Jin Fu Chinese Takeaway Limited v The Commissioners for HMRC

HMRC carried out unannounced visits to the appellant’s restaurant late in the evening, when they thought evening trading was largely complete, on each of 23 and 27 July 2016. The officers attending did not observe the takeaway for any period of time before entering. Such surveillance would require specific authorisation. Invigilation of the business was not undertaken as it was considered to have a negative impact on a takeaway business.

Officer Jones confirmed that two test purchases undertaken after the visits had been recorded in information provided to HMRC in March 2017 and that marked notes used for purchase were also noted to have been recorded. However, test purchases undertaken before the visits could not be confirmed as the appellant had not kept any records at that time. She did not consider that the records of two test purchases, and the marked notes, meant that the business could not be suppressing sales, given that the business was by then aware of HMRC’s investigations.

On 23 July 2016, the HMRC officers observed the cashing up procedure. The appellant has a single till. This procedure resulted in a £4.40 discrepancy between the till and the takings.

On 27 July 2016, a further cashing up procedure was observed. There was a discrepancy of £37.70 between the till amount and the takings. The staff explained that £40 had been removed in notes, to be exchanged for coins, but they had forgotten to put the coins in the till. Officer Jones’ evidence was that, at this visit, there were two part-time members of staff as well as the family members. The takeaway has one till; if they are busy, orders are written on an order pad. Baokong Zhou stated that these written orders will be then rung through the till to obtain the price for the order.

In cross-examination, Officer Jones agreed that there would not have been time to change the till readings or remove cash from the till between their entering the takeaway and the cashing up procedure being undertaken. However, she considered that the appellant was aware that HMRC were investigating, as HMRC had written to them in May to say that they would be visiting. The correspondence had included a notice about keeping records. She considered that it was possible that some sales were not rung through the till, and the cash for those sales kept elsewhere: the takings and till would match in that case, but would not be an accurate record of the takings.

The till was noted to be set to record only that day’s information and no data was available from the till for previous days’ takings. HMRC had carried out test purchases on 28 May 2016 but, as the appellant did not keep any meal tickets at that time, it was not possible to check whether these had been declared in the recorded takings. In a discussion about the test purchases, the appellant advised that he did not give receipts to all customers. HMRC advised the appellant that meal bills should be retained and attached to the till readings for the day. Further test purchases carried out in November 2016 were noted to have been declared in the recorded takings.

On this occasion, the HMRC officers noticed a red cash box on the counter near the till. They were advised that this belonged to Baokong Zhou, who stated that it contained 50p pieces and tips and was not part of the business takings. He declined to allow HMRC to see the contents of the box, saying he did not want his father to see the contents. His evidence in the hearing was that the box contained his wallet and personal items, and tips of perhaps 10p or 20p per day, where he was told to keep the change. The box included special coins, which he would ask his father’s permission to keep in exchange for the same amount from his own money. He stated that the box also held his cigarettes. He denied that the box was used to hold undeclared cash from sales made by the business. In the hearing, Officer Jones explained that she was unable to insist on seeing the contents of the box as this would have required a warrant.

Officer Jones explained that, given the information obtained from AMB during the visit and the analysis carried out on the AMB accounts backup data, she had concluded that the only reasonable explanation for the failure to declare the purchases on the ZP334 account was that there were undeclared sales being made, to which those purchases related. She did not consider that it would be difficult for the business to suppress takings, as this could be done by removing cash and destroying any corresponding meal bills. As food purchases are zero-rated, there would be little or no impact on VAT cost recovery if the purchases were suppressed. Her experience of dealing with similar businesses is that evidence is removed before any records are taken or kept, such that suppression cannot usually be established from the records.

AMB had been asked for information on the ZP334 account, including copy invoices and delivery notes for purchases on that account, but had refused to supply that information to HMRC and had refused to allow HMRC officers to visit to take copies. The possibility of issuing statutory information notices to AMB had been discussed, but the relevant HMRC manager had not considered that it would be appropriate.

As no other information was available, the gross profit rate in the appellant’s accounts had been used to calculate undeclared sales, marking up the purchases on the ZP334 account by that gross profit rate to establish the suppressed sales. The VAT assessments had been produced on this basis.

The appellant confirmed that there was no dispute as to whether the VAT assessments were made in time. The dispute was as to whether or not the appellant had made the purchases on the ZP334 account and whether HMRC’s assessments had been made to best judgement.

The burden of proof as to whether a VAT assessment has been made to best judgment lies with HMRC. The decision in Van Boekel v Customs & Excise Commissioners [1981] STC 290 sets out three principles which apply in considering whether an assessment has been made to best judgment:

In Customs and Excise Commissioners v Pegasus Birds Ltd [2004] EWCA Civ 1015, Carnwath LJ set out the following relevant guidance in relation to ‘best judgment’ (at [38]):

“i)

The Tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer. In all but very exceptional cases, that should be the focus of the hearing, and the Tribunal should not allow it to be diverted into an attack on the Commissioners exercise of judgment at the time of the assessment.

ii)

Where the taxpayer seeks to challenge the assessment as a whole on "best of their judgment" grounds, it is essential that the grounds are clearly and fully stated before the hearing begins.

iii)

In particular the Tribunal should insist at the outset that any allegation of dishonesty or other wrongdoing against those acting for the Commissioners should be stated unequivocally; that the allegation and the basis for it should be fully particularised; and that it is responded to in writing by the Commissioners. The Tribunal should not in any circumstances allow cross-examination of the Customs officers concerned, until that is done.”

The appellant’s contentions were, in summary, that there was no reliable evidence of suppression and that HMRC had not considered whether the business could sustain the level of turnover. The appellant contended that HMRC had used only one source of information (the AMB account) in calculating the quantum of the assessments, and that data had not been shown to be accurate. HMRC had ignored the fact that the two cashing up procedures which HMRC had attended had not shown significant difference between the till and the takings, and field reports had not indicated any suppressed sales. HMRC had not given any credence to written information from AMB that sales in the ZP334 account were not necessarily to the appellant.

With regard to the contention that HMRC had not considered whether the business could sustain the level of turnover, Officer Jones’ evidence was that she had seen similar businesses with higher levels of turnover. We have set out above our view on the appellant’s contentions as to the capacity of the business to generate the turnover assessed.

The appellant also contended that the present appeal was effectively the same as that brought in the case of Wei Xian and Qiam Peng [2020] UKFTT 0017, in which the Tribunal concluded that the assessments had not been made to best judgement. The appellant also made reference to the decision in Kong’s Restaurant Ltd [2021] UKFTT 0220 (TC) as supporting their position.

We note that the facts in both cases are sufficiently different that neither case is of particular assistance. In Wei Xian, there was no allegation that purchases were being suppressed. The allegation of suppressed sales arose from invigilation of the business. The Tribunal’s conclusions as to best judgement arose because the ratios used by HMRC did not correlate to the invigilation results. In Kong’s Restaurant, the conclusions relating to best judgement in that case focussed on assumptions made in respect of till misreadings and a very small number of alleged suppressed purchases.

In this case, as we have already noted, both explanations given by AMB for the existence of the ZP accounts mean that cash purchases made by the appellant will not have been recorded on the J343 account because they were either recorded on the ZP334 account (under the original explanation), or on random ZP accounts which AMB noted could include the ZP334 account (under the second explanation). The appellant’s accountant confirmed to HMRC that the appellant had made cash purchases from AMB as well as credit account purchases. AMB confirmed to the appellant that they had checked the data and confirmed that it was the data on their systems. We note that other AMB customers have confirmed to HMRC that they had a second account at AMB and that purchases on such account were not declared, and that they had accordingly suppressed sales in reporting to HMRC. Data protection rules mean that HMRC were unable to provide more specific information as to these customers.

Considering this information, we do not consider that it is unreasonable or arbitrary for HMRC to have concluded that purchases had not been declared by the appellant. For the reasons set out above, we consider that AMB’s initial explanation of the ZP account at their HMRC visit is more likely to be accurate than their subsequent explanation and so do not consider that it is unreasonable or arbitrary for HMRC to have concluded that the purchases on the ZP334 account were made by the appellant. We also do not consider that it is unreasonable or arbitrary for HMRC to have concluded that undeclared purchases related to an under-declaration of sales.

We note HMRC’s explanation that they did not place significant weight on the fact that the till and takings did not substantially differ at the two visits because they considered that both the till readings and the takings could have been suppressed in the same way. Given the wider evidence before us, we do not consider that this is an unreasonable approach for HMRC to have taken in their calculation of the assessment.

Officer Jones based the VAT assessments on an analysis of the AMB purchases on the ZP334 account, as she considered that the only reasonable explanation for failing to declare those purchases was that sales were also being omitted. The assessments were calculated by applying the mark up rate achieved in the accounts to the omitted sales amounts in the same periods.

For the periods ended 30 June 2016 and 30 June 2017, estimated amounts were used as no data was available from AMB. The average under-declaration of purchases for the periods ended 30 June 2014 and 30 June 2015 was used to establish figures for undeclared purchases, and the mark up rate achieved in the submitted tax computations was applied to those figures for those periods.

We consider that the calculation of the assessments therefore took account of the information available to HMRC. We note the appellant contention that HMRC could have undertaken invigilations, and HMRC’s explanation as to why these were not undertaken, but also note that Van Boeckel makes clear that the question is whether HMRC made the decision on the basis of the material available to them; they are not obliged to seek out additional material. We do not consider that HMRC acted unreasonably in making the assessment on the basis of the information available to them. We note that the appellant contended also that HMRC should have obtained further information from AMB, but also note AMB’s refusal to cooperate with HMRC and also that the appellant was unable to obtain any such further information despite requesting assistance from AMB. As such, we do not consider that HMRC acted unreasonably in not taking further action to seek further information from AMB.

Considering the principles in Van Boeckel, and on the evidence before us, we find that HMRC have discharged the burden of proof on them and that the assessments were made to best judgment.

In order to make assessments for the years ended 30 June 2016 and 30 June 2017, HMRC relied on the principle set out in Jonas v Bamford 51 TC 1 that the “situation will be presumed to go on until there is some change in the situation, the onus of proof which is clearly on the taxpayer”. HMRC contended that there had been no such change as the margins achieved in the accounts for those two years were very similar to the margins achieved in the earlier years.

The appellant argued that, as the appellant was aware that it was under investigation by HMRC, it was inappropriate to apply the presumption of continuity to raise assessments for VAT periods after the enquiry started. We consider that, following Jonas v Bamford, a rebuttal of the presumption of continuity requires more than a statement that it would be inappropriate to apply that presumption following the start of a VAT enquiry.

The appellant also submitted that HMRC had accepted that any suppression had stopped once the enquiry started. We note that in a letter dated 2 June 2020, relating to the preparation of the bundles for the hearing, an HMRC litigator who was not involved in the hearing wrote “It is agreed that following the start of enquiries in to the business, takings were accurately recorded”. The statement is made in response to a statement in a letter from the appellant which contends that details of takings between May 2016 and October proved that takings were accurately recorded.

Officer Jones stated that there was no basis for such a statement and that she did not agree with it, nor had she been asked whether such a statement could be made. We note that there is no reason given by the litigator for the statement and no other correspondence which supports the statement. The appellant did not apparently pursue the point in any subsequent correspondence.

We also note that the same litigator prepared one of the statements of case in this matter and did not make the same statement there. Given the importance of such a statement, we would have expected to see it in the statement of case or at least separately recorded with details. In the circumstances we consider that is not outside the realms of credibility that the word ‘not’ was inadvertently omitted after the word ‘It’ at the start of the sentence.

We therefore do not consider it appropriate to treat this sentence as binding HMRC with regard to the presumption of continuity.

The appellant also stated that there was no proof that the ZP334 account had continued to be operated after the data was extracted in 2015. However, we note that the appellant had been in correspondence with AMB, and there was no indication in that correspondence that the ZP account system (following either explanation) was no longer operated. There was also no evidence that the appellant had ceased to make cash purchases which, following AMB’s second explanation, would not appear on the J343 account.

We note also that the gas costs, which the appellant contended would be related to the level of turnover, did not vary significantly during the periods for which assessments were raised. As noted above we cannot conclude that the gas costs support a specific level of turnover without additional information which has not been made available. However, we do agree that consistent gas costs across a period of time would indicate that the amount of cooking, and therefore turnover, did not vary significantly during that period of time. We have noted that the declared turnover rose slightly from the VAT period ending 31 July 2016, but also note that the appellant’s explanation for this was that the kebab shop next door had closed at the end of May 2016.

Considering the information above, we find that the taxpayer has not discharged the burden of proof on them to displace the presumption of continuity for the periods of assessment for which no AMB data is available.

As made clear in Pegasus Birds, the burden of proof therefore falls on the appellant to demonstrate that the assessments do not reflect the correct amount of tax. The appellant has not in fact made any detailed submissions as to the correct amount of tax that should have been assessed and provided no evidence (such as bank statements) to rebut the amount of the assessments. This follows unsurprisingly from their contention that they did not make any under-declaration. We have considered the contentions made as to capacity and footfall in this context but, as noted above, do not consider that these are substantiated.

We find that the appellant has not discharged the burden of proof upon them in this context, and so the assessments are upheld in full.

For direct tax purposes, the omitted profits were charged to tax under s455 Corporation Tax Act 2010. The charge was based on the calculations undertaken for VAT purposes. The appellant submitted that the quantum had not been proven by HMRC, for the same reasons as above in respect of VAT. We have concluded that the appellant has not discharged the burden of proof upon them to displace the amounts assessed and as noted by Officer Post, the corporation tax calculations take into account the VAT assessments and undeclared purchases. As such, we do not consider that the quantum of the assessments (as amended by Officer Post) has been shown to be incorrect.

Officer Post provided a witness statement and gave oral evidence at the hearing. The officer who had made the direct tax assessments had since retired from HMRC, but Officer Post stated that he would have drawn the same conclusions, based on his experience with similar businesses, that there had been an understatement of tax and that a discovery had been made which enabled the assessment to be made. The corporation tax calculations provided for deductions in respect of the undeclared purchases and the VAT assessments. He had reviewed the figures and made an amendment, in favour of the appellant, with regard to the calculation of the assessment. The penalties were also revised accordingly. The revised figures are set out in the appendix to this decision.

The skeleton argument for the appellant indicated that the appellant considered that the assessments might have been made out of time on the basis that a protective assessment could have been made earlier. In the hearing, it was accepted that the assessments had been made within the relevant time limits and that this point was not being pursued further.

HMRC contended that the discovery on which the assessments for the years ended 30 June 2014, 2016 and 2017 were based arose from the data provided by AMB Foods in 2015 when evaluated by HMRC officers from October 2016 onwards. The officers’ evidence was that it was not until October 2017 that HMRC concluded that they had enough information to conclude that there had been a loss of tax relating to the appellant. The conclusion that there had been an insufficiency of tax was a reasonable conclusion from that evidence. The presumption of continuity means that this discovery extends to the tax years ended 30 June 2016 and 30 June 2017.

HMRC contended that the assessments for the years ended 30 June 2016 and 2017 were made within four years of the end of the relevant accounting periods and were, therefore, within the general time limits provided for in paragraph 46 of Schedule 18 of Finance Act 1998. The assessment for the accounting period ended 30 June 2014 had been made within six years of the end of the accounting period and, as HMRC considered that the loss of tax was brought about either carelessly or deliberately by the appellant or a related person as the director of the appellant would have known that sales had been under-declared, the assessment had been made in time under the time limits in paragraph 46 of Schedule 18.

Having considered the evidence and submissions before us, we find that there was a relevant discovery and that the assessments were made within the relevant time limits set out Schedule 18 of Finance Act 1998.

The appellant contended it was not appropriate for amounts to be assessed under s455, as there had been no intention to create a debt between the appellant and the director. It was submitted that the appellant should have the right to choose how to be taxed if HMRC considered that there had been an understatement.

Officer Post explained that the understatement of tax had been assessed under s455 rather than treated as a distribution as there was no evidence of distributions in the company records. It was normal practice to treat the amounts as a loan to a director in such circumstances. The alternative would have been to assess the amounts via PAYE as earnings of the director.

s455 CTA 2010 applies where “a close company makes a loan or advances money to … a relevant person who is a participator in the company or an associate of such a participator …”. We have considered the parties’ submissions and consider that the wording of s455, particularly the reference of an ‘advance’ of money, is wide enough to encompass an extraction of funds from a company by a participator which is not recorded in the accounts as either salary or a distribution. We do not consider that the appellant has the right to choose how amounts should be taxed in circumstances where the appellant has not under-declared amounts which are subject to tax.

Accordingly, we find that the corporation tax assessments were correctly raised and that the quantum of such assessments is also appropriately calculated.

Paragraph 1 of Schedule 24 of Finance Act 2007 provides for a penalty to be paid where a person provides HMRC with a document, including VAT and corporation tax returns, which contains an inaccuracy which leads to an understatement of tax (inter alia). Where the behaviour which leads to the inaccuracy is deliberate and concealed the standard penalty is 100% of the potential lost tax. This may be reduced to a minimum possible penalty of 50% where the disclosure of the inaccuracy is prompted by HMRC action. The actual penalty depends on the quality of disclosure, with mitigation being given for telling HMRC about the inaccuracy, helping HMRC to understand it, and giving HMRC access to records to evaluate the inaccuracy.

HMRC submitted that knowingly omitting purchases and corresponding sales from records and tax returns cannot be anything other than deliberate behaviour and that the omission of such information from the records and return was an attempt to conceal the action. The maximum penalty would, therefore, be 100% and the minimum possible penalty 50%. HMRC gave 0% mitigation for telling, as the appellant has not admitted the inaccuracy; 40% for helping, as the appellant co-operated with the enquiries; and 30% for access to records. The total mitigation was, therefore, 70%. Applied to the difference between the maximum and minimum penalties, this gave a reduction of 35% so that the penalty charged was 65% of the potential lost revenue. The same penalty percentage was applied for all of the assessments.

At the hearing, the appellant stated that arguments as to penalties were academic as they contended that there had been no suppressed sales. The appellant nevertheless did not dispute the amount of mitigation in context.

Having considered the evidence and submissions and having upheld the assessments for the reasons given above, we consider that the behaviour which led to the understatements of tax can only be described as deliberate and concealed, and that any disclosure was prompted by HMRC action. The penalties are therefore correctly raised, and we see no reason to alter the mitigation allowed for by HMRC. The penalties are therefore upheld in full as set out in the appendix.

For the reasons set out above, we find that the appellant has understated turnover and profit for both VAT and direct tax purposes.

As requested by HMRC, we find that the appeals are upheld in part in respect of the amendments requested by HMRC. The appeals are otherwise dismissed. The assessments, closure notice and penalties are therefore upheld in the amounts stated in the appendix.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

VAT assessments and penalties

Direct tax discovery assessments and closure notice