19883

VAT – takeaway food shop –appellant unregistered – commissioners enquiries indicated ought to have been registered – appellant invited to apply for registration – having applied and been registered rendering of returns showing no liability to tax – assessment in default of proper returns by taxpayer based on appellant’s own takings figures – assessments held to be to best judgment – appeal dismissed  

MANCHESTER TRIBUNAL CENTRE

 
 	
		         		               SIKANDER ALI          	Appellant
	
                                                             - and -

				THE COMMISSIONERS FOR
			HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

		Tribunal:	David Demack (Chairman) 
				Mrs Rayna Dean FCA (Member)	

Sitting in public in Manchester on 2 November 2006 

The Appellant did not appear and was not represented  

 Andrew Macnab, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2006

 
DECISION

Introduction

1.	The Appellant, Mr Sikander Ali, appeals against a notice of assessments to VAT given on 12 August 2004 in a total of £5,963 covering the period between 1 June 2003 and 29 February 2004 inclusive. 

2.	In his Notice of Appeal of 18 August 2004, Mr Ali disclosed his reason for appealing as: 

“The assessments are invalid on the grounds that at no time has the Appellant been registrable for VAT because he has never traded over the registration limits.”

3.	We might usefully add at this point that the past, i.e. historic, turnover registration limit for one year was £55,000 between 25 April 2002 and 9 April 2003 and £56,000 between 10 April 2003 and 31 March 2004.   

4.	Mr Ali failed to attend the hearing and, on the application of Mr Andrew Macnab, counsel for Her Majesty’s Commissioners for Revenue and Customs (“HMRC”), we determined to proceed under rule 26(2) of the VAT Tribunals Rules 1986, as amended,   that is, in Mr Ali’s absence.  

The facts

5.	We were presented with HMRC’s bundle of copy documents and took oral evidence from the following four HMRC officers: 
		Mrs S A Carey 
		Mr P J Gittins
		Mr R Rawal 
		Mr N J Lunn

6.	From that evidence we find the following facts to have been established. 

7.	Mr Ali carries on the business of selling takeaway food from shop premises at Milkstone Road, Rochdale, under the style of “King Balti”. 

8.	On 17 July 2002 Mrs Carey and another officer visited Mr Ali’s premises.  Mrs Carey spoke to the two male persons in the shop and was told by one of them, who called himself “Mr Sultan”, that the owner was Shazad Khan.  Mr Sultan gave Mrs Carey Mr Khan’s mobile phone number, and she attempted to contact him.  Mr Khan telephoned her the following day and informed her that Mr Ali was the owner of the business.  He also disclosed that Mr Ali was the second person in the shop on 17 July, adding that Mr Ali had not identified himself because he thought the officers were bailiffs seeking to recover money owed to the Inland Revenue.  Mr Khan also said that although Mr Ali was the owner of the business, he, Mr Khan, dealt with the “business side”, Mr Ali having a poor command of English.  Mrs Carey asked Mr Khan about the business and recorded his answers  to questions on a cash trader questionnaire. 

9.	On 30 July 2002, by arrangement with Mr Khan and Mr Ali, Mrs Carey visited Mr Ali’s shop and questioned Mr Ali.    Mr Khan translated Mr Ali’s answers to the questions.  She was told that Mr Ali worked in the shop, and that Mr Khan did the day-to-day bookkeeping for the business.  Minimal business records were produced for inspection, those for takings consisting merely of notes on A4 lined paper for each week and month from January 2002 to May 2002 and for July 2002.  Average weekly takings disclosed were £987.  No till rolls or daily takings sheets were available to support the weekly takings figures.  On Mrs Carey asking to see all the business records, Mr Khan agreed to contact her once he and Mr Ali had had an opportunity of getting them together. 

10.	Mrs Carey collected the records on 25 September 2002.  From her analysis of them she was unable to obtain a true picture of the business.  She was provided with but few purchase invoices, and found herself unable to establish an audit trail.    On 16 January 2003 she visited the shop to discuss her findings with Mr Khan and Mr Ali.  She disclosed the lack of an audit trail, and opined that profits were extremely low bearing in mind the long hours the business was open.  (The opening hours were recorded in the cash trader questionnaire of 18 July 2002 as: 

	“Monday-Thursday 		11am – 12pm  (may stay open longer)
	Friday-Saturday 		11am – 2am  (may stay open longer)
	Sunday 			11am – 12pm”).

11.	Mrs Carey invited Mr Ali to self-invigilate for a period of time to identify his actual daily takings.  On his accepting the invitation, he was handed invigilation sheets and he and Mr Khan were instructed how to complete them. 

12.	On 24 January 2003 Mrs Carey paid an unannounced visit to the shop to collect the first week’s invigilation sheets, and to ensure that the sheets were being properly completed.  She found that they had not been completed, Mr Ali explaining that Mr Khan would complete them from meal bills later in the week.   After Mrs Carey had explained that that was unacceptable, Mr Ali asked her to speak to Mr Khan.  Having uplifted the meal bills on the premises, Mrs Carey then explained to Mr Khan that entries on the invigilation sheets had to be made at the time of each sale, and that the cash in the till had to be counted and recorded on the sheets at the end of each evening.  Mr Khan said that that would be done. 

13.	At 1.15am on 1 February 2003 officers Rawal and Giltins paid a second unannounced visit to the shop and asked that the cash in the till be counted.   On that being done they counted £300 in notes, and were told that the float was usually £10 or £20.  They analysed the invigilation sheets completed by Mr Ali and noted both that sales for 1 February were recorded as £183.55, and that no sales had been recorded on the invigilation sheets for sales on any of the days the sheets covered between 4pm and 5pm or after midnight.  

14.	On 4 February Mr Khan telephoned Mrs Carey asking for the return of Mr Ali’s purchase receipts. (They were posted  to him the same day).  In the conversation,  Mrs Carey explained that some invigilation sheets were missing and was told by Mr Khan that staff were forgetting to complete them and that, on occasion, he too had forgotten to do so.  Mr Khan was then told that if the takings were not recorded accurately, HMRC would have no alternative but to estimate them to best judgment.  Further invigilation sheets were uplifted on 20 February 2003, and Mr Ali was instructed to continue the self-invigilation exercise until further notice.  

15.	When Mrs Carey met Mr Khan and Mr Ali on 12 March 2003 she produced a spreadsheet analysis of the invigilation sheets which showed: 

a)	that sales were being omitted for the same periods each day.  (That was after Mr Khan had admitted that other sales had been omitted in other periods);  
b)	that the cashing up exercise on 1 February 2003 showed £300 in the till, (and indicated takings after deduction of the float of £280) but takings recorded of only £182.55; 
c)	that the average number of sales per day recorded was 37;   and the average transaction cost was £3.30 despite the minimum cost of a meat and rice dish being £3.50 and a pizza costing between £2.50 and £6.  

16.	Having made plain that she considered Mr Ali’s records to be inadequate and inaccurate using the takings figure for 1 February 2003 (£300 less £10 or £20) as an example, Mrs Carey informed Mr Ali that he appeared to be trading well above the then annual registration limit of £55,000, and thus ought to be registered for VAT.

17.	A further meeting between Mrs Carey, Mr Khan and Mr Ali took place on 12 March 2003 when Mr Ali was told that, if necessary, officer-attended invigilation of takings would take place, but that if he accepted that he had been  inaccurately recording his takings and realised he was trading over the registration limit, HMRC would allow him to register from a current date.  Mr Khan asked for a week’s grace to check whether the takings figures indicated that Mr Ali was trading above the registration limit, and said that if they did so he would register for VAT.   Mr Ali then completed and signed a Form VAT 1, which Mrs Carey agreed to hold pending completion of his trading checks.  In it he indicated that he expected his turnover in the next 12 months to be between £60,000 and £70,000.    On 20 March 2003 Mr Khan telephoned Mrs Carey to confirm that that Mr Ali was liable to be registered, and authorised her to proceed with the registration.

18.	In accordance with the request contained in the Form VAT 1, Mr Ali was registered from 1 March 2003. 

19.	Mr Ali subsequently made nil VAT returns for periods 08/03, 11/03 and 02/04.

20.	Mr Lunn and another HMRC officer paid a VAT assurance visit to Mr Ali’s accountant, Mr Safdar, on 7 May 2004 and enquired why he had made three nil returns.  The officers were handed records and extracted details of takings from Mr Ali’s records, but no explanation for the returns was offered. 

21.	Mr Lunn then calculated the VAT which HMRC considered Mr Ali had underdeclared based solely on his own records but incorporating average figures where there were gaps in the records, and by letter of 16 June 2004 Mr Lunn informed him of the figure.  Mr Ali was asked to supply any further relevant information that might affect the value of VAT considered to have been underdeclared, but he failed to respond to the letter.

22.	Consequently, Mr Lunn proceeded to assess Mr Ali to the VAT considered underdeclared, and notified him of it.  On 26 October 2004 HMRC also assessed Mr Ali to output tax of £1,048 for period 05/03, and in the assessment credited him input tax of £300 for each of the periods 08/03, 11/03 and 02/04.   That assessment was not appealed.

23.	All we know of the case for Mr Ali, other than his original reason for appealing, is contained in what was described as an “amended notice of appeal” served on behalf of Mr Ali on 11 November 2005 in which it was alleged that although he signed the Form VAT 1 on 12 March 2003 he did not understand what was said about it and his registration for VAT by Mrs Carey;   he  claimed to have signed the Form under duress (namely a threat that if he did not register, HMRC would conduct an invigilation exercise at his shop);   and maintained that he signed the Form as the result of an inducement (to register from a current date, rather than an earlier one).  If Mr Ali wishes to pursue all or any of those allegations, he must do so through the Adjudicator for HMRC:   they are not matters for us.  Consequently, we ignore them. 

The legislative framework

24.	By section 3 of the Value Added Tax Act 1994 (“VATA”), a person is a taxable person  if he is, or is required to be, registered under that Act.  By section 4, VAT is to be charged on any supply of goods or services in the UK where it is a taxable supply.   A supply of food of a kind used for human consumption which is a supply in the course of catering is a taxable supply (see item (a) Group 1 of Schedule 8 to VATA) and by Note 3 to that Group “A supply of anything in the course of catering includes – (a)… (b) any supply of hot food for consumption off [the premises on which it is supplied].”  For the purposes of (b), “hot food” means “food which, or any part of which – 
	(i)  has been heated for the purposes of enabling it to be consumed at a        temperature above the ambient air temperature;   and 
(ii)	is above that temperature at the time it is provided to the customer.”

25.	There being no evidence before us to indicate that Mr Ali’s supplies are other than those of catering, and since it is for him to establish that they are not, we proceed on the basis that they are standard rated supplies of catering. 

26.	The statutory provisions dealing with liability to be registered are to be found in  paragraph 1 of Schedule 1 to VATA.  At the relevant time, it provided that:

(1)	Subject to sub-paragraphs (3) to (7) below, a person who makes taxable supplies but is not registered under this Act becomes liable to be registered under this Schedule – 
(a)  at the end of any month, if the value of his taxable supplies in the period of one year then ending has exceeded £55,000;   or 
(b)  at any time if there are reasonable grounds for believing that the value of his taxable supplies in the period of 30 days then beginning will exceed £55,000.”

	(Sub-paragraphs (3) to (7) are not in point in the appeal)

27.	Paragraph 9 of the said Schedule 1 permits HMRC to register a person who is not liable to be registered under VATA and is not already registered with effect from the day on which the request is made, or from an earlier date by agreement. 

28.	Finally, in so far as presently material,  section 73(1) of VATA provides: 

“(1)  Where a person has failed to make any returns required under this Act … or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him.”

Submission and conclusion

29.	Against that factual and statutory background, Mr Macnab made the following submissions, all of which we accept. 

30.	Mr Ali registered voluntarily for VAT:   he completed and signed the Form VAT 1, and the burden of proof was on him to show that he did not register voluntarily.  He registered voluntarily on the basis that the value of the taxable supplies he expected to make in the next 12 months was between £60,000 and £70,000;   and even the lower of those two figures was considerably above the registration limit at the relevant time.  Mr Macnab submitted that the Form VAT 1 provided the best evidence (indeed, the only available evidence) of Mr Ali’s minimum annual turnover at that time.  Further, Mr Ali was at all times a “taxable person” for the purposes of section 3 of VATA because he was registered for VAT;   and in those circumstances he was liable to charge and  account for VAT on supplies of goods he made in the course or furtherance of his business. 

31.	Mr Ali submitted three nil returns despite his being VAT registered and making sales of takeaway food.   In those circumstances, Mr Macnab contended that those returns were incorrect. 

32.	Mr Macnab maintained that HMRC were entitled to assess the amount of VAT due from Mr Ali under section 73(1) VATA  to the best of their judgment.  He observed that in assessing the amount of VAT undeclared HMRC had simply used the figures for sales and takings contained in Mr Ali’s own books and records (including some average figures where the records themselves were incomplete).   Notwithstanding that Mr Ali’s records were unlikely to be accurate, and probably underdeclared sales and takings, Mr Macnab observed that HMRC had been content to use those figures for determining Mr Ali’s tax liability. HMRC had, in Mr Macnab’s contention, correctly assessed the tax due from Mr Ali in accordance with section 73(1) of VATA.  

33.	There was, in Mr Macnab’s submission, no evidence before the tribunal to suggest that Mr Ali’s turnover was below the VAT registration limit at any material time. 

34.	Having accepted all Mr Macnab’s submissions, it only remains for us to hold that the tax assessments under appeal were made to HMRC’s best judgment, and that the quantum thereof should not be disturbed, so that we dismiss the appeal.

35.	We accede to an application for HMRC’s costs by Mr Macnab by directing Mr Ali to pay their costs of and incidental to and consequent upon the appeal, such costs to be determined by a costs judge in the event of the parties being unable to agree them.  

DAVID DEMACK 
CHAIRMAN 
Release date: 13 November 2006

MAN/04/466