Peng and Another (t/a Zhu Guang Restaurant)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 09 January 2020 |
| Neutral Citation | [2020] UKFTT 17 (TC) |
| Date | 09 January 2020 |
| Court | First-tier Tribunal (Tax Chamber) |
[2020] UKFTT 17 (TC)
Judge Gething
Peng & Anor (t/a Zhu Guang Restaurant)
Mr Michael Firth, counsel appeared for the appellant
Mr Thomas Nicholson, counsel appeared for the respondents
Value added tax – Assessment under VATA 1994, s. 73(1) – Whether best judgment assessment – Whether taxpayer discharged the burden of proof – Whether assessment out of time under VATA, s. 76(1) – Whether taxpayer behaviour deliberate – Appeal allowed in part.
DECISION
Introduction
[1] The issues in this case arise out of best judgment assessments for VAT purposes issued on 1 August 2016 under section 73(6) Value Added Tax Act 1994 (“VAT Act”) to the Appellants in respect of a restaurant business carried on by them. The assessments were in respect of the 16 quarter periods ended 30/06/2011 to 31/03/2015. The Appellants' restaurant was based in Boston Lincolnshire. HMRC conducted an investigation into the Appellants' business prompted by a suspicion of supressed turnover. In the absence of adequate records HMRC made best judgment assessments.
[2] The issues are whether:
- the assessments made by HMRC in respect of the periods ended prior to 30/09/14 are out of time per section 73(6) – the two year time limit;
- the assessments made by HMRC in respect of the periods ending on or before 09/12 are in time under section 77(4) and (4A) VAT Act. These provisions require deliberate conduct on the part of the Appellants which lead to an under payment of VAT and the burden of proof is on HMRC. The Statement of Case was silent on the issue of deliberate behaviour, and
- the assessments raised are to the best of HMRC's judgment in accordance with section 73(1) VAT Act. The burden of proof to show that the assessments are best judgment assessments rests on HMRC.
[3] We heard evidence from the Investigating Officer Mrs Jackson. Mrs Jackson worked in VAT from 1997 to 2018.
The facts
[4] We find the following facts from the evidence given and the witness statements and documents in the bundle and those not in the bundle but presented to the Tribunal at the hearing:
- The Appellants ran a Chinese restaurant in partnership which was based in Boston Lincolnshire. The premises from which the business was conducted were a former jobcentre with two frontages. The restaurant occupied half of those premises. The other half was let to a person also carrying on a restaurant business. The Appellants had not elected to tax the premises for the purposes of VAT.
- In 2014 HMRC decided to target the restaurant to verify its turnover. This lead to a number of under-cover visits to the restaurant in preparation for an unannounced visit at the time of cashing up. During each such visit two officers of HMRC were in attendance, one of whom was Mrs Jackson. The unannounced visits occurred on three Saturdays and one Friday.
- During each under-cover visit the officers sat close to the till in the hope of being able to see each occasion on which payments by card and cash were made. Mrs Jackson always sat opposite her fellow officer and always faced in the direction of the till. Mrs Jackson admitted she could not in fact see all that occurred at the till. She could hear the till and she observed the unwinding of the till roll.
- Mrs Jackson also admitted that observations made at the restaurant during under-cover visits were recorded in note books during the course of the evening at the restaurant, in the toilet.
- On the first visit on 28 November 2014 the officers arrived at 19.45 and left at 22.00. Mrs Jackson recorded that she witnessed 3 card purchases and 9 cash purchases. The list of transactions observed by her fellow officer (3 card transactions between 20.05 and 21.30) as set out in that officer's handwritten notes does not correspond to the actual card transactions for which copies of records are available. These records show that during the time the officers were in the restaurant there were nine card transactions. Mrs Jackson accepted that HMRC's records did not show a complete picture.
- On the second under-cover visit on 31 January 2015 the officers arrived at 18.00 and left at 22.00. The running of the restaurant and the cash and card purchases were monitored and four twenty pound notes were used to make payment for the officers' meal. The notes were planted for future verification. The visit was followed by another unannounced visit at cashing up time. The twenty pound notes were in the till. The card transactions that evening represented 46% and the cash sales represented 54% of the turnover. It was noted on this visit that the till had no battery so that when the mains were switched off the memory was erased. Otherwise a report called a Z read report could be produced of the prior days' transactions. The bundle contained a handwritten note of the meeting which refers to Mr Peng saying the Z read was unreliable and he threw them away. Mrs Jackson's typed note of the meeting refers to Mr Peng destroying the Z read reports from the till. Under cross examination Mrs Jackson was unable to confirm that Mr Peng had used the word destroyed. I find that he had not done so.
- By letter on 3 February 2015 Mrs Jackson asked for records going back to January 2012 including bank statements, VAT summary sheets, daily gross takings sheets, purchase day book and Z readings. The Appellants accountant provided some information and the meal slips recording items ordered were also provided by the Appellants.
- The third visit occurred on 25 April 2015, it was an unannounced visit at cashing up time and HMRC recorded card sales of 35% and cash sales on 65%.
- Also on 25 April the Appellants were asked to self-invigilate for a period of 30 days. During this period three further tests were carried out:An officer ordered a take-away meal on 7 May 2015On 15 May there was an unannounced visit at cashing up time and card sales were at 29% and cash sales at 71%.On 23 May 2015 there was another unannounced visit at cashing up time. The card to cash sales ratio was 63%: 37%.
- A meeting took place on 22 February 2016 and correspondence ensued thereafter:HMRC's position as set out in a pre-assessment letter of 24 February 2016 broadly was that the Appellants' declared ratio of card to cash sales of 66%:34% was called into question by the takings on the days of the unannounced visits, three of which recorded some of the highest takings for a period.The Appellants' position was broadly that the sample HMRC had taken was too small and put forward an alternative basis drawn from the business records. These representations were rejected by Mrs Jackson who alleged that the business records were incomplete and the increase in sales could not be accounted for.
- Mrs Jackson made enquiries about the rental income from the adjoining premises. She indicates in her second witness statement at paragraph 7 that she had all the facts relevant to the rental payments on 23 March 2016 when she received a letter from the Appellants' Agent. The paragraph confirms that on 29 July 2016 she raised the assessments in relation to the rental income. The assessments were enclosed in a letter dated 1 August 2016.
- In cross-examination:Mrs Jackson confirmed she was aware that the default position in relation to rent is that it is exempt unless the taxpayer has opted to tax. She explained that she considered she had to investigate the rental income received on the adjoining premises. Mrs Jackson considered that there can be circumstances where a person will be treated as if an option to tax has been made if the person conducts him/herself as if an option had been made. She assessed the rent notwithstanding that there was no evidence that an option to tax had been exercised and no evidence that VAT had been charged on the rent; andMrs Jackson explained that the Appellants had assets which could not have been acquired with the declared takings and she was in touch with other colleagues to assist her assessment of the situation.
- The VAT assessments on the rent and the turnover of the business were sent by letter of 1 August 2016. The assessments of the VAT on the turnover are set out in a table annexed to the letter and are based on a split of card and cash sales of 37%:63%. Also attached to the assessments are tables showing the percentages of card to cash sales on the four unannounced visits which were as follows:CashCard(a) Saturday 31/1/1554%46%(b) Saturday 25/4/201565.44%34.56%(c) Friday 15/05/1570.88%29.12%(d) Saturday 23/05/1562.7%37.3%
- Also attached to the 1 August 2016 letter was a schedule of results from the 23 day period of self-invigilation. The average for the period was 49.13% cash : 50.87% card.
- All of this information was available to Mrs Jackson in real time.
- Mrs Jackson considered that the card to cash split in the Appellants' business 66% card to 34% cash as reflected in the Appellants' VAT returns was inconsistent with what she considered the norm of about 50/50 for buffet style restaurant businesses such as this and in her view inconsistent with the demographic in Boston where there are a lot of people in and out of work and where cash is used more readily. Mrs Jackson considered any indication that is outside the norm is an indication of suppression of turnover. That is why the decision was made to investigate and undertake four under-cover visits followed by attendance at the restaurant at cashing up time. This in Mrs Jackson's view is the best source of information. She considers that where there has been suppression, the turnover on the night of a visit is usually the best night ever or one of the best nights ever.
- During cross examination Mrs Jackson admitted that:On the four nights of undercover visits, the highest card to cash ratio was 54.1% cash:45.69% cardThe sample was not a very representative sample given its size and that it comprised only Friday and Saturday nights but HMRC chose similar nights to be able to make a comparison.In raising the best...
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