BJ Shere Khan Star City Limited & Anor v The Commissioners for HMRC

It is common ground that the lease on Unit 1B is held by BJ Star City (UK) Ltd (“SC”). Mr Saddiq was a director of SC until he resigned on 19 February 2010. The lease was assigned to SC from Service Retail UK Ltd (previously Big John’s Retail Ltd).

The lease on Unit 13 was held by Star City MW Ltd (formerly BJ Star City Ltd).

It is also agreed that Oodles was previously operated by Businessrite Services Ltd (“Businessrite”), another company of which Mr Saddiq was a director.

Mr Saddiq’s case is that Oodles, as operated by Businessrite, between August 2008 and February 2010 was not successful. Because it was seen as a Chinese restaurant, it was difficult to educate a potential Muslim audience that pork was not sold and the food was halal. The “English” (Mr Saddiq’s phrase) audience were deterred because it was not possible to buy alcohol or bring alcohol. Also Star City had negative publicity due to shootings in the area, resulting in a loss of footfall. Businessrite entered liquidation in January 2010 and was dissolved on 22 August 2012.

Mr Saddiq’s case is that after January 2010 Oodles was closed for refurbishment, in order to modernise, with the intention that the modernised premises would operate a Pan-Asian restaurant as a division of BJSKSCL. He says that BJSKSCL was paying £160,000 pa rent on an empty site and he had personally guaranteed the rent.

Earlier in his witness statement he said that prior to opening Oodles in 2010 Unit 1B had been converted from a night club and bar to a restaurant and that the work took almost two years to complete. We find there to be no reason to disbelieve this.

Mr Saddiq says that he then received a proposal from Mr Zahoor Malik and Mr Zeeshan Hamid to take a licence on Unit 1B and run Oodles as an ethnic led concept. They would take on responsibility for paying the rent and overheads, and they would complete the refurbishment. In return they would be given an exclusive right of occupation for two-years with no additional payment for the licence.

Mr Saddiq was attracted by the proposal as he considered that the payment of rent on Unit 1B, which he was guaranteeing, was an onerous obligation which he wanted to avoid. Mr Saddiq believes that Mr Malik and Mr Zeeshan traded as Oodles through two companies, Star City Noodle Bar Limited and Recoverage Limited. He was not involved in either company. From Companies House returns Mr Saddiq noted that the director of Recoverage Limited was Mr Chen Zhou and the director of Star City Noodle Bar Limited was Ms Mei Chen. A Mr Chen was the head chef at Oodles when it was ran by Mr Malik and Mr Zeeshan, however Mr Saddiq does not know if it was Mr Chen Zhou.

Mr Saddiq also says he allowed Mr Malik and Mr Hamid to use two merchant bank accounts. The first was opened in the name of B and J Restaurants Limited, another company that he was director of. The second was with American Express, set up only to take American Express payments and had little or no activity overall. He says that he let them use the merchant accounts because Mr Malik and Mr Zeeshan had difficulty in opening their own account, and without this assistance they would not be able to operate the business and he would be required to pay-out on his personal guarantee of the rent.

In August 2014 Mr Malik and Mr Hamid vacated Unit 1B and Mr Saddiq gave his son and nephew, Mr Muhammad Waqaas Babar and Mr Mauheed Johngir, the opportunity to run the business of Oodles and Shere Khan. They paid nothing for this: it was a gift. They did this through their company Two Bros Restaurant Brands Ltd (“Two Bros”), acquiring both of the businesses in 2014. The licence of Mr Malik and Mr Hamid ended in July 2014, on their giving notice. Mr Malik and Mr Hamid gave notice as their two main chefs did not have their visas renewed by the UK Boarder Agency.

To support their contention that BJSKSCL traded as Oodles at Unit 1B, HMRC rely on the following facts:

In response, adopting the same numbering, Mr Saddiq says:

We find these answers persuasive. Further, Mr Saddiq has also produced eight invoices from Keyani’s and several invoices from Peonix addressed to Star City Noodle Bar Ltd at Unit 1B. The Keyani’s invoices are dated between 15 December 2011 and 11 July 2012. Many of the Pheonix invoices that we have are illegible, but the five legible ones are dated between 29 December 2011 and 27 December 2012. Mr Saddiq says he found these invoices under the till in 1B in 2014 after Mr Malik and Mr Hamid left. He has also produced a bill for non-domestic rate, dated 2 April 2013, issued by Birmingham City council to Star City Noodle Bar Limited at unit 1B.

Mr Saddiq has also produced a summons to Birmingham Magistrate’s Court for non-payment of non-domestic rate, dated 20 June 2012, addressed to what appears to be Star City Noodle Bar Limited at unit 1B, although part of the name and address is illegible.

We attach some weight to such documentary evidence and accept Mr Saddiq’s account of its provenance.

We are conscious of the fact that the assessment is made against BJSKSCL, not against Mr Saddiq. Accordingly even if we were to accept the involvement of Mr Saddiq in the operation of Oodles, that would not necessarily show that it was BJSKSCL (which of course has separate legal personality) that was trading. It could be Mr Saddiq as sole trader: we note points 23(2) and 23(9), above, suggest that Mr Saddiq used the property of companies he owned as if it was his own property. It could also have been one of his (many) other companies.

We are also conscious that much more evidence might be thought to have been reasonably available. For example the landlords could have been contacted as to who was generally paying the rent and who they considered were occupying the premises. Former staff could have given witness statements. Evidence could have been supplied by the bank who issued the merchant account. Also former suppliers could have been called upon to give evidence. Absent of a finding of absence of best judgment, the burden of proof would be on the appellant to show this. However we acknowledge that Messrs Hamid and Malik vacated the premises in 2014 and accept Mr. Saddiq’s oral evidence that he did not hear from them again. HMRC’s enquiries commenced three years later and evidence for this appeal was served in 2022. So we accept obtaining such evidence might have been problematic.

However, viewing the evidence before us in the round, we find that while it could perhaps have given rise to a suspicion that BJSKSCL was trading as Oodles, it could not have reasonably given rise to anything more than a suspicion. We do not consider that the evidence could give rise to a belief that BJSKSCL was operating Oodles throughout the relevant period. Indeed, we consider several factors on which HMRC rely, may in fact point in the opposite direction. The fact that for a short period money from the merchant account was paid into BJSKSCL’s bank account shows that this was not generally done: and we find the explanation for it credible. The fact that Star City Noodle Bar Limited filed no statutory accounts might also point to it being non-compliant rather than dormant. We find it plausible that Mr Saddiq would arrange for Mr Malik and Mr Hamid to be granted a licence at no rent, to avoid his own personal liability for the matter. Similarly we find that it is plausible that Mr Malik and Mr Hamid would have been allowed to use the merchant acquirer accounts so they could trade and allow Mr Saddiq to avoid personal liability for rental payments as guarantor for Unit 1B.

In his witness statement Officer Beard explains that a review of bank statements and annual accounts suggested there was a suppression of profits, particularly:

The comparison of the cash:card ratio is unpersuasive for a number of reasons. Firstly, the 2017 figure is jointly for both Oodles and Shere Khan. There is no reason why the cash:card ratio of Oodles should be relevant, any more than that of any other unrelated restaurant at Star City.

Further, the evidence suggests that Shere Khan when run by Two Bros was a substantially different enterprise than when it was run by BJSKSCL. The old menu did not have a “Grab & Go Section”. The photographs of the signage on the front of the restaurants show “Shere Khan Restaurant Juice and Coffee Bar”, when under BJSKSCL. This was replaced by “Shere Khan’s Restaurant” under Two Bros. This is consistent with Mr Saddiq’s testimony that, under him, Sher Khan involved quick service, small menus at a low price, quick turnaround, an emphasis on the juice bar and cold food. He said that the new owners were tech savvy, oriented to larger gatherings, weddings, students and home deliveries. The new owners immediately dispensed with the juice bar and “Grab & Go” section of the menu. We accept this part of his testimony.

In addition to the area being different, Star City was also a different sort of complex at the relevant times. As Officer Beard admitted in his evidence, it previously had a gym and casino, in addition to the cinema. However by 2017 only the cinema was left.

We place limited weight on the interior photos of the two restaurants, especially as evidence as to who the clients were. The photos are not necessarily representative of the makeup of customers. However they are consistent with Mr Saddiq’s testimony that the new restaurant catered more to families and large gatherings.

We also accept that the environment of Star City had changed substantially over the six years. We accept Mr Saddiq’s testimony that the area was previously associated with gun crime, but regeneration and the opening of a new university, caused it to become more associated with students.

We also note that no evidence of the till data of Two Bros has been adduced, beyond the references to the findings in Officer Beard’s witness statement. There is also no record of the visit report. As such the appellant has been denied the ability to challenge Officer Beard’s findings, based on an analysis of the underlying evidence. Nor can this Tribunal verify the accuracy or reasonableness of the method. It would not be appropriate for us to have regard to factual findings made in Mauheed Johngir & Muhammed Waqas Babar v HMRC [2024] UKFTT 00274 (TC), as HMRC invited us to. The appellants in that case were not those before us in this case. While they are the son and nephew of Mr Saddiq, and the appeal concerned the restaurants they ran at Star City, we do not regard their to be a sufficient degree of identification that not following the decision would be an “abuse of process”: see Hackett v HMRC [2020] UKUT 212 (TCC) approving Hackett v HMRC [2016] UKFTT 781 (TC). Rather, the general rule applies, that “findings of fact made by another decision maker are not to be admitted in a subsequent trial because the decision at that trial is to be made by the judge appointed to hear it (‘the trial judge’), and not another”: Hoyle v Rogers and another (Secretary of State for Transport and another intervening) [2015] 1 QB 265 at [39].

The extracted till data apparently covers 75 days from 26 August 2017 to 8 November 2017. It is noted that in other calculations, used to support the allegations of suppression, a 17 day period (in relation to average cash sales) and a 7 day period (in relation to the percentage of zero-rating) have been used in the analysis. A short random sample may be considered representative, however the 75 days are not a random sample: they represent the full data that Officer Beard was able to access. While in evidence he stated that the 7 and 17 days were a random sample from the 75, no evidence was given as to how such randomisation was carried out. The 17 day period contains Eid, which we accept is likely to increase sales. But in addition to the volume of sales, it is highly likely the nature of the trade would differ during Eid potentially resulting in a different cash:card ratio. Indeed, we accept the comparison produced by Mr Khan of 2012 sales, which shows sales of £20,219.49 in the week before Eid and £29,378.87 in the week following Eid.

We also note Mr Saddiq’s evidence that, while card sales were encouraged, he operated a charge for card sales under £10. We accept this evidence and consider it is a further explanation why the average value of card and cash sales was similar in 2017, but different when the restaurant was operated by BJSKSCL.

For these reasons we find that the cash:card ratio from the 2017 inspection is not a reasonable comparison to deduce the cash card ratio when BJSKSCL operated Shere Khan.

We also do not accept Officer Beard’s assertion that in certain periods bank deposits were greater than gross sales declared, to be evidence of suppressed sales. In his witness statement Mr Khan exhibited calculations showing these differences to be attributable to miscalculations and that money was not always regularly banked. Officer Beard confirmed during cross-examination that he had not considered this and would need to look into it. We note that no challenge was made to this evidence. We accept however that, contrary to Mr Khan’s calculations the payment from Consilium Legal was not inappropriately included in the analysis. Even so, we do not regard this as evidence of suppression of profits.

We accept Mr Khan’s (unchallenged) analysis which shows mistakes by Officer Beard in his calculation of credit card receipts.

We note there is an inconsistency between the 2012 accounts and the comparator in the unsigned 2013 accounts, filed with HMRC. However, we note that the signed version of the 2013 accounts, filed with Companies House, has figures that do match. We accept that the unsigned accounts must have been filed in error with HMRC: there would be no rational basis for deliberately filing comparator figures different to those for 2012 previously filed. We accept that the correct accounts are likely to be those that are signed, rather than unsigned.

As a result of Officer Beard basing his analysis on the unsigned set of accounts, this has also affected his analysis in the table at [61] of his witness statement showing differences between turnover and declared outputs. The correct accounts give a turnover of £960,677 for 2013 instead of the £1,010,480 Officer Beard has used, which would result in a difference of about £4,000 rather than £56,000. For the quarter 04/12 net output in the table is £808,833. Using Mr. Khan’s table to April 12 adding the net sales column gives £813,892.65. That would make a difference of £28,877 not £33,936. Whilst there is still a difference we consider this is most likely, having regard to the totality of the evidence, due to the chaotic nature of the record keeping of the appellant, and does not evidence suppression of profits. Similarly, having regard to the totality of the evidence, we consider the provision of different SAGE ledgers with different totals was due to chaotic record keeping by the appellant and not suppression of profits.

There is no dispute as to which items would qualify for zero rating. In closing submissions Mr Bracegirdle conceded that, for the purpose of this appeal, all supplies from the “grab and go” menu would be zero rated. It is also accepted that catering supplies that were supplied cold to be reheated would be zero rated. The dispute concerns the extent to which those items were supplied.

In evidence we were told that the tills did not distinguish between zero rated and non-zero rated goods. It was therefore not possible for this to be done automatically. Rather, at the end of each day staff members went through the till receipts to calculate the proportion of zero and non-zero rated supplies. As it happened, this was said to be consistently 12%. The receipts were then destroyed.

We find it unlikely that staff members would calculate by hand the zero rated supplies each day (or twice weekly when the book keeper came in, as was alternatively suggested). This is especially so when set against the generally chaotic way that the tax affairs of the business was conducted: including not filing a CT return for the final two years and being unable to locate the books when requested. The chaotic way the affairs of the business was conducted is also evidenced by the failure to retain records for the items discussed below in relation to input tax.

Furthermore, the oral evidence of the 12% being claimed on the basis of an actual rate of 12% calculated daily, is contradictory to Mr Saddiq’s witness statement, which says:

From that we find that there was, in all likelihood, an honest attempt to claim the right amount of zero rated output tax, but that was most likely based on a rough and ready method of sampling: hence why the amounts were rounded down to avoid overclaiming.

Whilst we note Mr Khan’s experience that most catering businesses have zero rated sales above 15%, we consider this to be a highly fact specific enquiry, which would depend on the nature of the business and the ability of a particular business to evidence zero rated sales.

It is for the appellant to show that the supplies are zero rated. For the reasons above, we find the appellant’s evidence to be unreliable on this matter.

For this reason, we do not consider there are grounds for departing from Officer Beard’s best judgment assessment of 2% of sales when there was the Virgin Active gym in Star City and, 1% for the rest of the time. Whilst this figure is quite likely too low, we find the appellant has not discharged the burden of proof, which is on it, to show that a higher figure is appropriate.

Regulation 29(1) of the Value Added Tax Regulations 1995 requires the taxpayer to hold the evidence of the input tax, namely, the tax invoice, at the time of making the claim. Where the tax invoice is not held regulation 29(2) allows HMRC a discretion to accept alternative evidence such as proof of payment, orders, delivery notes, correspondence.

In his letter of 20 February 2020 Officer Beard denied a deduction in respect of the BMW X5 as it appeared to him to be for personal use.

Mr Saddiq’s evidence was that this vehicle was used to pick up and drop off staff, especially late at night when public transport was no longer available. He said that the vehicle was covered in livery advertising the business and stayed in the open car park, as an advertisement. He said it was insured for any driver aged over 25.

There are no photographs of the vehicle, evidencing the livery. Nor has there been exhibited any invoice for the livery of the vehicle, or email correspondence relating thereto.

No witness statements have been provided from staff members, relating to how they were taken to and from work in the vehicle.

In the absence of corroborative evidence, which could potentially have been provided if proper records were kept, we do not find there to be reason for disturbing Officer Beard’s best judgment assessment on this point.

Given that we have found there to be no evidence that the BMW X5 was acquired or used for business use, it follows that the fuel for that vehicle should also not be allowed.

We were told in evidence that staff members were often reimbursed £20-£30 each week, to cover the fuel they used to make home deliveries in their own vehicles when the van was busy. No witness statements of staff members have been provided. Nor have we been provided with an itemised list of payments to individual staff members. It would be reasonable to expect such records to be kept.

In the absence of corroborative evidence, which could potentially have been provided if proper records were kept, we do not find there to be reason for disturbing Officer Beard’s best judgment assessment.

It is the appellant’s case that payments of rent for the leasing of kitchen equipment were made to Dobhai, a company also owned by Mr Saddiq.

It is said that the rental payments were £1,345 per week, including VAT. However these were not paid weekly, but only from time-to-time. Dobhai only raised invoices on receipt of these payments, so not to have to account for VAT without being in funds. We find that plausible.

Mr Saddiq’s evidence was that there was a £25,000 deposit paid for the equipment, however this has not been returned yet. The equipment was placed in storage after removal from the restaurant.

However, many of the descriptions and amounts of these invoices are inconsistent with this narrative.

An invoice dated 31 March 2012 is for “Interest Pmnts shere khan”. This is for about 25.25 times the weekly price, so difficult to see how that relates to any whole number of weeks. Further the description does not imply a payment for kitchen equipment rental.

An invoice dated 30 April 2012 is for “Rent: Service charges April”. This is for six times what is said to be the weekly price, so not solely for April. Given the excess payment in the earlier month it is difficult to see how this can be for arrears. Further the description does not imply a payment for kitchen equipment rental.

An invoice dated 31 May 2021 is for “Rent: Service charges May 2012”. Again it is for 7 times the weekly price, so not solely for May. Given the excess payment in the earlier two months it is difficult to see how this can be for arrears. Further the description does not imply a payment for kitchen equipment rental.

An invoice dated 30 June 2012 is for “Rent: Management charges June.” Further, it would appear to be for 7 times the weekly price, so not solely for June. Given the excess payment in the earlier three months it is difficult to see how this can be for arrears. Management charges are not a normal description of hiring kitchen equipment.

An invoice dated 30 June 2013 is for “Management May and June charges”. This is for 19 times what is said to be the weekly price, so not solely for May and June.

An invoice dated 31 July 2013 is for “Management charges July 13”. This is for 10 times what is said to be the weekly price, so not solely for July.

Whilst Mr Saddiq suggested management charges imply management of kitchen equipment, we do not consider this is a natural use of the English language. As this is a regular transaction we find it perplexing why there are so many different descriptions of a regular transaction, none of which mention kitchen equipment.

The fact that so many different descriptions are used is another pointer to the generally chaotic record keeping of Mr Saddiq’s business. We find it unlikely that the payments were for different things, given the recurring unit-amount. However it is for the appellant to provide adequate documentary proof of what the payments are for. They have not done that.

Mr Saddiq also suggested that larger payments than for the rental period specified could be for accumulated amounts. However, when there are seemingly over-payments for so many consecutive periods, it would be for the appellant to show arrears were due, or a surplus was accruing that as subsequently utilised. They have not done that.

Officer Beard has, by mistake allowed two of these invoices. It was suggested that there was an inconsistency by continuing to allow these two invoices, so all the others should be allowed. We disagree. Whilst Officer Beard may have chosen to allow the taxpayer the benefit of Officer Beard’s error, this does not require the error to be extended.

We also note there is no schedule produced of the equipment that was said to be rented.

We do not consider that the appellant has shown these payments were for the rental of kitchen equipment and therefore do not allow these amounts as input tax.

VATA requires a “best judgment” assessment, providing that:

It is clear that there is a two stage process to be followed in considering a VAT assessment raised by HMRC in cases such as this. First, it must be established whether the assessment was made “to the best of their judgment”. The burden lies on the taxpayer to establish that it was not. If that hurdle is passed, the burden then lies on the taxpayer to demonstrate that the assessment raised by HMRC is excessive. In Van Boeckel v Customs and Excise Commissioners [1981] STC 290, 292-3 Woolf J (as he then was) said, in respect of the precursor provision in s 31(1) of Finance Act 1972:

In C A McCourtie Customs and Excise Commissioners [1992] Lexis Citation 802 Dr A N Brice, sitting as a judge of the VAT Tribunal, noted that:

In Rahman (trading as Khayam Restaurant) v Customs & Excise Commissioners (No 2) [2003] STC 150, [2002] EWCA Civ 1881, Chadwick LJ gave the following guidance:

Pegasus Birds Ltd v Customs and Excise Commissioners [2004] EWCA Civ 1015; [2004] STC 1509 both Carnwath LJ (at [[22]) and Chadwick LJ (at [84]) emphasised that a best judgment would be made where the officer made an “honest and genuine attempt” to make a reasoned assessment. Even in cases where there was no best judgment, the Court of Appeal suggested (at [23]-[28] and [90]) that it was open to the Tribunal not to discharge the assessment but to specify the correct amount, as Chadwick LJ also suggests in the passage quoted above. Carnwath LJ noted (at [29]) that:

Carnwath LJ also noted (at [38]) that any allegation of dishonesty or other wrongdoing against those acting for the Commissioners should be stated unequivocally and that the allegation and the basis for it should be fully particularised.

Chadwick LJ accepted, at [75], that an assessment made on behalf of the Commissioners by an officer who had, consciously or unconsciously, ‘closed his mind’ to any material which did not fit his case, would not be an assessment of an amount due to the best of their judgment.

In Karoulla (trading as Brockley’s Rock) v HMRC [2018] UKUT 255 (TCC) Judges Herrington and Scott cited with approval the summary of “best judgment” by Judge Scott in Fio’s Cash and Carry Ltd v HMRC [2017] UKFTT 346 (TC) where he said:

It was agreed by the parties that the determination of whether the assessment is on the basis of best judgement applies to the entire assessment. As is evident from the foregoing analysis, we agree that the input tax was correctly assessed. We also agree with the assessment with regard to zero rating. However, we do not agree that there was a suppression of profits. Viewing the assessment as a whole, we must determine with it is best judgment.

Miss Brown’s submissions on this point are that the assessment:

From the findings we have made above it will be apparent that the primary factual basis on which these submissions are made is largely accepted.

However we do not consider that it follows that it is one of those “rare” cases where the officer has not made a “honest and genuine attempt” at making an assessment. No allegation of dishonesty has been made against the officer. Whilst, on his own admission, Officer Beard did not review the calculations provided by Mr Khan, the fact that there have been changes to the original assessment shows that he generally kept an open mind: reviewing evidence as it came in. Even though we consider that the facts that made Officer Beard consider that BJSKSCL was trading as Oodles could only, at best, give rise to a suspicion that may warrant further investigation rather than a conclusion, we consider that it does not follow from such misjudgement that Officer Beard did not make an honest and genuine attempt in his assessment. Furthermore, we are in agreement with Officer Beard’s assessment with regard to zero rating and input tax.

Even if we were wrong in our assessment of best judgment, we do not consider that this is a case where the defect is so serious or fundamental that justice requires the whole assessment to be set aside. Given the lack of evidence in respect of the input tax claims and zero rating we consider, rather, justice can be done simply by correcting the amount to what the tribunal finds to be a fair figure on the evidence before it.

It is clear from Officer Pinder’s letter of 23 May 2018 that the CT assessment for omitted sales are on the same basis as the VAT assessment for suppression of profits. It does not relate to the input tax items (for example seeking to deny and expense, in the calculation of profits, which is not wholly and exclusively for the purpose of the trade). Nor is zero rating relevant to this.

It follows from our decision that there was no suppression of profit for the purpose of VAT, that there are no omitted sales for these periods.

The relevant parts of Schedule 18 of Finance Act 1998 (“FA 1998”) specify that:

In Anderson v HMRC [2018] UKUT 159 (TCC); [2018] STC 1210, which was approved by the Supreme Court in HMRC v Tooth [2021] UKSC 17; [2021] STC 1049 at [72], Morgan J and Judge Berner stated (at [24]) that they regarded the following propositions as established by the various previous authorities:

With regard to the subjective element they held (at [27]) that:

Further with regard to the subjective element they held (at [28]) that:

With regard to the objective element (at [30]) they held that:

In Tooth, which considered the equivalent provisions for discovery assessments in the Taxes Management Act 1970, Lord Briggs and Lord Sales (with whom the other members of the panel agreed) held (at [42]) that deliberately meant a statement “which when made, was deliberately inaccurate”, it was not sufficient for it to be “a deliberate statement which is (in fact) inaccurate”.

Lord Briggs and Lord Sales (at [63]-[65]) also accepted the following passage from Charlton v Revenue and Customs Comrs [2012] UKUT 770 (TCC), [2013] STC 866 that discovery involves a change in mind but not necessarily new information:

Further Lord Briggs and Lord Sales accepted ([64]-[65]) the submissions made on behalf of HMRC that:

Lord Briggs and Lord Sales (at [79]) noted that the position was qualified by section 29(1) of the Commissioners for Revenue and Customs Act 2005, which provides that:

However, we note this still requires that the first officer has the subjective view that the assessment to the relevant tax is insufficient.

The legal framework is set out for completeness: we were taken through it at length.

With regard to the objective test, we have already stated our finding that the evidence could only reasonably give rise to a suspicion, rather than a belief, that there was an insufficiency of tax. Hence we find that the objective test is not met as the belief could not have been reasonably held.

This is all the more the case when we consider the information that was, on her own account, before Officer Pinder. It was noticeable from Officer Pinder’s letter of 23 May 2018 was in the following terms:

Similarly, Officer Pinder’s witness statement suggests her view regarding the deficiency of CT was formed on the basis of relying on Officer Beard’s view of suppression. In her oral testimony she mentioned how she sat down with officer Beard and would go through his calculations: although this was not mentioned in her witness statement. However, what she did not mention in her witness statement or oral testimony is going over the reasons Officer Beard gave for believing BJSKSCL to be trading as Oodles.

We find it was not reasonable for Officer Pinder to merely take as given Officer Beard’s view that BJSKSCL was trading as Oodles, without interrogating the reasons for holding this view. We find this to be a further reason for holding that the objective condition was not met.

It follows, in our view, that the conditions for issuing a discovery assessment were not met.

The amount of VAT subject to any penalty only relates to the amounts in respect of zero rating and input tax, as we have decided for the appellant in respect of suppression of profits.

Likewise, as we have decided that there were no omitted sales for CT purposes and that the discovery assessment was invalid, any CT penalties fall away.

It is HMRC’s case that the VAT penalties relate to deliberate but not concealed behaviour. As such the penalty is 70% of the potential lost revenue: para. 4 of Schedule 24 FA 2007. But that is subject to potential reductions for disclosure, under paras. 9-10 of Schedule 24 FA 2007, which specifies:

The penalties in respect of output tax (including zero rating) are explained in schedule 2 to the letter of Officer Beard dated 11 June 2019. Under the heading “description of the inaccuracy” it states:

It is notable that the explanation in respect of the behaviour being deliberate in the letter covers behaviour relating to the alleged understatement of profit, rather than the zero rating. Similarly, HMRC’s statement of case states the behaviour to be deliberate since:

Officer Beard stated that the behaviour was prompted for the following reason:

With regard to reductions for the quality of disclosure, Officer Beard allowed the following reductions, totalling 25%:

Under the policy in HMRC’s Compliance Handbook these are out of, potentially, maximum reductions of 40% for helping, 30% for telling and 30% for giving access (totalling 20%).

In the letter of 11 February 2021, which reduced the amendment to the assessment in respect of input tax, Officer Beard did not adjust the reductions for disclosure, noting that (separately, but identically, in respect of input and output tax):

The penalties in respect of input tax are explained in schedule 2 to the letter of Officer Beard dated 11 June 2019. Under the heading “description of the inaccuracy” it states:

With regard to reductions for the quality of disclosure, Officer Beard allowed the following reductions, totalling 20%:

As noted above, under the policy in HMRC’s Compliance Handbook these are out of, potentially, maximum reductions of 40% for helping, 30% for telling and 30% for giving access (totalling 20%).

The burden of proof is on HMRC to show deliberate behaviour.

Deliberate behaviour, in this context, requires proof that the taxpayer knowingly provided HMRC with a document which contained an inaccuracy, intending that HMRC rely upon it as accurate. This incudes where a taxpayer suspects that a document contains an inaccuracy but deliberately and without good reason chooses not to confirm the true position before submitting the document to HMRC. However, the suspicion must be more than merely fanciful: CPR Commercials Ltd v HMRC [2023] UKUT 61. As noted in the statement of case, the burden of proof is on HMRC.

In our view the behaviour with regard to the input tax was careless rather than deliberate. The record keeping of the company appears to be chaotic. We accept Mr Saddiq’s evidence that he lost the records whilst the office of Oodles was refurbished and only rediscovered them, by chance, over a year later. Similarly, his failure to keep records in respect of the expenditure on petrol by employees suggests a chaotic and disorganised operating system. We accept Mr Saddiq’s evidence that he was not able to obtain records from his former bookkeeper and accountant as they were uncooperative. With the help of Mr Khan, the appellants have produced a certain amount of evidence which persuaded HMRC to vary the original VAT assessment. This all suggests that the errors in the returns were attributable to carelessness, rather than deliberate behaviour on the part of the first appellant.

With regard to the zero rating we have also reached the view that the behaviour was careless. The explanation in the statement of case for the behaviour being deliberate, being lack of accompanying evidence, is as consistent with carelessly failing to retain records as it is with deliberately failing to audit zero rated sales.

We agree with HMRC that the disclosure was prompted.

We therefore adjust the calculation of the penalty so it is based on careless rather than deliberate behaviour.

Given the detailed correspondence and calculations provided to HMRC by Mr Khan, on behalf of the appellant, we consider the reduction for helping is too little. We would increase that from 10% to 20%. We consider the reductions for telling (5%) and giving (15%) that were allowed by HMRC are appropriate, for the reasons stated in HMRC’s letter which we quote above.

We have found, above, that the inaccuracy was not deliberate, accordingly the requirement for a PLN in paragraph 19(1) of Schedule 24 to Finance Act 2007 is not met.

Accordingly, the appeal against the PLN is allowed.

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.