19646
	VAT — ASSESSMENTS — best judgment — take-away pizza business — VAT under-declared — VAT estimated from likely purchases of food to provide for sales and from purchase records — no appearance for Appellant at substantive hearing of appeal — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	MOJTABA ASHOURIAN trading as CASPIAN PIZZA	Appellant

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Michael Johnson (Chairman)
						Marjorie Kostick BA FCA CTA

Sitting in public in Birmingham on 17 January 2006 and 26 June 2006

The Appellant appeared in person on 17 January 2006 but did not appear on 26 June 2006 and was not represented 

Nigel Poole, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2006

DECISION

Nature of the appeal

1.	The Appellant is appealing against assessments for VAT totalling, not including interest, £62,040 (“the assessments”).  The assessments were made on 4 February 2004 and notified to the Appellant on 9 February 2004.  They cover periods extending from 1 April 2000 to 31 August 2003.

2.	The assessments are pursuant to section 73(1) of the Value Added Tax Act 1994.  They relate to the business of a take-away pizza shop run by the Appellant located in Lichfield Street, Walsall.  The business is carried on under the name “Caspian Pizza”.  The case of H M Revenue and Customs (“Customs”) is that the Appellant has failed to declare and pay all the VAT due from him in respect of that business, which is why they exercised their power to assess under the statutory provision mentioned.

3.	The Appellant was first registered for VAT in 1999, along with a partner, a Mr Nasser Tavakoli.   Following the discovery by Customs that Mr Tavakoli had assigned his interest in the “Caspian Pizza” business to the Appellant, making the Appellant sole proprietor, the Appellant was retrospectively re-registered for VAT in his own sole right with effect from 1 April 2000.

4.	Customs have based the assessments on estimated figures.  The appeal against the assessments, issued on 5 March 2004, is upon the following grounds:

•	that the assessments are based on estimates that are overstated;

•	that the Appellant has recorded his transactions, making his records complete to the best of his ability, so that the assessments are unjustified; and 

•	that the assessments proceed upon the basis of purchases of food insufficient to support the estimated level of sales.  

5.	The burden of proof in the appeal is upon the Appellant.  It is up to him to demonstrate that the assessments are unsound, in whole or in part.

Appeal heard in the absence of the Appellant

6.	This appeal first came on for hearing on 17 January 2006.  The Appellant attended in person.  It was evident that the Appellant, who is of Iranian origin, required an English/ Farsi interpreter in order to be able to follow the proceedings properly.  He told the tribunal that he had planned to bring his cousin to interpret, but that, unfortunately, the cousin was unable to attend on that day.

7.	The tribunal therefore gave directions on 17 January 2006, adjourning the hearing until 26 June 2006.  On that day, the Appellant did not attend, nor did he send a representative.  No explanation of the Appellant’s non-attendance has been offered to the tribunal.  On 17 January 2006, the adjourned hearing date was fixed to suit the convenience of the Appellant, and he left the hearing knowing that his appeal would be heard on 26 June 2006.  He has not since been in contact to indicate that that date might be unsuitable.  

8.	On the morning of 26 June 2006, the tribunal clerk attempted to contact the Appellant, by telephoning the premises of “Caspian Pizza” and those of his accountants, Yevs & Co of Smethwick.  Both calls were connected, but neither contact was able to shed light on the whereabouts of the Appellant.  The tribunal clerk also telephoned the mobile ‘phone number given for the Appellant in the Notice of Appeal; that call was not connected.

9.	In these circumstances, we decided to proceed to hear the appeal, as we are empowered to do pursuant to rule 26(2) of the Value Added Tax Tribunals Rules 1986 (as amended).  It is a matter for regret that, having obtained an adjournment of the hearing of the appeal for his own convenience, and despite knowing when his appeal would be heard, the Appellant has not seen fit to attend the resumed hearing.

Facts found by the tribunal

10.	In the absence of the Appellant, the circumstances of the appeal were presented to the tribunal by Nigel Poole of counsel, representing Customs.

11.	We find the following facts, as apparent from the written evidence and documents put before the tribunal by Customs.  At our request, the assessing officer Ms Jane Parry was called to give oral evidence, in order that we could be entirely satisfied as to the methodology of the assessments, and we have taken account of her explanations.  We record that no other witness gave oral evidence. 

12.	In 2002, the Appellant was asked to fill in a questionnaire summarizing his trading activities and the records he kept, which the Appellant did.  The questionnaire was signed by him and dated 15 October 2002.

13.	It appears from the questionnaire, inter alia, that the Appellant had expenditure relating to his business totalling between £776.31 and £847.31 per week.   He was also stated to employ two casual staff @ £125 each per week.  

14.	His annual expenditure would, on that basis, amount to at least £40,368.12, plus £13,000 for staff.

15.	However the Appellant’s accounts for the year ended 31 March 2001 show a turnover for the business of £33,477, and the accounts for the year ended 31 March 2003 a turnover for the business of £28,599.  (No accounts are available to us for the year ended 31 March 2002.)  In the accounts for the year ended 31 March 2003 – the year during which the questionnaire was completed – the Appellant’s gross profit, ie his turnover less cost of sales, is stated to be just £10,053, and his overheads £20,086, leading to a declared loss for the year of £10,033.  His declared net profit after overheads for the year ended 31 March 2001 was £5,116.  No wages paid or amounts withdrawn from the business by the Appellant are shown in either set of accounts.

16.	We find that the accounts are obviously unrealistic when compared with the levels of expenditure stated in the questionnaire.

17.	We were informed by Mr Poole that the figures contained in the Appellant’s VAT returns corresponded with those contained in the annual accounts that we have seen.

18.	A multi-agency team (“the team”) which included officers from H M Customs and Excise, the Inland Revenue and the Department of Work and Pensions, as they then were, was put together to investigate the business of “Caspian Pizza”.   

19.	The following events took place relevant to the investigation.

Visits to “Caspian Pizza”

20.	A trading standards officer, Mr David Hendy, visited the premises of “Caspian Pizza”, in company with other officers of the team, at about 9 pm on 22 November 2002.  It was Mr Hendy who had sent the questionnaire to the Appellant, and this had been completed and returned to him prior to his visit.  Mr Hendy identified as present at the “Caspian Pizza” premises a Mr Sharam Esmaili, the manager of another fast food outlet in Walsall visited by him earlier that evening.  Mr Esmaili was talking to an apparent employee of “Caspian Pizza”.  There appeared to be about four individuals working in the premises.

21.	As Mr Hendy introduced himself to the apparent employee, another individual entered the counter area of the premises from a room at the back, apparently in the act of stuffing a large quantity of banknotes into his pocket.  This individual introduced himself as the Appellant.  The Appellant irately refused to answer questions about his business and required the officers to leave.

22.	On 11 December 2002, Mr Hendy and another officer of the team visited the premises of the Appellant’s accountants, Yevs & Co.  The Appellant and Mr Dzotsi, his accountant, were present.  It was at that meeting that it was discovered that the business of “Caspian Pizza” had been operated by the Appellant on his own since 2000.  The registration for VAT was still in the joint names of the Appellant and Mr Tavakoli as partners.  The Appellant agreed to be retrospectively re-registered as sole proprietor from 1 April 2000.  It was agreed that there would be a further meeting at the premises of “Caspian Pizza”.

23.	On 9 January 2003 at about 3 pm, Mr Hendy and two other team officers met the Appellant and Mr Dzotsi at the “Caspian Pizza” premises.  The Appellant confirmed the correctness of the details contained in the questionnaire dated 15 October 2002.  Mr Hendy proposed that an invigilation of the business should take place, to which the Appellant agreed.  Before leaving, Mr Hendy took a “Z”-reading from the till at the premises.

24.	In the early hours of 18 January 2003, a Friday, Mr Hendy and another team officer drove past the premises several times.  They noted that the premises were still open for business at 2.30 am.

25.	On 25 January 2003, a Saturday, Mr Hendy and another team officer entered the “Caspian Pizza” premises at about 1.40 am.  The premises were extremely busy.  About five people, plus the Appellant, were working hard to serve customers.  

The invigilation

26.	This began at about 8.45 pm on 7 February 2003.  Two officers of Customs, Ms Parry and Ms Beacham, remained in the “Caspian Pizza”, observing and recording every transaction, from then until about five minutes to midnight.  Other officers were present for part of the period (Sockett and Gibson).  At about 11.45 pm, Mr Hendy and team officer Mr Bartley arrived to take over invigilation from officers Parry and Beacham.  However, the Appellant closed the premises for trade at midnight.  The officers asked for and received a “Z”-reading made at that time.

Video recordings

27.	Six video recordings were made of the customers entering and leaving the “Caspian Pizza” premises between 5.30 pm and 5 am the following morning.  This was from an external vantage point where the front of the premises could be clearly observed.

28.	The recordings were made on 21/22 February 2003, 21/22 September 2003, 22/23 September 2003, 8/9 October 2003, 12/13 September 2003 and 13/14 September 2003.

29.	We viewed extracts from some of these recordings in tribunal.  We found the pictures to have been taken from a good vantage point and to be of good quality.  What was apparent was the very high volume of trade enjoyed by the business in the small hours.  It was obvious that the Appellant was not accustomed to closing the premises at midnight, as he did on 7 February 2003, or indeed at 2 am, as stated in the questionnaire.  Very large numbers of customers presented themselves between 2 and about 3.30 am.

30.	We also noted that between three and six staff appeared to be present to serve in the premises, and that a similar number of apparent staff left the premises when they closed, after 4 am.

Static surveillance

31.	Ms Parry became the case officer for the “Caspian Pizza” business in February 2003.  It fell to her to investigate the supply side of the business.  She had observed for herself, at the invigilation, what sorts of food the business served.  There were lamb and chicken kebab sticks, displayed on vertical spits, with individual portions being carved off for sale.  There were also cooked chicken portions sold, French sticks for garlic bread, and pizza bases made by the Appellant’s business using pizza flour.  The Appellant confirmed that all burgers were sold in buns.  Onion, lettuce and cheese slices were provided.

32.	The Appellant’s purchase records did not confirm purchases of all these items.  Moreover, the purchase of some items seemed insufficient.  The records appeared to show that fewer kebab sticks were purchased than must have been needed.  

33.	We have before us a witness statement from Mr Clive Daniel James Potts, Principal Environmental Health Officer with Walsall MBC, dated 9 November 2004 – a statement which has not been objected to by the Appellant, despite our providing him with an opportunity to do so in our direction dated 17 January 2006 – which makes it clear that a kebab stick is safely and properly only reusable for one further day after its first day of use.  After a maximum of two days, the remains of the stick are to be discarded.  Yet Ms Parry found that the Appellant’s records indicated that only one stick of lamb and one of chicken was purchased each week.

34.	Ms Parry therefore organized static observations of deliveries of food to the premises.  Those observations led her to identify suppliers who might be approached for their assistance.  We have before us witness statements from two suppliers to “Caspian Pizza”, namely from Mr Roger William Gould, of “Midland Meats”, dated 10 July 2003 and from Ms Janartheni Sockalingam, of “King’s Fruit and Vegetables”, dated 16 July 2003.  Neither of those statements has been objected to by the Appellant, although again he was invited by us in our direction of 17 January 2006 to lodge objections should he so wish.

35.	It appeared to Ms Parry from the evidence of the suppliers that there were deliveries of raw food for which the Appellant had not accounted.  576 burgers had apparently been sold by him for which he had purchased no buns at all.  There was no record of the purchase of chicken portions, French garlic bread sticks or pizza flour since 6 May 2002.  

36.	The Appellant’s records showed that purchases were also made from “Blackmore’s Cash & Carry”.  Ms Parry checked the records of that business with those of the Appellant.  She found that, of the 104 invoices found to have been issued to the Appellant, 34 were missing from the “Caspian Pizza” records.

Test purchases

37.	Ms Parry arranged four test purchases, which took place on 6 May 2003, 10/11 May 2003, 5/6 July 2003 and 6/7 July 2003 respectively.  The first of these was rung through the till of the business.  The other test purchases were not rung through.  This appeared to indicate that the till was used haphazardly for the recording of transactions.

Comparison of “Z”-readings

38.	A comparison of the “Z”-reading taken from the till of the business on 9 January 2003, when Mr Hendy visited the premises, with that taken from the till on 7 February 2003, at the end of the invigilation, shows that there had been 111 “Z”-readings taken during the 28-day period.  The recorded total had moved on by £5,014.  At that rate the annual turnover through the till would amount to over £65,000 – taking no account, of course, of any unrecorded transactions.

Interview with the Appellant

39.	Ms Parry interviewed the Appellant on 18 December 2003, in the company of another team officer, who took detailed notes.  The Appellant attended the interview along with Mr Dzotsi.  Mr Dzotsi was sent a typed-up copy of the notes of the interview for his agreement and that of his client, but the notes were neither accepted nor rejected by him or by the Appellant.

40.	At the interview, the Appellant maintained that he closed his premises for the night when he had taken enough money.  He could not, however, explain why his accounts showed that he was taking less money than he apparently should have been.  

41.	The Appellant did not appear to appreciate the significance of the “Z”-readings showing a potential annual turnover of over £65,000.

42.	The Appellant accused the officers who made the test purchases of lying with regard to those purchases which were allegedly not rung through the till.  He maintained that all transactions were rung through the till.

43.	The Appellant denied that the individuals seen to be serving behind the counter of the business were employees.  He said that they were just friends who helped him when he was busy.  

44.	The Appellant admitted that not all his purchases were recorded, but maintained that, because VAT was not payable on the purchases, he did not see this to be necessary.  He maintained that some of the purchases were for his home and not for the business.

45.	The Appellant claimed that kebab sticks could be used for longer than two days, despite the advice of the environmental health officer.

46.	The Appellant claimed to be living on credit, and so able to continue his business, even though according to him it was loss-making.

47.	At the meeting, a further questionnaire was completed, in order to establish that the Appellant’s pretended circumstances had not changed.  The Appellant now maintained that he typically traded from 5 pm until midnight, stating that the shop might close “a little earlier or a little later”.

48.	Ms Parry was dissatisfied with the responses received, so she issued a letter prepared before the meeting, dated 18 December 2003, attaching a schedule showing how the assessments would be constructed.  That letter gave the Appellant 28 days to reply.

Methodology of the assessments

49.	In constructing the assessments, Ms Parry decided that she would not rely upon the evidence of the “Z”-readings, because there was evidence that not all sales had been rung through the till.  

50.	She felt that she could, however, rely upon the quantities of food that must have been purchased in order to account for the level of sales observed.

51.	On the basis of the evidence of Mr Potts as to the need to discard kebab sticks after a maximum of two days, Ms Parry calculated that at least four sticks each of lamb and chicken would be needed by the business each week.

52.	She calculated the number of servings obtainable from each stick, and thus the sales of kebab portions to be expected each week, if each stick were sold to the full.

53.	From the sales made to the customers observed during the invigilation, Ms Parry might have estimated the total weekly sales of food.  However, she was convinced that the invigilation was incomplete, in that it was atypical for the business to have closed its doors at midnight, as happened on the day of the invigilation.  It moreover appeared to be after midnight that the heaviest trade was done.  

54.	The fact that not all purchases of food had been recorded meant that Ms Parry could not rely upon evidence of actual purchases to establish sales.  But she could estimate the sales that were to be expected on the assumption that purchases of food, apart from kebab sticks, were all recorded.  She did that.

55.	Accordingly Ms Parry was able to arrive at figures for weekly sales of, firstly, kebab portions, and secondly, other food.  From that she derived an expected minimum sales figure per quarter of £39,520.

56.	There appeared to be no reason to adjust that figure to allow for fluctuations in trading during the periods to be assessed.  Ms Parry therefore calculated the expected tax due at the rate of that figure throughout.  Deducting the declared output tax, she arrived at the total amount of £62,040 assessed.

The case for the Appellant

57.	Mr Dzotsi telephoned Customs on 19 December 2003, requesting an extension of time for discussing Ms Parry’s letter of 18 December 2003 with his client.  He was given until 22 January 2004.

58.	On 22 January 2004, Mr Dzotsi telephoned again, to say that the Appellant’s case was simply that he had declared all his sales.  Mr Dzotsi was informed how an appeal against the assessments might be lodged, once they were issued.

59.	It is a feature of this case that there has been no letter at all from Mr Dzotsi to Customs, or indeed from any other representative of the Appellant, joining issue with the methodology of the assessments.  We have seen a copy of one letter from the Appellant personally to Customs, dated 8 April 2004, which contains no comment about the assessments.

60.	Having regard to the Appellant’s absence on 26 June 2006, we must treat his case as that set out in the Notice of Appeal dated 5 March 2004, no more and no less.  The grounds of appeal are those set out in paragraph 4 above.

Submissions for Customs

61.	We found it unnecessary to call upon Mr Poole to make submissions.     

Decision with reasons

62.	We are in no doubt that the Appellant has substantially under-declared his takings.  As we see it, the only question for us is in what amount he should properly be assessed to additional VAT. 

63.	It is clear to us that the Appellant has misled Customs in three main areas, namely (1) as to his trading hours; (2) as to the volume of his trade; and (3) as to his overheads. 

64.	The questionnaire of 2002 stated the opening hours of the business to be 5 pm to 2 pm (this appears to us to be a slip for 2 am).  However, having viewed the video record, we are sure that the business remained open on occasions for at least an hour and a half, if not two hours, after 2 am.  We are satisfied that the Appellant attempted to “play down” the fact that his business remained open after 2 am, and it is clear to us why he did so.

65.	The Appellant obfuscated because the truth is that the business did a roaring trade in the small hours.  Customers packed the establishment, overflowing in queues and groups onto the pavement outside.  Once evidence existed of the size of the Appellant’s trade in the early hours of the morning, the legitimacy of his declared takings would be bound to be called into question.  We think that the Appellant must have realized that full well.

66.	For the same reason, the Appellant wished to obscure his outgoings.  We think that he must have employed more than just two casual staff.  The evidence shows that, at busy periods, five or six persons worked in the shop, and three or four earlier in the evening.  

67.	Similarly, the Appellant has obscured his expenditure on purchases of food.  He has admitted that his records are incomplete.  In our view, they are very incomplete indeed.  He had a very large number of customers, and he must have acquired the food to sell to them in quantities far in excess of those demonstrated by the records that Ms Parry saw.

68.	In our judgment, Ms Parry was entitled to base her assessments on the quantities of kebabs that must have been sold, as to which we think that the contents of four sticks each of lamb and chicken per week should rightly be treated as a minimum, and is in fact generous towards the Appellant.  As regards sales of other food, the Appellant has been assessed on a basis less sweeping than might have been adopted, had the assessing officer attempted to estimate turnover on the basis of the number of customers who crossed the threshold of the premises.  

69.	However, she did not do this, and so did not lay herself open to the charge that she assessed on the basis of a number of customers that is unclear.  Rather she adopted the conservative and reasonable course of assessing only on the strength of the marshalled information of which she could be reasonably certain.  We commend her in having done that.

70.	We decide that the assessments were made to best judgment.  No case has been put to us to suggest otherwise.  Nor is there anything in the evidence before us to leave us with the slightest doubt as to the reasonableness of the assessments, either in principle or in amount.

71.	This appeal is therefore dismissed.

Costs  

72.	At the conclusion of the hearing, Mr Poole applied for costs in the sum of £1,320, representing fair remuneration for preparation for and the attendance at the hearing on 26 June 2006.  As it was up to the Appellant to attend and prove his case, which he has failed to do without excuse of any kind, and as we have found the appeal to be wholly without merit, we order that the Appellant is to pay the costs of Customs, quantified in the amount of £1,320.

MICHAEL JOHNSON
CHAIRMAN
Release Date: 5 July 2006
MAN/04/0144