Cheon Fat Limited v The Commissioners for HMRC

Appendix

UPPER TRIBUNAL

TAX AND CHANCERY CHAMBER

APPLICATION FOR PERMISSION TO APPEAL

DECISION NOTICE

JUDGE RAMSHAW

Introduction

1. The Appellant seeks permission to appeal against a decision (the ‘Decision’) of the First-tier Tribunal (Tax Chamber) (the ‘FTT’) released on 29 February 2024 [2024] UKFTT 180. The FTT dismissed the Appellant’s appeal against VAT and Corporation Tax assessments and penalties.

2. The Appellant applied to the FTT for permission to appeal against the Decision and on 13 June 2024 permission to appeal was refused. On 15 July 2024, the Appellant made an in-time application to the Upper Tribunal (Tax and Chancery) for permission to appeal against the Decision.

Jurisdiction of the Upper Tribunal

3. An appeal to the Upper Tribunal lies only on ‘any point of law arising from a decision’ of the FTT (section 11(1) of the Tribunals, Courts and Enforcement Act 2007). A party’s right of appeal may be exercised only with permission (section 11(3) of the 2007 Act). The Upper Tribunal will generally give permission to appeal if there is a realistic prospect of success in demonstrating that the FTT materially erred in law in making its decision, in other words that it is arguable that the decision was wrong in law.

4. Normally, findings of fact by the FTT cannot be the subject of an appeal. Findings of fact, whether primary facts or factual inferences, can be an error of law where the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal (Lord Radcliffe in Edwards v Bairstow [1956] AC 14 at 36). If, in making its factual finding, the FTT ignored relevant considerations, took into account irrelevant considerations, or came to a conclusion that could not be supported by the available evidence, its determination can be set aside.

5. The approach to this kind of appeal is a well-trodden path. The following principles (See Volpi & Anor v Volpi [2022] EWCA Civ 464 (05 April 2022) are well-settled:

i) an appeal court should not interfere with the trial judge's conclusions on primary facts unless it is satisfied that he was plainly wrong,

ii) the adverb "plainly" does not refer to the degree of confidence felt by the appeal court that it would not have reached the same conclusion as the trial judge. It does not matter, with whatever degree of certainty, that the appeal court considers that it would have reached a different conclusion. What matters is whether the decision under appeal is one that no reasonable judge could have reached.

iii) An appeal court can therefore set aside a judgment on the basis that the judge failed to give the evidence a balanced consideration only if the judge's conclusion was rationally insupportable

6. Further the weight to be attributed to evidence is matter for the FTT and the evaluation of the reliability of witness evidence is the quintessential function of the First-tier Tribunal judge who has seen and heard the witnesses.

The Appellant’s grounds of appeal against the Decision

7. The grounds of appeal are that:

(1) Section 455 was misunderstood.

(2) HMRC were required to prove discovery to maintain their corporation tax discovery assessments.

(3) The FTT failed to apply the correct VAT time limit.

(4) The proceedings were procedurally unfair in examining the missing test purchases.

(5) The proceedings were procedurally unfair in the failure to prove meeting notes except by cross examination.

(6) The FTT adopted an irrational method of calculating profits.

(7) The FTT failed to consider the overall outcome.

(8) The FTT wrongly assumed that increases in VAT turnover would be reflected in increases in profits.

(9) The FTT took into account irrelevant considerations and its reasons were inadequate when considering deliberateness.

Discussion

Ground 1 – Section 455 was misunderstood.

8. It is argued that Mr. Chan was not a participator therefore loans or advances to him could not give rise to a s455 charge. If HMRC cannot identify a participator who they claim to have received a loan or advance, then there is no s455 charge. Reliance is placed on the explanation given in Stirling Jewellers v HMRC [2019] UKFTT 44 at [357].

9. It does not appear that this point was raised before the FTT. An appeal to the UT is not an opportunity to argue a different case, i.e. to have a second bite of the cherry by pursuing arguments that ought to have been put but where not pleaded at first instance. That said on a purely legal point that the FTT ought to have considered but did not permission to appeal may be granted. In this case the issue is one of mixed fact and law. The legal point (for the avoidance of doubt it should not be inferred that I consider it correct) only arises if the factual position is ascertained to be as now asserted in the grounds of appeal. It appears that the FTT did not consider the points raised in this ground of appeal because the arguments appear to have been simply that Mr. Chan was not in charge on any of the covert visits. The Appellant was professionally represented. I note that there is no factual finding by the FTT that Mr. Chan was not a participator. Paragraph 5 of the decision simply records that he was the sole director from 1 February 2015 and that the did not own shares in it. I do not consider that there was an obvious point that would have given rise to a need for the FTT to have made factual findings on the specific issues set out in the grounds of appeal in the absence of any dispute by the Appellant on the issue.

Ground 2 - HMRC were required to prove discovery to maintain their corporation tax discovery assessments

10. It is argued that it is not for the Appellant to challenge discovery but for HMRC to prove it and in the absence of an express concession the FTT needed to address it. The grounds refer to paragraph 16 of the decision where the FTT recorded that it understood it to be accepted that HMRC had made a relevant discovery. It is submitted that this was not an appropriate approach.

11. I do not agree. The FTT is not required to go behind an acceptance by a professionally represented Appellant that HMRC had made a relevant discovery and so were entitled to raise the Discovery Assessments. That acceptance amounts to an express concession that discovery is accepted.

Ground 3 – the FTT failed to apply the correct VAT time limit

12. It is argued that the FTT erred by failing to consider if the VAT assessments were made within one year of evidence of facts sufficient to justify the making of the assessments comes to their knowledge (s73(6)(b) VATA 1994.

13. Again, this point does not appear to have been argued before the FTT and the same points made above arise. It is a mixed question of fact and law. At paragraph 72 of the Decision the only issue the FTT considered was whether HMRC could assess beyond the four-year time limit for VAT. Apart from the caution in permitting new points to be argued I am unable to ascertain if this point has any merit as the Appellant has not drawn my attention to any relevant dates. The Appellant has the burden of proving that a ground of appeal is arguable. The Decision does not appear to indicate the dates the assessments to VAT were made.

Ground 4 – Procedural Unfairness in examining the missing test purchases

14. In the grounds of appeal it is submitted that the meal ticket analysis is extremely hard to understand, this was only produced during the course of the hearing and the underlying documents were not produced. The question of whether or not the five test meals had not been recorded was central to the case. It was not fair to permit HMRC to produce their meal ticket analysis during the hearing giving the Appellant no chance to analyse of consider it.

15. Generally a party would require permission from the FTT to produce evidence it intended to rely on at such a late stage and only during the course of the hearing. There is no note in the Decision of any application or decision on such application. I note the FTT recorded that in addition to the bundle of 505 pages it had before it further documents erroneously missed from the bundle. Assuming that the meal ticket analysis was not included in the bundle of documents or in the index to that bundle, the correct time to raise the issue of fairness in relation to the production of such evidence was at the time it was produced. There is no indication in the Decision that the Appellant raised a formal objection or that an adjournment was requested to give the Appellant time to analyse the evidence.

16. The meal ticket analysis appears to have been presented during a meeting on 5 March 2018 so cannot have been entirely new. The meal ticket analysis was not the only evidence the FTT considered in reaching its conclusions on the evidence – see paragraph 66. The underlying documents were found (on the balance of probabilities) by the FTT to have been returned to the Appellant – see paragraph 26. It was open to the Appellant to have produced evidence to counter the assertion that meals had not been recorded. The evidence of HMRC regarding the meal tickets is consistent with the other evidence of suppression of sales including Mr. Chan’s evidence of the percentage of cash sales.

Ground 5 – procedural unfairness in the failure to prove meeting notes

17. It is argued that a key document relevant to the meal ticket analysis was undated and unsigned and not prepared by either of HMRC’s witnesses. In the context of the imposition of penalties for deliberate error it was procedurally unfair for HMRC to prove the accuracy of the document except by putting it to the Appellant in cross examination. It is submitted that the FTT’s decision on the accuracy of the document is inadequate explained it does not explain what was asked and by who.

18. Whilst the FTT in its decision does not set out precisely what questions were asked it records that significant parts of the note were put to Mr. Chan in examination in chief and in cross examination leading to its conclusion that the note was a sufficiently accurate record of the events on that evening. The FTT also specifically refers to Mr. Chan having confirmed that the note was accurate in that it recorded that he produced and gave the attending officers business records including meal tickets, purchase invoices and bank statements and an A4 purple book. The FTT also recoded that Mr. Chan accepted that the cash takings recorded on the note were correct and he accepted that he said that the float on that day was £80. I do not have a copy of the note before me but it would appear that a number of specific parts of the note had been agreed by Mr. Chan as accurate. The grounds of appeal do not set out any specific details on the note that it says were disputed and that the FTT ignored. The weight to be afforded to evidence is a matter for the FTT. It has the advantage of having not only the written evidence but also of hearing and evaluating the oral testimony of witnesses in relation to that evidence. The FTT did not simply accept HMRC’s note as accurate – it arrived at a conclusion on the accuracy of the note after it had been tested against the witness evidence of Mr. Chan.

Ground 6 – the FTT adopted an irrational method of calculating profits

19. It is argued that the FTT’s method of calculating profits was irrational because instead of calculating the correct cash figure for each period by multiplying card takings by 35/65 it multiplied the recorded cash figure for each period by 3.456 on the basis that average cash takings declared across the whole period was c.9%. This was irrational because the percentage of takings in cash varied enormously between 2012 – 2016, before 2015 cash receipts of less than 10% of turnover were recorded but from the second half of 2015 they were always substantially over 10%. In periods where cash sales were recorded closer to 15% multiplying them by 3.456 would enormously overestimate them.

20. The UT can only interfere with the FTT’s factual finding if it is irrational. The thrust of the attack on the approach adopted arises from the fact that the percentage of cash sales recorded varied. The FTT proceeded on the basis of establishing an average percentage of suppression over the whole period. I do not have before me the document ‘Proposed VAT Additions based on Cash to Card analysis’ referred to by the Appellant. In calculating and average across a period it is implicit that where the % varies over that period some periods will be higher and some lower. The average of 9% was calculated from the declared takings over a four-year period. I note that no specific challenge has been made to the FTT’s recording that the Appellant accepted that ‘cash takings were not the 9% declared but of the order of 30-40%’. In some periods the amount suppressed will be overstated but this is balanced out by the periods where the amount is understated. The task of the FTT is to arrive at a figure that is a fair assessment on the evidence of the amount of tax due. The method adopted is not irrational.

Ground 7 – Failure to consider the overall outcome

21. It is argued that the average meal spend of c. £24 was high as it was calculated without taking account of takeaways. The result of the FTT’s estimation of the average meal price implied that there must have been c. 80 additional customers per week – this is an unrealistic addition to the regular business of the restaurant and one that HMRC’s evidence did not support. The FTT erred by failing to consider whether the outcome of their profit reconstruction was reasonable in light of the other evidence as to how the business worked – Stirling Jewellers v HMRC [2020] UKUT 245.

22. I do not accept that the FTT failed to consider whether the outcome of the method of calculation of the suppressed sales was reasonable in light of the business operation. In paragraphs 84- 86 that is precisely what the FTT was doing. The FTT tested the figures by considering the number of additional customers which would be required to generate the additional sales. It found that the increase in customers which are implied was not unreasonable or unrealistic on the whole of the evidence available including the capacity of the restaurant and how busy the restaurant was on the days of observation. Although the grounds of appeal assert that c.80 additional customers is unrealistic I can see nothing in the FTT’s reasoning and conclusions on the evidence before it that could be considered to be irrational. The FTT arrived at a figure for the average meal price based on several pieces of evidence which included the bill values declared on the day of the test – at paragraph 49 take away sales were included in bill values.

Ground 8 – wrongly assuming that increases in VAT turnover would be reflected in increases in profits

23. The grounds of appeal aver that the FTT erred in assuming that increases in VAT turnover would be reflected directly in increases in profits – the cash paid to staff could very substantially reduce the £2000 per week additional cash that the FTT considered to be missing.

24. I see no merit in this ground of appeal. The issue is suppression of sales. The payment of wages in cash is not relevant to the calculation of how much sales figures were suppressed. The Appellant did not argue that the payment of staff wages in cash had not been properly accounted for and recorded. It must be assumed that payment of wages was included in the accounts as an expense thereby reducing profit when computing the Appellant’s corporation tax liability – whether the payment was by cash or any other method.

Ground 9 – irrelevant considerations and lack of explanation when considering deliberateness

25. It is asserted that the FTT misread data when finding that Mr. Chan had to be aware that cash takings were underdeclared because for the entire period declarations were consistently made on the basis of cash takings which were on average below 10% . The % in the period Mr. Chan was director was consistently higher than 10%. Therefore Mr. Chan was being accused of deliberate understatement from a period before he was a director which was an irrelevant factor. The FTT’s reasoning is compressed into two paragraphs and is inadequately explained.

26. The main thrust of the FTT’s conclusion as to whether the conduct was deliberate was because of the scale of the suppression. It is the conduct of the Appellant that is under consideration – Mr. Chan was not being accused of deliberate understatement from a period before he was director. Although brief I consider the FTT has adequately explained why it concluded that the behavior was deliberate.

27. The findings and conclusions reached by the FTT were ones that were open to it. The grounds of appeal disclose no arguable errors of law.

Conclusion and right to apply for an oral reconsideration

1. Permission to appeal is refused on all grounds.

2. If the Appellant is dissatisfied with this decision, it may apply to the Upper Tribunal under Rule 22(4) and (5) of the Upper Tribunal Rules for the application to be reconsidered at an oral hearing. The application for an oral hearing must be made in writing within 14 days after the date on which this decision notice is issued.