Rahman (trading as Khayam Restaurant) v Commissioners of Customs and Excise (No 2)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Chadwick,Lord Justice Brooke |
| Judgment Date | 20 December 2002 |
| Neutral Citation | [2002] EWCA Civ 1881 |
| Docket Number | Case No: 2001/0373 |
| Court | Court of Appeal (Civil Division) |
| Date | 20 December 2002 |
[2002] EWCA Civ 1881
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(MR JUSTICE LAWRENCE COLLINS)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Brooke
Lord Justice Chadwick and
Mr Justice Bodey
Case No: 2001/0373
Miss M Lonsdale (instructed by Messrs Salusburys for the Appellant)
Mr R Barlow (instructed by Solicitor of Customs & Excise for the Respondent)
This is an appeal from an order made on 25 October 2001 by Mr Justice Lawrence Collins on an appeal under section 11 of the Tribunals and Inquiries Act 1992 from a decision of the VAT & Duties Tribunal (Mr M S Johnson, chairman, Mr J M Lapthorne and Mr R J Freeson) on an appeal by the taxpayer, Mr Mohamed Hafiz Rahman, against part of an assessment which had been issued on 25 January 1995 by the Commissioners of Customs and Excise under section 73(1) of the Value Added Tax Act 1994. The Tribunal dismissed the taxpayer's appeal; and the judge upheld the Tribunal's decision. Permission to appeal to this Court was granted on 5 May 2002 by Lord Justice Aldous.
The legislative provisions
Value Added Tax (VAT) is chargeable on the supply of goods and services in the United Kingdom where the supply is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him—see sections 1 and 4 of the Value Added Tax Act 1994. A person is a taxable person for the purposes of the Act while he is, or is required to be, registered under the Act—see section 3(1). Regulations made under section 58 of, and paragraph 2(1) of schedule 11 to, the Act require records to be kept and returns to be made in respect of the tax for which a taxable person is accountable—see paragraphs 25 and 31 in Part V of the Value Added Tax Regulations 1995 (SI 1995/2518).
Section 73(1) of the Act provides for assessment where a person has failed to make returns, or where it appears to the commissioners that returns are incomplete or incorrect. The section is in these terms:
"Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are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."
No appeal against an assessment under section 73(1) of the Act shall be entertained unless the appellant has made all the returns which he was required to make under paragraph 2(1) of schedule 11 and has paid the amounts shown in those returns as payable by him—see section 84(2). Subject to that, section 83 of the 1994 Act, at paragraph (p), provides that an appeal will lie to a VAT tribunal with respect to:
"an assessment—(i) under section 73(1) …in respect of a period for which the appellant has made a return under this Act; or (ii) … ; or (iii) … ; or the amount of such an assessment;".
The two-stage approach
Section 83(p) of the 1994 Act provides both for an appeal "with respect to … an assessment under section 73(1)" and for an appeal "with respect to … the amount of such an assessment". That distinction reflects the two distinct questions which may arise where an assessment purports to have been made under section 73(1) of the Act. First, whether the assessment has been made under the power conferred under that section; and, second, whether the amount of the assessment is the correct amount of VAT for which the taxpayer is accountable.
The first of those questions itself contains two elements: (i) whether the pre-condition to the exercise of the power is satisfied—that is to say, has there been a failure to make returns, keep records or afford facilities for inspection, or has it appeared to the commissioners that returns which have been made are incomplete or incorrect—and (ii) whether the assessment made by the commissioners was made "to the best of their judgment". The first of those elements is, I suspect, rarely in dispute; but the second element—the need for 'best judgment'—has led tribunals to adopt what was has been described as a 'two-stage approach' to appeals under section 83(p) of the Act. It has become the practice for tribunals to consider, first, whether—on the material available to the commissioners at the time when the assessment was made—the assessment satisfies the 'best judgment' test. It is only if that test is satisfied that the tribunal goes on to consider, as a second stage in the appeal, whether the assessment should be varied—or, as the taxpayer is likely to contend, reduced—by reference to additional material not available to the commissioners or in the light of explanation or argument advanced on the appeal. The existence of that practice is material to an understanding of the contentions on the present appeal.
The underlying facts
Before addressing those contentions it is convenient to set out the underlying facts and the procedural history. From September 1992 the taxpayer had carried on a business known as Robi's Indian Takeaway at Bath Road, Cheltenham. He was not registered for VAT in respect of that business. In December 1992 he acquired the Khayam Restaurant at Vine Street, Evesham as a going concern. He became registered for VAT as sole proprietor of that business. In June 1993 he sold the Cheltenham business. In August 1994 the Commissioners became aware that he had made no returns in respect of the Cheltenham business. That led to an investigation, in the course of which officers of H M Customs & Excise, Mrs Stark and Mrs Green, visited the Khayam Restaurant in Evesham on 16 November 1994. Shortly thereafter, on 28 November 1994, the taxpayer sold the Khayam Restaurant. He was no longer required to be registered under the 1994 Act; and, accordingly, he de-registered.
On 25 November 1994 Mrs Stark wrote to the taxpayer's accountants, enclosing a schedule which (as she said) she intended "to use as a basis for an assessment of further value added tax due." The schedule contained a calculation of mark-ups in respect of wine (116.73%), beer/lager (115.49%) and spirits and Indian lager (100%). By applying those mark ups to invoiced purchases of wine, beer, lager and spirits for the year to 31 August 1994, Mrs Stark calculated that total sales of those drinks from the Khayam Restaurant over the twelve month period were £23,410. From an examination of meal bills over a six week period she estimated that sales of drinks comprised 14% of total sales—that is to say, total sales of food and drink—made by that business; and so reached a figure of £167,214 for total sales of food and drink. On that basis she calculated that VAT in an amount of £29,428 (after taking account of beer and wine given away) should have been accounted for and paid by the taxpayer in respect of the business carried on at the Khayam Restaurant in the year to 31 August 1994; compared that with the amount of VAT actually declared in respect of that year (£19,531); and identified a shortfall in an amount equal to the difference (£9,897). She invited the taxpayer's accountants to comment on her schedule of calculations. She pointed out that the amount of the shortfall was equal to 50.67% of the amount actually declared; and indicated that she would treat amounts declared in respect of earlier periods as having been under-declared by the same proportion.
No response was received to the letter of 25 November 1994 until the end of February 1995. In the meantime, on 20 January 1995 Mrs Stark had issued an assessment under the provisions in paragraph 4(1) of schedule 7 to the Value Added Tax Act 1983—provisions which had, by then, been re-enacted as section 73(1) of the 1994 Act. The assessment comprised three parts. First, an assessment (£4,229 in aggregate) in respect of the Cheltenham business for the three quarters commencing February, May and August 1993. Second, an assessment (£9,897 in aggregate) in respect of under-declaration for the Khayam Restaurant business for the four quarters commencing November 1993, February, May and August 1994 (apportioned as to £2,474 per quarter). Third, an assessment (£7,353 in aggregate) in respect of under-declaration for the Khayam Restaurant business for the three preceding quarters, commencing February, May and August 1993.
On 27 February 1995 the taxpayer's accountants replied to Mrs Stark's letter of 25 November 1994. The accountant's letter of 27 February 1995 contained no reference to the assessment of 20 January 1995; but it took four points on the earlier schedule of calculations: (i) that the amount said to be under-declared in respect of the year to 31 August 1994 (£9,897) was "very high"; (ii) that the allowance given for wastage was "very low"; (iii) that an allowance should have been given in respect of free drinks to staff; and (iv) that a greater allowance should have been given in respect of free drinks given to customers. The commissioners were not persuaded to reduce the assessment. On 8 January 1996, the taxpayer gave notice of appeal to the tribunal on the grounds that the amount "was excessive and very high".
The first tribunal hearing
The appeal was limited to the assessments in respect of the alleged under-declarations (£17,249) in respect of the business carried on at the Khayam Restaurant. There was no appeal from the assessment in respect of the Cheltenham business. The appeal was heard on 3 March 1997 before a tribunal comprising two members (Mr Demack, chairman,...
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