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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Sterling (t/a Sally’s Sandwich Bar) v Customs and Excise [2005] UKVAT V19057 (29 April 2005) URL: http://www.bailii.org/uk/cases/UKVAT/2005/V19057.html Cite as: [2005] UKVAT V19057

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19057

REGISTRATION – Compulsory registration of Second Appellant – Whether payment by First Appellant to Second Appellant of monies to purchase food taxable in Lands Second Appellant

ASSESSMENT – Whether to best judgment when officer misunderstood origins of First Appellant and nature management charge

AGGREGATION – Whether First and Second Appellants should be aggregated – Consideration of financial and economic links – Appeal dismissed

LONDON TRIBUNAL CENTRE

(1) MR & MRS STERLING T/A SALLY'S SANDWICH BAR First Appellant

(2) THE CORNER CAFÉ (TOOTING) LTD Second Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MISS J C GORT (Chairman)

MRS R A WATTS-DAVIES MHCIMA, FCIPD

Sitting in public in London on 17 and 18 January 2005

Mr M Smith, accountant, for the Appellant

Miss N Shaw of counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2005


 


DECISION

1. The Appellants appeal against an assessment dated 4 September 2003 in the amount of £11,024.87 for the period 1 March 2002 to 29 March 2003, based on a decision to compulsorily register the second Appellant for VAT with effect from 1 March 2002. There was an original decision to compulsorily register the second Appellant with effect from 1 May 2001, and based on this there was an assessment for the period 1 May 2001 to 29 March 2003. However both the assessment and the effective date of registration were subsequently amended by a letter dated 1 December 2003. After this date there was considerable correspondence and communication between the parties and a further reconsideration was notified to the Appellants by a letter dated 23 April 2004.
2. On 28 February 2003 the Commissioners issued a direction that the second Appellant and the first Appellant be treated as a single taxable person with effect from 30 March 2003.
3. The original notice of appeal gave the name of the Appellant as "Mr & Mrs Sterling (Corner Café Tooting Ltd)". The disputed decision was stated to be that made on 23 April 2004 relating to liability for tax on supplies of goods and services. The grounds of appeal were stated to be: "We do not believe the company should be registered and please find enclosed most recent correspondence." At the hearing of the appeal it was directed that the notice of appeal be amended properly to reflect the names of the Appellants and the matters appealed against. The amended Notice of Appeal sets out the matters appealed against as follows:-

The Corner Café (Tooting) Limited did not exceed the VAT threshold and was not therefore liable to be registered for VAT;

Consequently no assessment in the amount of £11,024.87 should have been made; and

Sally's Sandwich Bar and the Corner Café (Tooting) Limited are separate businesses and no Notice of Direction aggregating the businesses (or centrally issued assessments) should have been made.

4. The issues for the Tribunal were:

(i) Is the compulsory registration of the second Appellant with effect from 1 March 2002 valid?

(ii) Is the section 73 VATA assessment against the second Appellant for £11,024.87 correct? and

(iii) Is the notice of direction treating the first and second Appellants as a single taxable person with effect from 30 March 2003 valid?

5. Both parties provided bundles of documents and Mrs Sterling gave evidence on behalf of both Appellants. Mr Stephen Robbins, a VAT officer with the Joint Shadow Economy team in Croydon and Mrs Susan Liddington also with the Joint Shadow Economy team gave evidence on behalf of the Respondents.

The facts

6. In 1994 Mrs Sterling had acquired a derelict shop which she opened in January 1995 in partnership with a Mrs J Vargerson trading as "Corner Café". The partners ran this together with one assistant serving breakfast and lunches between 7.00am and 2.30pm. The partnership was registered for value added tax from commencement until 1995 when it deregistered due to low level of turnover. The partnership was dissolved in May 1997. At that time Mrs Sterling took over as a sole proprietor, the sole proprietorship ceasing on 30 September 2000 when a limited company known as Corner Café (Tooting) Ltd ("the Café") was set up, the director being Mr Frederick Sterling (the husband of Mrs Sterling) and Mrs Sterling was the company secretary. At this time the Café was operating successfully.
7. Down the road from the Café there was a bakery which sold sandwiches. That shop closed down and Mr and Mrs Sterling decided to set up Sally's Sandwich Bar ("the Sandwich Bar") as a partnership operating from the Café premises. This was done on the advice of their accountant. The Café was run by Mrs Sterling with two other members of staff. The Sandwich Bar was run by either one member of staff or two part-time members.
8. The Café sold hot meals, including hot sausage or bacon sandwiches. The Café meals were eaten at the Café, the Sandwich Bar sold sandwiches to be taken away, although on occasion people did eat sandwiches in the Café.
9. The Sandwich Bar and the Café operated from leasehold business premises owned by Mrs Sterling. She owned half of the freehold and rent was paid in respect of the occupation by the two Appellants. The sign above the premises said "Corner Café". There was no sign either inside or outside referring to the Sandwich Bar. Inside the premises there were four food boards, one for sandwiches and three for food sold by the Café.
10. Both businesses used the same counter at the back of the Café, but they operated separate tills which were separately labelled and were located underneath the counter. When the Sandwich Bar was set up an extra work surface was built for the preparation of sandwiches and an extra fridge was acquired to store sandwich fillings and other ingredients. There was a kitchen at the back of the Café where food preparation for the Café business took place. The sandwiches were ordered at the main counter but were prepared at a separate counter in the kitchen. Both Appellants shared the use of the premises, fixtures and fittings and certain items of equipment such as : the coco cola fridge, the milk fridge, the dish washer, the hot water boiler, the mixer and the fly killer. The assets were all recorded in the Café's books.
11. Each Appellant had separate business bank accounts, Mrs Sterling was the sole signatory on both accounts. The businesses has used one daily takings book but separate weekly summaries of income and expenditure were kept. The Café was responsible for obtaining the public liability insurance for the premises. The majority of the purchases and the overheads of the two businesses were made by an invoice made out to the Café and the Café would then charge the Sandwich Bar pro rata for the overheads and goods used by them.
12. The Sandwich Bar sold a selection of cold sandwiches, tea, coffee, soft drinks and confectionery. The very large majority of its sales were takeaway, although on a very rare occasion the customer would eat a sandwich on the premises. The Café sold hot food such as pies, quiches, casseroles, fish and chips, roasts, hot sandwiches, hot breakfast and puddings, mainly to eat in. Occasionally hot sandwiches, teas and coffees would be taken away. Both the eat in and the takeaway hot food was treated as a supply by the Cafe.
13. Whilst both businesses were open between 7.00am and 2.30pm, from 7.00am until 10.00am the Café was very busy, whereas the Sandwich Bar effectively operated between 10.00am and 12.30pm. The Café was also busy at lunchtime. Employees of both businesses worked the same hours.
14. Initially when the Sandwich Bar was first set up, it made its own food purchases. After the first year of trading it was realised that it would be more economical for bulk purchases to be made, and it would also be more convenient. Thereafter the suppliers would provide one combined bill which would be paid by the Café. The Sandwich Bar would reimburse the Café by way of a weekly payment which was agreed at 30% of the Sandwich Bar's takings for all the purchases made by the Café but used by the Sandwich Bar. On the spreadsheets provided on behalf of the Appellants it was shown as "overhead to Café". This 30% was paid so that the Café's cashflow would not be disadvantaged by the payments it made on behalf of the Sandwich Bar.
15. The Commissioners had originally based the date which they considered to be the effective date of registration on the 30% charge which appeared in the Appellant's records as a weekly amount; they later reworked the schedules using the figures for Management Charges in place of the 30% charges originally used. This had the effect of amending the effective date of registration from 1 May 2001 to 1 March 2002. It also reduced the liability for the period 1 March 2002 to 29 March 2003 to £11,024.87.
16. Overhead bills, such as electricity, rates and gas, could not be split, therefore there was a compensatory payment made by the Sandwich Bar to the Café in respect of these items. This amount was £167 per month.
17. The Commissioners first became concerned when Mr S Robbins, an officer of the Commissioners, made an unannounced visit to the premises on 29 May 2002. He interviewed Mrs Sterling and extracted the "Z" readings from the two tills. An appointment was arranged for 20 August 2002 for a full assurance inspection to be carried out. In the meantime observations were carried out on people entering and leaving the premises, but there was no resulting allegation of suppression. By a letter dated 9 January 2003 the Commissioners notified the Appellants that compulsory registration action was to be taken and advised that the turnover had been calculated by including the amount of money paid by the Sandwich Bar to the Café in return for goods and services used by the Sandwich Bar. This was the 30% of the Sandwich Bar's takings identified in the records. It was this calculation which was subsequently amended (see above).
18. On 28 February 2003 a civil penalty in the amount of £985 was issued to the Café, being a penalty in respect of the company's failure to notify its liability to register. This amount was also subsequently reduced and later waived. On 10 June 2003 compulsory registration action was taken in respect of both Appellants, and a partnership of Mr Sterling, Mrs Sterling and Corner Café (Tooting) Ltd was registered by the Commissioners with effect from 30 March 2003 in the new name "Corner Café". On 3 July 2003 a Notice of Cancellation of Registration was issued to the Café cancelling its VAT registration from close of business on 29 March 2003. By a letter dated 1 August 2003 Mr Smith, on behalf of both Appellants, confirmed that the amalgamation of the two activities into one business had been reluctantly accepted, but he requested that the registration of the company be reviewed. Subsequently by a letter dated 22 January 2004 Mr and Mrs Sterling wrote to the Commissioners saying that, despite Mr Smith telling them in his letter of 1 August 2003 that they accepted the aggregation of both businesses from March 2003, this was incorrect. What they accepted was that the Café should be registered for VAT when it reached the VAT threshold.
19. On 4 September 2003 a Notice of Assessment was issued to the Café in the amount of £16,234. This assessment was an estimated figure based upon the expected turnover for the period 1 May 2001 to 29 March 2003. On 24 November 2003 a Certificate of Registration was issued to the Café notifying an effective date of registration of 1 May 2001. By a letter dated 1 September 2003 the Commissioners notified the result of the reconsideration and advised as above. The reconsideration letter confirmed that action had been taken to cancel the registration of the Café and to set in place a new registration of the new partnership. By a letter dated 22 January 2004 Mr and Mrs Sterling advised the Commissioners that both businesses had been sold and they wished to appeal against the calculation of the turnover of the Café and the inclusion in that calculation of the amounts paid by the Sandwich Bar to the Café. The Appellants did not accept the amalgamation of the two activities. A reconsideration followed. On 22 March 2004 a Notice of Assessment to Tax in respect of the accounting period 1 December 2003 to 19 December 2003 was issued to the new partnership in the amount of £109. By a letter dated 23 April 2004 the Commissioners notified the result of the reconsideration and upheld the decisions made to register the Café and to amalgamate the two activities into the one new partnership.
20. An analysis of the accounts of the Sandwich Bar and the Café shows that as far as the Sandwich Bar is concerned, there are separate amounts of expenditure shown as "purchases" and "management charge payable". The "management charge payable" is described in the accounts of the Café as "management charges receivables". This sum relates to overheads such as rates, electricity, insurance, gas, water and telephone and was intended to cover the costs incurred by the Café which were attributable to the Sandwich Bar.
21. Purchases (goods) are dealt with separately. The purchases figure for the year ending 2002 of £6,614 comes from the Sandwich Bar's weekly takings spreadsheet summary. However the figure for the year ending 2001 of £13,528 is not borne out by the weekly spreadsheet summary which shows £7,318.
22. The Commissioners calculated revised schedules consequent upon their reconsideration by taking the actual monthly takings of the Café and adding the amount of the management charges paid to it by the Sandwich Bar. Monthly takings figures were extracted from spreadsheets provided by the Appellants. The management charges were taken from the accounts. The rolling total as at 26 January 2002 was £54,181, and therefore, the Café had exceeded the VAT registration threshold by the end of January 2002; at that date the VAT registration threshold was £54,000. From the total turnover of £82,249, an output tax liability of £12,249.85 was established by the Commissioners, having made an allowance of 10% (being the average for businesses of that type) for input tax to give a net liability of £11,024.87.
23. Mr Smith's explanation for the difference between the figure of £9,574 which appears in the Café's spreadsheet for the year ending 2001 and the figure of £4,273 which is shown as the management charge, was due to an adjustment which was made at the end of the year between the amount which had been paid by the Sandwich Bar to the Cafe, and the amount of the actual management charge payable for the year. However he could point to no entry in the accounts of the Café showing an amount of £5,301 (being the difference) as a liability to the Sandwich Bar. The directors' current account for that period shows an amount of £39.00 and a total liability to creditors of £2,611. There was therefore no liability in the amount of £5,301 shown as owing from the Café to the Sandwich Bar in the accounts.
24. Mrs Liddington notified the Appellants of the result of her reconsideration by a letter dated 1 December 2003. When carrying out the reconsideration Mrs Liddington had obtained the monthly takings figures as shown on the spreadsheets and asked Mr Robbins to use those figures instead of the annual figures. In addition she had considered the 30% figure shown on the spreadsheets as "overhead to Café" used by Mr Robbins, the schedule shown in the accounts of the management charge and the figure of £167 per calendar month for utilities which were shown in a letter from Mr Smith dated 9 October 2003. In her evidence Mrs Liddington accepted the utilities figure, but took the view that there were other charges not accounted for in this figure such as a charge in respect of the use of premises, fixtures and fittings, although Mrs Sterling in a letter dated 18 February 2004 had specifically referred to such matters. Mrs Liddington had assumed that the management charge related to recharges of overheads and expenses. She had considered that recharges in respect of food would be shown in the trading account under purchases, it never having been made clear by Mr Smith that the management charge included an amount in respect of food. She considered that, had she known that the management charge figure included an amount in respect of food, she would have made an allowance in respect of zero-rated food items included within the management charge figure and would have removed those items from the calculation. She subsequently, at the hearing, recalculated the quantum of the assessment to take account of a concession made on behalf of the Commissioners that, as it was accepted that the management charge included an amount in respect of zero-rated food purchases, no output tax should be payable in respect of that element. The alternative calculations used were based on a schedule provided by Mrs Sterling for the period October 2002 to September 2003, no schedule for the period of the assessment March 2002 to March 2003 was produced. To rework the amount of the assessment the Commissioners removed all standard-rated items from the total purchases of £6,176.30. These items included sweets, soft drinks, cling film (and other such kitchen products), cleaning products, till rolls and baking case and amounted to £2,139.80. The balance of £4,036.50 was accepted by the Commissioners as relating to zero-rated purchases.
25. Mr Smith on behalf of the Appellants argued that such part of the management charge as related to the provision of utilities, being £2,004 per annum, should be treated as standard rated. The balance should be treated as zero-rated supplies of food.

The law

26. Section 25(1) of the Value Added Tax Act 1994 provides:

"A taxable person shall –

(a) In respect of supplies made by him

…

account for and pay VAT by reference to such periods (in this Act referred to as "prescribed accounting periods") at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances."

27. Section 3(1) of the VAT Act provides:

"A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act."

28. Regulation 25(1) of the VAT Regulations (SI 1995/2518) provides:

"Every person who is registered or was or is required to be registered shall in respect of every period of a quarter … make to the Controller a return on the form numbered 4 in Schedule 1 to these Regulations showing the amount of VAT payable by or to him and containing full information in respect of the other matter specified in the form and a declaration, signed by him that the return is true and complete."

29. Schedule 1 of the VAT Act sets out the threshold for liability to be registered for VAT. For the year 2001 to 2002 the VAT registration threshold was £54,000.
30. Section 73(1) of the VAT Act provides:

"Where a person has failed to make any returns required under this Act (or under any provision repealed by 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."

31. Paragraph 1A and 2 of Schedule 1 to the VAT Act provide that:

"1A –

(1) Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.

(2) In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard should be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.

2 –

(2) The Commissioners shall not make a direction under this paragraph naming any person unless they are satisfied –

(a) that he is making or has made taxable supplies; and

(b) that the activities in the course of which he makes or made those taxable supplies form only part of certain activities …, the other activities being carried on concurrently or previously (or both) by one or more other person; and

(c) that, if all the taxable supplies of the business described in the direction were taken into account, a person carrying on that business would at the time of the direction be liable to be registered by virtue of paragraph 1 above; …"

32. Section 5(2)(b) of the VAT Act provides:

"Anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services."

The Respondents' case

33. The Respondents relied on section 5(2)(b) of the VAT Act above and submitted that the "Management Charge Receivables" paid by the Sandwich Bar to the Café was a consideration for services, being the provision of utilities, and insurance cover for the business premises supplied by the Café.
34. The Tribunal was referred to the use of the word "consideration" in Article 2(1) of Council Directives 77/388/EEC (of Sixth Directive) and also to several ECJ cases. It was submitted that essentially there must be a link between the goods or services supplied and the consideration received (see Apple and Pear Development Council v CCE [1988] STC 221 and Naturally Yours Cosmetics Ltd v CCE [1988] STC 879) and there must be a legal relationship between the supplier and the recipient pursuant to which there is a reciprocal performance, remuneration received by the supplier constituting the value actually given in return for the supply. The Tribunal was also referred to the case of Tolsma v Inspecteur der Omszetbelasting Leeuwarden [1994] STC 509. In the present case it was submitted that there was a clear and obvious nexus between the payments made by the Sandwich Bar and the supplies made by the Café. It was admitted by Mr Smith that the payments were intended to reimburse the Café for the utilities, part of the benefit of which had been passed on to the Sandwich Bar. In the circumstances therefore the Café was liable to be registered for VAT with effect from 1 March 2002 on the basis that it had made taxable supplies in excess of the registration threshold at that point.
35. The consequence of the Café's liability to be registered and to make returns, triggered the provision of section 73 of the VAT Act which allowed the Commissioners to make an assessment to the best of their judgment.
36. The approach taken by both Appellants, namely that the goods or services were merely being passed on at cost was irrelevant for VAT purposes. It was not permissible to take a global view of such transactions, the Tribunal was referred to the speech of Lord Hoffman in Robert Gordon's College [1995] STC 1093. It was submitted that the common purchases might well have been made on the basis of the Sandwich Bar's requirements, however all of the common food purchases were paid for by the Café. These common food purchases were not supplies made by the separate suppliers directly to the Sandwich Bar, they were supplies made to the Café and which the Café then passed on to the Sandwich Bar. It was irrelevant that the arrangement was in place for reasons of convenience and economy.
37. The Respondents did not accept that the Appellant's situation fell within the exception referred to in paragraph 11.8 of Notice 742. That notice at 11.8 provides:

"If you are the owner or tenant of the premises and you do not grant other occupants an exempt licence to occupy land … then any service charge you make is standard rated. This applies even if you are simply passing on appropriate shares of your costs. The only exception is if you are paying and recharging a bill that is entirely the liability of another occupant, such as a telephone bill or insurance premium in the other occupant's name. You can treat such payments as disbursements."

In the present circumstances none of the bills in question were in the Sandwich Bar's name and none were entirely its liability.

38. The Respondents' case was in principle that there was only one business, that the Café took over the Sandwich Bar as the transfer of a business as a going concern, and that therefore the compulsory registration of the Café was correct, and the only issue for the Tribunal in those circumstances was the question of the quantum of the assessment. With regard to the Notice of Direction that the Appellants should be treated as a single taxable person, this was based on the Commissioners' conclusion that without the support of the Café, the Sandwich Bar would not have been a viable business. There were economic links between the two operations; there were organisational links, in that both businesses were affectively run by Mrs Sterling, and the reason for the separation of the businesses was purely because of the accountant's advice, and not for any substantive reason, either practical or commercial. There was no documentary evidence supporting any arms' length or independent relationship between the two enterprises. Furthermore there was no sign outside the premises referring to the Sandwich Bar. nor was there a sign inside the premises indicating the existence of the Sandwich Bar, therefore to the general public it would appear that there was only one business.

The Appellants' case

39. Both Appellants contended that the Commissioners misunderstood the origins of the Sandwich Bar and also misunderstood the nature of the payments made by the Sandwich Bar to the Café. It was submitted that in those circumstances the assessment could not have been made to best judgment. It was the Appellants' case that the only sum which should properly be added to the Café's sales was the sum of £167.00 per month relating to the overheads.
40. With regard to the 30% cash movement figure, it was submitted that this was simply a cash movement, and was to avoid the Café having cashflow difficulties. The sum was in respect of the cost allocation in respect of the Sandwich Bar's portion of the common purchases such as eggs, bread and soft drinks made on its behalf by the Café. It was not accepted that there should be a profit element in this as far as the Café was concerned. The assessment had also ignored the fact that several of these purchases were zero-rated. It was accepted on behalf of the Café that by adding the sum of £167.00 per month to its turnover, then the VAT threshold was reached on 14 September 2002.
41. With regard to the Direction, it was submitted that the fact that Mr Robbins had prepared a questionnaire relating to the businesses in his office rather than in conjunction with Mrs Sterling, showed that no reliance could be placed on Mr Robbins' work. He had made various assumptions about the nature of the business prior to the formation of the Sandwich Bar.
42. To show that there were two separate businesses the Appellant relied principally on the following:

(a) There were separate bank accounts for each business, in their respective names.

(b) There were separate employees and PAYE records for each business.

(c) Separate books of account and financial accounts for each business.

(d) There were separate tills for each business.

(e) Hot sandwiches continued to be part of the Café's business after the formation of the Sandwich Bar.

43. It was disputed that there was an economic relationship between the businesses, and the Café had operated independently prior to 1 October 2000 and it continued to trade in exactly the same way subsequently. It was submitted that neither business benefited from the other.
44. It was further submitted that the customers for the Sandwich Bar were totally new customers who had not previously traded with the Café. A receipt could be given from the respective tills showing whether the customer had purchased from the Sandwich Bar or the Café. It was only on very rare occasions that a customer of the Sandwich Bar would eat on the premises.
45. Whilst it was recognised that there was a confusion arising out of the cash movement from the Sandwich Bar to the Café, and that the confusion might have been reduced if the purchases element had been debited (added) to purchases instead of to the management charge and the accounts of the Sandwich Bar, and credited to (deducted from) purchases in the accounts of the Café, instead of being included in management charges received, but this in fact had had no effect on the accuracy of the net profit of each business or the accounts of each business. It was submitted that the accounts were correct in either event and the question and manner of presentation should not have any bearing on the consideration as to the incorrectness or otherwise of the Direction.
46. The Tribunal was referred to three tribunal decisions:

Garden & Another t/a The Dolly Tub [2000] PBC 4026, (Tribunal Decision 16260, Barton & Another t/a The Railway Tavern Tribunal Decision No.18194 and Stephen and Angela Jane Trippitt Tribunal decision 17340

In the case of Barton the Appellants relied on the passage where the tribunal had said inter alia that in cases involving a husband and wife the same legality was not to be expected in their separate relations as would be expected between independent artist. The case of Stephen and Angela Trippitt concerned a wife who started up a bed and breakfast business in her husband's public house. Mrs Trippitt did not register for VAT as her turnover was below the relevant threshold when taken on its own. The Commissioners took the view that the separation of the bed and breakfast business from the general running of the public house was artificial. The tribunal had concluded that the activities of Mrs Trippitt were not closely bound to those of Mr Trippitt by financial, economic or organisational links to such an extent as to warrant the Commissioners concluding there was an artificial separation of the two business activities. The Appellants relied on various aspects of the case of Mr and Mrs Trippitt as being similar to the present case; in particular the fact that Mrs Trippitt had agreed to pay 35% of her income for the bed and breakfast business as her payment for the use of the premises and her share of the overheads. Mr Smith also pointed to the fact that both businesses were carried out under one premises, utility bills were all made payable to Mr Trippitt and paid by him, the lease was in Mr Trippitt's name and he paid the rent, there was only one telephone for both businesses, there was no formal written agreement relating to the payment of the 35% of the income.

47. Mr Smith refuted the suggestion made by the Respondents that the figures in the accounts were wrong. Mr Robbins had failed to make a distinction between money movements between the businesses and actual debits to be charged by one business and credited by the other in the accounts. This misunderstanding was reiterated in the Respondents' written submissions. In the present case the moneys advanced against overheads and purchase costs left a balance which was reflected in the balance sheet as either a debit or a credit loan. The Respondents had pointed to a figure of £9,574 which is shown in the spreadsheet for the year ending September 2001, and stated that no such figure appeared in the accounts of either Appellant. The answer was that £5,301 of this sum appeared as a credit to purchases in the Café's accounts and £4,273 was the credit to management fees in the Café's accounts. The Respondents had also pointed to a figure of £2,611 which appeared in the director's current account for 2001 as a total liability to creditors. That figure was in fact made up of various items as follows:

Bank overdraft £389.00

Corporation tax £841.00

PAYE £492.00

Director's current account £ 39.00

Accruals £850.00

Total £2,611.00

Reasons for decision

48. This case has been characterised by confusion from the outset. Mr Robbins had quite clearly failed to understand that there was no sandwich business on the premises prior to the formation of the Sandwich Bar. Mrs Liddington similarly was under a misapprehension that there had been a disaggregation and in her letter of 31 March 2003 states: "The turnover appears to have increased significantly since the business was split". Despite Mr Smith on two occasions writing specifically on this point, Mrs Liddington still appears to have misunderstood the situation by the time she reconsidered the assessment. It was not until the hearing of the appeal itself and evidence was given by Mrs Sterling and Mr Smith that both the previous nature of the business and the true nature of the 30% Management Charge was understood by the Respondents.
49. We accept that the management charge was a sum representing services which were supplied in the amount of £167.00 per month which related to such items as electricity and gas as set out above, and it also was in respect of purchases of food made on behalf of the Sandwich Bar by the Cafe, but it was not meant to be a precise payment in that respect, rather it was to ease the cashflow of the Café. The exact calculations were made later. The assessment was raised on the basis that the 30% amount which appeared in the spreadsheets represented a sum paid by the Sandwich Bar to the Café for management charges. It was the Respondents' case that in any event even if an allowance were made for zero-rating food purchases, nonetheless the provision of goods and services by the Café to the Sandwich Bar should be taken into account in establishing the quantum of its receipts.
50. Whilst the reason for the Café making the food purchases on behalf of the Sandwich Bar are understandable, and there was indeed an advantage to the Café in so doing in that it itself benefited from the cheaper prices available because of the quantum of the purchases, nonetheless we do not accept Mr Smith's argument that the arrangement was purely a financial one and there was no element of service in it. The Sandwich Bar benefited from the arrangement, and the fact that the Café was merely passing on the cost of the items did not mean that there were no VAT consequences. This was a service and as such attracts VAT, as does the £167 paid monthly in respect of overheads. In respect of the overheads, we accept (as did Mr Smith) the Respondents' argument that there was a clear and obvious nexus between the payments made by the Sandwich Bar and supplies made by the Café. The payments were intended to reimburse the Café for the utilities, part of the benefit of which had been passed to the Sandwich Bar.
51. With regard to the assessment, it was submitted on behalf of the Appellants that it was not made to best judgment because of Mr Robbins' misunderstanding as to the origin of the Sandwich Bar business, and as to the nature of the management charges. In our judgment neither misunderstanding is such as to lead to the conclusion that no reasonable officer could have made the assessment for the following reasons. Mr Robbins formed the view that there was an artificial separation of the businesses, and that they should be treated as one. We concur with that view, given that there was no separate sign outside the premises indicating that the Sandwich Bar was operating from there, nor was there a sign within the Café to indicate that it was a separate business. Whilst we accept Mrs Sterling's evidence that by and large the customers for the Sandwich Bar were different from the customers for the Café, nonetheless we do not accept that either set of customers would have been aware that the other was a separate business. It may have been unusual for a person buying sandwiches to choose to eat in the Café, but it happened on occasion and any china or cutlery used was provided by the Café. Mrs Sterling herself operated in both the Café and the Sandwich Bar. The employer's liability insurance was paid by the Café. There were common premises, and although Mr Smith claimed that the amount of space taken up by the Sandwich Bar was no more than 10 square feet, nonetheless it was occupying space that had previously been used by the Café. There was only one cooker, one milk fridge and some of the cutlery was used by both entities.
52. We do not ignore the fact of the separate trading accounts and separate bank statements, nor the separation of the food preparation areas and the serving arrangements. There was also some small equipment and a drinks fridge owned by the Sandwich Bar. We accept Mrs Sterling's evidence that the employees from the Café did not work in the Sandwich Bar and vice versa. Whilst the financial arrangements are such that it was possible to ascribe to the Sandwich Bar just those items which had been purchased for it, it was certainly the case that at the time that the Commissioners were looking at the accounts it was not made abundantly clear to them that food charges were included in the management charges.
53. The above matters by and large were known to Mr Robbins and taken into account by him, with the exception of matters relating to the management charges. Even after Mrs Liddington had raised the issue of the nature of the management charges it was still not made clear to the Commissioners their exact nature. There is a burden on taxpayers in the circumstances to set out clearly for the Commissioners just what the nature of the business is. In our judgment this was not done in this case until the hearing of the appeal.
54. We uphold the Notice of Direction because, as set out above, we find that there was in effect one business. There were financial links between the Sandwich Bar and the Café, and without the support of the Café the Sandwich Bar would not have been a viable business. This support went beyond the mere provision of the premises. We do not accept that the case is on all fours with that of Trippett, relied on by the Appellants. In that case the businesses were much more readily distinguishable. There were different premises, different entrances, different size and different operating hours. In the present case there were clear organisational links, and even though the fact that Mrs Sterling's presence in both businesses cannot be decisive, it is nonetheless a factor to be considered. Whilst we accept Mrs Sterling's evidence that she intended to keep the two businesses separate because she was not certain whether the Sandwich Bar operation would be successful, whereas the Café had already shown itself to be successful, and that it was her intention to run two separate businesses, we do not find that she achieved this. We accept that it is not fatal to the Appellants' case that both businesses are run by the same person, however we have no doubt that the customers would have been completely unaware that there were two businesses. The Café had to sacrifice some of its space, even if it was only a matter of 10 square feet, to accommodate the Sandwich Bar. There was no charge made for rent. There were occasions when customers of the Sandwich Bar would eat in the premises of the Café, even if this was not the usual occurrence. There were items which were shared, even though there was an attempt made to keep the two businesses entirely separate. It might have been possible to have established the Sandwich Bar as a separate business, but there would have needed to have been more separation in the accounting procedures, and it would have to have been made clearer to the customers by means of more or different signs.
55. With the regard to the quantum of the assessment, the Commissioners prepared an alternative calculation based on the fact that some of the food purchases were zero-rated. We regard the Commissioners' approach as the correct one in the circumstances but further adjustment will have to be made in respect of the period for which no schedule had been produced at the time of the hearing. We do not accept Mr Smith's argument that all the matters relating to food should be discounted and only such part of the management charges as related to the provision of utilities should be treated as standard-rated.
56. In all the circumstances this appeal is dismissed.

MISS J C GORT

CHAIRMAN

RELEASED: 29 April 2005

LON/04/0928