Mr Paul Whybrew of Kenneth Shaw & Co, Solicitors, for the taxpayers.
Miss Leslie Sperring, deputy district inspector, Southend 1 District.
NOTE OF ORAL DECISION DELIVERED ON 9 JULY 1996
Mr & Mrs Scott run a restaurant known as Farthing Steak House at 513 Southchurch Road, Southend-on-Sea, Essex. They have done so since 1982, at first in partnership with two friends, but since 1984 alone. They appeal against seven further assessments to Schedule D Income Tax for the years 1988/89 to 1994/95 inclusive and two main assessments for the years 1994/95 and 1995/96. All the assessments are in time assessments, so there is no allegation by the Inland Revenue of fraud or wilful default on the part of the taxpayers.The taxpayers were represented by Mr Paul Wybrew, a partner in Messrs Kenneth Shaw & Co, solicitors and the Inspector by Miss Lesley Sperring, Deputy District Inspector of Taxes at Southend 1 District.
I heard oral evidence from each of the taxpayers, from Mr Alan Roger Howard FCA of Messrs Howard and Stapleton, the taxpayers’ chartered accountants, from Mr John Stuart Gwyer of Messrs Levy Gee, from Mr Jonathan Charles Jude an Inspector of Taxes at Southend 1 District, from Mr James Michael Preston, an assistant district Inspector of Taxes at Euston Park District and from Mr Robin Michael Cuthbert, until recently District Inspector at Southend 1 District.Documentary evidence consisted of a large agreed bundle (B1) and a smaller bundle (B2) consisting mainly of business economic exercises carried out by the Inland Revenue. I also inspected one of the Lion Brand books maintained by Mrs Scott and several photographs of the restaurant premises.
The limited statement of agreed facts reads as follows:
1. The taxpayers are Mr Trevor David Scott and Mrs Vivienne Anne Scott trading as Farthings Steak House. The business is the restaurant known as Farthings Steak House situated at 513, Southchurch Road, Southend-on-Sea, Essex.
2. The description of the premises. The premises consisted of a two storey building, on the ground floor there is a restaurant kitchen and next to this a small area for washing up. The toilets are situated at the side and to the rear of the building and are reached by an outside path. On the other side of the pathway are a pond and a variety of shrubs. The garden extends beyond the end of the building and is mainly laid to lawn. There is a small greenhouse sited near the end of the garden. The first floor consist of two bedrooms, a bathroom, WC and a sitting room. This floor is reached by an external wooden staircase. There are no cooking facilities on this floor.
3. Inspection of the premises. The whole of the premises was inspected by the Revenue on 31 October 1994.
4. Proprietorship and history. The proprietors Trevor David Scott and Vivienne Anne Scott are husband and wife and partners in the business. They have been in business since 16 August 1982 originally in joint partnership with M Morcher and Mrs A Morcher. Mr and Mrs Scott became the only partners on 15 August 1984. Accounts are drawn up to 15 August each year and had been submitted on an annual basis to H M Inspector of Taxes. Mr Scott had previously been a self-employed decorator, a washer-upper and then a cook for Whitbread Brewery at one of the Beefeater Restaurants. Mrs Scott previously worked as a waitress at the Beefeater Restaurant. Mr Scott is the only cook at Farthings and Mrs Scott works in the business as a waitress.
5. Private records. Private records made available have been bank statements relating to a joint current account operated by Mr and Mrs Scott at National Westminister Bank Plc, paying-in books and some cheque stubs, also a pass book for an account held by Mrs Scott with the Abbey National Building Society. The records stated above have been seen and inspected by HM Inspector of Taxes.
6. Purchase of property 245 Henley Road, Ilford. Mr Scott’s late widowed mother, Mrs E Scott lived at the above property until her death in June 1994. In 1988 the deceased had the opportunity to buy the property from the council for £29,000. Mr and Mrs Scott acquired a 100 per cent mortgage from the Local Authority to buy the property. The purchase took place in November 1988 and Mr and Mrs Scott and the deceased were the legal joint owners. Mr and Mrs Scott paid the mortgage repayments from their private bank account. The annual insurance payment was paid from the business bank account. On Mrs Scott’s death the property was sold for £48,000 gross, £18,430 nett. The net proceeds were retained by Mr and Mrs Scott.
I supplement those facts from the oral evidence:
1. There is no till at the restaurant. All cash is handled solely by Mrs Scott. Waitresses employed casually on Fridays and Saturdays do not handle cash.
2. Copies of customers’ bills were not retained until recently. During the greater part of the investigation period they were discarded by Mrs Scott after she had recorded the relevant details from them. This she did by entering such details at the end of each day’s trading in the Lion Brand or similar exercise books, each of which have been seen by the Inland Revenue. She was following the practice which she observed at the Whitbread Beefeater Restaurant where she worked previously. That restaurant had no till for food sales.
3. Casual waitresses were employed on Fridays and Saturdays. On those days all tips were handed by Mrs Scott to the waitresses. Mrs Scott kept none. On other days when Mrs Scott was the sole waitress, tips were added to the bar takings and recorded in the Lion Brand books.
4. At weekly intervals Mrs Scott completed the Evrite Account Books. She did so in what the Inland Revenue regarded as an unorthodox fashion, using net of VAT figures.
5. All banking was done by Mrs Scott. She rarely banked coins, but saved them and converted them into notes via the Petty Cash at intervals. Occasionally, particularly near Christmas, deposits for advance party bookings were accepted and banked.
6. Mr Scott controlled the ordering of steak and other meats. He had problems with his suppliers over the years and had to dispose of a significant proportion of the steaks supplied. Wastage was high. He also controlled the supply of keg beer and again wastage was high.
7. During the lifetime of Mr Scott’s mother and after the completion of the purchase of her former council house by her and the taxpayers, she contributed her share of the mortgage payments in cash to the taxpayers at quarterly intervals. She also possessed a hoard of cash, only discovered by the taxpayers after Mrs Scott senior’s death.
8. The taxpayers had a very frugal lifestyle. They ate only one meal per day at lunchtime six days per week. On Mondays they visited and lunched with one or other of Mrs Scott’s mother or Mr Scott’s mother. They have no children and at the relevant time had no hobbies. Their lives were devoted to running the restaurant. Their flat was sparsely equipped, lacking a kitchen. Since Mrs Scott senior’s death they have installed double glazed windows.
9. The Inland Revenue investigation has failed to discover any unaccounted for bankings or any unaccounted for expenditure. Nor has any unaccounted for increase in capital been found.
My first task is to decide whether the Inspector of Taxes made a discovery sufficient to support the making of the further assessments in December 1994.The relevant statutory authority is section 29(3) of the Taxes Management Act 1970 which provides:
’29(3) If an Inspector or the Board discover
(a) that any profits which ought to have been assessed to tax have not been assessed or
(b) that an assessment to tax is or has become insufficient or
(c) that any relief which has been given is or has become excessive the Inspector or as the case may be the Board may make an assessment in the amount or the further amount which ought in his or their opinion to be charged.’In the case of Rex v Commissioner of Taxes for St Giles and St George, Bloomsbury, ex parte Hooper 7 TC 59 the Lord Chief Justice dealt with the question by relying upon the judgment of Baron Park in Allen v Sharpe 2 Exchequer Reports at p.352 where he said:
‘If the language had been to charge and assess all such persons as they honestly and bona fide after due care and diligence believed to be chargeable their assessment would beyond all question be final.’
Let me first consider the question of due care and diligence by the Inspector of Taxes in these appeals. In my judgment due care and diligence has not been exercised by the Inland Revenue. Mr Thomas, the first inspector involved in the Inland Revenue investigation prepared an incorrect business economic exercise because he did not recall the contents of a letter from the taxpayers’ accountants. Mr Jude, who succeeded Mr Thomas had to apologise for Mr Thomas’ error. Mr Jude compounded matters by failing to read the correspondence file when he took over the investigation from Mr Thomas – a serious failure in my view. Since that moment there has been a series of errors by Mr Jude culminating in his demonstrating in the witness box at this hearing that he failed to add correctly columns of figures in one of his business economic exercises.
Turning to the question of honest and bona fide belief, I have come to the conclusion that such belief was not held by the Inspector of Taxes.
Mr Gwyer gave evidence as follows:-
‘In a telephone conversation with Mr Cuthbert on or about 27 July 1995 he told Mr Cuthbert that in his view there was nothing wrong with the taxpayers’ accounts and the Inland Revenue enquiries were not worth powder and shot, to use his words. Mr Gwyer was however worried about the escalating costs of the investigation and hoped to be able to achieve a minimal settlement with the Inland Revenue. Mr Gwyer said that Mr Cuthbert’s response was that his belief was that no business accounts were ever correct. He then asked Mr Gwyer what the taxpayers had said to Mr Gwyer in private’ Mr Gwyer responded that they had made no admissions and had said nothing adverse to their interests. Mr Cuthbert concluded, according to Mr Gwyer by saying that he was not willing to settle these appeals as he wished to get his own back on Mr Howard (the taxpayer’s accountant) who had not only complained to Head Office but had also compelled Mr Cuthbert to go before a General Commissioner with a section 20 notice application in order to obtain the taxpayers’ records.’
I must make it plain that although Mr Gwyer’s evidence went unchallenged in cross-examination, Mr Cuthbert was called as a witness and vehemently denied the allegations made by Mr Gwyer. Mr Cuthbert had no note of his conversation with Mr Gwyer as Mr Cuthbert said that Mr Gwyer had asked that the conversation be without prejudice and off the record.
Is there anything in the evidence to lend support to Mr Gwyer’s claims? I believe that there is. In Mr Cuthbert’s report to Mr Howard of the ex parte application to the General Commissioner for the section 20 notice (to be found at p.57 of Bundle 1) Mr Cuthbert said:
‘The taxpayers have been asked informally to forward the records covered by the s.20 notices but have so far refused to do so, their accountant going so far as to complain to the Revenue’s Head Office.’br>Mr Cuthbert said in evidence that that was purely factual. I reject that. A factual statement would be to the effect that the accountant had complained to Head Office. Using the words ‘oing so far as to’ shows that Mr Cuthbert believed that the accountants’ action was unwarranted in my judgment. In addition, on 10 May 1995 Mr Cuthbert wrote a memo to Mr Jude who had, according to Mr Cuthbert’s evidence, become exasperated with Mr Howard. That memo contains the sentence:
‘The best approach when faced by such an accountant and Howard in particular, is to sit back, and go back to basics and think what to say to the Commissioners if the case goes there.’
The words ‘and Howard in particular’ betray a certain amount of prejudice in my judgment and certainly do not accord with the instructions in the Inland Revenue Handbook to adopt a neutral approach. The correspondence shows that the Inland Revenue approach has been heavy handed in my view throughout.
I cannot dismiss Mr Gwyer’s allegations as suggested by Mr Cuthbert and Miss Sperring. Mr Gwyer was an employee of the Inland Revenue as a tax investigator with London Enquiry branch for 23 years up to 1984. Since then he has been employed almost continuously by well known firms of chartered accountants as a director of tax investigation. Mr Cuthbert had never heard of him before he began to assist Mr Howard in these appeals. I can think of no reason why he should make unwarranted allegations against Mr Cuthbert. Mr Cuthbert suggested the reason was that Mr Gwyer was being paid for his efforts, but he would be entitled to his fees whether or not the taxpayers succeeded in these appeals.In view of all these facts I find that there was no honest bona fide discovery by the Inspector of Taxes when the further assessments were made in December 1994.
In case I am wrong and in order to deal with the main assessments for 1994/95 and 1995/96 I must consider whether the taxpayers’ business records are complete and the accounts prepared from them accurately reflect the trading results.
In my judgment the answer to those questions must be yes.
The Inland Revenue have failed to find any unaccounted for bankings or unaccounted for expenditure or any unaccounted for capital accretions. Their efforts have thus been devoted to the preparation of several business economic exercises, several of which have been shown to be inaccurate or just plain wrong. In any event in my judgment business economic exercises alone can rarely if ever justify the sort of attack mounted by the Inland Revenue in these appeals.What therefore am I left with’
1. A low gross profit rate is alleged and that was the trigger for the initial investigation. Gross profit rate throughout has been almost level and did not alter much in the 1995/96 accounts, when copies of customer’s bills were retained for part of the accounting period. In addition the Inland revenue did not challenge Mrs Scott’s evidence that there is no comparable restaurant business within the local area served by Farthings Steak House. Documentary evidence of a survey by Manchester Business School of the accounts of restaurants nationally showed a gross profit rate of 37.6% for 1991 and 38.1% for 1992 for small businesses and 46.4% for 1991 and 45% for 1992 for all such businesses, below the rates achieved by Farthings Steak House. That evidence was not challenged by the Inland Revenue.
2. The Inland Revenue allege ‘low own goods’. However the taxpayers have had a frugal lifestyle, only recently improved slightly by the proceeds of Mrs Scott senior’s house.
3. The Inland Revenue allege high wastage, particularly of steak and beer. But the taxpayers are not on trial for inefficiency in their business. Mr Scott may not be the best of managers and he may be unduly pernickety as to his requirements in relation to steaks, but that is no crime.
4. The Inland Revenue allege that the taxpayers had insufficient cash to support their lifestyle, rejecting the taxpayers’ explanation of cash from Mr Scott’s mother. I accept their explanation.
5. There is no record of tips say the Inland Revenue. I must make it clear that I accept both Mr and Mrs Scott were witnesses of truth and I accept their explanations of the allegations by the Inland Revenue.
6. Finally, say the Inland Revenue there is the lack of prime records. Again I accept Mrs Scott’s explanation for this situation and point to the fact that since she began to retain copies of customers’ bills at the suggestion of Mr Jude, no significant alteration has occurred to the gross profit rate of the business.
I also note the evidence of Mr Howard and Mr Gwyer who commended Mrs Scott’s record keeping. In addition even Mr Jude admitted in evidence that Mrs Scott’s response to one of his business economic exercises was detailed and highly satisfactory.
I do not overlook the failure to operate PAYE on waitresses’ tips by Mrs Scott, but that had no effect on the business accounts. The failure was due to a lack of knowledge, and was remedied as soon as discovered by Mr Gwyer. Again the failure to apportion the cost of the central hearing radiators in the taxpayers’ flat was corrected when pointed out to them and I dismiss it as de minimis.
I find that the taxpayers’ accounts for the years in question accurately record the profits of their business. I quash each of the further assessments and determine the 1994/95 and 1995/96 main assessments in the figures shown in the accounts. I understand that the capital allowance figures have been agreed between the parties.
Finally, I would like to record that I cannot understand and do not condone the Inland Revenue criticisms of the conduct of Mr Howard, the taxpayers’ accountant. In my view he has represented his clients in a proper and fair manner throughout this long and difficult investigation.
Now there is the question of the application for costs. Regulation 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 states:’Subject to paragraph 2 below the Tribunal in making order awarding the costs of, or incidental to the hearing of any proceedings by it, against any party to those proceedings (including a party who has withdrawn his appeal or application), if it is of the opinion that the party has acted wholly unreasonably in connection with the hearing in question.’
In view of my findings of fact and in particular my acceptance of the evidence of Mr Gwyer I make an order awarding the costs of this hearing to the taxpayers. Such costs, if not agreed are to be taxed in the County Court. I find that the Inland Revenue has acted wholly unreasonably in connection with this hearing, having shown bad faith. However, I do not accept Mr Wybrew’s view that such costs should cover the period from the date of the appeals. The regulation speaks of costs of or incidental to the hearing, not in relation to the appeals. Therefore, for example, the costs of preparation for the hearing are allowable but not the long drawn out pre-trial negotiations.
Appeal allowed and further assessments quoshed