Li & Anor (t/a Phoenix House Chinese Takeaway) v Revenue & Customs [2006] UKVAT V19608 (05 June 2006)

19608

VALUE ADDED TAX – Best judgement assessment – limited information declared – careful calculation of suppression rate – attempt to do honest best  – appeal dismissed

LONDON TRIBUNAL CENTRE

MR AND MS LI
Trading as PHOENIX HOUSE CHINESE TAKEAWAY 	Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS	Respondents

Tribunal:	ADRIAN SHIPWRIGHT (Chairman)
RUTH WATTS DAVIES FCIPD MHCIMA

Sitting in public in London on 6 April 2006

Andy Lau of Andrew Cross Lau & Co, for the Appellant

Shaheen Rahman, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

Introduction
1.	This is an appeal against an assessment to Value Added Tax (“VAT”) for £37,836.00 and a misdeclaration penalty of £5,672.00.  The assessment was made on 11 November 2003 and the misdeclaration penalty was notified by letter dated 21 October 2004.  They both relate to the partnership between Mr and Mrs Li which traded as "Phoenix House Chinese Takeaway".  
2.	The assessment was made following covert test purchases and observations and was expressed to be made to the best of judgement.
The Issue
3.	The issue in this case is whether the assessment was properly made "to the best of their judgement" by HMRC officers.  The onus in this case is on the appellants to show that it was not the case.
4.	No allegation of fraud or bad faith on the part of HMRC or its officers was made and so was not an issue in this case.
The Law 
5.	Section 73 Value Added Tax Act 1994 (“VATA”) provides that the Commissioners may assess the amount of VAT due from a person to the best of their judgement where a person has failed to make any returns required under the VATA or to keep any documents and afford the facilities necessary to verify such returns or where returns are incomplete or incorrect.
6.	Section 63 VATA provides that where a return understates a person's liability to VAT the person concerned shall be liable to a penalty equal to 15% of the VAT that would have been lost if the inaccuracy had not been discovered.
Authorities
7.	We were provided with copies of the following cases.
Rahman (trading as Khayam restaurant) v Customs and Excise [2002] STC 73
Customs and Excise v Pegasus Birds Limited [2004] STC 1509
Evidence
8.	An agreed bundled documents was produced which was not objected to and was admitted in evidence.  There was no agreed statement of facts.
9.	Mr Li, one of the appellants, gave oral evidence with the aid of an interpreter.  Julie Barnes, HMRC officer, and Desmond Lewis, HMRC officer gave evidence.  A detailed witness statement was produced for Julie Barnes.

Findings of Fact
10.	From the documents and the evidence we make the following findings of fact
The Partnership Business and Location
(1)	Mr and Mrs Li were registered for VAT, having purchased the Chinese takeaway in question, from 13 June 2001 till 1 July 2004 when the business was incorporated and a new registration made.
(2)	They were registered as partners carrying on business as a Chinese takeaway, trading as "Phoenix House Chinese Takeaway".
(3)	Mr and Mrs Li had purchased the business earlier that year and refurbished it.  The opening was delayed because Mr Li had to undergo a gallbladder operation.
(4)	The takeaway is located in Coxheath, Maidstone, Kent.
(5)	We did not visit the site but were provided with photographs and oral evidence concerning its location.  The takeaway is located on the corner of a parade of shops on a slip road from a very busy main road.  This provides parking for customers in addition to that available on the nearby residential roads.
(6)	The takeaway is located next to an off-licence.  There is also an Indian takeaway, a kebab house and a pizza takeaway on the parade.  There is a fish and chip shop on the opposite side of the main road.
(7)	Although Mr Li was the chef, other part-time staff were employed.
Test Purchases and Visit
(8)	Test purchases and observations were undertaken by HMRC officers on 23 November 2002 and 28 January 2003.
(9)	On 24 September 2003 HMRC officers (Mrs Barnes and Mr Lewis) visited the takeaway without prior appointment.
(10)	The officers discussed with Mr and Mrs Li the operation of the business and their accounting practices at that visit.
(11)	Mrs Barnes recorded that Mr Li did not speak English fluently.  This was corroborated by the need for an interpreter when he gave evidence.
(12)	Accordingly, Mrs Li (who spoke excellent English, we were told) provided most of the information obtained at that meeting.
(13)	The officers were told that Mr Li, a chef, was mainly responsible for the food preparation and cooking.  Mrs Li served at the counter, taking orders, handing over food when it was collected and receiving payment.
Staff, Flat, Son 
(14)	The Li’s have a son.  He was usually in the flat above the Takeaway.  Mrs Li would be there with him looking after him.  She could and would answer the business telephone there.
(15)	There was only an outside staircase between the flat and the Takeway.
(16)	Information recorded as supplied at the time of the visit was as follows:
i.	Customers’ orders, whether placed at the counter or via telephone, were recorded on a pre numbered order pad with no duplicate ticket created.  The completed ticket was passed through to the kitchen for the food ordered to be cooked.
ii.	Only one pad was used for recording orders.  Once one pad was complete a new pad would be started.  There was not more than one pad in use at a time.
iii.	Some small orders, for example, if a customer only ordered a low value item from the menu, would be called through to the kitchen and not written down anywhere.
iv.	Meal order tickets had not been retained.
v.	At the end of the night the takings were counted by Mr Li and noted on a piece of paper.  The Daily Gross Takings (“DGT”) figure was then posted into a blue cashbook that was sent to the Li’s accountant, Mr Pheby, for preparation of the VAT return.
vi.	Mrs Li’s uncle, Mr Lau, who purportedly ran a Chinese restaurant in Maidstone, initially showed the Li’s how to prepare their business records.  With effect from VAT period 7 March 2003, Mr Li took over completion of the cashbook from Mr Lau.
(17)	Mrs Barnes gave oral instructions to Mr and Mrs Li that, with immediate effect, they must ensure that all orders were recorded on an order ticket and that these were secured in a bundle at the end of the day with the date and DGT recorded on the bundle.  She also informed them that these and all other business records had to be retained for six years.
(18)	Two blue cashbooks were produced for inspection at the visit.  The last recorded “DGT” in the cashbooks related to 26 July 2003.  Mrs Barnes asked to see the takings records from 27 July 2003 up to the previous day, which was 23 September 2003.
(19)	There was an apparent problem with the production of these records.  Mr Li went away to their private accommodation above the take-away shop to look for the missing records.  Mrs Li also left to assist her husband and returned approximately 15 minutes later saying that they were unable to find the records; this included the previous night’s order tickets.
(20)	Mrs Li left again and on her return produced an A4 sheet of paper showing purported takings figures covering the period 2 September to 21 September 2003 on the front of the sheet, and the period 4 August to 31 August 2003 on the reverse.
(21)	Mrs Li also produced pieces of torn audit roll type paper, one piece of paper showed “22-9-03 £150.00” the other “23-9-03 £230.00”.
(22)	These were estimated takings as Mr Li had not kept a written record of takings for the last two days.  He admitted that he had only just written down these figures.
(23)	There still remained a gap of one week between the takings records just produced and the last date in the cashbook.  The DGT record on the sheet commenced 4 August 2003 but the last DGT shown in the cashbook was 26 July 2003.  After confirming that the Takeaway was not closed during the period, Mrs Barnes asked to see the takings record for the missing week.
(24)	After some further discussion between Mr and Mrs Li, not in English, Mrs Li advised that her uncle Mr Lau might have the missing records.
(25)	Mrs Barnes asked for Mr Lau’s telephone number in order that she could verify this explanation.  Mrs Li rang him and after a while passed the phone Mrs Barnes.  Mrs Barnes explained to Mr Lau that there were some records missing which the Li’s thought he might have.  Mr Lau was certain that he did not/would not have any of the Li’s records and stated that he had helped them to set out their records initially as this was their first business but had no further involvement thereafter.
(26)	On hearing what Mr Lau had said, Mrs Li stated that her husband sometimes did not write the takings down but “memorised” them.  Both parties were certain that the missing records would not now be found.
(27)	Mrs Barnes advised Mr and Mrs Li that she was concerned that proper takings records had not been maintained.  She issued a receipt for the business records that had been produced and were taken.
(28)	On 6 October 2003, Mrs Barnes sent written instructions to the Li’s reminding them of the requirement to retain their meal bills.  She also informed them that surveillance evidence gathered indicated that the business takings figures were not being fully declared and invited them to make a disclosure to the Commissioners within fourteen days of undeclared takings.
(29)	In a letter dated 13 October 2003, Mr Pheby, an accountant who then represented Mr and Mrs Li, stated that records were now being kept in accordance with Mrs Barnes’ instructions and that his clients believed that their business takings were correctly recorded.
Calculation of Suppression Rate 
(30)	 In a letter dated 5 November 2003, Mrs Barnes informed Mr Pheby that she would be issuing an assessment based on the surveillance evidence held.  Enclosed with the letter were four schedules providing details of the surveillance evidence, the calculation of a weekly suppression rate of 59.1% and a breakdown by VAT period of the assessed sum of £37,836.00 covering VAT periods November 2007 to July 2003.
(31)	In calculating the assessment, Mrs Barnes first worked out an average bill value for each of the two days that test purchases were undertaken using order values seen or heard by the officers but excluding the bills that related to the officers’ own purchases.  As shown in her schedule headed “Test Purchase Details” she found that the average bill value for Tuesday 28 January 2003 was £10.62, and that the average bill value for Saturday 23 November 2002 was £12.81.
(32)	The pads of meal bills used at the Takeaway contain fifty tickets per pad.  They had numbers printed on the bottom in red.  The bundles of meal bills taken from the Takeaway were exhibited to her statement.
(33)	Mrs Barnes produced a schedule headed “Number of Tickets Used”.  It was exhibited to her Statement.  It showed how she had worked out how many bills had been used on each day that test purchases were carried out.  This was on the basis that only one consecutively numbered sequence of bills was used at a time, ie only one pad at a time.  She then applied the average bill for the day in question (ie £10.62 or £12.81, see above) value for the day, to the number of tickets used to project a “true” Daily Gross Takings (“DGT”) amount.
(34)	The “true” DGT was compared to the declared DGT and a suppression rate calculated.
(35)	Mrs Barnes next looked at the proportion of the declared Weekly Gross Takings (“WGT”) that the declared DGT represented and, on the basis that the “true” DGT figures represented the same proportion of the “true” WGT as those shown for the relevant weeks in the declared business records, she calculated the “true” WGT figures that are shown in her schedule called “Calculation of Weekly Suppression Rate”.  This was exhibited to her Statement.
(36)	The combined total of the two weeks where “true” WGTs are projected was then compared to the combined total declared WGTs for the same two weeks and an average suppression rate of 59.10% calculated.
(37)	A “Schedule of Assessment” showing the application of 59.10% suppression rate and a breakdown of tax due for each VAT period was also exhibited to Mrs Barnes’ Witness Statement.
Further Meeting
(38)	A meeting attended by Mrs Barnes, Mr Lewis, Mr Pheby and Mr and Mrs Li was held at the business premises on 7 January 2004.
(39)	At this meeting Mr and Mrs Li maintained that there was no disclosure to make in respect of suppressed takings.  Additionally, they now claimed that three order pads were in use at any time, these were said to be:
i.	The pad being used at the counter by Mrs Li.
ii.	A second pad that Mr Li would use to record orders of customers waiting at the counter if Mrs Li was busy recording a telephone order on the other pad.  Either person could take orders on either pad during the course of an evening as they were not separately kept.
iii.	A third pad kept in the upstairs accommodation that Mrs Li sometimes used between 18:00 and 19:00 hours if she had to cook dinner for their son.  It was alleged at this meeting that the business telephone line rang simultaneously in the takeaway and on an extension in their private accommodation.
(40)	Meal bills kept since the first visit were also produced.  However, Mrs Li said she had rewritten all the bills onto one pad so that the declared tickets appeared to be consecutively numbered.  This meant that it was not possible to check whether Mr Li had completed any of the tickets.
(41)	An A4 lined sheet was also produced.  This was alleged to be the missing takings record for the week commencing 27 July 2003 that is referred to at paragraphs 19 to 22 of my statement.  Mrs Li said she had not found the record before as her son had written his homework on the back of it.  On the reverse of the sheet produced there were some multiplication sums written in pencil.
(42)	This A4 sheet had a grey printed margin on it and covered only 7 days whereas the A4 sheet located at the time of the visit had blue printed margins and covered three to four weeks per side.
(43)	On Friday 6 February 2004 at approximately 16:40 hours, accompanied by Mr Lewis, Mrs Barnes visited the business premises without an appointment for the purpose of carrying out an invigilation exercise to monitor the level of trade and observe working practices.  After taking advice from Mr Pheby, Mrs Li provided her written consent that the officers could remain on the premises.
Invigilation
(44)	Mrs Li also said that the practice of taking orders in the private accommodation, (see above), no longer applied.
(45)	Mrs Barnes considered that the following had a negative effect on the level of trade achieved at the invigilation:
i.	The take-away shop did not open until 17:13 hours.  The advertised trading hours are 17:00 hours until 22:30 hours, however, there was a customer at the door at 16:45 hours who was told that they were not open yet and turned away.
ii.	Mrs Li made two outgoing calls at the beginning of the evening that caused the business line to be continually engaged.  Customers would not have been able to place a telephone order until after 17:20 hours.
iii.	On two occasions between 17:30 hours and 17:45 hours, incoming telephone calls were not being received.  When this was investigated it was found, in the first instance, that there was no connection as the telephone receiver had not been replaced properly, and, in the second instance, there were no incoming calls as the telephone appeared to be switched off.
iv.	Mrs Li notified telephone customers of lengthy delays, at times exceeding ninety minutes.  Initially she recorded the orders before notifying the waiting time and then cancelled the meal tickets when customers decided they were not willing to wait.  From 19:10 hours Mrs Li immediately informed customers of the waiting time before writing onto the order pad and it was noted that seven telephone customers and two females who came into the shop decided not to proceed with their orders.
v.	After 19:30 hours it was noticeable from the lack of noise coming from the kitchen that there was little activity occurring there.  It transpired that the two kitchen staff had already left; yet delays in excess of an hour were still being notified to customers coming into the shop and calling on the telephone.
vi.	It was also noted that Mrs Li at times appeared to be in no apparent hurry to answer the telephone and on fifteen occasions calls went unanswered.
(46)	The findings of the invigilation were as follows:
Value of orders for which meals provided
(including one supplied free of charge)
	£   914.90	(57 bills)	
Known order values cancelled (paragraph 47 (iv))	£   181.10	(10 bills)
	
Total	£1,096.00	(67 bills)	

(47)	The above orders have an average bill value of £1,096.00 / 67 = £16.36.  This is significantly greater than those applied when the assessment was calculated, see paragraph 10(31).
(48)	A further 8 orders were not placed when callers decided not to wait (paragraph 47 (iv)), the estimated value of the declined orders is 8 x £16.36 average = £130.87, which could have resulted in total takings for the day of in excess of £1,200.00.
(49)	Takings declared in the cashbook for Friday trading in February 2003 were:
Friday 07 February 2003		£420.40
Friday 14 February 2003		£464.90
Friday 21 February 2003		£401.40
Friday 28 February 2003		£340.80
Meeting with Mr Lau
(50)	On Friday 7 May 2004 a meeting took place at the Canterbury VAT office that was attended by the Li’s new representative Mr Lau of Andrew Cross, Lau & Co, Mr and Mrs Li, Mr Lewis and Mrs Barnes.  No agreement was reached on the level of arrears.
Self Invigilation
(51)	In a letter dated 2 June 2004 Mr Lau notified Mrs Barnes that his clients had conducted a “self invigilation”  The reported result of the self invigilation, shown in an accompanying schedule, was that quarterly takings were estimated as being on average 22.92% greater than had been declared over VAT periods 01/02 to 04/04.
(52)	No revised takings figures were shown in respect of VAT period 10/01, which covered the first nineteen weeks of trading, as it was maintained that the declared takings record for these weeks were genuine.
(53)	Mrs Barnes asked to see the meal bills that had been retained for the period by the self invigilation and collected them from the business premises on 9 July 2004.
“The Implausible Straight Line”
(54)	Mrs Barnes wrote to Mr Lau on 6 August 2004 notifying that she did not consider that the takings record for VAT period 10/01 was genuine as takings were of a consistent level.
(55)	Shown below is Mrs Barnes’ extrapolation of the Weekly Gross Takings (“WGT”) declared in the blue cashbook referred to above for VAT period 10/01:
Week ending	Declared WGT
	
23/06/2001	1648.40	
30/06/2001	1633.25	
07/07/2001	1630.60	
14/07/2001	1635.45	
21/07/2001	1629.65	
28/07/2001	1631.45	
04/08/2001	1632.65	
11/08/2001	1630.80	
18/08/2001	1634.65	
25/08/2001	1632.45	
01/09/2001	1637.55	
08/09/2001	1630.80	
15/09/2001	1634.75	
22/09/2001	1631.95	
29/09/2001	1637.25	
06/10/2001	1640.35	
13/10/2001	1633.45	
20/10/2001	1637.45	
27/10/2001	1640.20	
 
(56)	
The above record sorted in ascending value order is as follows:
Week ending	Declared WGT
	
21/07/2001	1629.65	
07/07/2001	1630.60	
11/08/2001	1630.80	
08/09/2001	1630.80	
28/07/2001	1631.45	
22/09/2001	1631.95	
25/08/2001	1632.45	
04/08/2001	1632.65	
30/06/2001	1633.25	
13/10/2001	1633.45	
18/08/2001	1634.65	
15/09/2001	1634.75	
14/07/2001	1637.25	
29/09/2001	1637.45	
20/10/2001	1637.25	
01/09/2001	1637.55	
27/10/2001	1640.20	
06/10/2001	1640.35	
23/06/2001	1648.40	

(57)	In the nineteen week period the difference between the lowest WGT, week ending 21 July 2001, and the highest weekly takings figure, week ending 23 June 2001, is £18.75 (eighteen pounds and seventy five pence)
(58)	If those two weeks were excluded from the comparison, the remaining seventeen weeks fall within a range of less than ten pounds.
(59)	In the same letter Mrs Barnes informed Mr Lau that she did not consider that the self invigilated findings were reliable as there was a marked decline in the average order values when compared to the findings of HMRC’s invigilation.
(60)	Mrs Barnes demonstrated this point in a schedule accompanying the letter, which is summarized below:
Date	Total
number of
orders
	Takings	Average	Invigilation
conducted by	
Friday 06.02.04	67	£1,096.00	£16.36	Commissioners	
Friday 07.05.04	57	£   698.00	£12.26	Mr & Mrs Li	
Friday 14.05.04	72	£   808.90	£11.23	Mr & Mrs Li	
Friday 21.05.04	56	£   609.80	£10.89	Mr & Mrs Li	

(The 67 orders per the Commissioners invigilation includes one meal supplied to an acquaintance of the Li’s for which no charge was made)

(61)	The average customer order value on Friday 6 February 2004 when HMRC invigilated was £16.36.  On the three Fridays that Mr and Mrs Li conducted their own invigilation exercise the average customer order value fell by between £4.10 and £5.47.

Date	Number of orders
< £10 value	% of orders
< £10 value	Invigilation
conducted by
	
Friday 06.02.04	12	17.91%	Commissioners	
Friday 07.05.04	29	50.88%	Mr & Mrs Li	
Friday 14.05.04	36	50.00%	Mr & Mrs Li	
Friday 21.05.04	32	57.14%	Mr & Mrs Li	

(62)	In a letter dated 19 August 2004, Mr Lau stated that because the declared takings for Friday 14 May 2004 were much higher than the other two self invigilated Fridays, Mrs Barnes schedule could not be used as an indicator to support the assessment.  However, the relevant percentages shown on her schedule are not calculated in relation to takings figures.  The expressed percentages relate to the total number of orders received, for example:
(63)	Column C, Self Invigilation, 14 May 2004 shows that there were: 
19 (no.) bills of a value less than £5.00, and 
17 (no.) bills of a value between £5.00 and £10.00
The total number under £10.00 in value was therefore 36 (no.) bills.
The total number of bills declared for the day was 72 (no.) bills.
36 bills / 72 bills x 100 = 50% of total bills of a value under £10.00
(64)	In the same letter Mr Lau stated that the number of orders taken was also not relevant as it takes much longer to cook an order than it does to prepare one.  On the assumption of a cooking time of four minutes per dish, Mr Lau estimated that the chef would cook fifteen dishes an hour and states that to achieve over £800 takings in an evening this would mean non-stop cooking. 
Ticket 48
(65)	There was much discussion at the hearing as to whether two tickets numbered 48 had been used whilst the HMRC officers were present.  As Mrs Barnes gave the appellants the benefit of the doubt in her calculations the matter does not arise for decision.  Accordingly, we do not hold that two tickets numbered 48 were used.
Conclusions of fact
(66)	We conclude that:
i.	It was reasonable for HMRC to conclude that the takings were understated particularly in the light of the “”implausible straight line” and the less than £10 variation in takings over 17 weeks and nothing has been produced to show otherwise.  Mr Lau’s letter of 2 June 2004 seems to accept this.  He was merely suggesting that the suppression rate should be 22.92% rather than 59.1%.
ii.	The takings were understated and we find this as a matter of fact.
iii.	The amount of the assessment was arrived at on a reasonable, sensible and rational basis.
iv.	The officers acted reasonably and properly.  They did not take in to account irrelevant matters on matters that they should not have.
v.	They sought to produce a fair result.  They did their “honest best” on a proper and fair basis.
vi.	They did act to the “best of their judgement”.
Discussion
Our Task on How to Approach It
11.	Our task is to decide whether or not the assessment was properly made to "the best of their judgement" by HMRC.  The onus is on the Appellants show that it was not so made if the Appellant is to succeed.
12.	In approaching this task we remind ourselves of what Lawrence Collins J said in Rahman v Customs and Excise (Number 2) and the "Guidance to the Tribunal" Carnwath LJ gave in Customs and Excise v Pegasus Birds.
13.	Lawrence Collins J said (at paragraphs 18-20):
“[18] In McNicholas Construction Co Ltd v Customs and Excise Comrs [2000] STC 553 at 581 Dyson J said, after referring to the decision of Carnwath J in Rahman (No 1), that the words 'to the best of their judgment' permitted the commissioners a margin of discretion in making an assessment, and a taxpayer could only challenge the assessment if he could show that the commissioners acted outside the margin of their discretion by acting in a way that no reasonable body of commissioners could do. On a best judgment challenge, the taxpayer had to show that the assessment was wrong in a material respect and that, if so, the mistake was such that the only fair inference was that the commissioners did not apply best judgment, as explained in Van Boeckel. The primary focus of the attention of the tribunal should be on the objective evidence adduced by the taxpayer in seeking to discharge the burden of showing that the amount of VAT assessed was not due from him. That was because it would be absurd for the tribunal to conclude that the assessment was correct, but that the commissioners had made a dishonest or capricious assessment. Parliament cannot have intended that a tribunal should be required to set aside assessments which were shown to be correct, or which the taxpayer did not show were incorrect. See also Elias Gale Racing v Customs and Excise Comrs [1999] STC 66 at 73, where Carnwath J rejected the argument that an assessment could be invalidated by a failure to exercise best judgment when the failure was to the benefit of the taxpayer.
[19] In my judgment, the better view is that, first, an assessment which turns out on the evidence to be substantially correct cannot normally be attacked as being contrary to best judgment, and, the fact that it turns out to be substantially incorrect does not mean that it was contrary to best judgment. It follows from Van Boeckel, Rahman (No 1) and McNicholas that to show, on an appeal to the tribunal, that an assessment has not been made to best judgment the taxpayer must show that the assessment is wrong in a material respect, and that the mistake was such that the only inference is that the assessment was arbitrary (in Woolf J's formulation), or (in Carnwath J's formulation) dishonest, vindictive, or capricious, or based on a spurious estimate or guess, or is wholly unreasonable. If the assessment is wrong in a material respect but the taxpayer fails to show that it was not made to best judgment the tribunal will deal with it on the quantum aspect of the appeal.
 [20] The tribunal's approach to the best judgment issue was squarely based on the approach of Carnwath J in Rahman (No 1) and of Dyson J in McNicholas. I do not accept the submission that the duty of the tribunal was to put itself objectively in the position of a reasonably competent officer in order to test whether what had been done in preparing and issuing the assessment, and to consider whether the officer had fairly considered all the material, and come to a reasonable conclusion. In my judgment, the tribunal was right to follow the approach that a much stronger finding was required, for example, that the assessment had been reached dishonestly or vindictively or capriciously, or was wholly unreasonable.”

14.	Carnwath LJ's guidance is as follows:
“Guidance to the tribunal
[38]  I would make four points by way of guidance to the tribunal when faced with 'best of their judgment' arguments in future cases:
(i) The tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer. In all but very exceptional cases, that should be the focus of the hearing, and the tribunal should not allow it to be diverted into an attack on the Commissioners' exercise of judgment at the time of the assessment.
(ii) Where the taxpayer seeks to challenge the assessment as a whole on 'best of their judgment' grounds, it is essential that the grounds are clearly and fully stated before the hearing begins.
(iii) In particular the tribunal should insist at the outset that any allegation of dishonesty or other wrongdoing against those acting for the Commissioners should be stated unequivocally; that the allegation and the basis for it should be fully particularised; and that it is responded to in writing by the Commissioners. The tribunal should not in any circumstances allow cross-examination of the Customs officers concerned, until that is done.
(iv) There may be a few cases where a 'best of their judgment' challenge can be dealt with shortly as a preliminary issue. However, unless it is clear that time will be saved thereby, the better course is likely to be to allow the hearing to proceed on the issue of amount, and leave any submissions on failure of best of their judgment, and its consequences, to be dealt with at the end of the hearing.”

15.	We also note Chadwick LJ's approach in Pegasus:
“[82] In relation to cases where the explanation for the discrepancy was to be found in the different assumptions made by the Commissioners and the tribunal, I had said this (at para 32):
'As Woolf J pointed out in Van Boeckel, that does not lead to the conclusion that the assumptions made by the commissioners were unreasonable; nor that they were outside the margin of discretion inherent in the exercise of judgment in these cases.'
Taken out of context, that sentence might appear to suggest that I was accepting that there was an objective standard of reasonableness against which the assumptions made by the Commissioners were to be measured; so that an assessment made on the basis of assumptions which did not meet that standard was not properly made under the power conferred by s 73(1) of the 1994 Act. But I am satisfied that that would not be a proper reading of that sentence in the context in which it is set.
[83] The sentence which I have just set out is, perhaps, no more than a statement of the obvious. The fact that the tribunal, in making their own assessment of the VAT properly due, has thought it right to reject the assumptions as to food/drink ratios, wastage or pilferage on which the Commissioners' s 73(1) assessment was based—and to make different assumptions as to those matters—cannot, of itself, lead to the conclusion that the Commissioners' assumptions were unreasonable; a fortiori, that those assumptions were 'wholly unreasonable' in the sense that they were outside the margin of discretion inherent in the exercise of judgment in these cases—a phrase used by Dyson J in McNicholas Construction Co Ltd v Customs and Excise Comrs [2000] STC 553. All that can be said from the fact that the tribunal has adopted assumptions which differ from those adopted by the Commissioners is that the tribunal have preferred their own assumptions.
[84] But, of course, the tribunal may choose to make a finding that the assumptions made by the Commissioners were wholly unreasonable; as they did in the present case. The question, then, is whether it follows from that finding that the Commissioners did not make the assessment 'to the best of their judgment'. That is, in substance, the same question as the question which I addressed in Rahman (No 2) in the context in which it arose—an admitted miscalculation in computing the amount of VAT due arising from a double counting of purchase invoices and delivery notes. As I have said, it was in that context that I observed that the relevant question was whether the mistake was consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or was of such a nature that it compelled the conclusion that no officer seeking to exercise best judgment could have made it. The relevant question is much the same where the tribunal has found that the assumptions made by the Commissioners were wholly unreasonable; in that context the question is whether, in the particular case, the making of wholly unreasonable assumptions by the officer compels the conclusion that he was not doing his honest best. That, I think, is what Dyson J had in mind when he said, in McNicholas ([2000] STC 553 at 581, para 76), that:
'In order to succeed, the taxpayer must show that the assessment was wrong in a material respect, and that if so, the mistake is such that the only fair inference is the commissioners did not apply best judgment …'
[85] In reaching the conclusion, in Rahman (No 2) and on the present appeal, that it is enough that the officer through whom the Commissioners act in making the assessment 'does his honest best', I have sought to construe s 73(1) of the 1994 Act in the sense which sits most easily within the statutory framework.” 
He continued:
 “[88] It seems to me necessary to ask whether, given the statutory framework, there is any good reason why Parliament should have intended there to be engrafted upon a power to assess the amount of VAT due 'to the best of their judgment' some objective standard against which the assessment must be measured. Why should it not be enough, in this context, that the Commissioners, through their officer, make an honest and genuine attempt to make a reasoned assessment of the VAT payable? If, doing his honest best, the officer makes an assessment which turns out to be wrong, the tribunal can substitute their own assessment on appeal. Why should it have been thought necessary to introduce the additional requirement that the assessment be measured against an objective standard; so that, if the officer (despite doing his honest best) fails to attain that standard, the tribunal must hold that there has been no proper exercise of the power to assess, the assessment must be treated as if it had not been made, and there is no basis (because there is no existing assessment) upon which the tribunal can substitute their own assessment of the correct amount? I have not been persuaded that there are satisfactory answers to those questions.”

16.	With this in mind we turn to considering whether the assessment was properly made by Mrs Barnes to the best of her judgement.
Mrs Barnes's evidence
17.	We found Mrs Barnes to be a thoughtful, careful and truthful witness.  She had clearly taken time to consider the matter fully and to test her calculations critically, and on a number of occasions had also given the Appellants the benefit of the doubt on a number of points (e.g. only including ticket number 48 once).  We find this as a fact.  
18.	We also find that she "attempted to do her honest best" to make the right assessment.
HMRC's Approach
19.	HMRC considered that proper returns had not been made for the partnership business.  Hence the decision to make the test purchases.  They were justified in this as can be seen from the returns showing what counsel described as, "the implausible straight line" (see paragraph 10 (55) and following). 
20.	The calculation of the suppression rate was proper using a satisfactory methodology and a rigorous approach.  We consider that it was not wrong in a material respect but a genuine attempt to do their honest best.  We find this as a fact.
21.	The Appellants have not shown that the assessment was made other than on a proper and fair basis by HMRC officers who attempted to do their honest best.  We find this as a fact.
Conclusion
22.	As it has not been shown by the Appellants that the assessment was not made to “best judgement” the appeal is dismissed.
23.	We made no order as to costs.
ADRIAN SHIPWRIGHT

CHAIRMAN
RELEASE DATE: 5 June 2006

LON/2005/0792