VALUE ADDED TAX  — wholesale fireworks business — assessment made by Customs on basis of till rolls — whether assessment was made to best judgment — appeal allowed

MANCHESTER TRIBUNAL CENTRE

 
 	
	JHALMAN SINGH	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Mr I E Vellins (Chairman)
						Mr A E Brown FCA 	

Sitting in public in Manchester on 18 February 2003, 27 August 2003 and 2 and 3 December 2003

Mr Nigel Gibbon, VAT Consultant for the Appellant

Mr Jonathan Cannan of counsel instructed by the Solicitor for the Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2004

DECISION

Introduction
1.	 This is an appeal by Mr Jhalman Singh, trading as Jimmy’s Wholesale Distribution at premises at Batley, West Yorkshire.  He appeals against the decision of the Respondents dated 14 June 2001 to amend the Appellant’s VAT return for the period 10/00 to VAT due of £7,929.85.  

2.	The Appellant appealed against the VAT assessment claiming that the decision, which relied on an incorrect interpretation of the records  and trading of the business, was wrong and not within the best judgment of the Commissioners.  The Appellant in his Notice of Appeal submitted that the VAT repayment which the Appellant had claimed in his VAT return for the period 10/00 of £9,993.87 had been correct and due to be paid to him by the Commissioners, and that the Commissioners had not exercised best judgment in amending that repayment claim to an assessment of £7,929.85 due from the Appellant to the Commissioners.

3.	At the hearing of this appeal over four hearing days, oral evidence was given by Mr G A Lumb, an officer of the Commissioners on behalf of the Commissioners, and by the Appellant himself, his son Paul Singh, two former employees James Mark Jackson and Joyce Angele Jackson, and by a Mrs Rita Lloyd who assisted the Appellant from time to time and made deliveries on his behalf.  Bundles of documents were submitted by the Commissioners and on behalf of the Appellant.

The Facts.
4.	We find the following facts to have been established.

5.	Mr Jhalman Singh carries on the business of wholesale fireworks under the style or title of Jimmy’s wholesale distribution.  He was registered for purposes of VAT under registration number 747 1790 08 with effect from 1 August 2000.  He sells fireworks as a wholesale distributor from premises in Batley.  His main customers are retail newsagents and retail grocery stores.  The Appellant explained that most of his customers were small retail shops, and that a large proportion of his customers were Asian.  Prior to starting the wholesale fireworks business at Batley, he and his wife had carried on business as a confectioners tobacconist and newsagents from premises at Bradford and that business also was a wholesaler of fireworks.  That partnership had been registered for VAT from 19 July 1982 to 31 December 1999.  The confectioners tobacconist and newsagents business was sold, and the wholesale fireworks business was moved under the Appellant’s name as a sole proprietor to the premises at Batley, where he registered for the purposes of VAT with effect from 1 August 2000.

6.	The Appellant at the hearing described the new premises at Batley which consisted of a single storey modern industrial type unit.  Photographs of the unit were produced.  Inside the premises, fireworks were displayed, in particular from a show room which contained a display container from which customers were served.  In a separate room was an office which contained an old-fashioned till.  This was a simple cash register which had been previously used in the previous newsagent business.  This till required the manual input of figures.  Customers took away the fireworks purchased by the customers in the customers’ own vehicles, but the Appellant also offered a delivery service whereby fireworks could be delivered to the customers own premises in a van operated by the Appellant’s business.  The Appellant’s van was also driven by Mrs Rita Lloyd who helped out the Appellant from time to time, particularly during the busy season for fireworks leading up to 5 November.

7.	 The Appellant purchased his fireworks from the only four suppliers of fireworks in the United Kingdom who were Standard, Black Cat, Brightstar and Red Dragon (Standard and Black Cat being jointly owned).  

8.	The Appellant kept records on which he based his VAT returns.  Amongst these records were the purchase invoices in connection with his purchase of fireworks from the manufacturers, which were VAT purchase invoices, invoices for expenses,bank statements and bank records, cheque book stubs, delivery notes, and invoice books for his sales to customers.

9.	The Appellant carried on a wholesale business and there was no requirement that he should maintain a till and retain till rolls.  However the Appellant did keep in his office the old-fashioned till, which was used as an adding machine as well as to calculate sales, and the Appellant did keep in his office the till rolls, although these till rolls were not intended to be used as the basis of calculating his accounts or his VAT returns.

10.	The first VAT return in connection with the Appellant’s new business for the period 10/00 was not due to be rendered until January 2001.

11.	On 31 October 2000, before the Appellants first VAT return was due, and some five days before Bonfire Night of 5 November 2000, Mr Lumb together with other officers of the Commissioners made an unannounced visit to the Appellant’s premises at Batley.  They were accompanied by police officers.  Mr Singh explained to the officers the accounting procedures for the wholesale fireworks business.  Mr Lumb uplifted the VAT purchase invoices, delivery notes, sales invoice books, some back statements, banking records and cheque book stubs.  He also uplifted the till rolls which were used on the till.  Remaining business records were subsequently supplied to the Commissioners by the Appellant.

12.	One of the officers on 31 October 2000 conducted a stock check in connection with the stock at the Appellant’s premises at the time of the officer’s visit, but apparently the officer did not conduct a full and accurate stock check as the officer did not calculate the items in each box of stock or all of the stock which was on display.

13.	Subsequently the Commissioners made enquiries with the manufacturers of the fireworks which had been purchased on a wholesale basis by the Appellant, and the Commissioners were satisfied that the Appellant’s purchase records and invoices were accurate, and reflected accurately the purchases made by the Appellant from the manufacturers.

14.	The Commissioners also investigated and inspected the partnership records and accounts of the Appellant’s previous partnership business with his wife for the period from 30 November 1995 to the date that the business was transferred on 31 December 1999.  Although Mr Lumb had suspected that the returns rendered by the previous partnership were incomplete or incorrect and that output tax had been under-declared by the previous partnership, it would appear that no assessments were made by Mr Lumb against the previous partnership, and no action was taken by the Commissioners against the previous partnership.

15.	After Mr Lumb’s visit to the Appellant’s premise on 31 October 2000, there then ensued correspondence between the Commissioners and the Appellant and his accountant, together with two interviews between the Commissioners and the Appellant which took place on 19 December 2000 and 6 March 2001.  The notes of those interviews, consisting of over one hundred pages, were contained in the Respondents’ bundle of documents.  

16.	In the correspondence and at the interview it was maintained on behalf of the Appellant that the till rolls could not form any proper basis for any calculations or assessment, as the till and till rolls were used, not for the purpose of recording sales, but as an all-purpose calculator carrying various forms of calculations that had been done on the machine.  Mr Lumb made some calculations based on the till rolls, taking into account some of the Appellant’s explanations as to the till rolls, but not all the Appellant’s explanations.

17.	Mr Lumb from the till rolls calculated what he considered to be sales for the period of the till rolls, namely from 4 October 2000 to 30 October 2000.  He calculated that he considered the sales from that period from the till rolls to be £359,986.25.  He compared this to the invoices from which the VAT return for the period 10/00 had been produced and estimated total sales for the period 10/00 to be £474,311.61.  In correspondence from the Appellant’s accountants, Mr Lumb had established that the Appellant had operated a mark-up of  19.95%.  Using the mark-up Mr Lumb estimated the input tax credit and calculated the net VAT tax due of £7,929.85.  In the return for the period 10/00 the Appellant had claimed a repayment of £9,993.87.  According to Mr Lumb’s contentions there was therefore a swing of £17,923.72 against the Appellant.  

18.	The Commissioners notified the Appellant by letter dated 14 June 2001 that the Commissioners had decided to amend the Appellant’s VAT return for the period 10/00 to VAT due to the Commissioners of £7,929.85.

19.	It was the Appellant’s case that the Commissioners have not correctly dealt with the value of free stock given by the Appellant to his customers, and that further, larger amounts which appeared on the till roles could not possibly have amounted to sales because they were of such large amounts that the customers would have been unable to collect fireworks of such magnitude in their vehicle or store the fireworks in their premises within the appropriate Regulations and Licences.

20.	The Appellant further contended that the till was used as a calculator for a variety of different purposes as well as for recording sales namely:

•	Calculating the value of customer’s selections prior to sale
•	Calculating the value of potential future sales from telephone enquiries
•	Calculating the value of faxed orders prior to sale
•	Training exercises
•	Calculating the total value of purchases
•	Calculating bankings
•	Calculating sandwich orders

21.	In addition, the Appellant contended that there were entries on the till rolls which were obvious mistakes made by staff and transactions which had been double counted.

22.	We deal with these  matter now in detail.

23.	The evidence of the Appellant and his witnesses was that the price charged by the Appellant to his customers was one half of the retail price of each firework which appeared in the catalogues of the manufacturers.  The Appellant was able to do this because of the favourable discounts that he obtained from the manufacturers when purchasing the fireworks.  This was in addition to the free stock given to customers and also certain other discounts that might be applicable to a particular customer.  We found the Appellant and his witnesses to be credible relating to the pricing structure made by the Appellant in his charges to the customers.

24.	With regard to the Appellant’s evidence that the till rolls were used to calculate the value of customer’s selections prior to sale, the Appellant and each of his witnesses have described the way in which customers would almost routinely enquire as to the value of selections made so far.  The individual items would be rung through the till and a subtotal would be arrived at.  The result and figure would them be halved to leave the amount of the spend so far.  The evidence of the Appellant and his witnesses was that this would occur with almost every eventual sale.  When the customer was satisfied that he had selected sufficient fireworks the entire selection would be rung through again in exactly the same fashion.  We found the Appellant’s evidence in that connection to be credible.  We find that where two adjacent transactions were identical or of similar amounts, Mr Lumb attempted to exclude one of them, but he did not do so where the second transaction was different, although we find that it was often bound to be the case in the circumstances, that the second transaction would be different, where the customer decided to increase his spend and his total order exceeded the figure which had been calculated as the “spend so far”.  Furthermore Mr Lumb did not exclude the second transaction where the transaction was separated by other transactions.  We found that it frequently occurred that where one customer had asked for the calculation of the spend so far, but another customer had intervened with an order before the first customer had worked out the extra fireworks he required, the first customer’s calculation and transaction would be separated by the second customer’s transaction.  Mr Lumb claimed that transactions which were duplicated in whole or in part had been taken out by him from his calculations of the till rolls.  We find that Mr Limb did not in fact do so with all such transactions.  Mr Lumb contended that where the till was used where a customer asked to know how much he had spent prior to completing the transaction, such entries would not involve the entering of the 50% refund and hence had not been included in Mr Lumb’s sales figure.  On the evidence however, we do not agree with Mr Lumb’s contentions in relation to this.  We accept the Appellant’s evidence that his Asian customers wished to see in writing exactly the spend so far including the 50% reduction, and would therefore have been shown the till roll calculation.  The Respondents contended that it was not common sense that the till operator would enter the 50% refund if a customer was wishing for a calculation of the spend so far.  We do not accept that submission.  We find on the evidence that the till operator did use the till and the till roll to calculate the “spend do far” and that Mr Lumb did not make allowance for all such items in his calculations.  With regard to the till being used for telephone and fax enquiries, the Appellant and each of his witnesses described the way in which the till would be used to calculate the value of each of these enquiries or orders in exactly the same way as the customers in the shop who wished to know the value of their selections so far.  We found the evidence of the Appellant to be credible in relation to this.  We find that Mr Lumb has not taken all these items in the till roll into account in working out his calculations.  We find that such entries did not represent sales, and it was often not possible to cross reference these items against the actual sales for the purpose of excluding one or other from the till roll analysis, because firstly, the distance in time between the calculations and the actual sales, and secondly, because of the probable difference in value between the items on the enquiry, and the actual eventual sales.  The Respondents submitted that such entries would not involve entering the 50% refund and accordingly had not been included in Mr Lumb’s sales figures.  We find however that the Appellant’s staff habitually did enter the 50% refund.  The Respondents submitted that where there had been a telephone enquiry, and the customer later collected the items, Mr Lumb had taken out such a duplicated transaction from his calculations.  We do not agree with that contention.  We find that there were occasions of double counting which were not excluded by Mr Lumb.  The Commissioners submitted that the issue relating to telephone enquiries had only been raised by the Appellant on the first day of the hearing and not at his interviews.  However, we find that the Appellant’s evidence was credible.

25.	With regard to staff training the Appellant’s evidence was that staff were trained by using the till and till roll, and that these training exercises were not therefore sales.  Such training exercises would give the appearance of actual sales on the till roll, but they were of course fictitious because no sales had ever taken place.  The Appellant claimed that staff training on the till continued to October 2000 and that no account of this was taken of by Mr Lumb.  Indeed the Commissioners have not excluded any transactions from their analysis from the till rolls on the grounds that there were transactions which were training excises because they believed that training had finished by October 2000 when the till rolls in their possession commenced.

26.	We find that the till was used for training exercises.  We accept the evidence of the Appellant at the hearing and also his witnesses at the hearing that the till was used for training exercises in October 2000.  The witnesses described training in the autumn of 2000 as occurring almost every day.  We find that the employees of the Appellant did have difficulty with the till.  It was an unusual fact that the till inserted its own two decimal places without the need for a point to be inputted, and the double zero button printed two zeros.  We found that the staff did make mistakes and that in an attempt to restrict the number of mistakes, staff were required to practice on the till roll doing training exercises at quiet moments of the business.  It is true that at his interview the Appellant told Mr Lumb that he thought that training had finished by October.  However, we find that it is not appropriate to place reliance on that answer which was given in stressful circumstances of a tape recorded interview and without access to professional advice.  We find that subsequent time for reflection has indicated that the Appellant had been mistaken in the interview.  At the hearing, in cross examination the Appellant gave evidence that the staff were always training.  Furthermore, Mr Paul Singh gave evidence that he did most of the training with the staff and that staff training occurred throughout the period.  His evidence was supported by Mr James Jackson and by Mrs Joyce Jackson who confirmed that other staff members needed staff training.

27.	The Appellant demonstrated at the hearing the use of the till.  We find that we accept as credible the explanation of the Appellant and his witnesses that the staff did not find it easy to use the till and that was why training exercises continued throughout October 2000.  We find that one employee, Sarah, was particularly “thick” and that she had problems in the use of the double zero button.  We do not accept the Respondents’ contentions that it was easy to use the till, or that the use of the till was straight forward and would not require ongoing training.  We do not accept the explanation of the Respondent that where transactions were repeated in the till roll and the Appellant had suggested that this was staff training, the explanation was more plausible that these represented sales to customers with more than one shop, or, where a customer required confirmation of an order value.  We find that such repeat transactions were in fact staff training.

28.	On the second day of the hearing the Appellant submitted a further bundle of documents representing a sample of the till roles which he and his son, Paul Singh, had inspected, identifying various errors that Mr Lumb had made in his calculations from the till rolls.  This exercise had been conducted after the first days hearing of this appeal.  

29.	In this bundle were two examples occurring on 19 October and 12 October which were claimed by the Appellant to be examples of the decimal point being in the wrong place when it came to refund the 50% discount.  The Appellant and Paul Singh told the tribunal that this supported the view that training was necessary during October 2000.  We accept as credible the evidence on behalf of the Appellant relating to this.

30.	In the same exercise the Appellant and Paul Singh identified six entries on the till roll which they explained were examples of training, on 12th, 19th, 6th, 23rd, 20th and 6th October respectively.  We find that we accept the Appellant’s submission that training had occurred during October 2000 and that whereas it is possible to identify certain transactions as falling within the category of training, it would be impossible to identify every such occurrence, for example a one off input of a relatively small order of several types of fireworks totalling £200 or £300.

23.	Both the Appellant and Paul Singh also identified two examples of transactions which were too large to be actual sales, namely on 10th and 5th October, and we accept the evidence of the Appellant that these were training exercises.

24.	The Appellant had explained in detail at the hearing why these transactions would not be actual sales.  For example, no customer would buy only three types of fireworks in such huge quantities.  Also the customer would need more than one Mode A Licence (each Licence permitted storage of up to 1,000 kilograms) to store such a quantity, and such a quantity would require a 7.5 tonne vehicle or larger and a special ADR licence to carry explosives.

25.	The Appellant also produced a bundle of photographs at the hearing to illustrate the bulk of an order for fireworks to the same value of the transaction on 10 October, being an undiscounted value of £15,717, and the transportation requirements for such an amount of fireworks.  We find that this supported his evidence that his customers, being predominantly newsagents, tobacconists and grocers shops, would not buy that quantity of fireworks from him.

26.	We accept the Appellant’s evidence that sales to that value and to the value of the 5 October transaction of £11,531.55 did not occur and that these were examples of entries on the till roll which could not be sales.

27.	In evidence the Appellant, in commenting on the Commissioners’ analysis of the till rolls, also pointed to other transactions which he thought could not have been transactions for similar reasons by virtue of their size.  These were in particular:
•	4 October -  £4,648.42 (undiscounted value £9,296.84)
•	5 October - £5,045.06 (undiscounted value £10,090.12)
•	6 October - £4,176.38 (undiscounted value £8,352.76)
•	7 October - £3,660.70 ( total undiscounted value shown on copy till role £8,571.05)
•	7 October - £6,791.71 (total undiscounted value shown on copy till roll £15,066.03)
•	10 October - £6,876.19 (undiscounted value £13,752.38)
•	19 October - £6,672.75 (undiscounted value £13,345.50)

28.	The Appellant also pointed to additional transactions which he thought were unlikely to be sales for the same reason namely:
•	4 October - £3,189.21 (undiscounted value £6,378.20)
•	12 October - £3,125.35 (£6,251)
•	19 October - £3,418.91 (£6,837.82)
•	21 October - £3,073.50 (£6,147)
•	23 October - £3,507.96 (£7,015.92)

29.	The Appellant had produced at the hearing a bundle of photographs and charts showing  what transportation would be required in order to transport fireworks.  These revealed that approximately £3,000 of fireworks at full price would weigh approximately 350 kilograms, £6,000 worth of fireworks at full price would weight approximately 600 kilograms, and £9,000 worth just over 1,000 kilograms.  Accordingly an order worth £3,000 at full price would require two Mode B licences or one Mode A Licence, an order worth £6,000 at full price would require three Mode B licences or one Mode A licence, and that an order worth £9,000 at full price would require more than one Mode A licence.

30.	We accept the Appellant’s evidence in relation to this.  The Appellant also said in evidence that his customers were predominantly newsagent shops, tobacconists  and grocery shops which would have one Mode B licence in all likelihood and that none of his customers had Mode A licences.  He also said that his largest sale in or around October 2000 would have been about £3,000 at full retail price (£1,500 at the discounted rate) and that such a customer would have to have “a big shop and an A licence”.  We accept the Appellant’s evidence that the seven transactions detailed above were not sales, and that the five transactions listed above were most unlikely to have been sales.

31.	The Respondents submitted that the Appellant’s evidence as to quantities was inconsistent and unreliable.  We do not accept this submission.  We accept the evidence of the Appellant and his photographs.  The Respondents queries why the Appellant had advertised that he gave free stock on purchases greater than £500 if this could not be taken advantage of by customers without A licences.  In that advertisement was a ready reckoner which gave prices for transactions up to £5,000.  We find however that the Appellant’s brochure was nothing more than his initial brochure when starting the business in which he hoped that customers would in fact spend more than £500, and the ready reckoner was nothing more than an illustration of what a customer would get if the customer spent £5,000.  We find that the wording of the brochure and ready reckoner for those reasons did not reflect the reality of the situation with regard to sales.  We find that in the new business the Appellant was hoping to attract new customers into his new premises, and that the brochure reflected that.  The respondents suggested that there was a discrepancy in the evidence of the Appellant and Paul Singh when the Appellant had stated that he might do transactions of £4,500 now, whereas Paul Singh had said only £1,500 to £2,000.  We find that the Appellant was looking at the retail price and Paul Singh at the wholesale price and there was no fundamental discrepancy between their versions.

32.	The Appellant claimed that the till was also used for calculating to total value of purchases, calculating bankings and calculating sandwich orders.  Although the Commissioners have claimed to have extracted transactions under each of those headings from the analysis of the till rolls, we find that we can not be satisfied that the Commissioners have extracted all of such transactions under these headings from their analysis of the till rolls.

33.	The Commissioners have submitted that the evidence of the Appellant and his witnesses should not be regarded as credible for a number of reasons.

34.	With regard to the evidence of Mr Jackson he was only employed for a short period of about three months some three years ago.  At first he thought that there had been two tills, but later gave evidence that in fact his recollection was not correct and there had only been one till.  We find that Mr Jackson was making an honest attempt to recollect events that had occurred three years previously, and we accept his evidence concerning free stock being given to customers, and staff training having taken place throughout his employment.  We found Mrs Jackson to be a reliable witness, and we do take into account that she was employed for only a short time leaving in October.  The Commissioners’ submissions accepted that Rita Lloyd was a  genuinely reliable witness but pointed out that it was not clear how often she actually attended the premises.  We find that at busy periods she was there at the premises frequently.

35.	We found Paul Singh to be a reliable witness despite some errors in relation to when free stock started being given away, and how much free stock was given.  The Commissioners submitted that Paul Singh’s memory, whether consciously or not, was not free from the influence of his father because following the first day of the hearing he had discussed the issues of the case in detail with his father.  We find however that Paul Singh was a reliable and credible witness and we do not find that his evidence was tainted by his discussions with his father.

36.	The Commissioners submitted that the evidence of the Appellant of the free stock which he gave to customers was not credible.  They referred to the advertisement of the Appellant that free stock was given to customers for orders of £500 or more.  The evidence of the Appellant was that in fact all customers received free stock.  We find that the Appellant did give free stock to all customers and that his advertisement was his initial attempt to lure customers into the premises and to spend as much as possible, that is to encourage trade.  Although the Appellant’s accountants made one calculation of a mark-up of 11.9% based on free stock, at a later date they accepted a mark-up of 20% based on free stock.  Free stock was not an issue in this appeal except as to credibility.  

37.	The Commissioners submitted that the Appellant’s evidence as to the performance of the business was unsatisfactory and designed to be self-serving, pointing out the gross profit margin of the Appellant’s previous registration.  We do not accept that submission.  The Appellant’s previous business was not a fireworks business as such but an adjunct to the main tobacconist and newsagent business, and the fireworks side of the business was not the central money earning part of the business.  We find that the evidence by the Appellant as to the performance of the Appellant’s business was satisfactory, and the Commissioners have not pursued an assessment against the previous business.

38.	The Respondents had suggested that the Appellant’s evidence as to discounts was unsatisfactory.  We disagree.  We accept the evidence of the Appellant with regard to discounting.

39.	The Commissioners submitted that the documentary and oral evidence given by the Appellant on 27 August 2003 had been rehearsed and discussed in detail with his son Paul Singh and that his evidence on that day was unreliable.  We find that the Appellant did discuss his evidence with his son Paul Singh, but even taking that into account, we found that the evidence of the Appellant and Paul Singh was credible.  We find that their evidence was reliable and can be safely relied on by the tribunal.

40.	With regards to the Appellant’s purchase records the Appellant was relying on his declared purchases together with the known mark-up of 20% to support his sales declarations.  The Commissioners submitted that a purchase mark-up exercise in the circumstances of this case did not provide a reliable measure of sales.  We disagree.  We find that the correct method would have been to apply the mark-up of 20% to the Appellant’s declared purchases in order to arrive at sales, and that in fact such a mark-up would have arrived at the figures set out by the Appellant in his VAT return.  The Commissioners submitted that such a mark-up exercise relied on the integrity of the purchase records and that, in the light of the Appellant’s evidence and submitted lack of credibility, the integrity of the purchase records could not be vouched.  We find that there is no evidence that the Appellant’s purchase records were wrong or incorrect or that their integrity could not be relied on.  We do not accept the Commissioners submission that there was a lack of credibility.  We take into account that Mr Lumb in his interview with the Appellant in pages 154 and 155 of the respondents’ bundle did tell the Appellant that the Commissioners were satisfied that the Appellant’s purchase records were correct.  The Commissioners submitted that a purchase mark-up exercise would not be appropriate because of the availability of fireworks from other manufacturers.  However, there is no evidence that the Appellant did obtain fireworks from any other manufacturers and the evidence was that there was only four manufacturers in the country.  Another reason given by the Respondents why a purchase mark-up exercise was not reliable or appropriate was because of doubts about the Appellant’s record keeping generally.  However there is no evidence that there were inaccuracies in the Appellant’s record keeping generally.  

The Law
41.	Section 73(1) of the Value Added Tax Act 1994 deals with the law in relation to the VAT assessment as follows:
“…where it appears to the Commissioners that… returns [required under this Act] 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”.

42.	This section has been interpreted by the Courts in a number of established authorities.  

43.	In Van Boeckel v Customs and Excise Commissioners [1981] STC 290 at 292 Woolf J stated as follow:
“Therefore it is important to come to conclusion as to what are the obligations placed on the Commissioners in order properly to come to a view as to the amount of tax due, to the best of their judgment.  As to this, the very use of the word “judgment” makes it clear that the Commissioners are required to exercise their powers in such a way that they can make a value judgment on the material which is before them.  Clearly they must perform that function honestly and bona fide.  It would be a misuse of that power if the Commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could possibly be payable, and then leave it to the taxpayer to seek on appeal to reduce that assessment.  Secondly, clearly there must be some material before the Commissioners on which they can base their judgment.  If there is no material at all it would be impossible to form a judgment as to what tax is due.  Thirdly, it should be recognised, particularly bearing in mind the primary obligation, to which I have made reference, of the taxpayer to make a return himself, that the Commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to best of their judgment is due.  In the very nature of things frequently the relevant information would be readily available to the taxpayer but it would be very difficult for the Commissioners to obtain that information without carrying out exhaustive investigations.  In my view the use of the words “best of their judgment” does not envisage the burden being placed on the Commissioners of carrying out exhaustive investigations.  What the words “best of their judgment” envisage, in my view, is that the Commissioners will fairly consider all material placed before them, and on that material come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due.  As long as there is some material on which the Commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them.”
44.	In Rahman v Customs and Excise Commissioners [1998[ STC 826 (Rahman number 1) Carnwarth J examined the Van Boeckel case and said in relation to it at page 863:
“The tribunal should not treat an assessment as invalid merely because it disagrees to how the judgment should have been exercised.  A much stronger finding is required; for example, that the assessment has been reached “dishonestly or vindictively or capriciously”; or is a “spurious estimate or guess in which all elements of judgment are missing”, or is “wholly unreasonable”… short of such a finding there is no justification for setting aside the assessment.

Once the grounds for making an assessment are established, then the tribunal’s primary function is to examine the amount.  Since the assessment is the starting point of that exercise, the tribunal will need to consider whether the judgment made by the Commissioners was sound or not.  If it is shown to be wholly unreasonable or not bona fide there would be sufficient grounds for setting the assessment aside, because it would not be fair for the taxable person to be required to answer a case which has been formulated in that way.  However, that kind of case is likely to be extremely rare.  In the normal case it should be assumed that the Commissioners have made an honest genuine attempt to reach a fair assessment.  The debate before the tribunal should be concentrated on seeing whether the amount of the assessment should be sustained in the light of the material then available.”

45.	In Rahman v Customs and Excise Commissioners (Rahman number 2) [2002] EWCA 18A1, Lord Justice Chadwick stated at paragraph 45:
“It is in cases where the amount of tax found by the tribunal to be properly due is substantially different from the amount assessed by the Commissioners that the tribunal may think it appropriate to investigate why there is that difference; and to seek an explanation.  That investigation may – but, often (as in the present case) will not – lead to the conclusion that the Commissioners did not exercise best judgment in making their assessment.  The tribunal may take the view, in such cases, that the proper course is to discharge the assessment.  But even in cases of that nature, as it seems to me, the tribunal could chose to give a direction specifying the correct amount – with the consequence that the assessment would have effect pursuant to section 84(5) of the 1994 Act.  It could not be criticised for doing so.  The underlying purpose of the legislative provisions is to ensure the taxable person accounts for the correct amount of tax.”

46.	Mr Justice Patten in the Chancery Division of the High Court of Justice in the case of the Commissioners of HM Customs and Excise v Pegasus Birds Limited case number CH/2002/APP/0608 [2003 EWHC 2552 (CH)] reviewed the previous authorities and at paragraph 28 concluded as follows:
“…an error in the assessment due to a miscalculation, or even a flaw in the methodology adopted, cannot vitiate the assessment of the basis that it was not made to best judgment, if there is an innocent explanation for the mistake and the methodology or interpretation of the material, even if defective, was nonetheless adopted as part of what Chadwick LJ describes as an honest and genuine attempt to make a reasoned assessment.  It is not enough merely to show that the officer responsible for the assessment was negligent and in that sense fell below standards to be expected  of a reasonably competent officer faced with the same task.  A fortiori it is not enough to show that the officer’s assessment of the amount of unpaid tax or his view of the facts in dispute, was wrong.  There has to be a conscious or irrational failure to place a reasonable interpretation on the evidence to hand.”

Conclusions
47.	In this appeal the Appellant’s case is that the Commissioners have not exercised best judgment in raising the assessment which is the subject of this appeal as they are required to do by section 73 of the Value Added Tax Act 1994.  The Appellant submits that the appeal should be allowed and that the assessment should be dismissed.  In the alternative the Appellant submits that the assessment is excessive and should be reduced to nil.

48.	The Commissioners have based their assessment on an analysis of till rolls for the period 04/10/00 to 30/10/00.

49.	The till rolls were not used solely to record the sales of the business and were not used to calculate the Appellant’s VAT liability, the sales invoices being used for that purpose one of which invoices being given to each customer.

50.	Throughout his investigations it was absolutely clear that the till was used by the Appellant as an all purpose calculator and was used for a variety of different purposes as well as for recording sales.  We have set out in detail in our findings of fact the variety of different purposes for which the till was used.  For example the till was used to calculate the value of customer’s selections prior to sale, to calculate the value of potential sales for telephone enquiries, to calculate the value of faxed orders prior to sale, for training exercises, for calculating the total value of purchases, for calculating bankings and to calculate sandwich orders.  Mr Lumb was made aware of the different purposes other than recording sales for which the till was used.  We find that in the circumstances it was irrational, capricious and spurious for Mr Lumb to use the till rolls as a basis upon which to form any opinion as to the true level of sales made by the business.  We find that in doing so he did not use the best of his judgment.  We find that he did not consider all material placed before him and that he did not come to a decision that was reasonable and not arbitrary.  We find his decision wholly unreasonable.  We do not find that Mr Lumb acted dishonestly or vindictively or without good faith, but we do find that he acted capriciously and irrationally and totally unreasonably in concluding that the till rolls were a basis upon which to form an opinion as to the levels of sales of the business.

51.	It was absolutely clear throughout Mr Lumb’s enquiries that the till roll had been used for a multiple of purposes and as an all purpose calculator.  In our view Mr Lumb embarked down the avenue of the till rolls without fairly considering all the other material which was available to him and which was before him.  We take the view that the till rolls were not material upon which it was possible to make a value judgment and we find that Mr Lumb did not use his best judgment in deciding to use that material as the basis of his assessment.

52.	We have set down in our findings of fact our findings in detail relating to the uses made of the till.

53.	We are satisfied that the till was used to calculate the value of customer’s selections prior to sale as well as the final sale.  It was clearly impossible from the till rolls to identify which were the second transactions in many of these cases.

54.	The till was further used to calculate the value of potential future sales for telephone enquiries and calculating the value of faxed orders prior to sale.  It was impossible to identify all of these items with any accuracy from the till roll.

55.	The till was used for training exercises in October 2000.  Mr Lumb failed to take these into account.  He further failed to take into account that there were items on the till roll which were too large to be actual sales.  We are satisfied from the evidence of the Appellant in relation to the physical size of the amount of fireworks that would be required for such a huge order, from the type of licence required for the storage of such fireworks, and the size of a vehicle with the appropriate licence to carry such a quantity of explosives, that various large items, such as those analysed by the Appellant and detailed in our findings of fact, could not possibly have been sales of the business.  It was obvious that the till roll was unreliable to calculate the Appellant’s level of sales.

56.	We found that the till was also used for calculating the total value of purchases, calculating bankings and calculating sandwich orders, not all of which have been taken into account by Mr Lumb.

57.	In concentrating totally upon the till rolls we find that Mr Lumb capriciously and irrationally and unreasonably closed his mind and ignored other matters and material which made it obvious that his use of the till rolls was unreliable.

58.	We find that the level of the assessment was such as should have led Mr Lumb in the direction that his assessment was not credible.  Notional purchases of the business had been calculated by Mr Lumb’s methods at £395,424.43 a figure in excess of the declared sales by £160,000.  We agree with the Appellant’s submission that this should have alerted Mr Lumb to the fact that there was something fundamentally flawed in his method of assessment.

59.	Mr Lumb failed to look at alternative evidence that was available.

60.	Mr Lumb failed to consider properly a mark-up of the Appellant’s purchases by a figure of 19.95%, which was a figure that Mr Lumb himself had used in a calculation.  Mr Lumb ignored that avenue claiming that Mr Lumb could not be sure that the business had declared all of its purchases.  However, there was no evidence to support Mr Lumb’s theory that the business had not declared all its purchases.  Indeed, at Mr Lumb’s interview with the Appellant Mr Lumb told the Appellant that the Commissioners had visited his suppliers and were satisfied that he had declared all his purchases.  Indeed, Mr Lumb ignored the fact that there were only four suppliers of fireworks in the United Kingdom (two of whom were jointly owned), and we find that there would have been no difficulty in the Commissioners tracing the Appellant’s purchases through his suppliers.

61.	Mr Lumb ignored the Appellant’s VAT declaration for the periods 10/00 and 01/01 which produced a mark-up of approximately 20%.  Mr Lumb has given no satisfactory reason as to why he did not conduct a mark-up exercise based on suppliers records of purchases.

62.	When Mr Lumb made his unannounced visit to the Appellant’s premises on 31 October 2000 an officer conducted a stock check.  Mr Lumb ignored that.

63.	Mr Lumb further ignored the fact that there was no legal requirement for a wholesaler to give a till receipt to a customer or even to use a till at all as long as the wholesaler recorded his actual sales, which we are satisfied that Appellant did in the duplicate invoice books.  We find that there was no need for Mr Lumb to use the till roll as the copy sales invoices and all purchase invoices were available.  Mr Lumb had admitted that to arrive at the VAT on the expenses he had to go through all the bills, so he could have examined the purchase invoices from the records and then marked it up at the agreed rate to see if it equalled the sales on the copy sales invoices.  That material was available to Mr Lumb but he did not use it.  Accordingly we find that Mr Lumb did not use all the evidence that was available to him.  We find that nothing was withheld by the Appellant.  We find that Mr Lumb did not make a judgment on the basis of all the evidence available to him.  There was indeed not a shred of evidence to indicate that the Appellant suppressed the level of his sales in his business.  There was an irrational failure on Mr Lumb’s part to place a reasonable interpretation on the evidence he had to hand.

64.	We find accordingly that the decision of the Commissioners was not made to the best of their judgment.

65.	We would add that if indeed it was considered that Mr Lumb had used best judgment, on the material which was before him, we find on all the evidence in this appeal at the hearing, and in the light of our findings of fact, that we would have reduced the assessment to nil, with a direction that the Appellant’s own VAT claim be paid by the Commissioners.  We find however that Mr Lumb’s assessment was so irrational, capricious and lacking in best judgment that the proper course for us to take is to allow the Appellant’s appeal, as his decision was not made using best judgment, rather than simply reduce the assessment to nil.

66.	We allow the Appellant’s appeal and direct that the Commissioners do pay the Appellant’s costs of the appeal to be assessed if not agreed. 

I E VELLINS
CHAIRMAN
Release Date:

MAN/02/62