.  (The delivery charge for orders of £7 and under was £1). 
11.	Mr Akbari explained that, prior to his having had a substantial number of menus printed for “dropping” in the area of his shop, the only menu had consisted of a single A4 sheet posted on the shop window.  We are not satisfied that that was the case for, if it had been, sales would have been confined to persons visiting the shop.  All the evidence points to deliveries having  been a feature of the business throughout the assessment period. Further, deliveries form an essential part of fast food sales outlets so that, had Mr Akbari not made them, his business would have been uncompetitive when compared with similar ones.
12.	The till on the premises was a second-hand electronic TEC FS 1650 which Mr Akbari claimed to have bought from a Mr Walters in June or July 2000 for £240.  As the purchase did not feature in his records, we are unable to say whether that was in fact the case.  He further claimed that Mr Walters extended its scope by allocating an individual key  to each item on the menu.  His evidence in that behalf was not  challenged, and we accept it as fact. (The till produced two tickets – one pink, one white, which were separated, one going to the kitchen as instructions to the chef and the other being the customer’s copy.  The contents of tickets were reflected on the till audit roll.)
13.	Customs chose the business for investigation because of the low level of declared takings throughout its registration.  By September 2000 declared turnover had fallen significantly below the then registration limit.  In the period between 4 July 1999 and 18 December 1999 Mr Akbari’s declared weekly sales varied between £564 (admittedly in a week when he opened only 6 days) and £789.  For the period between 2 October 2000 and 12 November 2000 they varied between £645 and £787, mainly at the upper end of that variation.  But then they increased dramatically in the following fashion:

  	Week ending			Takings
19.11.00			£1102
26.11.00			£  943
3.12.00				£  969
10.12.00			£1451
17.12.00			£2097
14.	Customs were aware that the till registered every transaction keyed into it and allocated to each one a consecutive number between 0 and  9999.  On reaching 9999 the invoice number reverted to 1.
15.	Consequently, to determine the number of transactions keyed in in a particular period, Customs made a series of test purchases. The first was on 7 September 2000 by Mr Elliott and the receipt for it was numbered 6532.  Others followed on 28 September, 26 October, 23 November, 11 December and 18 December, by which date the receipt number had reached 3772 in the next following sequence after that in use in September. Each officer received a numbered receipt for his or her purchase.
16.	At the end of trading on 18 December 2000 Messrs Lumb and Elliott entered the shop unannounced and identified themselves to the staff.  Mr Akbari was not there, but was telephoned and arrived about 15 minutes later.  The officers found the till to contain an audit roll covering the four days commencing on 15 December 2000.  They uplifted the audit roll, and  later accepted it as a complete and true record of the four days’ transactions. It revealed that Mr Akbari took a Z reading at the end of each day’s trading,  and also included a GTZ reading.  (Mr Akbari claimed in evidence to have taken a GTZ reading at the end of each week.  We have no reason to doubt that he did not do so).
17.	Whilst on the premises, the officers observed the appellants’ delivery driver key and pay into the till a sum of £202.40, which represented monies he had collected  for an unknown number of sales.
18.	Various questions were then put to Mr Akbari by the two officers.  From his answers, it appeared that the till he had bought was 10 years old; that there had been a “menu drop” that week; that Blue Elephant dishes had been added to the menu at the end of February 2000; and that he had taken his weekly record sheets and invoices to his accountant that very morning.  We find that Mr Akbari had indeed taken his weekly record sheets and invoices to his accountant that morning and that the sheets contained  the information found on the audit roll, i.e. that he intended to declare the contents of the audit roll uplifted by Customs.  We make no findings in relation to the other matters.
19.	Mr Akbari was interviewed formally on 16 January 2001, but not under the terms of Notice 730.  He claimed that Customs had visited him at the busiest time of year, when sales were at their highest.  He also claimed that 10,000 to 15,000 menus had been “dropped” in November, and that he had only had the till for  2 or 3 months.  He made two further claims which we should note: first, he said that he had always recorded what the till reading had shown him; and, second, that there was nothing wrong.  In relation to the former further claim,  at this stage we merely observe that it appeared to confirm what Customs test purchase exercise revealed.
20.	Although Mr Elliott was later to become the assessing officer, he was throughout guided and assisted by Mr Lumb.  And it was Mr Lumb who decided how the contents of the uplifted audit roll should be used to calculate the tax to which Mr Akbari was assessed.  Because Customs knew how many “transactions” had been keyed into Mr Akbari’s till between 7 September 2000 and 18 December 2000, he  decided to base the calculation of sales made on transactions keyed into the till rather than the true number of sales.
21.	From the test purchase Mr Elliott knew that Mr Akbari had keyed into his till an average of 70 transactions each day.  Applying that average figure to  what Customs treated as the daily sales figures revealed by the audit roll, he proceeded to calculate what he described as the average price per transaction entered into by Mr Akbari as follows (C1 p 4f):

Date	Day	Total	Number of transactions	Average price per transaction		
15/12/00	Friday	£438.90	    70	£6.27		
16/12/00	Saturday	£496.70	    81	£6.13		
		£935.60	  151	£6.20		
Price per ticket for Saturday and Sunday - £6.20
[This is incorrect: it should read Friday and Saturday]

17/12/00	Sunday	£389.90	    81	£4.81		
18/12/00	Monday	£332.50	    78	£4.26		
		£722.40	  159	£4.54		

Price per ticket for Sunday-Thursday = £4.54

From till roll average transactions are 70*
Therefore number of tickets for Friday and Saturday = 140
Therefore number of tickets for Sunday –Thursday = 350

Expected takings for Friday and Saturday	= 140 x £6.2 = 	   £868.00
Expected takings for Sunday to Thursday 	= 350 x £4.54 = 	£1,589.00
Expected Weekly takings = 		£2,457.00
Expected Average Price = £2457/490 = 		       £5.01
(*) Although the calculation says “from till roll average transactions” the figure of 70 is in fact the average daily number of transactions entered into throughout the test purchase period
22.	We pause at that point to demonstrate that Mr Elliott’s work was nothing more than an exercise with figures.  He had available to him on the audit roll, which we repeat Customs accepted as a complete and accurate record of trading for the four days it covered, the true sales  totals and the true number of sales transactions so that he could have calculated to the penny the average price per sale on each of the four days, and the average price per sale on the four days.  We ourselves carried out the exercise during the luncheon adjournment on the first day of the hearing with the following result:
  Date		Total Sales	No of Sales	Average price per sale
15.12.00	£380.70		48		£7.93
16.12.00	£481.60		60		£8.03
17.12.00	£384.40		55		£6.99
18.12.00	£336.00		47		£7.15

23.	From our figures, the true average price per sale emerges as £7.33, and the average sale as a delivery of slightly over £7, i.e it was a  free delivery.  Our exercise also shows that 29.04 per cent of Mr Akbari’s sales were shop sales, and 70.96 per deliveries.
24.	We should perhaps confirm that our table contains the true sales totals.  Customs sales figures include items which were not sales, and are therefore incorrect.
25.	We now revert to Mr Elliott’s calculation. Using the receipts obtained in the test purchase programme, he proceeded to calculate the “expected takings” of the business and, having deducted declared takings, concluded that Mr Akbari had underdeclared 67.05 per cent of his sales.  His calculation took the following form (C1 p. 5):
  	Date 		Time		Ticket No.
23/11/00	18.12		1866
25/10/00	23.38		9920
28/09/00	17.14		7924
Declared Takings from period 28/09/00 – 25/10/00 = £2545
Declared Takings from period 25/10/00 – 23/11/00 = £3386

Number of tickets produced between 28/09/00 – 25/10/00 = 1996
Number of tickets produced between 25/10/00 – 23/11/00 = 1946

Average price per ticket used, £5.01, has been calculated from the till roll uplifted on 18/12/00 and is outlined in schedule 2

	Expected Takings For Period 28/09/00 – 25/10/00
 = 1996 Tickets x £5.01 = £9999.96
Expected takings for period 25/10/00 – 23/11/00
 = 1946 Tickets x £5.01 = £9749.46
Amount of declared sales for Period 28/09/00 – 25/10/00 
= £2545/£9999 = 25.45%

The period 28/09/00 – 02/10/00 has been discounted as no sales have been declared, therefore to amend the period in Mr Akbari’s favour, 350 tickets have been subtracted from the period 28/09/00 – 25/10/00, which would leave 1646 tickets to generate £8246 worth of expected sales.

Amount of declared sales for Period 25/10/00 – 23/11/00
 = £3386/£9749 = 34.73%

Revised expected takings for period 03/10/00 – 25/10/00 
= 1646 Tickets x £5.01 = 8246
Amount of declared sales for Period 03/10/00 – 25/10/00 
= £2545/8246 = 30.86%
Therefore for the period 03/10/00 – 23/11/00 declared sales = £5931
Therefore for the period 03/10/00 – 23/11/00 expected sales = £17995
Amount of declared sales for Period 03/10./00 – 23/11/00
= £5931/£17995 = 32.95%
Therefore amount of under declared sales = 67.05%

26.	We again digress, on this occasion to say that we reworked Mr Elliott’s calculation using the correct sales figures and the true average price per transaction, and arrived at a percentage of underdeclared sales of 65.35 per cent. (Our reworking is contained in the Schedule to the decision).
27.	Mr Elliott then proceeded to assume that declared outputs represented 32.95 per cent of expected outputs in every period within the three year capping period “as outputs and inputs have remained constant over the assessed period”. He determined that Mr Akbari had underdeclared tax of £29,611, the sum in which he was later assessed.  Whilst we were provided with output figures for the assessment period, we were not provided with input figures.  And since the output figures varied between a high of £8,173 in period 4/98 and a low of £6,035 in period 4/00 we are unable to accept that inputs and outputs “remained constant” throughout the assessment period.
28.	For completeness, we should mention that Customs compared Mr Akbari’s declared takings for the four days ending 18 December 1999 (£770) with those for the same period in 2000 (£1,658), and also ascertained that his 1999 takings had not increased significantly in the period immediately preceding Christmas.
29.	Both counsel made reference to the authorities of Van Boeckel v CEC [1981] STC, Rahman v CEC [1998] STC 826 and Rahman (No. 2) v CEC [2003] STC 150,  and Mr Poole, for the Commissioners, also  relied on Majid &Partners v CEC [1999] STC 585 as indicating that the Commissioners may apply an overall percentage suppression  rate from an investigation covering a number of days or weeks and extrapolate that to cover a number of years.  Without going into detail, we should indicate that we have taken on board the principles enunciated in the various cases, and we proceed to apply them.
30.	Three factors have greatly influenced the way in which we propose to deal with this appeal.  First, we are quite satisfied that Mr Akbari intended to declare his greatly increased takings in the four days ended on 18 December 2000 for he had on that last mentioned day given his accountant the figures, and he was completely unaware of Customs interest in him when he did so.  Second, the assessments to tax indicate that, within a pound or so, Mr Akbari withdrew in cash from the business £1,400 each and every week and failed to disclose those withdrawals for tax purposes. We have grave doubts on the evidence that the business was capable of generating such sums over and above declared takings.  Third, and most tellingly of all, the assessments are based on Mr Akbari not declaring two out of every three sales he made.  The test purchase programme – consisting of 9 purchases in all – showed nothing whatsoever to be amiss in Mr Akbari’s recording of sales.
31.	In Grunwick Processing Laboratories v CEC [1987] STC 357, the Court of Appeal held that, in an appeal against an assessment to tax, it is for the appellant to show on the balance of probabilities that the assessment is wrong, and (per MacPherson J [1986] STC 441 at p.445) “at no time do [the Commissioners ] have any burden to prove anything before the tribunal . . . [I]t is throughout . . . up to the taxpayer company, if it can, to attack the assessment in whole or in part”.
32.	In the instant case, the only records Mr Akbari produced relating to the assessment period were details of his purchases in the five consecutive weeks commencing with that ending on 7 October 2000. To say that they are rudimentary in the extreme is a gross understatement.  Suffice it to say that they give us no assistance whatsoever.
33.	Paragraph 6(3) of Schedule 11 to the Value Added Tax Act 1994 provides that the Commissioners may require taxpayers to preserve records for a period not exceeding 6 years.  In VAT Notice 700, the Commissioners indicate that business records must normally be kept for 6 years.
34.	If Mr Akbari has met the Commissioners’ requirements as to the preservation of records, he should have available the till audit rolls for at least the entire period of the test purchase programme.  Since the Commissioners accept that the audit rolls for the four days ended on 18 December 2000 are correct and the test purchase programme revealed nothing wrong in the sales recording process, we propose to adopt the extremely unusual course of directing him within 42 days of the release date of our decision to produce to the Commissioners the audit rolls for the entire test purchase period.  If he does so, and we require the Commissioners to confirm either that he has done so or has failed to do so within 49 days of the release date, and the audit rolls confirm to the Commissioners’  - not the tribunals - satisfaction that the declarations he made as to his sales were all complete and correct, we propose to accept that the assessments under appeal were made to best judgment but nevertheless reduce them to nil.  In other words, we shall allow his appeal.  On the other hand, if Mr Akbari shall fail to produce the audit rolls in question or they are defective in any way, whilst again accepting that the assessments were made to best judgment, we direct the Commissioners to recalculate the tax assessed on him for the entire assessment period on the basis of his true sales and the true average sale price, i.e.  in accordance with paras 22, 23 and 26 of our decision.  If the recalculation shall cause the parties any difficulty, either shall be at liberty to apply to the tribunal to restore the appeal to the list to enable us to deal with the matter.  To the very limited extent the recalculation will result in the tax assessed being reduced, we shall allow the appeal.  No mention having been made throughout the hearing by either party to the misdeclaration penalty, we need merely say of it that, if the tax assessments need recalculating, so too will that to the penalty.  In the event of the appeal not being allowed in full, we confirm the penalty assessment as recalculated in line with the tax assessments. We so determine the appeal.
35.	We cannot conclude without commenting on the method used to calculate the tax assessed on Mr Akbari.  We find it incredible that the Commissioners, having available to them information they themselves accepted as a complete and correct record of his sales on four consecutive days, should then proceed to use that information in such a way as grossly to distort the true sales picture in determining the tax in fact assessed.  In the instant case, the Commissioners’ exercise came as near as it is possible to come to a spurious estimate in which all elements of judgment were missing without actually qualifying for that description; and we record that had we not been able to offer an alternative means of calculating the tax assessed based on fact, we should have allowed the appeal because the assessments had not been made to best judgment.  (In this connection we might add that one officer involved in the test purchase programme performed so incompetently that in other circumstances her work alone might have destroyed the whole exercise; she failed to collect or retain the numbered receipt for her purchase, and had to resort to picking up from the shop floor a receipt dropped by another customer).

Schedule
		
No of sales recorded	No of transactions	Difference	
48	70	22	
60	81	21	
55	81	26	
47	78	31	
210	310		

	Therefore sales recorded represent 210/310 of transactions = 67.74%

Declared Takings from period 28/09/00 – 25/10/00 = £2545
Declared Takings from period 25/10/00 – 23/11/00 = £3386
Number of tickets produced between 28/09/00 – 25/10/00 = 1996
Number of tickets produced between 25/10/00 – 23/11/00 = 1946

If true sales represent only 67.74% of recorded transactions then 
	Sales between 28/9/00 – 25/10/00 = 1352
	Sales between 25/10/00 – 23/11/00 = 1318
Average transaction price = 7.33%

	Expected Takings For Period 28/09/00 – 25/10/00
 = 1352 Tickets x £7.33 = £9910.16
Expected takings for period 25/10/00 – 23/11/00
 = 1318 Tickets x £7.33 = £9660.94
Amount of declared sales for Period 28/09/00 – 25/10/00 
= £2545/£9910 = 25.68%
Amount of declared sales for Period 25/10/00 – 23/11/00
 = £3386/£9660 = 35.05%

The period 28/09/00 – 02/10/00 has been discounted as no sales have been declared, therefore to amend the period in Mr Akbari’s favour, 350 tickets have been subtracted from the period 28/09/00 – 25/10/00, which would leave 1646 tickets to generate £8246 worth of expected sales.

Revised expected takings for period 03/10/00 – 25/10/00 
(1352 – 350) = 1002 Tickets x £7.33 = 7344.66
Amount of declared sales for Period 03/10/00 – 25/10/00 
= £2545/7344= 34.65%
Therefore for the period 03/10/00 – 23/11/00 declared sales = £5931
Therefore for the period 03/10/00 – 23/11/00 expected sales = £17116
Amount of declared sales for period 03/10/00 – 23/11/00
= £5931/£17116= 34.65%
Therefore amount of under declared sales = 65.35%

DAVID DEMACK
CHAIRMAN
RELEASE DATE:   
MAN/01/237