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Sam Kudmany's father sent him and his brother to the United Kingdom to escape almost certain death through national conscription and the six-day war with Israel. Since those days, he has trained as an engineer, married an English wife, Edith, and had three sons. In 1994 he left his engineering job in Poole, Dorset, for health reasons and with money borrowed from his wealthy sister (still in Syria and attached to the Ministry of Education there) he purchased a derelict retail premises in Bournemouth with the idea of renovating it and selling it on.
Unfortunately things did not quite work out as planned and, in April 1995, on the advice of the estate agent who was marketing it for him, he opened the premises as a kebab shop, 'The Kasbah'. The resultant appeal took a total of 17 days at tribunal and the decision, 73 pages long, was not received until nearly 14 months after the last day of hearing.
The facts
Mr Kudmany had no experience – he hired a cook to show him the ropes, and a couple of staff to assist him. He later had the whole tribunal laughing as he described how he had purchased his till for £40 from a junk shop in Boscombe. The buttons occasionally stuck and he would bang it on the side to get it working again: 'It was a bargain!', he said. The audit roll part of the till was not functioning; it merely produced receipts as required, and 'Z' or 'X' readings.
Mr Kudmany did hire an accountant, who merely took the information given to him and constructed a set of accounts for Inland Revenue purposes. It was not until he employed Janet Seal as his accountant that he received any pro-active advice on running the business. She showed him how to calculate his costs and that prices must take into account overheads as well as direct costs, and VAT when he registered. She also convinced him that VAT registration was required on turnover limits, rather than profits, and in July 1998 he registered retrospectively from 1 July 1996, with a late notification penalty applying.
As a result of Inland Revenue enquiries into his trading for the year ending 5 April 1997, it was noted that there were a number of missing 'Z' readings from the till. These are consecutively numbered and in some cases there were as many as four or five missing until the next number showed in the records.
After discussion with the client and much analysis, Mrs Seal was able to demonstrate that at least half of the £17,000 apparently missing sales, were not sales at all, but mistakes – Mr Kudmany would make an error, zero the till, and throw away the erroneous 'Z' reading. For example a missing 'Z' reading might represent £3,000 in sales, but be for a single day. As sales in a day were often less than 10 per cent of this amount, it could clearly be seen that these were not sales. As a result of this exercise, adjustments were also made to the VAT accounts to include sales from genuinely missing 'Z' readings, and these were entered onto the February 1998 return.
Forced entry
On 5 February 1998, just before 6 pm, when the shop was due to open, Mr Kudmany was at the cooker, stirring the milk for making yoghurt, when a man and a woman entered the shop. There was no opening in the counter which stretched across the whole shop, and the man levered himself over the counter and confronted Mr Kudmany. He then introduced himself as an officer of Customs and Excise, holding up an identity card which hung from a chain around his neck.
Whilst he engaged Mr Kudmany in conversation, the female officer wandered around the premises to the rear, looking in cupboards and freezers, etc., and noting stock details. No permission was requested and none given – the shopkeeper was quaking in his boots wondering just what was happening. When challenged as to his actions on the witness stand, the officer thought his actions were reasonable – the tribunal made no comment in its decision, and preferred the officer's story that they were invited to climb over the counter. This was part of an exercise being carried out by the Poole VAT Office Cash Team, who visited eight takeaways on that day – there are nine in the road where Mr Kudmany has his shop.
Initial discussions
At that first meeting Sam Kudmany admitted that his takings were not always accurate. When asked to quantify this he could not do so, and the officer suggested the figure of 100 per cent under-recorded – this was later crossed through and 80 per cent written down instead. The officer had come prepared with a video, and upon request replaced the video in the security camera, taking away the one to review – the system had no recorded date and time on the video. The officer read the notes he had made of the meeting to Mr Kudmany and asked him to sign them, which he did.
The officer's original notebook was produced at the hearing and showed that the female officer accompanying him had countersigned the report shortly after the visit concluded – the photocopy of this produced for the bundle was not signed by her, and it became apparent that it was really some months after the event that she had countersigned the notes, but dating and timing it to just after the visit. The tribunal was rightly concerned at this, but nothing turned on this officer's evidence so the issue was mute.
Further visits
Further visits were made on 9 March and 16 March 1998 and Mr Kudmany agreed to complete invigilation sheets for the period 23 March to 18 April 1998, which were delivered on 20 March 1998. The standard letter accompanying these sheets was given to Mr Kudmany which stated that: '…. completion of these sheets will be monitored on a promiscuous basis by officers from both within and without the business premises'.
During the period, on 15 and 18 April 1998, observations were carried out from a venue which the tribunal later visited and agreed gave a good sight of people entering and leaving the shop. The officer also provided a set of eight three-hour videos, which he labelled with dates, two for each of four days, covering the observation periods. It was later ascertained that the officer had wrongly labelled the dates/days and these were corrected by Mr Kudmany as he used them. Upon reviewing these, the officer found them of no use as they did not cover the whole period of trading each day and the labels were confusing as to which period they covered, no dates and times appearing on the screen.
Increased assessments
The result of these investigations was that an assessment of £7,030 was raised for the period Mr Kudmany had been registered, and his registration date was then set back to 1 January 1998 with a further assessment of £5,502.78 for this period. A civil penalty under section 60, VAT Act 1994 was levied in the sum of £11,281, being at the rate of 90 per cent, 10 per cent having been allowed for attendance at interviews. Interestingly, the penalty was notified on 2 October 1998, whereas the first assessment was notified on 6 October 1998 and the second on 13 November 1998, although nothing came out of this at the hearing.
The assessment had been calculated by determining an average price from the invigilation sheets which Mr Kudmany had completed, and multiplying this by the observed takeaway bags on the days of observation. The results were then compared with the declared takings for those days and a 'suppression rate' calculated, which was then applied back to recorded takings. At no time did any of the officers involved in the case look at the appellant's accounting records, apart from a book which Mr Kudmany kept recording takings and purchases, so that he retained a note of these after passing the 'Z' readings and invoices to the accountant.
One of the officers had noted the 'Z' reading for the period of invigilation, when picking up the completed sheets, but only after being offered the information by Mr Kudmany. He described this book as a 'black book' in his witness statement. He was quizzed as to whether this was terminology such as the 'black box' in an aircraft (which is really orange) as the words were in inverted commas, but the officer confirmed that he meant a book coloured black.
Confusion at the tribunal
There seemed to be considerable confusion about this from Customs and it was in actual fact a flowery covered book. A 'black book' was also brought up in one of the two Notice 730 type interviews which Mr Kudmany attended – he was asked to produce his black book, which he denied having. During the course of the hearing the mystery about the 'black book' deepened, and Customs would not say how they had come up with the issue of a black book.
To try to press this point, we obtained a black year 2000 diary and distressed it and placed it with some of the other appellant's records – it did not take long for Customs to bite. They asked for discovery on the black book. We asked: 'Which black book?' to which they replied: 'The one on the appellant's table'. We advised that this had not been entered in evidence and they could not see it – unless, of course, they were prepared to tell us more about the origins of their 'black book'. They would not, and eventually Customs' counsel approached the tribunal with a request for discovery, to which the tribunal chairman allowed time for us to discuss the position.
He had already spotted the black book and it seemed to me that he had guessed the true position, for would we be likely to produce suddenly the 'black book'; was it a copy of the flowery book (also on the appellant's table), and, if not, what else could it be but a plant? Customs finally decided to let us know that in April 1998 they had received an anonymous telephone call advising them that the appellant kept 'off-record' records. We duly let them see our black book. The reaction of Customs' counsel was to apply for costs of wasting the court's time, but the position was reserved – we had after all, found out what we wanted to know. (One officer had his head in his hands – I'm not sure whether he was laughing or crying.)
Fundamental errors
To go back to the calculation of the assessment, it was clear that there was a fundamental error in the arithmetic. The average price had been taken from the invigilation sheets by dividing the total value by the number of lines or sales made, and this was multiplied by the number of takeaway bags leaving the shop. Not only did the invigilation sheets show less in sales than the 'Z' reading for the periods (£725 over the whole period) but the lines completed often showed more than one meal, as a simple example, two, three or even four kebabs on one line. These could have been one package leaving the shop, but on the basis that fast food is likely to be consumed immediately (especially kebabs purchased just after pub closing time) each of these was likely to represent more than one takeaway bag. On bringing this to the officer's attention, quite early on in proceedings, he carried out his own exercise but made no adjustment to the amount to be assessed, although at the hearing he did agree that multi-meals would have made a significant difference to the average price used.
The observation evidence was also challenged, because it was possible to synchronise the videos, despite there being no date or time on them and the labelling having been confused, by taking an unusual incident which was recorded on the observation sheets and identifying it on the video. It could be shown that observations, although generally correct, were not 100 per cent accurate. For example, a man seen leaving the shop with a bunch of tissues was counted as a package leaving the shop, as was another man who entered and left the shop with a rolled up newspaper. No allowance had been made for errors, the videos having been discounted as useless despite being instigated by the officer in the first place.
There was also an issue raised regarding funding received in cash over the period, and paid into the bank, from Mr Kudmany's sister, which Customs had taken as suppressed sales. The tribunal, however, accepted the appellant's evidence, seeing that this cash was paid into the bank mainly in £20 and £50 notes and was therefore unlikely to have been takings from the shop.
A favourable result
Although the tribunal did not quash the assessment on grounds of 'best judgment', it did absolve Mr Kudmany of dishonesty and on the basis that the calculation of the assessment had been fundamentally in error, required its recalculation, awarding the appellant 50 per cent of costs.
This has now been carried out in accordance with the method proposed by the tribunal and the assessment reduced to nil by agreement with the Review and Reconsiderations Officer. That officer stated that if Customs had listened to the issues raised early on in the proceedings, the assessment would probably never have been raised. At the time of writing, the claim for the considerable costs has not been settled with Customs but, on the basis of the result, the appellant has applied for payment of costs in full.
Serious issues
The end result may have been successful, but Mr Kudmany has had a very stressful three years which has almost seen his marriage collapse and seen him suffering from stress-related skin disease. Unfortunately this is a typical story of taxpayers who do not know their rights when confronted by a cold call from Customs, and who do not call in professional assistance because they do not realise they need it at the time. The only way to challenge these assessments is to carry out a more detailed analysis than the officer who raised the assessment, to identify the flaws in calculation, and this can only be done if there are records to evidence the true position.
Dave Jordan is an independent VAT specialist trading as Jordans VAT Consultancy, Lilac Cottage, Fakenham Magna, Suffolk, IP4 2QY. He can be contacted on 01359 268889.
