Wong & Ors v v Customs & Excise [2003] UKVAT V18445 (14 January 2004)

REGISTRATION – Underdeclaration – Suppression of takings – Calculation of suppressed takings – Compulsory registration – Effective date of registration – Whether mitigation allowed – No – Penalty for belated registration – Appeal dismissed – VATA 1994, ss 73(1), 67

LONDON TRIBUNAL CENTRE

YU HEUNG WONG
YU HEUNG WONG AND LI YING WONG
	YU HEUNG WONG AND LI YING WONG	Appellants

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	ANGUS NICOL   (Chairman)
						ANGELA WEST FCA

Sitting in public in Cardiff on 22 September 2003

Mr Chung Beng Koe, of Koe & Co, accountants, for the Appellant

Mr R Keller, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	The two Appellants trade, or used to trade, as the New Road Cantonese restaurant, which supplied Chinese food for consumption off the premises in New Road, Porthcawl.  Originally the first Appellant was registered as a sole proprietor of the business, and deregistered on 13 March 1997 on the ground that his turnover had decreased to below the threshold.  The Appellant continued to trade thereafter, and as a result of the Commissioners action in the present case, which took the form of test purchases and unannounced visits during January to August 2001, the first Appellant was reregistered with effect from 12 March 1997.  The two Appellants, as a partnership, were registered with effect from 1 May 2000.

2.	The further results of the Commissioners observations and inquiries were an assessment under section 73(1) of the Value Added Tax Act 1994 (“the 1994 Act”) to tax in respect of the period from 14 March 1997 to 30 April 2000 in the sum of £38,818, and a belated notification penalty of £5,822 under sections 67(1) and 76(1), and a further assessment under section 73(1) in the sum of £4,123 for the period 1 May 2000 to 18 August 2001.

3.	There are, therefore, three appeals, relating to the respective assessments and penalty.  The Appellant and the Appellants together served notices of appeal.  In his notice, the first Appellant gave as grounds of appeal, “Sales has been unreasonably overestimated.  Basis of calculation and collection of sales data were not accurate.”  The same grounds of appeal were given by the partnership. As to the second assessment, the grounds given were:  

“Sales has been unreasonably overestimated.  Two conflicting assessments i.e. £4,409.91 and £6,799.83.
Two conflicting schedule of assessments:
Pd 10/01	underdeclaration of turnover		£2,257
Pd 10/01	tax underdeclared			£2,257
Pd 01/02	underdeclaration of turnover		£2,047
Pd 01/02	underdeclaration of tax		£2,047”

There was a request that the three appeals be linked, as they have in fact been.

The evidence

4.	The only witnesses called were the Customs officers.  The first chronologically was Mr Robert Allen who visited the premises on 18 August 2001 after considering the results of a number of test purchases and observations.  The purpose of the observations was, he said, to establish the volume of trade, and then to make a decision as to whether the business ought to be registered for VAT.  The observations had been carried out from cars parked near to and across the road from the premises.  This position had been chosen so as to be unobserved, though there could be momentary obstruction of the view from time to time, as by a passing lorry.  The Commissioners were aware that the premises were immediately opposite a large holiday caravan park, which in fact was then the largest in South Wales.  There would, therefore, be a marked seasonal aspect to the trade.  The observation dates were therefore arranged so as to cover the lowest, mid-season, and highest trading times.  He secured copy meal bills, which were on a spike under the counter, and the till audit roll.  There was also an interview with Mr and Mrs Wong.  The visit was recorded in the visit report, which was written by the other visiting officer, Mr Griffiths.  It accorded with Mr Allen’s recollection.

5.	The visit took place at 2252, and the shop was closed a few minutes later.  The officers found a till on the shelf below the counter, with a till roll in it.  There were two pads for taking orders, one with the serial number 26 and the other 99.  There was a spike holding used meal tickets, the top one being numbered 25.  A slip of paper pinned to a notice-board shewed a nine-figure number, which was the Appellant’s previous, now deregistered, VAT number.  Mrs Wong said that some people wanted VAT receipts, so they gave them that number.  Mr Allen asked if they were taking more than £1,000 a week.  Mrs Wong said that the takings were about £600 to £700 in winter and between £1,200 and £1,500 in summer, and they were very busy in August.  Mrs Wong said that the bills on the spike were the bills for a couple of days, not just that day (a Saturday), and Mr Wong said that it was for the three days, Thursday, Friday and Saturday.  A Z reading was taken, and shewed a total of £676.80, which Mrs Wong said covered several days.  The total of the spiked meal bills was £870.70.  The cash in the till amounted to £152.  Some of the cash, Mr Wong said, had been removed earlier for safe keeping, and he produced a further £213.50.  The two employees had each been paid £15 for the evening shift.

6.	There was a notebook containing figures, which Mrs Wong said were the accurate takings figures.  Mr Allen said to the Appellants that the figures were known to be incorrect because observation had shewn that the Appellant had more customers than were shewn in the book.  The observation logs were shewn to the Appellants.  The till roll, meal bills and two notebooks were removed.

7.	On 4 September 2001 Mr Allen wrote to Mr Boey, the Appellants’ accountant, and outlined the matters in his report.  He went on to say that analysis of the till roll and adjustment of the transaction times, and comparison with the meal bills, had established that those records covered only 18 August and not the three days ending on that day.  The time adjustment was made necessary by the fact that when the Z reading was taken the actual time was 2308, but the till transaction time was 0846.  He also stated that examination of the notebooks revealed that there had been substantial suppression of takings.  This was illustrated by the fact that a figure had already been entered in the takings book for 18 August notwithstanding that the shop was still open when the officers arrived.  A weekly total had also been entered.  The entry for 18 August shewed takings of £341, but the till roll and meal bills shewed £884.60.  The letter concluded that Mr Wong should have been registered from 1 April 1997 to 31 March 2000, and also that the partnership was required to be registered from 1 April 2000.

8.	Enclosed with that letter was an analysis of the observation records and calculation of suppression.  The observations had taken place on Tuesday 23 January, Saturday 10 February, Wednesday 11 April, Saturday 19 May, and Friday 20 July 2001.  Test purchases had been carried out on the same days.  The first two of those dates were considered to be in the low season and the remainder in the high.  Analysis of the meal receipts and till roll gave an average sale of £10.96.  An example of the suppression, taking 23 January 2001, shewed that there were 26 customers who took out carrier bags, including four test purchases; the recorded takings were £69, and the projected takings based on the average of £10.96 were £285.20.  For the five days, the declared takings were £868, and the projected takings £2,546.70, giving a figure of 34.08 per cent of takings declared.  We were told that the figures were agreed, though it was conceded that the suppression would be lower in the low season.  It was also observed by the visiting officers that a substantial number of transactions had been rung into the till as “no sale”.  The receipts for 18 August amounted to £884.60 including lunch-time sales of £24.60.  The average for that evening was given as £11.25, dividing £855.40 by the total number of sales of 76.

9.	Mr Boey replied to the letter of 4 September 2001 on 14 September, having discussed the matter with the Appellants.  He disclosed that they had admitted that they had entered the takings beforehand in anticipation of lower sales, but on that evening (18 August 2001) one of the other nearby Chinese take-aways was closed and their takings were nearly doubled as a result.  He had carried out checks of the till rolls for the three following Saturdays, when the takings were respectively £422.00, £339.45, and £453.10, shewing that the 18 August takings were twice the amount on the other, normal, Saturdays.  He said that the summer holiday is the busiest time of the year, and that the six weeks of the holiday season accounted for 15 to 20 per cent of the annual takings, the rest of the year being very quiet, especially the winter months.  Mr Boey pointed out that not all the people who entered the shop were customers, some being friends who accompanied people who were customers.  Also not everyone bought the same value of food, and some bought only a portion of chips.  The assumptions as to sales were therefore not a true picture.  Mr Boey agreed that his clients might have suppressed the takings, but not as much as was alleged.

10.	Mr Allen replied on 20 September 2001.  He noted that the figures given for the three Saturdays following the visit were substantially higher than any figures declared for earlier Saturdays.  He remarked that since the Appellants had clearly been suppressing takings, unverified figures that they now gave would have to be treated with reservation.  The seasonal character of the business had been taken into consideration.  Only persons leaving the premises with carrier bags or packages were counted, and the figures used to find the average cost had taken into account low value transactions.  Mr Allen pointed out that since meal receipts from previous days had not been kept, that was the only method of calculating average transactions.  Finally, he said that he was pleased that there was an acknowledgement that the Appellants had suppressed takings, and that any alternative method of calculation suggested by them would be considered.  A meeting was suggested.

11.	The meeting took place on 9 October 2001, and Mr Wong was accompanied by both Mr Koe and Mr Boey.  Also present was Mr McGoubrey of the Inland Revenue.  At an early stage, it was admitted by Mr Boey on behalf of the Appellants that takings had been suppressed.  Mr Allen said that it was now necessary to establish the quantum of the suppressions.  Mr Koe said that the sales in the first two years would be as declared, at £49,000, but that after that, in 1999/00 there was an increase.  He said that in 1998 the Appellants were just over the limit.  There was, he said, competition from five other Chinese take-aways in the area.  The present turnover was between £55,000 and £60,000.  Mr Allen observed that that was low in comparison with his findings, and Mr Koe said that  on that particular night, one of the other Chinese take-aways was closed and the Appellants benefited from the increase in number of customers.  Mr Allen said that only those people leaving the shop with carrier bags or packages were counted.  Mr Koe said that carrier bags might hold no more than a portion of chips.  

12.	Mr Koe then said that the Appellants had made a full record of the takings for the Saturdays following the visit, and produced the figures, backed up by the meal receipts and till rolls.  These were:

25 August 2001	£422
1 September 2001	£339
8 September 2001	£453
15 September 2001	£427.63
22 September 2001	£435.59

There was a discussion about the average price of a take-away.  Mr Allen pointed out that the till receipt for 8 September 2001 shewed £453.10 in respect of 40 meal receipts, giving an average of £11.52, which was higher than the figure used in the computation.  Another Saturday gave an average of £10.80, which was close to Mr Allen’s figure.  The Appellants’ advisers said that some days of the week would yield a lesser amount: a calculation on a Thursday would give an average of £6.88.  A series of averages for a Friday were given, which varied between £8.20 and £11.15.  Mr Allen said that he would review his computations in the light of the meal receipts and till rolls (which were X readings, not Z) submitted, and  advise the Appellants of the result.

13.	This he did in a letter of 24 October 2001.  The upshot of his reconsideration was that the projected annual turnover figure was reduced by some £26,000 a year, though he said that he had serious doubts as to the credibility of the records submitted by the Appellants.  A revised analysis of the observation records and calculation of suppression was sent to the Appellants.  This shewed a figure of 42.54 per cent of takings declared, and average meal prices varying between £6.48 on a Tuesday and  £9.55 on a Saturday.  Those averages had been calculated from meal receipts and numbers of sales each day between 20 August and 22 September 2001.  The Appellants were invited to calculate a net tax figure for each of the registrations.  There would also be a belated notification penalty of 15 per cent of the tax due.  

14.	Mr Boey replied to that letter on 16 November 2001, enclosing six weeks till rolls and meal tickets.  He continued:

“From the past six week’s Saturday taking, there were none of them closed to the 18 August 2001 taking of £676.80 as per Mr Wong till rolls and £855.40 as per your analysis.  I have every reason to believe that the exceptional high taking must be due to one of the Chinese takeaway was not trading at that particular Saturday.”

He expressed doubts about Mr Allen’s calculation of suppressed takings and the accuracy of the number of customers recorded during the observations, pointing out again that the sampling method did not represent the whole year trading pattern, the business being seasonal.  He said that he had calculated a suppression rate of 56.34 per cent, based on the six weeks’ till rolls and meal tickets that he had enclosed, adding that there were problems because of the seasonal nature of the business, and saying that as the season became quieter the average meal price became lower.  He then continued:

“The best way forward is to compare this year takings with the corresponding period of last year taking into account of 5% price increase and those days which were not trading.  As you can see from the analysis which I have enclosed, the suppression ratio is 29.9% as compare to the 57.46 that you have calculated.”

The calculation covered the six weeks from 23 September to 3 November 2001.  The daily takings varied between £71.80 on Monday 1 October and £443.70 on Saturday 6 October.  The weekly average meal price varied between £5.19 for the Thursdays and £6.71 for the Fridays.  Comparing the six weeks with the sake period in the precious year, he shewed takings of £7,779.31 for 2001 and £5,453 for 2000, giving a declared proportion of 70.1 per cent.  In that letter Mr Boey also mentioned that Mr and Mrs Wong were in the process of selling the business.

15.	That letter was followed by another dated 26 November 2001, containing another calculation.  Having mentioned the suggested suppression ratio of 29.9 per cent, Mr Boey continued:

“My above clients maintained that they have usually under record between 10% and 20% depends on the amount of taking.  If you take 20% off the usual Saturday average taking of £394.47 (period 23.09.01 to 03.11.01), it comes to £315.57 which is more or less close to the amount they have recorded in 18.08.01 which was £341.

As I have mentioned before, they are in process of selling their shop but the money received will not be enough to pay of the potential VAT liability and the Tax.  They have to remortgage their house in order to raise the money and pay off their liabilities.

Since they are going to retire, there will be hardship for them because the only capital they are going to rely on is gone.  The money they earned over the years have been used to finance their two children in Universities.  So I hope you would sympathise their situation in this exceptional case.

I hope you would consider the above proposal taking into account the above consideration.  If you have accepted the above proposal (Suppression Ratio 29.9%), can you please kindly prepare the calculation for them, as this will save them considerable in Accountancy fees.”

16.	Mr Allen replied on 3 December 2001.  He said that he could not agree a suppression rate of 29.9 per cent as being realistic, nor did he accept that the high takings on 18 August were the result of another Chinese takeaway closing.  He expressed confidence in the accuracy of the observations carried out by the officers.  However, he was prepared to make some adjustments to the projected turnover figures for the financial years 1998 to 2001, and enclosed the calculation.  This resulted in a suppression ratio of 51.5 per cent.  To this Mr Boey replied on 7 December 2001, proposing a compromise between the Commissioners’ figure for declared takings of 56.43 per cent and the Appellants’ figure of 70.1 per cent, namely 63.22 per cent.  Mr Allen replied on 14 December 2001, saying that he considered that generous concessions had already been made in respect of adjustments to the turnover projections, and he was not prepared to reduce the figures further.  He proposed to register the Appellants for VAT as from 14 March 1997.  He mentioned that the Appellants could if they wished ask for a review of this decision.

17.	At this point Koe & Co, accountants, were instructed by the Appellants, and wrote on their behalf to Mr Allen on 7 January 2002.  The letter protested that the underdeclaration of 57.46 per cent was much too high, and gave reasons for this, and included a new analysis of takings.  The reasons were, that the shop was some way from the town centre and most locals would buy their takeaways from the three Chinese takeaway at the town centre; that the business was seasonal and average meal tickets were lower in the low season; that competition was keen; that the wealth created during their trading had not increased substantially; that in the Commissioners’ analysis Mondays, Thursdays, and Sundays were not taken into account and Saturday appeared twice; and the accuracy of meal orders overheard by observing officers was not accepted.  Mr Allen replied on 11 January 2002, saying that he had been into all those points with Mr Boey, that the process of registration had been begun, and that he was not prepared to start the matter all over again with a new representative, otherwise than in the review or appeal procedures.  He also pointed out that most of the averages that Mr Koe had supplied were higher than those used in his own projections.  On 29 January 2002 Mr Koe replied, saying that there was no alternative but to appeal.  In a letter dated 31 January 2002, the Appellants were formally informed of the assessments to tax and the penalty and required to forward the total amount to the Debt Management Unit.

18.	There was extensive further correspondence between Mr Koe and Mr Allen, largely repeating what had gone before, and which was met by Mr Allen repeating that he could not reconsider the figures.  After registration the Appellants submitted returns, but these were based upon their suppression ratio of 29.9 per cent, and the result was an additional assessment for the balance.

19.	In his oral evidence, which dealt with all the above, Mr Allen said that the observation had been carried out from between twenty and thirty feet from the premises.  He had written “yards” in his notes, but that was a mistake.  During the observation, if a number of people entered together they were counted as a single transaction, even if they each came out with a package.  He did not know whether three bags would amount to one meal or three separately, or whether one bag contained three bottles of pop.  On one day there was an entry “4 with pop only” which had not been included in the number of customers because it was so insignificant.  He agreed that the Appellant’s business was not as central as some others.  In his final calculation he used his model and Mr Boey’s figures.  He added the high average to the low and divided by two to reach an average that was representative of the whole season.

20.	Mrs Marie Louise Evans visited the Appellants’ premises on 20 May 2002.  When she came into the case the assessment made by Mr Allen, the first of the assessments, had already been raised, and she was, she said, aware that there was suppression and that Mr Allen had said that only 48.5 per cent of takings were being declared.  During the visit, Mrs Evans’s report relates, she discussed the accounting practices with Mr Wong, in the presence of his daughter and of Mr Boey, his accountant. She checked the Z slips and a selection of invoices to purchase listing, and found the former accurate and the latter satisfactory.  The report then states that she discovered irregularities, having carried out a simple cash reconciliation.  She wrote to the Appellants on 29 May 2002, expressing concern about the following.  First, that there was a difference of £7,655 between total takings and cash paid out for the period 1 August 2001 and 31 January 2002.  She was told that that was the result of unrecorded drawings, of which Mr Wong informed Mr Boey when asked, though Mr Boey had not been advised of these figures for some nine months.  As a result, Mrs Evans considered hat that shewed that the Appellants’ records were not complete and may have been inaccurate. Secondly, that invoices for plastic trays, on which sales of, for example, chips and curry sauce, were sold were missing, which also suggested that the records were not complete.  Thirdly, the Z numbers and transaction numbers had been programmed off the till, so that the Z slips could not be verified.  As a result, Mrs Evans said that she was basing the Appellants’ current takings on those calculated by Mr Allen for the same period in the previous year, and said that she would issue a new assessment for the difference in due course. Mrs Evans also expressed the view that the Appellants were continuing to suppress their takings.

21.	Mr Wong also gave evidence, though he did not give any evidence that went to the issues in the appeal.  With forewarning of that, we permitted Mr Boey to be sworn as interpreter, since Mr Wong evidently speaks little English.  He said that he knew that he had done wrong, through not doing the entries correctly in the books.  He had sold the property at a loss of some £30,000.  He is now 64 years old, and is unable to find any occupation and is therefore on benefit.  He said that he regretted having done wrong, and pleaded for leniency on compassionate grounds on account of his circumstances and on account of his age.

The Commissioners’ contentions

22.	Mr Keller, for the Commissioners contended that the assessments were to best judgment.  There had been observations and test purchases, taking in both the high and the low seasons.  The average price had been calculated by reference to figures supplied by the Appellants’ representative, again covering both high and low seasons, and incorporated into the calculation in good faith.  It would have been reasonable to expect that after the assessments the takings would have increased by about 50 per cent.  If they only increased by 30 per cent, either the takings had actually dropped badly or there was still suppression going on.

23.	There was some adjustment of the figures as a result of a new document having been produced.  This related to the further assessments arising out of the returns submitted by the Appellants.  As to the first, the starting point was £11,024; increased by 48.5 per cent that was £15,401.56.  The amount declared was £14,276, the difference, together with the suppression rate, was £2,425.05, of which 7/47 was £361.17.  With regard to the second return, the starting point was £9,615, uplifted by 100  ÷  48.5 = £14,566.72.  The amount declared was £12,845.09, giving a difference of £1,621.63, of which 7/47 was £241.52.  The total was £602.69.  The Commissioners stated that they were prepared to accept £500 (as against the assessment for £4,000) in order to allow for possible errors.

24.	No submissions were made on behalf of the Appellants.

Conclusions

25.	We start with the fact that the Appellants have admitted, through their accountant, and Mr Wong in his oral evidence, that there was suppression of takings.  That is, therefore, not in issue.  That is the conclusion to which the Commissioners came at an early stage, and it is clear also, therefore, that their decision to register the Appellants was correct.  It followed that an assessment would have to be raised, and that a belated notification penalty would be imposed.  Different sets of figures were submitted on behalf of the Appellants, and these were rejected by the Commissioners, for reasons which were given more than once in correspondence.  We consider that their reasoning was correct.  We have considered the figures.  For the early part of the compulsory registration period there were no figures and no proper records available, since all the meal bills had been destroyed, as they had been down to the time of Mr Allen’s visit.  To that extent, the Commissioners had only scanty data upon which to calculate the amount of tax in question.  However, in the light of figures submitted by and on behalf of the Appellants, the amount of suppression was reduced by some £26,000, and of the later assessments by some £4,500.  It appears to us that the officers, faced with no easy task, have done their best, and that the assessments were to their best judgment.  We do not see that the figures could, in the state of the evidence, have been calculated any more accurately than they were.  The Appellants were unable to give any further evidence bearing upon the amount of tax owed.

26.	Mr Wong made a plea for leniency, and it was difficult not to have some sympathy for him and his wife, who have had to sell their business at a substantial loss, and who will have little if any of the proceeds of sale left to enjoy when the tax is paid.  However, this Tribunal has no power to reduce the amount of tax due from a taxpayer on compassionate grounds.  As to the penalty, that was imposed under section 67, under which the amount of the penalty is 15 per cent of the tax due.  As the Commissioners pointed out in correspondence, they could have proceeded under section 60, under which the penalty is up to 100 per cent of the tax due.    It has also to be remembered that for a substantial time the Appellants were knowingly suppressing their takings.  In our view, in the outcome of this appeal, they have been treated with some leniency.

27.	For the above reasons, these appeals must be dismissed.  The Commissioners expressed their intention not to ask for costs, and accordingly we give no direction as to costs.

ANGUS NICOL
CHAIRMAN

RELEASED:

LON/2002/437&438