19835

ASSESSMENT - whether assessment of tax due made to best judgment - whether amount assessed excessive - appeal dismissed

LONDON TRIBUNAL CENTRE

	MOHAMMED ASSIM SOLIMAN	Appellant

-	and –

	THE COMMISSIONERS FOR
	HER MAJESTY'S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Nicholas Aleksander   (Chairman)
						Mrs E R Adams

Sitting in public in London on 28 and 29 September 2006

The Appellant in person

Mr J P Holl of HM Revenue & Customs Solicitor's Office for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The appeal

1.	Mr Mohamed Assim Soliman (the Appellant) was registered for value added tax as a sole trader on 1 August 2002. The Appellant ceased to be registered with effect from 1 January 2005. The Appellant appeals against an assessment to tax and a misdeclaration penalty.  

2.	The assessment was originally made on 23 December 2004 and assessed tax of £12,334.00 and interest of £618.72, making a total amount assessed of £12,952.72. The assessment was in respect of the four consecutive accounting periods from 1 July 2003 to 30 June 2004. In addition the amounts shown in the Appellant's VAT return for the period 1 July 2004 to 30 September 2004 were amended to increase the VAT due by £3,905.00. The assessment and adjustments were subsequently reduced on 20 October 2005 to tax of £13,700 and interest of £543.69.

3.	The misdeclaration penalty was originally assessed on 17 January 2005 in the sum of £1,483.00 and was in respect of the three consecutive accounting periods from that ending on 31 December 2003 to that ending on 30 June 2004. The penalty was reduced on 25 October 2005 to £948.00.

The legislation

4.	The assessment was raised under the provisions of section 73(1) of the Value Added Tax Act 1994. Section 73(1) provides:

"Where a person has failed to make any returns required under this Act. or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him."

5.	The misdeclaration penalty was raised under the provisions of section 63 of the Value Added Tax Act 1994. The relevant parts of section 63 provide:

"(1) In any case where, for a prescribed accounting period-

(a)     a return is made which understates a person's liability to VAT … 

and the circumstances are as set out in subsection (2) below, the person concerned … shall be liable to a penalty equal to 15 per cent of the VAT which would have been lost if the inaccuracy had not been discovered.

(2) The circumstances referred to in subsection (1) above are that the VAT for the period concerned which would have been lost if the inaccuracy had not been discovered equals or exceeds whichever is the lesser of £1,000,000.00 and 30 per cent of the relevant amount for the period."

6.	Section 83 of the  Value Added Tax Act 1994 provides that an appeal shall lie to a tribunal with respect to:

"(p)	an assessment-

(i)     under section 73(1) …

or the amount of such assessment."

The issues

7.	The Appellant asserts that the Commissioners of HM Revenue & Customs ("Customs") in making the assessments did not take into account all of the information which was supplied to them.  Accordingly, the issues in the appeal were: 

(1)     whether Customs and Excise had assessed the amount of tax due to the best of their judgment under section 73(1); and

(2)     whether the assessment should be reduced under section 83(p).

8.	The Appellant also sought orders from the Tribunal to clear his name from black lists of credit agencies, and to order Customs to pay him compensation.  We informed the Appellant that the powers of the Tribunal are derived solely from the relevant legislation, and that the legislation does not confer upon the Tribunal the power to make orders of this nature.

The evidence

9.	Oral evidence was given on behalf of the Appellant by the Appellant and by Mr A Mikhaimar of Seco Services Limited.  The Appellant produced copies of correspondence and a draft profit and loss account prepared for the purposes of his income tax return.  In addition, following the appeal hearing, the Appellant wrote to the Tribunal with further submissions.

10.	A bundle of documents was produced on behalf of Customs. Oral evidence was given on behalf of Customs by Mr John Prendergast, a Higher Officer of Customs. Mr Prendergast raised the assessment which was the subject of the appeal. We found Mr Prendergast to be a reliable witness.

11.	Witness statements were produced on behalf of Customs containing the evidence of Detective Constable Scott Yerby and Detective Constable Keith Simmonet.  These witness statements were not served at the tribunal centre in advance of the appeal.  The Appellant concurred with the substance of DC Yerby's statement, but disagreed with the contents of DC Simmonet's statement.  Accordingly we placed no reliance on DC Simmonet's statement, and make no further reference to it. 

12.	The Appellant also objected to the contents of a witness statement of Ms C H Adamson, which was in the Tribunal's file.  This statement was prepared on behalf of Customs in relation to a "hardship" application made by the Appellant at an earlier stage in the appeal process.  This witness statement was not produced in evidence before us for the purpose of the substantive appeal hearing, and we placed no reliance upon it.

The facts

13.	From the evidence before us we find the following facts.

14.	Mr Soliman was born in Egypt in 1954 and worked for 17 years in Cairo (including with British Airways and British Petroleum).  This was followed by a period working as a teacher in Germany.  Mr Soliman came to the UK for medical treatment approximately 12 years ago, which treatment was successful.  English is not Mr Soliman's first language, but we were satisfied that Mr Soliman's command of English was sufficient for him to understand and properly participate in the appeal proceedings.

15. 	At the relevant time, Mr Soliman was in business supplying international phone cards to retailers.  The phone cards are plastic cards about the size and shape of a credit or debit card.  They entitle the holder to a certain value (printed on the front of the card) of international telephone calls, by dialling a special number and keying in a code – both shown on the card. There are a number of different brands of card, which offer different rates – depending upon the country of destination of the call.  When Mr Soliman started in business, he purchased his cards from Seco Services Ltd (Mr Mikhaimar's company), but later bought his cards from other suppliers, including Primus Telecommunications Ltd, Clan Continental Links Ltd and Fonzon Ltd. 

16.	Mr Soliman purchased his cards from his suppliers at a discount to their face value (which, from the sample invoice produced in evidence to us, ranged from 31% to 39%).  Mr Soliman purchased his cards on credit terms, ranging from 10 days credit to 20 days credit.  Mr Soliman sold the cards a "sale or return" basis to various retailers.  In his evidence Mr Soliman told us that his mark-up was between 0.5% and 1% of his purchase price - but that on occasions he sold cards at cost when he had an urgent need for cash.  According to correspondence in the bundle from Mr Green (Mr Soliman's accountant), Mr Soliman's average mark-up was 0.66%.  Sometimes the retailers paid cash on delivery of the cards, sometimes Mr Soliman extended credit to the retailers, and sometimes the sales were a mixture of cash and credit.

17.	When Mr Soliman started his business, the sale of phone cards was not subject to VAT.  In April 2003, the sale of certain phone cards became subject to VAT under the provisions of paragraph 6 of Schedule 10A, Value Added Tax Act 1994.  However the sale of certain other phone cards were not subject to VAT.  Mr Soliman therefore registered for VAT in anticipation of this change, as he sold both kinds of phone cards.   Mr Soliman told us that at the time there was confusion amongst phone card suppliers about the application of VAT to phone card supplies, but from the evidence before us we are satisfied that Mr Soliman understood the distinction, and was able to distinguish between the two kinds of VATable and non-VATable phone cards for the purposes of his invoices and his VAT returns.

18.	Mr Soliman's application for VAT registration showed his business as being a retail groceries shop.  Mr Soliman acknowledged that he had signed the form, but could not explain why this description of the business had been given.  In any event, he wrote to Customs shortly after receiving his VAT registration certificate to correct the description – but this correction appears not to have been entered into Customs' computer records.

19.	Mr Soliman kept only rudimentary accounting records.  He kept two sets of duplicate books – one set for VATable phone cards  and another set for non-VATable phone cards.  When Mr Soliman supplied phone cards to a retailer, he would make out an invoice in the relevant duplicate book.  The examples of the invoices in the bundles before us only showed the number of cards sold to a particular retailer.  It did not give the brand, or any other indication which might identify the particular cards that were supplied.  Mr Soliman kept no stock records.  Thus there was no basis for determining which cards (or even which brand of cards) were sold to a particular retailer.  A large number of payments and receipts were made in cash.

20.	Each quarter, Mr Soliman would give his duplicate books and purchase invoices to his accountant, Mr Green of Terence Gordon & Associates, and Mr Green would prepare schedules, which were then used in the preparation of the VAT return.  The VAT returns were prepared on the basis of the amounts invoiced to Mr Soliman for VATable cards supplied to him, and the invoices rendered by him in respect of VATable cards supplied to retailers.

21. 	The VAT returns rendered by the Appellant showed the following total values of sales and purchases:

Accounting period ended	Total value of sales	Total value of purchases	
30 September 2002	Nil	Nil	
31 December 2002	Nil	Nil	
31 March 2003	Nil	Nil	
30 June 2003	£3,124.00	£1,143.00	
30 September 2003	£8,210.00	£37,113.00	
31 December 2003	£5,864.00	£27,042.00	
31 March 2004	£2,015.00	£37,987.00	
30 June 2004	£1,133.00	£62,792.00	
30 September 2004	£15,778.00	£50,772.00	
31 December 2004	£41,007.00	£34,713.00	

22.	No taxable supplies were recorded prior to 1 April 2003, as VAT on phone cards was only introduced with effect from 8 April 2003.  

23.	After initially buying the phone cards from Seco Services Limited, Mr Soliman then purchased cards from Primus Telecommunications Limited.  Subsequently, Primus Telecommunications Limited referred Mr Soliman to Clan Continental Links Limited, as his level of purchases was too small for them.  In addition Mr Soliman purchased cards from Fonzon Limited.  

24.	At some point, Clan Continental Links Limited decided to reduce the amount of credit they were prepared to extend to Mr Soliman.  They asked him to clear the balance owed to them, and reduced his credit from £28,000 to £10,000.  Mr Soliman then tried to purchase cards once more from Primus Telecommunications Limited, but they were not prepared to extend credit to him.

25.	Mr Soliman asserted that his stock of phone cards was suddenly deactivated without any prior warning or reason being given to him.  The evidence before us to support this contention is limited.  From the correspondence and statements in the bundle, it would appear that some cards were deactivated, but that credit was given to Mr Soliman for the deactivated cards.  According to a letter dated 30 September 2004 from Bird & Bird (solicitors to Primus Telecommunications) to Messrs Palis (Mr Soliman's solicitors), five cheques provided by Mr Soliman were dishonoured on presentation, credit was given for £4,132.93 on deactivated cards, but this still left a balance owing to Primus Telecommunications of £3,441.57.  Mr Soliman claims that his suppliers did not issue credit notes or statements showing all the cards that were deactivated.  However, from the statements in the bundles from Primus Telecommunications, it would appear that credit was given to Mr Soliman for the deactivated cards referred to in the Bird & Bird letter.    Mr Prendergast told us that in his experience cards are only deactivated by suppliers in the event of non-payment, and that credit notes would be issued by suppliers where appropriate.

26.	In order to continue in business, Mr Soliman considered that he needed to replace the stock held by his retailer customers (which, following the deactivation, was useless).  At this stage, Mr Soliman was only able to purchase cards from Seco Services Limited (his original supplier), and substituted these cards for the deactivated stock carried by the retailers.  Mr Mikhaimar told us that Mr Soliman paid the first two or three invoices raised by Seco Services Limited, but has not paid any subsequent invoices, and £6,700 remains outstanding.  Mr Mikhaimar told us that the margin between Seco Services' purchase and sales prices was 1%.

27.	Mr Soliman ceased trading in November 2004.

28.	Mr Soliman told us in his evidence that his monthly outgoings were approximately £4000 – this included rent, loan repayments, private school fees for his children's education, and normal living expenses.  Other than housing benefit of approximately £1000 per month, at the relevant time Mr Soliman had no sources of income other than from his phone card business.

29. 	On 17 September 2004, Mr Soliman was visited by Mr Prendergast as part of Customs' "Trader Group 1" exercise.  This was an exercise to visit traders who had never previously had a visit from Customs.  By coincidence, Mr Prendergast had experience of the phone card sector.  He had previously worked as a member of Customs Missing Trader Inter-Community Fraud Team, and as part of that work had visited between 10 and 15 phone card wholesalers and salesman over a three to four month period.  In addition, as a member of one of Customs' serious non-compliance teams, he had visited retailers similar to those supplied by Mr Soliman, where he had uncovered undetected phone card sales.  

30.	Mr Prendergast noted the considerable difference between the cards purchased by Mr Soliman and the sales made.  Mr Prendergast reviewed Mr Soliman's bank statements, and noted that Mr Soliman had substantial debts.  In addition to his trade creditors, Mr Soliman had a bank loan of £74,000, credit card balance of £18,000 and private loans totalling £28,000. 

31.	Mr Prendergast asked Mr Soliman a number of questions about his business, which he reiterated in a letter dated 24 September 2004.  Mr Prendergast noted that in the periods 06/03 to 06/04 stock of £166,077 had been purchased, but in that same period, sales were only £20,436.  In that same period, Mr Soliman had made bank deposits of £45,181 (excluding VAT repayments, inter-account transfers, corrections and interest payments).  However declared sales for that same period were £10,589. Mr Soliman was asked to explain these discrepancies, and to provide all records and account for all stock by 22 October 2004 (which deadline was subsequently extended to 30 November 2004).  In order to protect the revenue, Mr Prendergast set a "repayment inhibit" to block any repayments of VAT by Customs until the conclusion of his enquiries.

32.	On 30 November 2004, Mr Prendergast met the Appellant and his accountant, Mr Green, at the accountant's offices.  Mr Green explained the accounting records kept by Mr Soliman and the basis upon which the VAT returns were prepared (as described in paragraphs 19 and 20 above).  They spoke in general terms about the funding of the business.  Mr Prendergast asked about the considerable level of purchases and the location of the unsold stock of cards.  Mr Green did not answer those questions, and referred those questions back to Mr Soliman, but Mr Soliman did not give any substantive answers.  At the conclusion of the meeting, it was agreed that Mr Prendergast should take away the accounting records of the business to be able to study them in more detail.

33.	Mr Soliman had further meetings with Mr Prendergast at Custom's offices on 17 December 2004, when Mr Soliman confirmed that stock on hand at 30 November 2004 was £50,000, money owed to suppliers was £50,000, and all stock sold had been entered on the sales invoices. Mr Prendergast asked again for an explanation of the significant difference between the level of sales and purchases, and the location of the "missing" cards (which would have a face value of approximately £100,000).  Mr Soliman stated that cards with a face value of £20,000 had been stolen, but that he had not reported this theft to the police because on previous occasions when he had reported thefts, the police had taken no action.  We were referred in this regard to a witness statement from DC Yerby in relation to a theft Mr Soliman reported to the Police in 2001.  On 12 September 2001 Mr Soliman reported the theft of £15,000 of phone cards by a business associate known to Mr Soliman.  However, in October 2001, Mr Soliman telephoned DC Yerby and said that he owed the suspect money, but that the amount owed was considerably less than the value of the phone cards stolen.  A third party had agreed to act as an arbitrator, and would arrange for Mr Soliman to be refunded the value of the cards less the debt owed by Mr Soliman.  Mr Soliman requested that the police take no further action.  In relation to the theft of £20,000 of cards, Mr Soliman could not give Mr Prendergast a date for the theft or any documentation or other evidence of the theft.  

34.	Mr Prendergast also asked Mr Soliman about his outgoings and his income.  Mr Soliman had confirmed that he had outgoings of approximately £4000 per month.  Mr Prendergast asked how he managed to meet these obligations if he had only approximately £1000 per month of income, Mr Soliman could not give a satisfactory explanation.

35.	On 20 December 2004, Mr Soliman turned up at Mr Prendergast's office unannounced.  Mr Soliman told Mr Prendergast that the "missing" stock was represented by £13,000 face value of cards supplied by Primus which had been deactivated, and £5000 face value of cards supplied by Fonzon which had been deactivated.  Mr Soliman had had to purchase cards of an equivalent face value from other suppliers in order to replace the deactivated stock held by his retailer customers.

36.	Following the various meetings and the review of the accounting records, Mr Prendergast came to the conclusion that Mr Soliman had not declared all of his sales.  Mr Prendergast was not satisfied by the explanations given to him by Mr Soliman and Mr Green.  

37.	Mr Prendergast, from his experience of visiting other traders engaged in the sale or distribution of phone cards, expected Mr Soliman's mark-up would be in the range between 5% and 15%, whereas Mr Soliman stated that his average mark-up was approximately 0.66%.  Mr Prendergast told us that his experience was that traders at earlier stages in the supply chain (such as Seco Services, or Clan Continental Links) would only have a margin of 1%.  However, his experience was that the card retailers and the traders who supplied the retailers made significantly greater margins.  Mr Prendergast calculated that on purchases of £250,000 over a 15 month period, a 0.66% mark-up would only generate a gross profit of £1,700.  Mr Prendergast did not regard this as credible for a full-time business undertaken by a sole trader, or credible in the context of Mr Soliman's outgoings of £3000 per month (after taking account of housing benefit).

38.	Nor did Mr Prendergast find the explanation for the "missing" stock convincing.  From his experience, the only reason cards would have been "deactivated", would be as a result of unpaid suppliers invoices.  If cards had been deactivated, Mr Prendergast would have expected the relevant suppliers to issue credit notes for the deactivated cards.  Although there were some credit notes issued to Mr Soliman by suppliers, these were for much smaller amounts than the missing number of cards.  Alternatively, if no credit notes were issued, under Regulation 172H of the Value Added Tax Regulations 1995, there would in due course need to be a repayment of input tax in respect of any unpaid invoices.  

39.	In addition, Mr Prendergast did not find it credible that a trader would fail to report a theft of £20,000 of stock to the police.  The fact that Mr Soliman was unable to provide any details or evidence of the deactivation of cards, nor any details of retailer customers affected by the deactivation supported Mr Prendergast in his view.

40.	Accordingly Mr Prendergast raised assessments for VAT in respect of his estimate of the undeclared sales.  In undertaking his calculations, Mr Prendergast used the figures supplied by Mr Soliman for opening and closing stock, and opening and closing creditors – as there were no accounting records from which these amounts could be derived.  Mr Prendergast had been supplied by Mr Soliman with an estimate of the value of his stock as at 5 April 2003 as £20,000, and as at 30 November 2004 as £50,000.  Because Mr Soliman did not keep any stock records, Mr Prendergast had to apportion Mr Soliman's stock estimate as at 30 November 2004 between VATable and non-VATable cards (as only sales of VATable cards would attract VAT).  Mr Soliman opening stock figure as at 5 April 2003 would all be non-VATable cards – as VAT was only introduced after this date. 

41.	In order to determine the value of Mr Soliman's non-VATable stock as at 30 November 2004, Mr Prendergast added to the value of the opening stock, the amount of non-VATable cards purchased by Mr Soliman over this period (taking the figures from purchase invoices).  Mr Prendergast then noted the amount recorded in Mr Soliman's invoice books for non-VATable sales over this period, and determined the cost of these cards (using a mark-up of 5% - being at the lower end of the 5% to 15% range Mr Prendergast expected from his experience).  This amount was deducted from the sum of the opening stock and purchases in order to determine the value of the non-VATable closing stock.  The value of the non-VATable stock was then deducted from the total stock value in order to determine the value of the VATable stock as at 30 November 2004:

Non-VATable sales 05/04/03 to 30/11/04			£41,750		
Cost of goods sold (assuming mark-up 5%)			£39,762	(1)	
			
Stock-in-hand at 5 April 2003				£20,000		
Non-VATable purchases 06/03 to 09/04		£42,020		
Total stock to 30/09/04				£62,020		
			
LESS cost of goods sold (1)				(£39,762)		
			
Non-VATable stock at 30/11/04				£22,258		
			
VATable stock at 30/11/04 (£50,000-£22,258)	£27,742		
									
Sales value of VATable stock (assuming mark-up 5%)	£29,129	(2)	

42.	Having determined the closing VATable stock figure as at 30 November 2004, Mr Prendergast went on to determine the value of undeclared sales:

Standard rated stock purchases	£201,683.66		
Expected mark-up of 5%	£211,767.84		
Standard rated sales 06/03 to 09/04	£32,793.13		
Standard rated sales 1/10/04 to 5/11/04	£40,800.56		
Total Sales	£73,593.69		
Value of cards not accounted for 	£138,174.15		
Sales value of closing VATable stock (2)	£29129.00		
Value of stock not accounted for 	£109,045.15		
			
Output tax due on sales 7/47ths	£16240.77		

43.	Mr Prendergast then apportioned the undeclared sales (and the output tax on those sales) to the relevant VAT periods pro-rata to the purchases of VATable cards made in each of those periods.

44.	In addition Mr Prendergast disallowed input VAT totalling £319.18.  Of this £22.47 had been claimed twice in error, and £296.71 related to private telephone bills.

45.	Mr Prendergast issued an assessment for £12,334.00 in respect of the periods 09/03, 12/03, 03/04 and 06/04.  For the period to 09/04, Mr Soliman's return was adjusted to reduce the amount of net VAT reclaimable.

46.	Mr Prendergast wrote to Mr Soliman on 20 December 2004 giving details of his conclusions and calculations.  Notices of Assessments were issued on 23 December 2004, and a letter adjusting the 09/04 VAT return was issued on 20 December 2004.  Notice of assessment of misdeclaration penalty for the periods 12/03, 03/03 and 06/03 for a total of £1,483 was issued on 17 January 2005.

47.	Following correspondence from Mr Green and Mr Soliman, the assessments were referred to Mr Keith Bowman for reconsideration.  Mr Bowman was a Senior Officer of Customs based at the London Appeals and Reconsiderations Team at Customs' offices in Poole, Dorset.

48.	Mr Bowman summarised Mr Soliman's objections as falling into three categories:
(a)	that the mark-up used by Mr Prendergast to calculate the undeclared sales was too high;
(b)	some of the stock of cards were stolen before they could be sold; and
(c)	some of the stock of cards were cancelled before they could be sold.
Mr Bowman asked Mr Soliman to supply evidence to support these contentions.

49.	Further correspondence followed between Mr Bowman and Mr Soliman, and between Mr Bowman and Mr Prendergast.  At one stage Mr Soliman offered to visit Mr Bowman at his office in Poole.

50.	On 3 October 2005, Mr Bowman wrote to Mr Soliman with the results of his reconsideration.  Mr Bowman confirmed the methodology used by Mr Prendergast to determine the value of undeclared supplies.  However, based upon a random selection of supplier invoices, Mr Bowman used a mark-down of 3% in the calculation of undeclared supplies - in other words, Mr Bowman assumed that Mr Soliman would make a loss of 3% on the sale of phone cards.

51.  As a result of Mr Bowman's reworked calculations, the overall VAT assessed was reduced from £16,239 to £13,700.  The misdeclaration penalty was reduced on 25 October 2005 to £948.00.

Reasons for decision

52.	In this appeal, the burden of proof is on Mr Soliman to satisfy the tribunal of any facts upon which he seeks to rely and the standard of proof is the balance of probabilities. 

53.	The assessment was raised under the provisions of section 73(1) of the Value Added Tax Act 1994, pursuant to which Customs can assess the amount of VAT due from a trader "to the best of their judgment" where the trader's returns are incomplete or incorrect. 

54.	The criteria by reference to which "best judgment" is determined are conveniently set out in the decision of the tribunal in Curry Inn Restaurant  (LON/97/834). In that decision, the tribunal reviews Van Boeckel v Customs and Excise Commissioners [1981] STC 290 and M H Rahman (trading as Khayam Restaurant) v Customs and Excise Commissioners [1998] STC 826. At paragraph 42, the tribunal summarises the guidelines in those decisions in a manner which is sufficient for the purpose of this appeal:

"From the decision in Van Boeckel we derived three principles. First, there must be some material before the Commissioners on which they can base their judgment. Secondly, the Commissioners are not required to do the work of the taxpayer in order to form a conclusion as to the amount of tax due. Thirdly, the Commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them. From the decision in Rahman we derived three more principles. Fourthly, the Tribunal should not treat an assessment as invalid mainly because it disagrees as 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'. Fifthly, if the assessment is shown to have been wholly unreasonable or not bona fide there would be sufficient grounds for setting it aside but that kind of case is likely to be extremely rare. Finally, in the normal case it should be assumed that Customs and Excise have made an honest and 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."

55.	Mr Soliman submitted that the decision in the Curry Inn Restaurant case is of no relevance, as he does not run a restaurant.  However, in our view, the decision  helpfully summarises the legal principles relating to "best judgement" established  in the cases cited by the chairman – namely Van Boeckel and M H Rahman – and those authorities bind us.  We therefore accept the analysis of those cases by the tribunal in the Curry Inn Restaurant case.

56.	There has been no suggestion that Customs had acted vindictively in this case. We find that there is no evidence that they acted either dishonestly or capriciously either. Customs were perfectly entitled to base their judgment upon the material which they had. Mr Soliman submitted that Customs should have made enquiries of Primus Telecommunications and his other suppliers, in particular to verify his contentions as to the payments he had made and the reasons for the phone cards being deactivated.  We agree with the submissions of Customs in this regard.  There was no reason for Mr Prendergast to doubt Primus Telecommunications' invoices (or the invoices provided by other suppliers); as Mr Prendergast had no reason to doubt the credibility of Primus Telecommunications and the other suppliers.  Accordingly there was no reason nor need for him to check their records.  The issue of concern in this case is the amount of Mr Soliman's outputs – not his inputs.  

57.	Mr Soliman also referred to an e-mail passing between Mr Bowman and Mr Prendergast during the reconsideration process, in which Mr Prendergast wrote that:

"I cannot supply any more evidence.  The trader's appeal is based entirely upon his claim that the cards were not sold, but were stolen or 'switched off/cancelled' by his supplier.  Copies of all notebook entries are in the post.  I am sure Mr Soliman or his accountant will supply all records if requested".

Mr Soliman considers that this statement indicates that Mr Prendergast did not have evidence to justify his conclusion that there had been undeclared sales.  We disagree with this assessment.  The e-mail is one in a series in which Mr Prendergast responds to questions raised (quite properly) by Mr Bowman about the manner in which Mr Prendergast came to his conclusions, and the evidence upon which his judgement was based.  We would note that Mr Bowman, in reconsidering the assessments, took account of further data provided by Mr Soliman, and reduced the assessments on the basis that Mr Soliman was selling phone cards at a loss.

58.	We also explored with Mr Prendergast whether he should have taken any potential claims for bad debt relief into account.  His response was that Mr Soliman's records did not show when payments were due from retailer customers, and therefore when a debt would become "bad" for VAT purposes.  There were no records to substantiate a bad debt claim.  In any event, Mr Prendergast considered that it was for the trader to claim bad debt relief, and Mr Soliman had not.  We agree with Mr Prendergast's analysis. 

59.	On the balance of probabilities we find that Mr Soliman had not declared all of his sales for the periods from 1 July 2003 to 30 September 2004. We consider it quite reasonable for Customs to have made a judgment that there had been suppression of takings by the Mr Soliman on the basis of the material available to them.  We conclude that the amount of tax due was assessed to the best judgment of Customs.

60.	Section 83(p) of the Value Added Tax 1994 provides for an appeal both against an assessment and the amount of the assessment. However, it is for the Appellants to satisfy the tribunal, on the balance of probabilities, that the assessment is excessive. With regard to the amount of the assessment, the only evidence before us which might allow us to reduce the assessment is Mr Soliman's oral evidence.  Mr Soliman's only submission was that his VAT returns, as originally submitted, were correct.  On the evidence before us Mr Soliman has not satisfied us, on the balance of probabilities, that the relevant VAT returns were correct.  Therefore Mr Soliman has also failed to discharge the burden of proving that the assessment was excessive. 

61.	Section 63(10)(a), Value Added Tax Act 1994 provides that the Appellant will not be liable for misdeclaration penalties if he can satisfy the tribunal that he has a reasonable excuse for the conduct giving rise to the penalty.  Alternatively, the tribunal has the power to mitigate penalties under section 70, Value Added Tax Act 1994, and can reduce the penalty to such amount (including nil) as it thinks proper. Mr Soliman did not advance any excuse for the conduct giving rise to the penalty, and on the balance of probabilities, we are not satisfied that Mr Soliman had any reasonable excuse for such conduct.  We do not consider that this is a case in which it would be appropriate to mitigate the penalty. 

Decision

62.	Our decisions on the issues for determination in the appeal are:
  	
(1)	that Customs assessed the amount of tax due from the Appellant to the best of their judgment;

(2)	that the assessment was not excessive and should not be reduced;

(3)	that the Appellant did not have any reasonable excuse for the conduct which gave rise to the misdeclaration penalty; and

(4)	that this was not a case in which it would be appropriate to mitigate the penalty.

63.	The appeals against the assessment and against the misdeclaration penalty are, therefore, dismissed.

64.	We were not asked by the Commissioners for costs in that event and we make no order.	

NICHOLAS ALEKSANDER
CHAIRMAN

RELEASED: 25 October 2006

LON/2005/1198