19339                                                          
	ASSESSMENT — Chinese restaurant — under declared takings — use of Inland Revenue observations — assessing against former trading entity — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	HAZY VIEW LIMITED (1)
	AARON KAM MAN KWOK (2)	Appellants

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Lady Mitting (Chairman)
						Robert Grice	

Sitting in public in Birmingham on 6 & 7 October 2005

Tony Chew, Accountant, for the Appellants

Owain Thomas, of counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

1.	The first Appellant (Hazy View Limited) appeals against an assessment for tax in the sum of £10,243 covering the period 15 July 2000 to 31 August 2001.  The second Appellant (Mr Kwok) appeals against an assessment in the sum of £12,970.51 in respect of the period 1 December 1998 to 14 July 2000. 
2.	When the case came on for hearing on the first day, we were told that the Appellant would be calling expert statistical evidence to be given by an expert witness, Mr Eamon Saunders.  No witness statement had been put in by Mr Saunders who then in fact told us that his evidence would only be brief on statistics and he would be addressing rather more general issues.  As the Respondents would have had no knowledge of the evidence which he was to give, it was, in our view, unacceptable for an expert witness to attend the tribunal without a witness statement having been put in first.  We ascertained from Mr Chew that he did not need Mr Saunders in court for the first day of the hearing and Mr Saunders confirmed that he did not need to be there.  We therefore asked Mr Saunders to take the rest of the day in drafting a witness statement which was to be faxed to the Tribunal by 3.30 pm that day and Mr Saunders could then give his oral evidence on the following day, unless the witness statement threw up matters which the Commissioners could not address given the shortage of time in which case there may have had to be an adjournment with cost implications.  When the faxed witness statement was received, it contained no statistical evidence and indeed no mention of the calculation or methodology used by the Respondents or the quantum of the assessment.  The statement in effect consisted a series of criticisms of the conduct of the Respondents and their officers.  We informed Mr Chew that if Mr Saunders wished to give statistical evidence the following day he would need to put in a further draft witness statement summarising the points he would be making by 4 pm.  Mr Chew spoke to Mr Saunders on the telephone and then informed us that Mr Saunders would not be attending the tribunal the following day as he (Mr Saunders) did not think it necessary.
3.	Mr Chew called no oral evidence.  We specifically asked if he was going to call Mr or Mrs Kwok to give evidence as to the running of the business but he declined.  
4.	The Respondents were in an unfortunate position.  The assessing officer was Mr Phil Andrews who was seriously ill and on long term sick leave.  There was no estimate of when he might return to work, if at all and even if he did, whether he would be fit to give evidence.  The Respondents therefore had to proceed without the assessing officer but they did, at the request of Mr Chew, call Mr John Booth, the review officer.
The Two Trading Entities
5.	Mr Kwok registered for VAT with effect from 28 July 1991 as sole proprietor of the Lotus Cantonese Restaurant, trading from 20 High Street, Cinderford, Gloucestershire.  He de-registered with effect from 16 July 2000.  The business was transferred as a going concern to Hazy View Limited on 15 July 2000 and the company applied for registration with effect from 16 July 2000.  
6.	By a licence agreement dated 16 July 2000, Mr Kwok granted a licence to Hazy View Limited to carry on the business for a period of two years in return for a payment by the company to Mr Kwok of £300 per week.  The business was to be carried on at the same premises, using the same “trade name, symbols, insignia and distinctive designs”.  The company also agreed to “carry on the business diligently and in such a manner as shall maintain the reputation and good will thereof as exists at the date hereon …”.  We were told by Mr Chew that at the expiration of the two year agreement, Hazy View de-registered and the business was transferred back to Mr Kwok who took up registration once again as sole proprietor.  The reason for the change of ownership was, we were told, that Mr Kwok was expecting to go back to Hong Kong for a short period to work in the dot com business and he was leaving the Lotus for his wife to run in his absence.  As it turned out, Mr Kwok did not leave and he continued to work in the restaurant as an employee for the entirety of the two year agreement period.  We were shown copies of his P60s.  
The Respondents’ Case
7.	Customs first became involved after they were given details by the then Inland Revenue of three evenings of test purchases, internal and external observations carried out by Inland Revenue officers.  This prompted Mr Phil Andrews to visit the business premises on 22 February 2001.  Mr Andrews completed the standard form “Summary of Trading Activities and Records” and a Simplified Visit Report.  The Summary gives as the person to contact Mr or Mrs Kwok and names Mrs Kwok as a director and Mr Kwok as an employee.  Mr Andrews spoke at length with Mr Kwok and obtained all the trading information which he needed.  Mr Andrews’ Report indicates that there had been no break in trading when the company took over from Mr Kwok and the same menu and same prices were being used and that there was no obvious change from a customer perspective.  
8.	Customs then carried out their own observation on 15 June 2001 and following this, Mr Andrews wrote to Hazy View Limited on 21 June 2001 asking if he could visit the business premises again on 2 July to examine the records. He also asked if he could at the same time see Mr Kwok’s records from his period of sole proprietorship.  
9.	This meeting clearly took place and by this time Mr Andrews had examined the trading records of both entities; he had spoken at length to Mr Kwok and he had before him the results of the observations which were as follows:
Friday, 20 October 2000
Inland Revenue officers observed eight parties eating in the restaurant of which seven were declared and 56 takeaway customers of which 14 were declared.  Of the test purchases one eat in transaction was not declared and two of the takeaway transactions were not declared.
Wednesday 29 November 2000
Inland Revenue officers observed eight parties eating in the restaurant of which six were declared and 11 takeaway customers of which nine were declared.  Of the test purchases two eat-ins were not declared and two takeaways were not declared.
Wednesday 24 January 2001
Inland Revenue officers observed nine parties eating in of which seven were declared and eight takeaways of which seven were declared.  No takeaway test purchases were made but there were three eat in meals, of which one was not declared.
Friday, 15 June 2001
Customs and Excise officers observed 11 eat-in meals of which all were declared, 43 takeaway customers were observed, of which 17 were declared.  All eat in test purchases were declared but only two of the four takeaway tests were declared.
10.	Mr Andrews concluded that there had been an underdeclaration, principally of takeaway meals, and he entered into correspondence with Mr Chew, who was acting on behalf of both the company and Mr Kwok.  Mr Andrews’ letter of 10 July 2001 enclosed extensive summaries of all four sets of observations and he set out his view that although the observations had been carried out whilst Hazy View had held the VAT registration, he believed that suppression may have been going on before the company took over.  Further correspondence ensued culminating in the issue of the assessments.  The assessments were calculated in the following way.  From the four evenings of observation, Mr Andrews totalled the number of eat in meals and the number of takeaways declared and observed and he treated the difference between the two as suppressed takings.  This revealed a suppression rate of 12.5 per cent on eat in meals and 151.06 per cent on takeaways.  By applying these percentages as mark ups to the declared takeaway and eat in sales, Mr Andrews arrived at an overall suppression rate of 48.9 per cent against which he made an allowance of 5 per cent for extra unclaimed input tax.  It was his view that such was the similarity in trading and personnel that he was justified in concluding that suppression had been going on prior to the transfer and he therefore raised an assessment against both Hazy View and against Mr Kwok personally.
11.	Following the notification of the assessments, further correspondence ensued.  Mr Chew contended that the assessment against Mr Kwok was ultra vires as he had ceased trading and had de-registered.  In respect of the company assessment, he contended that the calculations were “skewed”.  He questioned why Wednesdays and Fridays should have been used for observations and he further maintained that during Mr Kwok’s proprietorship, Mr Kwok had focused on the restaurant side of the business rather than takeaways and that the volume of takeaway sales would therefore have been substantially lower.  
12.	By letter of 22 November 2001, Mr Chew accepted for the first time that there had been some suppression.  This had arisen when occasional takeaway bills had not been properly kept but these, he maintained, related only to small sales of popular items.  At this stage, Mr Chew put forward an alternative calculation of the suppression.  In respect of eat in meals, he took the observing officers’ bills only and calculated from these that the average price of a meal for a couple was £36.16 as against Customs’ calculation of £48.70.  In relation to takeaways, he calculated the 27 most popular items on the menu, divided the total cost of these items by 27 reaching an average of £3.35.  This figure he treated as being the average price of a takeaway, as against Customs’ figure of £11.82.  He applied these figures to the number of meals which Customs had alleged were suppressed and in relation to Hazy View only, put forward an alternative calculation of the suppression of £3,710.49.  
13.	Mr John Booth was the review officer and it fell to him to consider Mr Chew’s alternative calculation.  He believed both elements of the calculation were flawed.  In relation to the eat-in meals, first it was artificial to take only the officers’ meals rather than every meal consumed but also these bills would all only be for two people and the calculation would therefore be thrown out immediately if any number other than two ate in.  In relation to the takeaways, it assumed that all customers only bought one dish which was most unlikely.  He therefore rejected Mr Chew’s alternative calculation.
14.	This was where matters lay until the tribunal hearing.  In preparation for the hearing, the Respondents had served witness statements from all the observing officers, both Inland Revenue and Customs.  These had all been accepted by Mr Chew without challenge although during the course of the hearing, as we set out below, Mr Chew did raise a number of matters in relation to the statements.  
15.	Mr Booth’s evidence in chief was brief, merely reciting his review of the assessment which he had upheld and going over the flaws which he had perceived in Mr Chew’s approach.  He was cross examined at some length by Mr Chew on the basis of the calculation, how fair it had been to assess against Mr Kwok personally and how reasonable it was for Mr Andrews to have spoken only to Mr Kwok rather than a director of the company.  Nothing emerged in cross examination which would have changed Mr Booth’s view that the assessment was reasonable and to best judgment and that there was justification in assessing against both legal entities.  Mr Booth was under the misapprehension that Mr Kwok was company secretary of Hazy View, a view which was not correct and although this error was jumped on by Mr Chew, it was not in fact material to anything.
The Appellants’ case
16.	We will deal first with Mr Chew’s comments on the observations.  First, on 15 June 2001, he raised the possibility of a double count when the officers changed shifts and that certain takeaway meals might have been double counted.  He was not for one moment challenging the honesty of the officers but merely raising it as a possibility.  Second, again on 15 June 2001, one of the observing officers had noted eight people leaving with takeaways whereas her colleague had noted only seven.  This discrepancy had already been picked up by the Respondents and they had used the figure of seven in their calculations, this being favourable to the Appellants.  Third, two of the officers observing on 15 June 2001 had both referred to “a woman” as being in charge.  Mr Chew’s contention was that this pointed to Mrs Kwok running the business herself during Hazy View’s ownership.  Fourth, on 20 October 2000, one of the observing officers states that she observed four kitchen staff, three of which were female.  Mr Chew said the business never had three female kitchen staff.  Fifth, on 29 November 2000, one of the officers refers to a female person serving who was “not Chinese but of oriental appearance”.  We were told by Mr Chew that this would have been Mrs Kwok who was not Chinese but neither was she of oriental appearance.  The same officer refers to a silver tray in the restaurant, of which apparently there are none.  Next, one of the officers on 20 October 2000 refers to a conversation with an English female stating that the restaurant sometimes remained open until 02.45 am.  This was totally untrue and that conversation could not have taken place.  Next, an observation was carried out by the Inland Revenue on 7 March 2001 which was not used in the calculations.  Mr Chew concluded from this that it was not used because it would have been favourable to the Appellants.  In fact it appears that Mr Andrews was not aware of that observation when he did his calculation and also it appears to have remained only an observation carried out by Inland Revenue officers with no comparison being made to declarations.  Similarly, it is apparent that a test purchase only was carried out on 27 June 2001.  This purchase appears to be in limbo, no-one knows where it originated from and no use was made of it by Customs.  
17.	As we said at the outset, Mr Chew called no oral evidence but he did put into evidence a set of documents which Mr Thomas accepted even though not formally introduced and he allowed Mr Chew to speak to the documents.  We were told by Mr Chew that an extensive amount of building work had been carried out at the premises and all the documentation relating to the works was produced to us.  We saw quotations, final bills and a plan of what had been done.  From this we can find that during the middle part of 1999, a very smart new extension was made to the front of the premises which would render it rather more eye catching.  Additionally, an internal wall was erected effectively separating the takeaway area from the restaurant.  Both sets of customers would use the same entrance but to get to the restaurant, one would walk through the takeaway area and round behind the wall into the restaurant.  In support of the contention that Mr Kwok was only an employee of Hazy View, copies of his P60s were disclosed.  Finally, Mr Chew put in an amended alternative calculation of the suppression, again in relation to Hazy View only.  This amended calculation was based on an increased notional figure for a takeaway meal of £6.10.  To reach this figure, Mr Chew reverted to the 27 most popular items but he added together a portion of rice £1.70 and the value of the most expensive item of the 27 (£4.40).  This, Mr Chew, contended was realistic because it allowed people to have one main course with a subsidiary item as well.  He applied his new figure, as before, to the accepted number of meals suppressed.  This achieved, in relation to Hazy View only, output tax due of £5,263.98.  
Submissions
18.	Mr Thomas contended that the decision to assess both trading entities was a legitimate decision.  In respect of quantum, the observation evidence was unchallenged.  The observations themselves were carried out representatively and the calculation was justifiable and reasonable.  Further because the assessment was based on percentage of suppression any increase or decrease in trade would be factored in and would also cater for changing levels of trade between takeaways and eat in meals.
19.	Mr Chew made the following submissions:
i)	The two trading entities are distinct in law and in tax and in VAT treatment.  There was a legal licence agreement between the two entities under which Mr Kwok ceased to trade and in return for £300 per week, the company carried on the business.  Instead of treating the two concerns as separate businesses, the Respondents had combined them and treated them as one and the same.  If Mr Kwok had transferred his business to an outsider, the Respondents would not have been able to assess him and the only reason they had done so is because Mr Andrews believed that Mr Kwok was the company secretary of Hazy View.
ii)	It was highly irregular for Mr Andrews to speak to Mr Kwok who was merely an employee.  Mr Andrews should, at all times, have spoken to an officer of the company and in not doing so, he was in breach of confidence and also in breach the Data Protection Act because he had disclosed information about the company to an employee. 
iii)	Three of the four observations had been carried out by Inland Revenue officers and only one by Customs.  The Inland Revenue observations were inadmissible in evidence and Customs were not permitted to base assessments on Inland Revenue observations.  This meant that the assessment in fact was raised on the basis of one observation.  Mr Chew referred  us to the case of C A Harrison v Customs and Excise Commissioners (1981) VATTR 164 where the tribunal had found it unreasonable to issue an assessment covering more than four years on the basis of two days’ observations only and the tribunal had therefore found that the assessment had not been raised to best judgment.
iv)	There had been a major development in Cinderford between June 1999 and July 2000 and in addition, the restaurant had carried out its own extensions.  This had not only increased the level of trade but also the trading pattern had altered in that whereas Mr Kwok had operated primarily as an eat-in restaurant, Mrs Kwok focused on and increased the takeaway element.  We were referred by Mr Chew to annual takings figures which showed an increased turnover.  
v)	The bills not declared were mostly Friday bills for small amounts.  This was when the restaurant was busy and mistakes could easily occur.  If the restaurant was making mistakes, mightn’t the observing officers also have done so when it was so busy.  Also, Customs had recorded the number of customers but not what they ate.  Their calculation may well therefore have overestimated the value of the missing meals.  
vi)	The Appellants had been disadvantaged by the absence of Mr Andrews.  Mr Chew said that he wished to ask Mr Andrews why he spoke to Mr Kwok rather than an officer of the company and there would have been a number of other matters which he would have raised (these were not specified) if Mr Andrews had been there.  By not being there to answer questions, there had been a breach of the Appellants’ human rights.
Conclusions
20.	We see two major issues before us here, given that an underdeclaration has by implication been accepted.  First, were the Respondents justified in assessing Mr Kwok as well as the limited company and secondly whether the amount of the assessment is correct.  Mr Chew did, however, raise a number of other issues to which we will refer first.  Should Mr Andrews have spoken to Mr Kwok?  Mr Andrews spoke to Mr Kwok because it was Mr Kwok who put himself forward as being able to speak on behalf of the company.  Mr Andrews’ letter dated 21 June 2001 asking for an appointment to come to see the records is addressed to the limited company.  It does not specifically ask to speak to Mr Kwok and the company could of course have put forward Mrs Kwok.  The letter refers to an answer phone message being left by Mr Andrews.  Mr Chew asserted that in the answer phone message, Mr Andrews asked for Mr Kwok.  There was, however, no evidence of this and we cannot find that that was so.  We totally reject that there has been any breach of the Data Protection Act.  
21.	It is unusual for a case to proceed without the presence of the assessing officer and we considered with great care throughout whether the Appellants were being prejudiced and our conclusion is that they were not.  The only point which Mr Chew raised that he would have put to Mr Andrews is why he spoke to Mr Kwok rather than an officer of the company but Mr Chew also asserted that Mr Andrews only raised the assessment on Mr Kwok because he believed Mr Kwok was an officer of the company.  We do not believe Mr Andrews’ absence has prejudiced the Appellants.  That there has been a suppression, Mr Andrews based on observations by other officers, the evidence for which is all before us.  Mr Chew can challenge the quantum of the assessment in any way he wishes, quite irrespective of whether or not Mr Andrews is present to give evidence.  We as a tribunal will decide whether or not it was justifiable to assess both entities and it is, of course, open to the Appellants to bring before us whatever evidence they wish to show that it was not.  Mr Andrews’ absence can hardly affect this.  We are not quite certain what Mr Chew meant by asserting that Mr Andrews’ absence was a breach of human rights.  We assume that he was asserting that the Appellants were not getting a fair hearing but for the reasons which we have just stated, we are perfectly satisfied that they are.  
22.	We now turn to the two major issues before us.  First, were the Respondents justified in assessing both entities.  The Respondents have at all times accepted that there were two quite distinct legal entities, a limited company and a sole proprietorship.  They have never sought to combine the two or to treat them as one and the same.  Their approach has been that what was going on during the currency of the limited company may well have been going on during the sole proprietorship.  The business was transferred as a going concern.  The agreement between Mr Kwok and the limited company obliged the company to carry on the business in a similar manner, using the same trade name, symbols, insignia and maintaining Mr Kwok’s reputation and goodwill.  Mr Kwok told Mr Andrews that there had been no break in trading, the menu and prices were the same and there was no obvious change from a customer perspective.  There was no apparent difference in trading activity.  Mr Kwok was present on the premises, albeit as an employee, throughout the period under assessment.  If there was a genuine difference in the way the business was run or a reason why the underdeclaration began on the change of ownership, Mr or Mrs Kwok should have given evidence to tell us.  Without any such evidence, there is no reason for us to believe that whatever underdeclaration took place under the registration of the limited company was not also taking place under Mr Kwok’s proprietorship.  The suggestion was that underdeclaration arose only because the takeaway was so busy on a Friday night that bills got lost and that they might not have done so when the takeaway was not so busy under Mr Kwok’s proprietorship.  However, this was only a suggestion put forward by Mr Chew.  There was no evidence in support of it, either verbal or documentary as the annual trading figures showed no distinction between eat in and takeaway. We therefore conclude that the Respondents were justified in assessing not only the limited company but Mr Kwok as well.  We should just comment here on the suggestion which Mr Chew made in correspondence, although not repeated before us, that it was ultra vires to assess a trader who was de-registered and no longer trading.  This is clearly not correct and Section 73(1) VAT Act 1994 gives the Respondents the power to assess whenever they believe there has been an underdeclaration.  There is no provision which requires the trader still to be registered and indeed, if that were the case, all a trader need do to avoid payment of VAT would be to deregister.
23.	We turn now to the quantum of the assessment.  This was based on observations carried out by Inland Revenue and Customs teams and their evidence, given in the form of witness statements, had been accepted by Mr Chew.  He raised a number of points during the course of the hearing in relation to the statements but they did not go to the core of the observations, namely the number of diners observed set against the number of meals declared. We therefore accept these observations as accurate and indeed it is apparent that Mr Chew also does as both his alternative calculations used as their base the Respondents’ figures.  
24.	The Respondents based their assessment on four nights.  We reject Mr Chew’s contention that the Inland Revenue observations are not admissible.  First he put forward no authority why they should not be.  Also, we were referred by Mr Thomas to Section 127 Finance Act 1972 which allows a disclosure of information between the then two departments and once disclosed, there is no reason whatsoever why that information should not be used.  We consider four nights, two Wednesdays and two Fridays, spread over a nine month period to be fully representative.  Again with no evidence from the Appellants, we can see nothing exceptional in any of the nights chosen.  One of the two Wednesdays was Chinese New Year but the patterns were almost identical on each of the two Wednesdays so this, we assume, made no difference.  
25.	It was asserted that the underdeclarations were confined to low value transactions.  Again, we heard no evidence that this was so or why it should have been.  Any of the bills could have gone missing or could have been suppressed and there is no way of ascertaining what their value was.  
26.	It was asserted that the Respondents’ calculations did not take into account the changing balance of the business between takeaway and eat in.  Again, no evidence was given or produced to show that there was any such change or how this would throw out the Respondents’ calculation.  
27.	The substantive challenge to the Respondents’ figures has been in relation to the price of the meals with Mr Chew putting forward two sets of alternative figures.  Sometimes there can be two ways of approaching how an underdeclaration should be calculated using totally justifiable figures.  Here, however, we do not even have that position because the figures upon which Mr Chew relies are themselves flawed.  In relation to the eat in bills, his calculation presupposes that the officers’ meals are all recorded whereas on each of the Inland Revenue observations, there were officers’ meals which were not recorded.  Also in relation to eat in meals, Mr Chew bases his calculation on the number of diners rather than the number of transactions. This requires Mr Chew to be able to ascertain from the bills how many diners each catered for.  He claims to have been able to do this although no evidence was put forward in support and as it is a matter of guess work, there must be an element of discrepancy in it.  In relation to the takeaways, Mr Chew’s figures are totally hypothetical.  He has put together a hypothetical meal and concluded that that is the average price on the bills which went missing.  There is no support for this approach.  The Respondents’ calculations are based on the Appellants’ actual figures.  Mr Andrews took the actual declared takings and divided them by the actual number of bills, thus arriving at a value per bill which he then applied to the number of suppressed bills.  There is no means of knowing whether this is entirely accurate but as it was based upon unchallenged observation evidence and the Appellants’ own takings figures, it is difficult to see how the exercise could be improved upon.  We have no reason to upset the quantum of the Respondents’ calculation which we believe to be fair and reasonable.
28.	Mr Chew did not address us on the issue of best judgment but for the avoidance of doubt we should say that we have considered that issue and we believe that both assessments were raised to best judgment.  
29.	We should mention the “witness statement” faxed over to us by Mr Saunders (para 2).  The document was headed “Abstract Witness Statement”.  It was not accepted by Mr Thomas and Mr Saunders did not attend the hearing on the second day to give oral evidence.  The statement was at no time referred to by Mr Chew.  He did not ask us to pay any heed to it and we have not therefore taken any account of it.
30.	The onus of proof is on the Appellants.  They have to satisfy us, on a balance of probability, that the assessments should not have been raised or are incorrect in quantum.  In the absence of any oral evidence from Mr or Mrs Kwok, they have not discharged that burden of proof.  On the evidence before us we are perfectly satisfied that the Respondents were entitled to assess against both legal entities and we see no reason to upset the quantum of the assessments.
31.	Both appeals are therefore dismissed.  No application for costs was made by Mr Thomas and we make no order.

LADY MITTING
CHAIRMAN
Release Date: 9 November 2005
LON/01/1311 & 1312
££Hazy View Ltd & Ors v Revenue and Customs [2005] UKVAT V19339 (09 November 2005)