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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> New Millenium Supermarket Ltd v Customs and Excise [2004] UKVAT V18871 (09 December 2004) URL: http://www.bailii.org/uk/cases/UKVAT/2004/V18871.html Cite as: [2004] UKVAT V18871

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18870

VAT – Output tax – Underdeclaration – Failure to keep Z readings before visit – Assessment based difference between Z readings for 3 days with declared takings – Declared takings uplifted by 59.11 per cent – No challenge to Appellant's zero-rated proportion – Assessments for two periods reduced by reference to zero-rated proportion – Otherwise appeal dismissed

LONDON TRIBUNAL CENTRE

NEW MILLENIUM SUPERMARKET LTD Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: THEODORE WALLACE (Chairman)

J G ROBINSON

Sitting in public in London on 12 to 14 October 2004

Ahmet Mustafa Osam, of Osam & Co, VAT advocates, for the Appellant

Mrs P Crinion, advocate, for the Respondents

© CROWN COPYRIGHT 2004


 


DECISION

1. This is an appeal against assessments totalling £28,493 with default interest for the periods from 13 August 2001 when the Appellant started trading to 30 September 2003.
2. The assessments were based on Z readings obtained at a visit on 27 February 2003 and were calculated by adding 59.11 per cent to the declared standard-rated takings for each of the first six accounting periods. For the last two periods, 06/03 and 09/03, the assessment was the difference between the declared takings and the average for the previous five periods uplifted by 59.11 per cent.
3. As its name indicates the Appellant is a supermarket. The proportion attributed by the Appellant to zero-rated sales was not in dispute.
4. The Appellant's case is that the returns were correct being based on actual cash and credit card takings and that the discrepancy with the Z readings was due to errors in operating the cash register which was old.
5. The assessments under appeal had in fact been amended down by 3.73 per cent from the original assessments to allow for over-rings.
6. The parties put in separate bundles of documents. In addition each party put in documents which were not listed and not in the bundles.
7. Ali Yildirim, the managing director, and Mehmet Osman, of M Osman & Co, the company's accountant, gave evidence for the Appellant; Mr Yildirim's evidence was interpreted by Azer Cafaror, who was not a qualified interpreter.
8. John Cordwell, the assessing officer, and Mrs Jacqueline Gray and Michelle Collinson, Customs officers, gave evidence for Customs.
9. We find the following facts.
10. The Appellant company started business in Hoe Street, Walthamstow, in a double-fronted premises on 13 August 2001. The company was newly formed. The VAT registration application showed the business as "Mini Supermarket and Off Licence".
11. The initial return to 31 December 2001 showed output tax of £9,389 with sales excluding VAT of £93,911 for the 20 week period. Zero-dated sales of food were therefore 42.87 per cent. Input tax claimed was £8,729.
12. The next four returns showed the following:

Output tax Sales plus VAT

03/02 6,416 59,965

06/02 6,636 60,424

09/02 7,511 61,415

12/02 6,842 61,912

Zero-rated sales varied from 30.11 to 38.86 per cent.

13. The sales figures were taken from a daily takings book which Mr Yildirim entered up after counting the money in the till. Although there was a till which had come with the premises, the Z readings were not recorded and were not provided to Mr Osman, the accountant, who prepared the VAT returns. Mr Yildirim provided him with the takings book, purchase invoices and other expenses, bank statements, cheques and paying-in books.
14. The accounts to 31 August 2002 showed turnover as £252,260 and a profit of £9,590. Mr Yildirim's salary was shown as £8,170 and other wages as £9,031. Mr Yildirim was shown as having loaned £10,750. Closing stock was £18,725.
15. Mr Osman said that the accounts were not audited since it was a small company. He had no difficulty in balancing the accounts.
16. On 27 February 2003 Customs officers led by Mrs Gray paid an unannounced visit arriving at around 6.00pm as part of a two day exercise on off-licence shops in the Walthamstow area. She was accompanied by Miss Collinson and a police officer concerned with licences. Mr Cordwell and another officer were nearby. Mrs Gray had visited four other shops on that day and this was the last.
17. Mr Gray did not have a notebook but had a printed list of matters to be covered on which she made very brief notes.
18. She spoke to a man who after several attempts identified himself as Ali Yildirim, the director. Because he had difficulty in understanding he got a neighbour who translated. She recorded the translator's name as Kemal Cetion.
19. The officers said that Mr Yildirim who gave evidence at the Tribunal was not the person they interviewed. He told us that he was. However no submissions by either party were based on this dispute and it does not seem to us that anything turns on it since thee was little dispute as to what Mrs Gray was told.
20. Half an hour after arriving Mrs Gray took a Z reading from the till; this showed £748.34. One hour and 25 minutes later at 7.53pm she obtained another Z reading which showed £244.50.
21. She noted that the shop was open daily from 7.30 or 8.00am to midnight. There were two full-time staff at £165 a week and two part-time at £86 a week. The cash in the till was added daily between 8 and 9 o'clock and noted in a book; the previous day's take was £750. Credit cards were taken. The weekly turnover was £5,500. Some of the records were in the shop and some were with the accountant, Mr Osman. Money was banked weekly, sometimes every 3 weeks.
22. Mrs Gray put the questions in the back room or kitchen. She had difficulty in getting through all the questions due to the language problem. At Mrs Gray's request a metal drawer was opened and various items were produced for which she gave a receipt: a used cheque book, a purchase invoice, 3 Barclaycard payment advice slips a bag of credit card slips and Z readings for the previous three days. She was not given any takings books but did not specifically ask for them. She did not ask what cash was on the premises and in the till.
23. Mrs Gray issued a standard form letter with the Appellant's name filled in stating that the till was not being used correctly to record daily gross takings. She told Mr Yildirim that the till must be set up with a Z reading being taken daily and an audit roll and that these must be retained..
24. The officers found some alcohol for which no purchase invoices were available and seized them. Mr Cordwell and another officer helped to load those into the lorry.
25. Mr Cordwell told the Tribunal that he had noticed an audit roll in the till although he had not asked for it. He made no notes and this was not in his statement. It is difficult to see why Mrs Gray told Mr Yildirim that the till must be set up with Z readings being taken and an audit roll if the audit roll was there already.
26. Following the visit Mr Yildirim obtained another till which he started to use on 3 March, from which day he entered the Z readings in the takings book.
27. Mr Osman prepared the 03/03 VAT return using the takings book and Z readings from 3 March. Output tax was £1,319 higher at £8,161. Sales exclusive of VAT were £69,164, compared with £61,912 in 12/02.
28. Because of Mrs Gray's workload, the case was allocated on the day after the visit to Mr Cordwell. Mrs Gray had no further involvement.
29. Mr Cordwell decided to wait for the next return and check the records against it. On 26 June 2003 he wrote to the Appellant asking for all business records relating to the period 13 August 2001 to 30 June 2003, including daily takings records and till rolls with Z readings.
30. Mr Osman the accountant sent various records including the takings book and purchase day book from 13 August 2001 and the Z readings from 3 March 2003 to Customs. Mr Cordwell wrote asking for the Z readings before 3 March 2003 and the full till rolls. Mr Osman replied that the Z readings to 2 March 2003 and the till rolls before 30 July 2003 had not been kept.
31. On 8 September 2003 Mr Cordwell wrote stating that the Z readings for the three days before the February visit totalled £4,022.69 which was £1,588.74 more than declared sales of £2,433.95, the difference being 65.27 per cent.
32. On 30 September 2003 Mr Cordwell notified an initial assessment for the six periods to 03/03 on the basis that takings were 65.27 per cent above declared takings and that 34 per cent were zero-rated.
33. Mr Osman wrote on 30 October that before March the Appellant did not know how to delete wrong entries and errors on the till rolls. The Z readings for the 3 days in February were thus higher than those for March. He enclosed the till rolls from 4 October to 16 October showing average daily takings of £985.31.
34. Mr Cordwell analysed the October till rolls and concluded that the over-rings for the thirteen days totalled £649.28 or an average of £49.94 per day. The over-rings were 4.82 per cent of the gross Z readings. He took the over-rings at £50 per day and reworked the February figures, so that the adjusted Z readings totalled £3,872.69 for the three days and the difference was 59.11 per cent of declared sales.
35. He had already assessed the periods 06/03 and 09/03 on the basis of the difference between the declared outputs for those periods and the uplifted average for the five periods to 03/03, namely £115,175. Applying the reduced uplift resulted in that figure being reduced to £110,882.60 on which output tax was £10,899.52 after allowing for 34 per cent zero-rating.
36. The figures now relevant are therefore as follows rounded to the nearest pound and allowing for 34 per cent zero-rated sales:

Declared Uplifted Output Output tax Assessment

output output tax due declared

plus VAT

12/01 103,300 164,361 16,156 9,389 6,767

03/02 66,381 105,619 10,382 9,416 3,966

06/02 67,060 106,699 10,488 6,636 3,852

09/02 68,926 109,669 10,780 7,511 3,269

12/02 68,754 109,394 10,753 6,842 3,911

03/03 77,325 123,032 12,094 8,161 3,933

06/03 85,540 110,883 10,900 9,266 1,634

09/03 95,541 110,883 10,900 9,735 1,165

Evidence for the Appellant

37. Mr Yildirim's evidence took a considerable time due particularly to translation of questions and answers by an interpreter. Mr Yildirim has lived in England since 1988 and had another supermarket before this one. He obviously has some knowledge of English but told us that he cannot read English. He is familiar with Roman numerals which are used in Turkey. Inevitably some of the sense of questions and answers was lost in translation. Cross-examination took half a day.
38. Mr Yildirim produced his driving licence. We are satisfied as to his identity.
39. Initially he told us that he entered the daily takings in the small orange takings book every evening having counted all the money in the till. If money was taken from the till during the day for expenses he left a note or receipt and included it in the total. Later, in re-examination, he said that he counted the money in the morning leaving a float of £100.
40. He said that the till was there from the start of business in 2001. He used it to give receipts to customers, to keep takings and give change.
41. He said that at the time of the visit the shop was closing at 10.00pm. He sold groceries, fruit, bread, milk, frozen foods, cleaning liquids, beer, spirits and cigarettes.
42. He said that he kept papers in a metal cabinet ("casa") in the back room with takings from previous days. He kept it locked. When he needed money during the day he got it from the cabinet or the till.
43. Cross-examined, Mr Yildirim said that there were four staff including himself. One was part-time, two full-time. The wages were paid in cash from the till using the weekend's takings. He left a note in the till.
44. When working out the takings he said that he added up the cash in the till and invoices and notes. He added in credit card takings and put the total in the book. He said that at the time of the visit he did not take daily Z readings; he did not know how to use them. He agreed however that he took the Z readings for the officers. He said that there was no audit roll on the old till.
45. He said that he got a new till in March 2003; the first reading was on 3 March.
46. When asked why there were three Z readings in the cabinet, he said that they were wrong and he had to check them again. His book did not agree with those Z readings. He said that he did take daily Z readings before the visit to compare with the books; after comparing them he threw the Z readings away.
47. He told us that after the visit he still added the cash and chits in the till and entered them in the book but that he gave the Z readings to the accountant. He said that before the visit the Z readings were inaccurate because he did not know how to use the till. After the visit he realised that he needed training. Before then if he made an error he opened the till and started again. He made a note if he made a mistake.
48. Mr Osman said that he was the company's accountant but did not do an audit. He was not providing advisory services. He prepared the VAT returns from the material provided. Up to February 2003 he was only given the takings book; after the visit he had the Z readings. For period 03/03 he took account of the Z readings provided and for the later periods he relied on Z readings for outputs.
49. Mr Osman produced the working papers for the 06/03 and 09/03 returns. The schedules for takings agreed with the Z readings on the till rolls. Schedules showed the apportionment between standard and zero-rated supplies by reference to the cost of purchases for resale.
50. He said that he made no adjustment for errors on the Z readings; without an audit roll he could not know what adjustment to make. The Appellant had not told him that there were errors on the till. He had reconciled the takings with moneys banked and cash expenses.

The officers' evidence

51. Mrs Gray said that the visit was routine although unannounced. A number of premises in Walthamstow were visited on that day. There was no particular reason for the Appellant being visited and no indication of non-compliance. She did not ask what cash was on the premises.
52. Mr Cordwell who took over the case after the initial visit gave evidence of the assessments. It was only on the third day of the hearing that the Tribunal was informed how the assessments for 06/06 and 09/03 were calculated, see paragraph 34 and 35 above. He said that he was not entirely satisfied with the Z readings for those periods because he had no audit rolls and there was no guarantee that the Z readings had not been manipulated. He prepared schedules from the takings books for 18 November 2002 to 2 March 2003 for which the weekly average was £5,269 together with the period from 3 March to 3 August 2003 following the visit. The average for the latter period was £6,609, an increase of 25.4 per cent. He assessed the last two periods on the difference between the uplifted average for the five previous periods being the assumed takings and the declared takings. This resulted in much lower assessments for periods 06/03 and 09/03.
53. Mr Cordwell produced a bar chart covering the returns up to 06/04 and a print-out up to 12/03. He said that the returns for 12/03 to 06/04 were more reflective of the true turnover. The output tax declared for 12/03 was in fact £9,985, compared with £9,.735 declared for 09/03.
54. He said that turnover for 12/01 was higher because it was for more than three months. He said that he had no information to lead him to conclude that the underdeclaration was not at the same rate from the beginning on 13 August 2001.
55. He denied mentioning to the Appellant's representatives a 10 per cent error margin. The reduction in the uplift was because after a lengthy examination he was satisfied that there were errors shown on the audit rolls for 4 to 16 October 2003.
56. Mr Cordwell produced schedules of the takings shown in the takings book for the entire period covered by the assessments. From these it can be seen that the weekly takings from 13 August to 3 December 2002 varied within a relatively narrow band with the lowest week being the first week (£5,067) and the highest being £5,200. The variation in the first ten weeks was less with the highest figure being £5,107; over those ten weeks the lowest daily figure was £599 on 27 August and the highest was £833 on 8 September.
57. When calculating the assessments Mr Cordwell used a zero-rated apportionment of 34 per cent which he thought "reasonably fair". There was no criticism by Customs of the Appellant's apportionments. In fact the return for 12/01 was based on 42.87 per cent zero-rated supplies (see paragraph 11 above). Consequently the application of 34 per cent has resulted in a higher assessment for that period and to a lesser extent to 03/02 where the Appellant's figure was 38.86 per cent.

Submissions

58. Mrs Crinion said that the assessments were based on material and records produced by the Appellant and the original assessments had been reduced to take account of over-rings. The Appellant had failed to keep the audit rolls and Z readings which were part of the business records it was obliged to retain under regulation 31(a) of the VAT Regulations 1995 and Notice 727. She submitted that the assessing officer had not behaved unfairly and had taken the material before him into account as required in Van Boeckel v Customs and Excise Commissioners [1981] STC 290.
59. Mr Osam submitted that the assessments were not to best judgment because the assessing officer had ignored relevant evidence in that he chose not to take the takings books into account. The assessments were based on the Z readings however the Appellant had not used these. After the visit Mr Yildirim learned how to record using the machine.
60. Mr Osam said that he was mindful of the last paragraph of the judgment of Carnwath J in Rahman v Customs and Excise Commissioners [1998] STC 826. He said that he did not make any allegation against the officers of bad faith, nor did he submit that the assessments were malicious or capricious. He submitted however that the assessments were unreasonable because of the method.

Conclusions

61. We have no hesitation in finding that the assessments were made to best judgment. Mr Osam did not suggest that Mr Cordwell was not acting in good faith and there was no material on which he could have done so. We observe that although there was an initial delay, thereafter Mr Cordwell spent considerable time and effort examining the material. Our task is to consider whether on the evidence before us the assessments should be reduced.
62. We start with the divergence between the three Z readings found at the visit and the figures in the takings book (see paragraph 31). After making full allowance for language and translation difficulties we do not find Mr Yildirim's evidence as to the Z readings to be satisfactory. He knew how to obtain Z readings because he took readings for the officers. He said that he used the till to give receipts to customers : there would be no point in giving customers incorrect receipts. Furthermore there would have been no purpose in taking the Z readings to check against the books (see paragraph 46) if the Z readings were meaningless.
63. Mr Yildirim did not assert that all the earlier Z readings were in line with the counted takings and that a problem suddenly arose on 24-26 February 2003 for which the Z readings were £1,409.23,£1,416.18 and £1,197.28 compared with £803.15, £812.35 and £818.45 in the book. The Z readings do in fact show some deductions. The difference between the Z readings and the takings book is far too great to be explained by over-rings or other till errors. Furthermore they cover three days rather than one. The Appellant has not satisfied us that the Z readings are not evidence of the real takings on those days and that the difference does not represent underdeclarations. We consider that the adjustments made by Mr Cordwell for over-rings (paragraph 34) make a reasonable allowance.
64. The pattern of outputs declared (see paragraph 36) was very consistent for periods up to 12/02. Declared takings for the first eight weeks of 03/03 averaged £5,865 before rising by just over £200 a week for the last five weeks. If there were substantial underdeclarations on 24-26 February 2003, it is quite logical to assume similar underdeclarations for the earlier periods. Once the takings book is shown to be unreliable, we see no reason not to apply the uplift for 24-26 February 2003 to the earlier periods.
65. The question arises whether it is valid to apply a 34 per cent zero-rating apportionment for periods 12/01 and 03/02 instead of the figures of 42.87 and 38.86 per cent respectively used for the returns. The substitution of 42.87 per cent would bring down the VAT due and the assessment for 12/01 by £2,171 and would of course reduce default interest. A similar adjustment to 38.86 per cent for 03/02 would give a reduction of £764. It does not appear that Mr Cordwell gave any real consideration to the figure of 34 per cent adopted beyond basing it on the average of 33.32 per cent for periods 06/02 to 09/03 increasing it slightly to 34 per cent. There was no evidence that the Appellant's percentage for 12/01 or 03/02 was queried at any time. We conclude that the assessments for 12/01 and 03/02 should be reduced to reflect the zero-rated percentage used for the returns.
66. The assessments for the last two periods are much lower than for the earlier periods. They assume some continuing underdeclaration but still assume outputs 9 per cent lower than the Z readings for 24-26 February indicate.
67. The result is that the assessments for 12/01 and 03/02 are reduced by £2,171 and £764 respectively with a resultant reduction in default interest. Apart from that the appeals are dismissed.
68. There will be no order as to costs.

THEODORE WALLACE

CHAIRMAN

RELEASED: 9 December 2004

LON/03/1156