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	England and Wales High Court (Administrative Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> McNicholas Construction Co Ltd v Customs & Excise [2000] EWHC Admin 357 (16 June 2000) URL: http://www.bailii.org/ew/cases/EWHC/Admin/2000/357.html Cite as: [2000] STC 553, [2000] BTC 5225, [2000] STI 88, [2000] EWHC Admin 357, [2000] BVC 255

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MCNICHOLAS CONSTRUCTION CO. LTD. v. HM COMMISSIONERS of CUSTOMS and EXCISE [2000] EWHC Admin 357 (16th June, 2000)

Case No: CO/974/1999

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
CROWN OFFICE LIST
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 16 June 2000 at 0930am

1. McNicholas Construction Company Limited ("MC") appeals against the decision of the VAT and Duties Tribunal (Chairman Stephen Oliver QC) given on 12 January 1999 in relation to appeals against 24 assessments to VAT on MC for the three month periods from June 1990 to March 1996 inclusive. The assessments were all made on 21 March 1997. The aggregate amount of the assessed tax was £1,245,545 plus interest. The Tribunal allowed some of the assessments, with the result that the total amount of the assessed tax was reduced. It is MC's case that the Tribunal should have allowed the appeals in full, and discharged all the assessments of which complaint was made.

2. MC operates as a civil and public works contractor. One of its main activities is that of digging trenches for the laying of cable ducts. Part of its labour force comes from its own employed staff. But self-employed labourers, who usually work in gangs, form the much greater part of the workforce. As a result of investigations started in about 1993, the Commissioners came to the conclusion that companies and individuals purporting to be sub-contractors, whom they suspected to be bogus, were issuing VAT invoices to MC for services of providing labour that they had not provided. MC was claiming VAT relief as input tax of the amounts of VAT paid to these sub-contractors pursuant to the invoices. If in truth the sub-contractors were not making supplies to MC, there could be no obligation to pay them VAT, and no right in MC to claim VAT relief in respect of amounts purportedly paid as VAT.
3. Each of the 24 assessments was raised on the basis that in the opinion of the Commissioners MC had wrongly claimed input relief in respect of the VAT paid to 12 sub-contractors in all. The assessments were raised to recover the tax wrongly relieved in response to the input tax claims. Each assessment for each period was for an amount that was the aggregate of the input tax charged on the invoices issued in the names of the 12 sub-contractors.
4. The assessments for the periods 6/90 to 12/93 required the Commissioners to prove fraud against MC, since they were extended time-limit assessments made outside the normal 3 year time-limit for assessment to VAT. It was the Commissioners' case that MC was party to 3 frauds directed at the Commissioners. The first was supported by an organisation run by a Mr Christopher Lee, and was based on Hi-Tech House, Wembley. In the course of this fraud, VAT invoices were issued to MC in the names of 9 alleged sub-contractors. The second centred on the activities of Mr McHugh (who was employed as a project manager by MC): this related to the production of VAT invoices to MC in the names of 2 alleged sub-contractors. The third alleged fraud concerned the activities of a Mr Cassidy. Cassidy invoiced MC for consultancy services in finding labour purportedly supplied by the 11 alleged sub-contractors who were the subject of the first and second frauds.
5. The Commissioners' case before the Tribunal was that the steps in the fraud were as follows (see paragraphs 32-38 of the Decision). They started typically with the registration for VAT of individuals, whose businesses were ostensibly those of subcontractors. In some cases, the registration of an already VAT registered individual was used. In all cases, the person running the fraud, for example Mr Lee, operated and maintained a bank account in the name of the alleged subcontractor. MC paid into the bank account the amount shown as payable to that subcontractor in the relevant Certificate of Payment to Subcontractor for the services allegedly supplied by the subcontractor in the previous week. Payments were exclusive of VAT. The person running the fraud would arrange to withdraw the amounts required to pay the gangs whose services had allegedly been supplied the previous week. The amounts required to pay the gangs (and to make other disbursements) were a known percentage, usually 86%, of the amount paid into the bank account. The weekly withdrawals were transmitted to the sites, and used to pay the gangs and labourers. Periodically, VAT invoices would be issued to MC in the names of the alleged subcontractors. They were for VAT only, and purported to relate to the earlier supplies of labour made by the alleged subcontractors, covered by the Certificates of Payment to Subcontractor. The VAT was usually paid into the bank account of the alleged subcontractor.
6. The Commissioners' case was that MC, through its employees, perpetrated a fraud on them in relation to all the amounts paid by MC in response to the VAT only invoices. The Commissioners were not the only losers. The Inland Revenue lost income tax that should have been paid to them under the Construction Industry Tax Deduction Scheme. The object of the fraud, so far as income tax was concerned, was to procure that MC should pay the workforce without deduction for income tax. In the absence of 714 "tickets" and 715 vouchers, the main contractor was obliged to deduct income tax from payments to subcontractors, and account to the Revenue for that tax. This "ticketing" fraud involved the assembling of a portfolio of alleged subcontractors who had 714 "tickets", and whose 715 vouchers were used as "cover" for the cash payments destined for the gangs and labourers.
Summary of conclusions of the Tribunal
7. In summary, the Tribunal found that the allegations made by the Commissioners were substantiated in relation to most, but not all, of the alleged subcontractors. It will be necessary to examine parts of the decision in some detail. Before I do that, however, it is probably helpful to state some of the principal conclusions of the Tribunal. These were as follows:

(a) MC failed to satisfy them that, as regards each VAT invoice, there had been supplies of labour to them in the material periods by the alleged sub-contractor to whom the invoice related.
(b) None of the 11 alleged sub-contractors was in a contractual relationship with MC to provide the labour that was undoubtedly provided to MC on its various sites. Whoever it was who provided that labour, it was not the alleged sub-contractors in whose names the VAT invoices were submitted to MC.
(c) The persons who issued the VAT invoices in the names of the alleged sub-contractors (such as Mr C Lee and the other organisers of the fraud that undoubtedly occurred) were not acting as agents of the alleged sub-contractors.
(d) Those involved in the fraudulent operations week-in and week-out over a very long period, in particular Messrs P. Byrne, Keyes, McHugh, McQuaid and John Reid must have known that deductions of input tax would be made for the VAT shown on the VAT invoices that the alleged sub-contractors would submit.
(e) The acts and knowledge of these employees must be attributed to MC.
(f) Accordingly, MC's purpose was to evade tax within the meaning of section 60(1) of the Value Added Tax Act 1994 ("VATA"), its conduct involved dishonesty, and the dishonesty of the named individuals was to be attributed to MC.
(g) VAT was lost as a result of the section 60(1) conduct, so that the Commissioners were able to invoke the extended time-limit provisions contained in section 77(4).
(h) Although they were not satisfied that there was section 60(1) conduct by MC in relation to the Prendergast invoices, the Tribunal held that the Commissioners could rely on section 77(4) in relation to those invoices, because there was section 60(1) conduct in relation to invoices by other alleged subcontractors.
(i) The assessments were made to the best of the Commissioners' judgment within the meaning of section 73(1) of VATA.
(j) The assessments were not made more than one year after the evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessments, came to their knowledge, so that they did not fall foul of section 73(6)(b).
Relevant statutory provisions
8. "60 VAT evasion: conduct involving dishonesty
(1) In any case where -
(a) for the purpose of evading VAT, a person does any act or omits to take
any action, and
(b) his conduct involves dishonesty (whether or not it is such as to give rise
to criminal liability),
he shall be liable, subject to subsection (6) below, to a penalty equal to the
amount of VAT evaded or, as the case may be, sought to be evaded by his
conduct.
.....
61 VAT evasion: liability of directors etc
(1) Where it appears to the Commissioners -
(a) that a body corporate is liable to a penalty under section 60, and
(b) that the conduct giving rise to that penalty is, in whole or in part,
attributable to the dishonesty of a person who is, or at the material time
was, a director or managing officer of the body corporate (a "named
officer"),
the Commissioners may serve a notice under this section on the body
corporate and on the named officer.
.....
(6) In this section a "managing officer", in relation to a body corporate,
means any manager, secretary or other similar officer of the body
corporate or any person purporting to act in any such capacity or as a
director; and where the affairs of a body corporate are managed by its
members, this section shall apply in relation to the conduct of a member
in connection with his functions of management as if he were a director
of the body corporate.
.....
73 Failure to make returns etc
(1) Where a person has failed to make any returns required under this Act
(or under any provision repealed by this Act) or to keep any documents
and afford the facilities necessary to verify such returns or where it appears
to the Commissioners that such returns are incomplete or incorrect, they
may assess the amount of VAT due from him to the best of their judgment
and notify it to him.
.....
(6) An assessment under subsection (1), (2) or (3) above of an amount of
VAT due for any prescribed accounting period must be made within the
time limits provided for in section 77 and shall not be made after the later
of the following -
(a) 2 years after the end of the prescribed accounting period; or
(b) one year after evidence of facts, sufficient in the opinion of the Commissioners
to justify the making of the assessment, comes to their knowledge,
but (subject to that section) where further such evidence comes to the
Commissioners' knowledge after the making of an assessment under
subsection (1), (2) or (3) above, another assessment may be made under
that subsection, in addition to any earlier assessment.
.....
77 Assessments: time limits and supplementary assessments
(1) Subject to the following provisions of this section, an assessment under
section 73, 75 or 76 shall not be made -
(a) more than 3 years after the end of the prescribed accounting period or
importation or acquisition concerned, or
(b) in the case of an assessment under section 76 of an amount due by
way of a penalty which is not among those referred to in subsection (3)
of that section, 3 years after the event giving rise to the penalty.
.....
(4) Subject to subsection (5) below, if VAT has been lost -
(a) as a result of conduct falling within section 60(1) or for which a
person has been convicted of fraud, or
(b) in circumstances giving rise to liability to a penalty under section 67,
an assessment may be made as if, in subsection (1) above, each reference
to 3 years were a reference to 20 years."

The issues
9. Mr Purle QC submits that the decision of the Tribunal should be set aside on the following grounds (I indicate in brackets the paragraphs where I deal with each issue):
(a) There was unfairness in that the way in which the Commissioners were allowed to advance their case before the Tribunal was materially different from that which had been foreshadowed in their Statement of Case, and the Tribunal made findings on allegations on which the MC witnesses had no opportunity to comment, (paragraphs 10 - 17).
(b) The Tribunal's conclusion that the subcontractors did not make genuine supplies to MC is flawed (paragraphs 18 - 38).
(c) The Tribunal's decision on the attribution issue is wrong in law (paragraphs 39 - 56).
(d) The Tribunal erred in law in finding that there was conduct falling within the meaning of section 60(1) (paragraphs 57 - 60).
(e) The Tribunal was wrong to conclude that VAT was lost and that section 77(4) was thereby engaged (paragraphs 61 - 65).
(f) The Tribunal's decision on the best judgment issue was erroneous (paragraphs 66-81).
(g) Their decision in relation to the Prendergast invoices in respect of the extended time-limits was wrong in law (paragraphs 82 - 84).
(h) Their decision on the section 73(6)(b) issue was also wrong (paragraphs 85 - 92).
The Fairness issue
10. The Commissioners' Statement of Case alleged that the fraud involved the payment of money pursuant to bogus invoices to bogus sub-contractors under the pretence of being payment for supply of labour; the money was then repaid to MC in cash less commission, the cash being used to pay "off-record" or "top-up" wages to labour, thereby evading income tax. It also alleged that MC would cause a loss in VAT revenue by offsetting the "fictitious" VAT on purchases from the sub-contractors against the VAT declared on its own sales. In summary, therefore, the Commissioners were saying that the cash was repaid to MC (less commission), and that the benefit to MC of the fraud was that it was (a) able to pay "top-up" wages cheating the Inland Revenue of income tax, and (b) able to cause a VAT loss to the Commissioners, by claiming input relief to which it was not entitled. The Statement of Case stated that three senior employees of MC had been charged with VAT offences, namely Messrs P Byrne, Keyes and McHugh. Others were mentioned too.
11. During the hearing before the Tribunal, the Commissioners were asked by the Chairman to produce an "indictment" setting out more clearly the nature of their case on dishonest evasion of VAT. A document was produced which it was convenient, although inaccurate, to call "the indictment". Mr Purle QC did not object to this document at the time. The indictment alleged that MC "dishonestly and for the purposes of evading VAT through Keyes...Paul Byrne..McHugh..acted or omitted to take any action, particularised below, which conduct resulted in a tax loss by enabling McNicholas to deduct input tax in relation to supplies made by bogus subcontratcors, and knowing that by reason of such conduct such tax loss would occur. The subcontractors were bogus because they did not...amongst other things...."
12. There followed a list of matters relied on by the Commissioners in support of their case that the alleged sub-contractors did not contract to supply labour to MC at all. The indictment then pleaded by reference to groups of alleged sub-contractors, and separately in relation to Messrs Keyes, P Byrne, McHugh and "other McNicholas site managers or site agents" the participatory conduct relied on.
13. It seems to me that the indictment merely made clearer the essence of the case on fraud that had been made in the Statement of Case. Even if, in refining the case, the indictment did to some extent depart from the Statement of Case, this did not occasion any unfairness to MC. If the indictment had caused any prejudice to MC, I am confident that Mr Purle would have objected to it. Accordingly, I reject this complaint.
14. In his rather discursive skeleton argument, Mr Purle made a number of complaints of unfairness. But during his oral argument, the only one that he advanced with any vigour concerned certain adverse findings made by the Tribunal against senior management in MC. The relevant findings appear at paragraphs 260-264 of the Decision, but it is important to set them in their context. Having made findings as to the knowledge of contracts and project managers like Messrs Keyes, P Byrne and McHugh, they concluded at paragraph 259 that, on the basis of that knowledge and in view of their decision on attribution, MC's purpose was to evade VAT. At paragraph 260, the Tribunal turned to consider certain general points "which, we think, tend to reinforce the conclusion that we have already reached as to McNicholas' dishonesty". They then criticised the senior management for failing to provide an effective procedure for checking the genuineness of a subcontractor, and for failing to carry out appropriate checks even when accountants started making enquiries in January 1996. At paragraph 262, the Tribunal said:
".....We think that MC were deliberately trying to distance themselves
from the truth. The same goes for the enquiries that Colin McNicholas
made after the raid and the arrests. Short of asking bland questions of
Keyes, McHugh and P Byrne, to which he got reassuring answers (eg
to the effect that the workers were not paid in cash on the sites), nothing
was done to establish what had really been happening and to try to put
it right. Much the same approach, or lack of it, was taken by M Byrne,
the financial director of MC."

15. The complaint made by MC is that there were no allegations of dishonesty or turning a blind eye against senior management, and these allegations were not put to the relevant witnesses when they were cross-examined. Mr Parker submits that there is no substance in this complaint, since the only relevance of the adverse findings made by the Tribunal was that they explained how a massive fraud could have gone undetected for as long as it did. It was an answer to an argument that MC employees could not have been involved in such a fraud for so long, because it would have been bound to be discovered if they had been.
16. If these matters were indeed not put to witnesses like Mr McNicholas, I think that it would have been better if they had been. Adverse findings of the kind made by the Tribunal are serious for the individuals concerned. But the question for me is whether there was any unfairness here which might have affected the ultimate decision in some way. I am in no doubt that there was none. It is clear from the passages that I have cited that the Tribunal reached their decision on the section 60(1) point without regard to any part that might have been played by the senior management. They merely relied on their findings at paragraphs 260-264 to reinforce the conclusion that they had already reached as to MC's dishonesty.
17. Accordingly, I reject the arguments of unfairness.
Were genuine supplies made?
18. This was a critical question in the appeal, since if the supplies were not genuine, there was no entitlement to claim input relief on the VAT invoices. It was the Commissioners' case that the alleged contracts between MC and the 12 alleged sub-contractors were shams. That being so, the Tribunal decided (paragraph 13), in my view correctly, that, although the statutory obligation to discharge the in-time assessments lay on MC, the Commissioners started with the evidential burden of establishing a prima facie case of fraud against MC. If they failed to make this out, the assessments could not stand. But if the Commissioners' case passed the evidential test, the ordinary statutory rule operated to require the taxpayer to demonstrate that the in-time assessments were wrong.
19. I shall start by summarising the findings of the Tribunal. At paragraphs 47-55, the Tribunal described some of the arrangements for the carrying out of the work. The labourers who did the work were not employees of MC. They worked in gangs. Some came as ready-made gangs of three or four with their own gang leader. Some workers were marshalled into gangs by the site foreman, who was an employee of MC. Some of these workers remained directly subcontracted to MC; others might agree to work for the gang leader, and the gang leader might become the subcontractor. Rates of pay were worked out in advance by MC's managers and communicated to the site agents. The rates related to particular jobs, for example £x per metre dug, and were the same for all gangs irrespective of whether they were working for a subcontractor with a 714 certificate or for a subcontractor without one, and whether they were working as individuals (with or without 714 certificates) directly subcontracted to MC. Contra charges were made by MC and set off against payments due to alleged subcontractors where equipment belonging to MC was used by the gang or individual worker, or where remedial work had to be done at MC's expense. Payment was made at the end of each week when work had been done. The work was measured and agreed by the site agent or site foreman on behalf of MC and someone representing the gang. The amount payable to each alleged subcontractor was entered manually on a "Certificate of Payment to Subcontractor". Where the subcontractor was registered for VAT, he submitted a VAT-only invoice at intervals.
20. At paragraphs 56-64, the Tribunal dealt more fully with the arrangements for the engagement of subcontractors. MC had standard "Labour-Only Sub-Contracts". Only three such documents were produced to the Tribunal, and these were "barely filled in".
21. Later in their decision, the Tribunal analysed the evidence in relation to each of the 12 alleged subcontractors and concluded that, apart from Cassidy, none had made genuine supplies to MC. I do not propose to burden this judgment with an examination of the findings in relation to each subcontractor. I shall confine myself to two of them. The first subcontractor whom they considered was McCormack. Their findings are to be found at paragraphs 121-136. McCormack was registered for VAT in July 1993. He signed an agreement by which he undertook to be bound by MC's terms and conditions, and this was countersigned by Ms Prosvic of MC's accounts department. VAT invoices showing £236,000 of VAT were issued in his name. Input relief in respect of the McCormack invoices was claimed by MC for every accounting period from 12/93 to 3/96. Throughout 1993 and 1994 when certificates of payment show him as having provided labour on a number of sites, he was unseen by and unknown to the MC employees who gave evidence to the Tribunal. Mr Cox, the site agent, who is recorded as having authorised 85 certificates of payment to McCormack said that he could not recall seeing him, although he had been told by gang members that they were working for him. Others who had authorised certificates of payment to McCormack could not recall him. The Tribunal found it "hard to believe" that a genuine subcontractor providing labour on such a regular basis would go unnoticed. No income tax returns were submitted showing the profits of McCormack's trade. The VAT returns submitted by McCormack claimed input tax relief for invoices issued in the names of three subcontractors. The addresses given in the registration applications and on the invoices of the three subcontractors were visited by the Commissioners. Neither the occupants nor the letting agents recognised the names of the subcontractors. Bank accounts were opened in McCormack's name. The deposits and withdrawals were in large amounts, consistent with the conclusion that accounts in his name were receiving payments from MC and were being drawn on to pay labourers. The banking documentation was found at Hi-Tech House. The details on cheques drawn on McCormack's accounts were completed by Mr Lee. The Tribunal concluded that at all material times, McCormack was a functionary in the Hi-Tech House operation rather than a supplier of a large amount of labour at a wide range of MC sites. The Tribunal found support for this conclusion in entries in the Hi-Tech House books to small disbursements to "Gerry". This indicated that McCormack was being rewarded by the organisers of the fraud for his role in it, rather than being treated as a genuine supplier of labour entitled to his profit for that service.
22. The Tribunal also derived support from the activities of Mr P Byrne, the site manager who the Commissioners alleged participated in the fraud so far as it related, among others, to invoices bearing the name of McCormack. The Byrne diaries and related entries in the Hi-Tech House books were considered in detail by the Tribunal at paragraphs 86-102 of their Decision. These documents showed (as the Tribunal found) that Mr Byrne regarded it as his function to work out, each week, how much of the total amount shown as payable in the certificate of payment would be available for payment to the workforce after the 14% deduction, and how the retained balance was to be divided up. They also showed that Mr Lee was closely involved in the exercise. At paragraph 100, the Tribunal concluded that:

"100. The evidence (so far) about Mr P Byrne's involvement raises a
strong inference that he knew the alleged subcontractors were bogus.
If they had been real there would have been no need for the regular
diary entries, the regular deductions of 14 per cent and Mr Byrne's
frequent checks with Mr Lee to make sure the figures were right and
that the payment arrangements were in place. Moreover the evidence
does not show that Mr P Byrne was directing his fraudulent activities
at MC so as to make it the victim of his fraud."

23. Taking all these matters into account, the Tribunal concluded at paragraph 136 that they were "not satisfied that the supplies to which the relevant VAT invoices related were genuine".
24. Clark is a rather striking example of the fraud in operation, although there is only one relevant assessment. The findings are at paragraphs 181-188. Clark made no income tax returns in respect of his self-employed earnings. In interview in 1996, he admitted that he had been doing no work in the construction industry. He had been a taxi driver, and had been introduced to Lee in 1995, because Lee wanted a 715 book. He had signed his 715 vouchers and passed them to Lee. Lee had arranged for Clark to register for VAT, and had told Clark to hand him any paper work that he received from Customs and Excise in relation to the registration. He said that he had signed his VAT returns and passed them in blank to Lee. He was given £1000 each month for his services. He had never seen the VAT invoices submitted to MC, and had no knowledge of the bank account apparently set up in his name, details of which were found at Hi-Tech House. He said that he had had no dealings with MC. The Tribunal accepted the evidence of Clark and rejected the evidence of Mr Walsh adduced by MC to contrary effect (paragraph 188). They concluded that Clark and his 714 certificate were being used by Lee in his dealings both with MC and other contractors. Clark was not a genuine contractor.
25. The Tribunal brought together their conclusions as to the genuineness or otherwise of the supplies purportedly made by the subcontractors at paragraphs 246-252, where they said:
"246. With none of the extended time limit assessments has MC
advanced any evidence that has satisfied us that the supplies in question
were made to them by the alleged subcontractors. In saying this we are
well aware that Certificates of Payment to Subcontractor were duly issued
by MC in the alleged subcontractors' names and that the subcontractors
were duly paid. And we accept that the labourers were duly paid. Those
features do not, however, satisfy us that the subcontractors genuinely
provided the services to MC.
247. There has been no evidence from site agents or foremen demonstrating
that any of the alleged subcontractors undertook to provide labour. There
has been no evidence of the alleged subcontractors agreeing expressly or by
implication that they would provide the required numbers of labourers or
gangs and arrange for them to be at particular sites to work for stated periods.
We have seen no site records showing that J Martin, J B Coffey or G
McCormack had responsibility for providing labourers for the next week or
for a specific job. We would have expected to see site records or notes confirming
that, for example, a particular subcontractor had undertaken to provide eight
labourers at a particular site for "next Monday morning". We infer from the
absence of such records relating to the alleged subcontractors that there were
none. We were told that Health and Safety regulations required records of
labourers to be kept; we were shown none of these and assume that they did
not contain details of the subcontractors who were alleged to have provided
the labourers. John Reid of MC, as we have noted, told us that the information
as to which subcontractor they worked for most often came at the end of the
week from the gangs themselves. Mr Cox, also of MC, said (when questioned
about Prendergast - see below) that he recalled measuring the work of gangs
who said that they were working for Prendergast.
248. Nor did we hear any evidence that we can accept that the alleged
subcontractors engaged labourers to fulfil their commitments to MC. J A
Gallagher and Robert McMillan told us how they came to work under
O'Leary's ticket. But that does not satisfy us that the alleged subcontractors
actually engaged labourers to carry out the tasks for which they, as
subcontractors, had agreed with MC to provide labour. In particular we
heard no evidence to satisfy us that the alleged subcontractors had agreed
with the labourers or their gangmasters, in advance, as to the terms and
conditions on which they were hired.
249. None of the witnesses called for MC, with the exception of Shane
Doonan and P Gallagher (MC site agents in Edinburgh who recalled O'Leary
working on site there), could remember having seen any of the alleged
subcontractors on the sites. This feature alone is extraordinary, bearing in
mind the volume and the regularity of the supplies that each alleged
subcontractor is, according to the Certificate of Payment to Subcontractor,
recorded as having made to MC. By contrast there were several sightings
of Lee.
250. We heard no evidence from anyone whose immediate task it was to
assemble the details that were required for the purpose of working out the
amounts shown as payable to the alleged subcontractors in the Certificates
of Payment to Subcontractor. We heard from Messrs Reid and Cox, both
of whom authorized numerous Certificates of Payment to Subcontractor
showing payments as due to the alleged subcontractors. Neither were able
to satisfy us that they had checked that the subcontractors were real.
251. None of the alleged subcontractors have been shown to have had places
of business, books and records that we would expect of labour suppliers
doing business as self-employed subcontractors on the scale shown by the
Certificates of Payment to Subcontractor issued by MC.
252. The features referred to in the last five paragraphs are, we think,
consistent with findings of fact that the alleged subcontractors never made
the supplies of labour attributed to them in the Certificates of Payment to
Subcontractor. This must have been well known to the MC personnel
engaged at the sites and, we think, to more senior staff such as Gerry
McQuaid, Nicholas Bailey and J Reid (see below). These conclusions
are equally applicable to the assessments for in-time periods as they are
to extended time limit assessments."

26. So much for the findings of the Tribunal. Mr Purle submits that the Tribunal's conclusion is wrong in law. He does not seek to challenge any of the primary findings of fact as being wrong in law within the meaning of Edwards v Bairstow [1956] AC 14, 36. Rather, he contends that the only reasonable conclusion that could have been reached on the primary facts as found was that the subcontractors made genuine supplies to MC of the labour that worked for MC on the various sites in question. It is immaterial that the supplies were tainted with illegality, in the sense that the scheme was structured by the organisers of the fraud so as to defraud the Inland Revenue of income tax, and (if the Tribunal was right), also to defraud the Commissioners of VAT. Mr Purle says that there are two powerful indications that there were valid contracts between the subcontractors and MC for the provision of labour at MC's sites. First, suppose that, following payment by MC to a subcontractor pursuant to a certificate of payment, the men were not paid, and they came to seek payment directly from MC. Mr Purle submits that MC would have a complete answer to such a claim. MC would say "we have paid the subcontractor for this work; your remedy lies against him". Secondly, there is the question of liability for defective work. If a labourer carried out work defectively and caused MC loss, Mr Purle submits that it is obvious that MC's remedy would lie against the subcontractor, and not against the labourer.
27. Mr Purle argues that there were only three possibilities as to the true position with regard to the contractual status of the labourers, viz they were engaged (a) directly by MC pursuant to individual contracts with them; (b) by the subcontractor whose name was shown on the certificate of payment; or (c) by the person who in fact controlled the subcontractor, eg Mr Lee.
28.As regards (a), the Tribunal did not make any finding that the men were in direct contractual relationships with MC to supply their labour to it. It was common ground that all the men were paid for all the work that was reflected in the VAT invoices which are the subject of the appeal, and that the only payments made by MC were to the alleged subcontractors. Mr Purle submits that there was no material on which the Tribunal could properly have found that there were individual contracts between MC and the labourers. The money paid by MC to the subcontractors was not the men's money. There was no evidence that the money was held for the account of the men, or that it was the intention of those responsible in MC for making payments for work done that the money be paid for the account of the men. Mr Purle says that it must follow that the correct analysis of the labourers' relationship was as in (b) or (c).
29. Mr Parker QC submits that the Tribunal were justified in finding that, save in respect of Cassidy, there was no genuine contractual relationship between MC and the subcontractors, and that each purported subcontract was a sham. It was a sham by which the name of a 714 certificate holder was used to provide tax free wages. If the fraud broke down, the labourer would not look to MC for payment, because he was a party to the fraud, and as a knowing participant in the fraud must be taken to have accepted the risk that the fraud might break down. The acceptance of such a risk by a knowing participant in the fraud is consistent with, and indeed an intrinsic element of, the sham. The fact that the labourer would not look to MC does not, therefore, help to show that such contractual supplies were genuine. The contra payments shown from time to time were only a book keeping exercise, and a convenient way of ensuring that the defaulting labourer suffered the appropriate deduction. It would have been a nonsense for MC to seek to charge contra entries or to claim damages from, say, Mr Clark the taxi driver. Faced with such a charge, he would simply have replied that he was bogus qua subcontractor, as MC well knew, and that MC should look elsewhere to recover from the gangs who did the defective work.
30. Persuasive though Mr Purle's arguments are, I cannot accept them. For reasons which I shall develop when I come to deal with the section 60 issue, in my opinion the Tribunal was right to decide that the knowledge, intentions and acts of the MC managers, P Byrne, Keyes and McHugh in relation to the fraud must be attributed to MC. That is important, because, in determining whether there was a genuine contract between MC and the subcontractors, it is necessary to ask whether there was a common intention between them to make contracts for the supply of labour. That question must be answered on the basis of a consideration of the objectively ascertained facts. As Mr Purle rightly points out, the important incidents of a contract for the supply of labour would include an obligation in MC to pay for the work, and an assumption of responsibility by the subcontractor for any defective work or for any damage caused to MC in the course of the carrying out of the work.
31. The Tribunal considered the significance of the fact that the labourers were paid in some detail at paragraphs 81-85. They held that it did not follow from the fact that the men were paid that they were supplied by the alleged subcontractors to MC. They said that "the alleged subcontractors were mere names entered in the Certificates of Payment to Subcontractors and used as nominal holders of the accounts from which the wages were drawn by Mr Lee and his colleagues" (paragraph 84). The various examples relied on by Mr Purle at paragraph 85 did "no more than show that the individuals were afforded the benefit of his 714 ticket and so enabled to participate in the fraud by suffering a 14% deduction from their earnings rather than a deduction at the basic rate plus two per cent for the CITB levy".
32. In the light of their findings of fact, it was hardly surprising that the Tribunal were of the view that there was no common intention on the part of MC and the subcontractors that the latter should contract to supply labour to the former. As found by the Tribunal, the arrangements with 11 out of the 12 subcontractors were shams, and were known and intended to be shams by MC and each alleged subcontractor. The Tribunal were entitled to conclude that there was no intention by them that the ordinary incidents of a contract for the supply of labour should apply. The alleged subcontractors knew that they were not genuinely effecting supplies of labour to MC. Their names were being used in order to perpetrate a fraud on the Inland Revenue. The documentation produced was not in connection with genuine transactions for the supply of labour. It was produced in order to further the fraud. All of this was known to the subcontractors and (through Messrs P Byrne, Keyes and McHugh) to MC. The Tribunal dealt explicitly with the question of payment. There appears to have been a common understanding between the parties to these sham arrangements that contras could be deducted. That does not prove that it was accepted that there was an implied term of a genuine contract for the supply of labour that the work should be carried out properly.
33. It is time to address the question posed by Mr Purle: if a labourer was not paid for his work, was he entitled to be paid by MC? The Tribunal did not answer this question, and indeed, as I have said, did not make any finding as to the contractual status (if any) of a labourer. In view of the fact that the men themselves were parties to the fraud on the Inland Revenue, it is hardly surprising that the facts surrounding the engagement of the men were of less than limpid clarity. As the Tribunal found (paragraph 47), the men worked in gangs, some in ready-made gangs with their own gang leader, and others were marshalled into gangs by the site foreman. Some of the workers might agree to work for the gang leader who might become one of MC's subcontractors. The contractual position of the labourers (if any) was obscure, and may well have varied according to the circumstances. They may well in reality have been engaged by MC, but on terms that, in order to further the fraud, it should be made to appear that they were in fact being engaged by the subcontractors. In my judgment, the Tribunal were not required to make a finding as to who engaged each of the men or gangs of men whose work was reflected in the VAT invoices which are the subject of the appeal. It was sufficient that they should be satisfied, as they were, that the men were not in a contractual relationship with the subcontractors, and the subcontractors were not in a contractual relationship to supply the labour to MC.
34. I was referred by Mr Purle to a passage in the judgment of Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, 802, where the meaning of a "sham" in law is explained as follows:
"...acts done or documents executed by the parties to the "sham"
which are intended by them to give to third parties or to the court
the appearance of creating between the parties legal rights and obligations
different from the actual legal rights and obligations (if any) which
the parties intend to create. But one thing, I think, is clear in
legal principle, morality and the authorities...is that for acts or
documents to be a "sham", with whatever legal consequences follow
from this, all the parties thereto must have a common intention that
the acts or documents are not to create the legal rights and obligations
which they give the appearance of creating".
In my view, the decision of the Tribunal is entirely consistent with this explanation of a "sham". Whatever legal relationship, if any, the subcontractors and MC (acting through Messrs P Byrne, Keyes and McHugh) intended to have, the Tribunal had ample material to justify finding that both parties to each alleged subcontract intended their relationship to be different from that of a contract to supply labour.
35. There remains the question of agency. If his primary submission that there were supplies by the subcontractors is rejected, then Mr Purle submits in the alternative that the supplies were made by Mr Lee and the other identified organisers of the labour supply arrangements. This alternative argument, which proceeds on the footing that the alleged subcontractors were not real subcontractors, is in two alternative parts. The first is that, to the extent that the alleged subcontractors were fronts for others, such as Mr Lee, those others were registrable subcontractors. On this argument, the labour was supplied by them, and that supply gave rise to a liability in MC to pay VAT, and a right to deduct input tax: see Ellen Garage (Oldham) Ltd v Commissioners for Customs and Excise [1994] VATTR 392 (12407). The second is that, if Mr Lee and the others were not making supplies to MC as principals, they were doing so as agents for the alleged subcontractors. In short, Mr Purle submitted that, by giving Mr Lee and the others, their 714 certificate and 715 vouchers, the subcontractors in question authorised them to make use of them to make contracts with MC on their behalf.
36. The Tribunal dealt with the second of these arguments at paragraph 80. Having referred to Commissioners of Customs and Excise v Video Exchange [1992] STC 220, they said:
"80. We now turn to Mr Purle's third argument that the person who is from
time to time making use of a 714 ticket, issued in the name of an alleged
subcontractor, has authority from the alleged subcontractor and that that
authority makes that person's "real" supplies of gangs of workmen for MC
supplies by him as principal. In support of this argument we were referred to
the decision of McCullough J in Commissioners of Customs and Excise and
Video Exchange [1992] STC 220. In that case the taxpayer company sold
secondhand musical equipment obtained from original owners who were not
registered for VAT. The terms of trade stated that it acted as the original
owners' agent. It was assessed on the basis that it had made the sales as
principal. The Court ruled, in the light of the facts and documentation, and
in the absence of any allegation that the written agreement was a sham, that
it was acting as the original owners' agent. Here, by contrast, there are no
documents and no evidence that in any way substantiate the argument for
MC that Mr C Lee (and other organizers of the fraud) were acting as the
alleged subcontractors' agents. When the alleged subcontractor is prevailed
on to commit the criminal act of handing over his 714 ticket for use by a
third party he does not, in our view, enter into an agency contract. We are
quite unable to accept that by that single criminal act he makes himself
responsible for the potentially wide range of labour only arrangements,
lawful or otherwise, in which the handler for the time being of the ticket
becomes involved."
37. The Tribunal did not deal explicitly with the first argument based on the Ellen Garage principle. It is clear that, if the true analysis of the facts was that Mr Lee and the other organisers of the fraud were in fact supplying labour to MC through the agency of the alleged subcontractors, then the Ellen Garage principle would apply, and the claims to input relief would be good. But it is implicit in the reasoning of the Tribunal that led them to reject the primary arguments advanced on behalf of MC and the agency argument that was dealt with at paragraph 80, that, if they had expressly adverted to the Ellen Garage argument, they would have rejected that as well. If the alleged subcontractors (putative agents for the purpose of this argument) were not making genuine supplies of labour of MC, it is difficult to see how the putative principals could have been doing so through the agency of the subcontractors. If they had dealt with the point in terms, the Tribunal would undoubtedly have rejected the argument on the grounds that Mr Lee and the other organisers of the fraud were not engaged in the supply of labour, but in the organising of a fraud in which documents were used which purported to show that labour was being supplied to MC by the alleged subcontractors.
38. As for the second argument, in my judgment, the Tribunal's reasoning cannot be faulted. There was no evidence that Mr Lee and the others were agents of the alleged subcontractors. The Tribunal were correct in deciding that the mere fact that the alleged subcontractors handed over 714 tickets for use in the furtherance of the fraud was insufficient to make the alleged principals responsible for the arrangements made by Mr Lee and the others.
Attribution
39. The Tribunal discussed the applicable principles at paragraphs 22-28 specifically in relation to the section 60(1) and 77(4) issue. The question is whether the dishonest acts and intentions of the site managers could be attributed to MC. The Tribunal applied what in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] AC 500 Lord Hoffmann referred to as a "special rule of attribution" which had to be devised for the purpose, if the true construction of the relevant statutory provision so required: see pages 507D-F and 511B-D. Adopting that approach, the Tribunal pointed out that compliance with VAT rules is required at every point of supply, and at every point when supplies are being used by a trader. They continued:
"24. ..... When therefore the words of section 60(1) pick on a person doing
"any act or" omitting "to take any action", they will be referring to persons
at relevant points of the trader's business operation and not just to employees
who have the special responsibility for compiling and submitting the VAT
returns. Here the taxable person, MC, provides construction services at
sites throughout the UK. Responsibility for making the supplies lies as much
with senior management as with those with management authority at the
sites. The acts and omissions and the honesty or dishonesty of the latter
are, as we interpret section 60, matters to be brought into account in deciding
whether the company in question is to be liable to a civil penalty or, as here,
whether it is to face extended time limits assessments. Thus, in addressing
the question posed by Meridian of whether the relevant statutory provisions
(ss. 77(4) and 60(1)) on their proper construction require the attribution to
MC of the knowledge, acts and omissions of site managers and site agents,
the answer must we think be : in principle, Yes."
40. The Tribunal considered that the same conclusion was reached by applying what they called "the vicarious liability route" taken in Director General of Fair Trading v Pioneer Concrete (UK) Ltd [1995] 1 AC 456. They next discussed the so-called "Hampshire Land principle". This is based on the decision in In re Hampshire Land Company [1896] 2 Ch 743. I shall return later to consider the scope of this principle. The Tribunal treated it as establishing that, where an employee is party to an arrangement which is a fraud on the true interests of the employer company, then his acts and knowledge may not be attributed to the company. The Tribunal decided that the Hampshire Land principle did not prevent attribution in this case, since the frauds to which the site agents were a party were not frauds on the true interests of MC. The frauds were committed against the Commissioners, not against MC, whose position was "neutral". This is because the amounts that it had paid purporting to be VAT had been recovered as input tax.
41. Mr Purle submits that this part of the Tribunal's decision is wrong for a number of reasons. First, he says that section 60 should be interpreted in the light of section 61. Section 61 provides that where it appears to the Commissioners that a body corporate is liable to a penalty under section 60, and that the conduct giving rise to that penalty is attributable to the dishonesty of "a person who is, or at the material time was, a director or managing officer of the body corporate (a "named officer"), then the named officer may become liable to pay a portion of that penalty. Subsection (6) defines a "managing officer" as "any manager, secretary or other similar officer of the body corporate or any person purporting to act in any such capacity or as director..." Mr Purle contends similarly that, for the purposes of section 60(1), it can only be the acts and knowledge of a "named officer" within the meaning of section 61(1) that can be attributed to a company. I do not agree. Section 61 is dealing with a different issue from section 60, namely that of when a company's officers may be held liable for a portion, or the whole, of that company's penalty under section 60(1). There is no such limitation in section 60. Parliament must be taken to have intended that section 60 should be interpreted in accordance with the normal rules of attribution. Nor do I accept the argument advanced by Mr Parker that section 61 assists the Commissioners' case on attribution. He relies on what he contends is the very wide definition of persons who can be "managing officers" within the meaning of section 61(6). These are all persons to whose dishonesty the conduct of a company which gives rise to a penalty under section 60 may be "attributed" (see section 61(1)). But the meaning of the word "manager" or "officer" must depend on the context in which it is used: see the discussion in R v Boal [1992] 1 QB 591, 595H-598A. In my view, in the context of section 60 and 61, a manager does not include a contracts manager or site agent, whose responsibility is for organising work on construction sites. Section 61 is aimed at persons who are involved in managing the affairs of the company, rather than running individual contracts. That would include persons in charge of departments of the company, including the accounts department.
42. Mr Purle's next, and more fundamental submission is that, in determining whether to attribute the acts and knowledge of the managers to MC, the Tribunal should have applied the "directing mind and will" test. He submits that on a proper application of that test, the only persons whose acts and knowledge could be attributed to MC were those responsible for running the company's affairs, which I take to be a reference to the board of directors, and those responsible for running the VAT operations of the company. The Tribunal made findings against senior management that they turned a blind eye to the fraud (paragraphs 260-264), and these findings, as we have already seen, are the subject of separate complaint. But I leave those on one side for present purposes. It is clear that the essential basis of the Tribunal's decision on attribution was that the acts and knowledge of the site managers should be attributed to MC. Although this conclusion was stated most clearly in relation to the extended time assessments, (ie the section 60(1) and 77(4) issue), the same reasoning was applied in relation to the in-time assessments too. Mr Purle submits quite simply that the site managers were not the "directing mind and will" of the company for the purposes of its VAT activities, and that accordingly their acts and knowledge cannot be attributed to the company.
43. Mr Parker submits that the Tribunal's approach set out in paragraphs 22-28 was correct.
44. It is common ground that the knowledge and dishonest acts of the site managers could not be attributed to MC by virtue of the primary rules of attribution, the general rules of agency or the ordinary rules of vicarious liability of an employer for the acts of or defaults of his employee. As was made clear by Lord Hoffmann in Meridian, the question whether the acts or defaults of an employee of a company may nevertheless be attributed to the company is a matter of interpretation of the relevant substantive rule. In some cases, the acts or defaults of the "directing mind and will" of the company, or at least those of the directing mind and will of its relevant functions, will be attributed to the company. In others, the acts or defaults of other employees who cannot be said to be the "directing mind and will" are to be attributed. The question in each case is whether attribution is required to promote the policy of the substantive rule, or (to put it negatively) whether, if attribution is denied, that policy will be frustrated.
45. Thus in Tesco Supermarkets Ltd v Nattrass [1972] AC 153, it was held that the acts and defaults of the manager should not be attributed to the company, since otherwise the statutory defence of due diligence would be rendered nugatory, and the clear intention of Parliament would be thwarted. In the Pioneer Concrete case, the employees made a restrictive agreement in breach of an order of the court, and in defiance of a clear express prohibition by the board of directors. The Court of Appeal had accepted Pioneer's argument that it was not liable because of the prohibition by the directors. The House of Lords took a different view. They held that to accept that argument would allow a company to enjoy the benefit of restrictions outlawed by Parliament and the benefit of arrangements outlawed by the courts. Recourse to the "guiding will" rule for attribution would lead to this unacceptable result. As Lord Nolan put it (475A-D):
"The Act is not concerned with what the employer says but with
what the employee does in entering into business transactions in the
course of his employment. The plain purpose of section 35(3) is
to deter the implementation of agreements or arrangements by which
the public interest is harmed, and the subsection can only achieve that
purpose if it is applied to the actions of the individuals within
the business organisation who make and give effect to the relevant
agreement or arrangement on its behalf".
46. In Meridian itself, investment officers of a company used funds managed by the company to acquire shares in a public issuer. The company thereupon was required by statute to give notice that it had become a substantial security holder. It did not do so, and proceedings were instituted against the company for breach of statute. The Court of Appeal in New Zealand held that the knowledge of the officers should be attributed to the company on the basis that one of them was its "directing mind and will". The Privy Council dismissed the appeal. It did not decide whether the officer was in fact the company's directing mind and will. Lord Hoffmann considered the question of attribution by examining the policy of the substantive rule. At page 511C, he said:
".... The policy of section 20 of the Securities Amendment Act 1988 is to
compel, in fast moving markets, the immediate disclosure of the identity
of persons who become substantial security holders in public issuers. Notice
must be given as soon as that person knows that he has become a substantial
security holder. In the case of a corporate security holder, what rule should
be implied as to the person whose knowledge for this purpose is to count
as the knowledge of the company? Surely the person who, with the
authority of the company, acquired the relevant interest. Otherwise the
policy of the Act would be defeated. Companies would be able to allow
employees to acquire interests on their behalf which made them substantial
security holders but would not have to report them until the board or
someone else in senior management got to know about it. This would
put a premium on the board paying as little attention as possible to what
its investment managers were doing. Their Lordships would therefore
hold that upon the true construction of section 20(4)(e), the company
knows that it has become a substantial security holder when that is
known to the person who had authority to do the deal. It is then obliged
to give notice under section 20(3)."
47. I was also referred to the decision of the Court of Appeal in Odyssey Re (London) Ltd v OIC Run-Off Limited (formerly Orion Insurance Company PLC), 13 March 2000. The appeal raised several issues including: (a) did Mr Sage, a witness, commit perjury during a trial, and (b) if he did, was the perjury to be attributed to Orion, the party on whose behalf the evidence was given? The Court of Appeal held that Mr Sage did perjure himself, and by a majority (Buxton LJ dissenting) that his perjury was to be attributed to Orion. The perjured evidence was not procured or knowingly adopted by Orion, nor was it given by someone who was part of the company's directing mind and will. The approach of the majority of the court was to decide whether to attribute the perjury to the company in the light of the policy of the substantive rule which was that a person who procured a judgment in his favour by fraud ought not to be allowed to profit from the fraud (page 12 of transcript).
48. In my view, the Tribunal were correct in attributing the acts and knowledge of the site agents to MC. I start with section 60(1) and 77(4) simply because the Tribunal's reasoning in paragraph 24 is directed to those provisions. The policy of those provisions is to discourage the dishonest evasion of VAT, and to give the Commissioners an extended period in which to make assessments where VAT has been lost as a result of the dishonest evasion of VAT. That policy would be frustrated if the acts and knowledge of all those employees who have a part to play in the making and receiving of supplies were not to be attributed to the company for the purposes of section 60(1) and 77(4). If the only persons whose acts and knowledge may be attributed to a company are those who are responsible for running the affairs of the company as a whole, and those involved in its VAT activities, then the policy to which I have referred would be seriously undermined. As Mr Parker points out, it would encourage those prepared to engage in fraud or turn a blind eye to fraud to set up separate VAT accounts departments for that purpose. Moreover, it would discriminate against small companies that do not have separate accounts departments insulated from what happens on site or in contracts departments.
49. I would hold, therefore, that the acts and knowledge of all those employees of a company who have a part to play in the making and receiving of supplies, as well as those involved in its VAT arrangements, are to be attributed to the employing company for the purposes of section 60(1) and 77(4).
50. I now return to the question whether the knowledge and acts of the MC site managers in relation to the fraud is to be attributed to the company for the purposes of all the assessments, whether in-time or extended. Normally, questions of fraud are not relevant to in-time assessments made under section 73(1). But where the assessment is made on the basis that it appears to the Commissioners that a return is "incorrect" on the grounds that input relief has been claimed in respect of sham transactions, then the question arises whether the dishonest acts of the employees who were party to the shams is to be attributed to the company. The Tribunal correctly recorded at paragraph 22 that the Commissioners' case was that the dishonest conduct of the site managers should be attributed for all assessments. The policy of VATA is to allow "so much of the input tax for the period...as is allowable by or under regulations....as being attributable to supplies within subsection (2)"(see section 26(1)). Section 26(2) covers "....(taxable) supplies made or to be made by the taxable person in the course or furtherance of his business..." The Act is concerned with genuine supplies, not sham transactions under the guise of which fictitious supplies are purported to be made. The clear policy of the Act would be undermined if input relief could be claimed in respect of supplies purportedly made pursuant to sham transactions made by employees of a company in the course of their employment. The fact that the employees are aware of the true nature of the arrangements, but that those who are responsible for managing the affairs of the company as a whole and those involved in its VAT affairs are not, should not in my judgment be something of which the company ought to be allowed to take advantage.
51. I turn now to consider the Hampshire Land principle. Mr Purle submits that the Tribunal was in error in not treating the case as falling within the principle. He contends that MC was in a very real sense a victim of the fraud in that it paid the VAT shown on each of the invoices, and, if the Commissioners' argument is accepted, they were not entitled to claim input relief. On any view, the company suffered a cash flow detriment in paying the VAT and only subsequently being credited with the input relief.
52. It is necessary first to examine the scope of the Hampshire Land principle. It has been variously described as an exception to the general rule of attribution, or a special rule of attribution. In the Hampshire Land case, money was lent by a building society to a company. The secretary of the building society and the company was the same person, Mr Wills. He knew that there was an irregularity in the authorisation given by the company in that the shareholders had not been told, as required, that the borrowing was in excess of the directors' borrowing powers without the shareholders' consent. The question was whether the building society could prove in the company's winding-up, or were prevented from doing so on the grounds that Mr Wills' knowledge of the irregularity was to be attributed to the building society. Vaughan Williams J held that his knowledge could not be attributed to the building society. He said:
"... common sense at once leads on to the conclusion that it would be
impossible to infer that the duty, either of giving or receiving notice,
will be received where the common agent is himself guilty of fraud.
It seems to me that if you assume here that Mr Wills was guilty of
irregularity - a breach of duty in respect of these transactions - the
same inference is to be drawn as if he had been guilty of fraud. I do
not know, I am sure, whether he was guilty of actual fraud; but whether
his conduct amounted to fraud or to breach of duty, I decline to hold
that his knowledge of his own fraud or his own breach of duty is,
under the circumstances, the knowledge of the company [sc. the society]."

53. This decision was approved and applied by the House of Lords in J C Houghton and Co v Nothard, Lowe and Wills Ltd [1928] AC 1. That was a case in which the directors who had the relevant knowledge were parties to what Viscount Dunedin said was "a fraud on the true interests of the company" (page 15). He regarded it as a matter of "common sense" that in those circumstances the knowledge of the directors should not be attributed to the company. So too did Viscount Sumner who said (page 19):
"It has long been recognised that it would be contrary to justice and
common sense to treat the knowledge of such persons as that of their
company, as if one were to assume that they would make a clean
breast of their delinquency".
54. In Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] 1 Ch 250, the principle was applied in relation to an alleged conspiracy by two directors to sell shares in the company at an overvalue in order to finance the purchase of the company's share capital in breach of section 54 of the Companies Act 1948. The question was whether the company was debarred from seeking relief in relation to the purchase of the shares on the grounds that, through its directors, it was aware of what was going on. Buckmaster LJ asked whether the company could sensibly be regarded as a party to the conspiracy, and concluded that it could not be so regarded. The purpose of the alleged conspiracy was to deprive the company of some of its assets. The company was the party at which the conspiracy was aimed. It was the victim of the conspiracy. He explained that it was:
"a well-recognised exception from the general rule that a principal is
affected by notice received by his agent that, if the agent is acting in
fraud of his principal and the matter of which he has notice is relevant
to the fraud, that knowledge is not to be imputed to the principal."
55. In my judgment, the Tribunal correctly concluded that there should be no attribution in the present case, since MC could not sensibly be regarded as a victim of the fraud. They were right to hold that the fraud was "neutral" from MC's point of view. The circumstances in which the exception to the general rule of attribution will apply are where the person whose acts it is sought to impute to the company knows or believes that his acts are detrimental to the interests of the company in a material respect. This explains, for example, the reference by Buckmaster LJ to making "a clean breast of their delinquency". It follows that, in judging whether a company is to be regarded as the victim of the acts of a person, one should consider the effect of the acts themselves, and not what the position would be if those acts eventually prove to be ineffective. As the Tribunal pointed out, in Pioneer Concrete the company suffered a large fine for contempt of court on account of the wrongful acts of its managers. The fact that their wrongful acts caused the company to suffer a financial penalty in this way did not prevent the acts and knowledge of the managers from being attributed to it.
56. The Hampshire Land principle or exception is founded in common sense and justice. It is obvious good sense and justice that the act of an employee should not be attributed to the employer company if, in truth, the act is directed at, and harmful to, the interests of the company. In the present case, the fraud was not aimed at MC. It was not intended by the participants in the fraud that the interests of MC should be harmed by their conduct. In judging whether the fraud was in fact harmful to the interests of MC, one should not be too ready to find such harm. In my view, the cash flow point made by Mr Purle comes nowhere near being serious enough to trigger the principle. Looking at the facts of this case from a common sense point of view, there was no VAT fraud or harm to the interests of MC. The Tribunal were entitled to reach this conclusion. It was the correct conclusion to reach.
Section 60(1) "for the purpose of evading VAT"
57. The Tribunal found that Messrs P Byrne, Keyes, McHugh and others were involved in the fraudulent operations. None of these persons gave evidence. At paragraph 257, the Tribunal said that they must have known that VAT invoices would follow the Certificates of Payment relating to the non-existent supplies of labour, and held that they must have known that deductions for input tax would be made for the VAT shown in those invoices in MC's quarterly returns. They continued:
"258. In conclusion on this point, if the acts and knowledge of MC's
employees are properly to be attributed to it, then MC will be treated
as having carried through the transactions involving non-existent supplies
and the issue of VAT invoices based on them. It must follow that, in
making quarterly returns which claimed to deduct the purported input
tax on the non-existent supplies, MC's purpose was to evade VAT. We
think it is inescapable that the acts and knowledge of the relevant MC
employees must be attributed to it."
58. They then referred back to their earlier decision on the attribution point, and at paragraph 259 concluded that they were therefore satisfied that MC's purpose was to evade VAT. They recognised that it was "inherently unlikely" that a company like MC would commit frauds as alleged by the Commissioners, but decided that the evidence against MC was of sufficient weight to "more than counter-balance" that unlikelihood.
59. The approach of the Tribunal, therefore, was to attribute the knowledge of the site managers to MC, and to find that on the basis of that knowledge the purpose of MC was to evade VAT. In my view, if (as I have held) the Tribunal were correct in attributing to MC the acts and knowledge of the site managers, the finding as to the company's purpose was one which the Tribunal were entitled to make.
60. Mr Purle submits that the fact that a person knows that a certain result will follow from his conduct does not prove that he intends the result, or that achieving that result is his purpose. I accept this. But it is open to a tribunal to infer from the fact that X knows that a certain result will follow from his actions that he intends that result. Such an inference will be drawn the more readily where that result is the forseeable consequence of his actions, especially if X does not give evidence and does not give a different explanation as to his state of mind. In my judgment, the Tribunal were entitled to draw the inference that it was the purpose of the site agents to evade VAT, and in any event, that in making returns which claimed to deduct input tax on non-existent supplies, MC's purpose was to evade VAT.
Section 77(4): was VAT "lost"?
61. The Tribunal considered that it was irrelevant to determine whether the alleged subcontractors accounted for all or any of the VAT that was paid by MC to them (paragraph 35). It was the Commissioners' case that the subcontractors only accounted for a small fraction of that output tax. Mr Purle submits that the extended time assessments should have been disallowed because the Commissioners had not proved that they had "lost" any of the VAT for which MC claimed input relief. The onus was on the Commissioners to prove that the VAT for which input relief had been claimed was lost to them in the sense that it was not accounted for by the subcontractors. Mr Purle contends that it is not sufficient for the purposes of section 77(4) for the Commissioners merely to show that input relief has been claimed as a result of conduct falling within section 60(1). If the output tax is accounted for, the Commissioners will not suffer a loss of the VAT in question. If the Tribunal's decision is upheld, it is MC who will have suffered the loss. This is because it will have paid the VAT to the subcontractor, and will then be deprived of input relief. Mr Purle submits that this shows that the Commissioners' interpretation of section 77(4) is extravagant, and that, if possible, it ought to be avoided.
62. I cannot accept Mr Purle's argument. In my view, the VAT "lost" that is referred to in section 77(4) is VAT that is the subject of section 60(1). The dishonest conduct referred to in section 60(1) may or may not result in VAT actually being evaded. For the purposes of constituting an offence under section 60(1), it does not matter whether the conduct has or has not had that result. In this connection, I note that section 60(3) states that "the reference in subsection (1) above to the amount of the VAT evaded or sought to be evaded..." (emphasis added). The inclusion of the words "if VAT has been lost" to qualify section 77(4)(a) is to show that the subsection is only concerned with a situation where VAT has been evaded.
63. If a taxpayer claims input relief to which he is not entitled, he undoubtedly evades the amount that he wrongly deducts from the VAT that he would otherwise pay to the Commissioners. He is paying less VAT to the Commissioners than he should be paying. The Commissioners have suffered a loss of VAT. In my view, the fact that some or all of that amount may be accounted for as output tax by the putative supplier does nothing to change that. I accept the submission of Mr Parker that, for the purposes of section 77(4), the question of whether VAT has been lost is to be determined by reference to the trader's own entitlement to make claims to input tax relief, and by reference to his accounting periods. It does not depend on the outcome of an investigation of what accounting of output tax has been made by other traders in respect of their trading, and by reference to their accounting periods.
64. But is it not unfair on MC that it should have paid the subcontractors the VAT, and is then barred from claiming input relief? In my view, that is the inevitable result of the proper interpretation of the relevant statutory provisions, and applying the rules of attribution to which I have referred. It may be that MC would be able to recover the VAT from the subcontractors by a claim in restitution, on the footing that the VAT should never have been charged. But more fundamentally, this appeal to "fairness" has no particular relevance to section 77(4). After all, section 77(4) merely determines the conditions for the making of extended-time assessments. Mr Purle's appeal to "fairness", if valid, is as relevant to in-time assessments as it is to extended-time assessments. For the reasons that I have attempted to explain, it has no application to any assessments.
65. I am satisfied that the Tribunal were right to hold that the requirement that VAT be lost as a result of the section 60(1) conduct was made out.
Section 73(1): the best judgment issue
The Tribunal decision
66. This is dealt with by the Tribunal at paragraphs 287-295. The relevant parts of section 73(1) provide:
"...where it appears to the Commissioners that such returns are
incomplete or incorrect, they may assess the amount of VAT due
from him to the best of their judgment...."
The assessing officer was Mr G Marriott. The Tribunal record at paragraph 288 the basis of MC's challenge to the assessments made in the present case. It was alleged that there had been a failure to use best judgment because there had been a failure to have regard to certain key evidence of facts which were known to the Commissioners before they made the assessments. Three of these pieces of evidence are still relied on by Mr Purle in the appeal before me on this issue. These are: (a) the observation evidence obtained in Scotland that Mr O'Leary was seen actually working on the Edinburgh sites (Mr O'Leary was one of the 11 alleged subcontractors); (b) the VAT control visit to Prendergast (another of the 11) on 14 September 1992, and the officer's resultant report which said "credibility would be better tested when the annual accounts become available but no reason to doubt credibility at this stage"; and (c) Mr Marriott knew nothing about the circumstances of Cassidy Construction and the supplies made by Cassidy.
67. The Tribunal found that the Commissioners failed to take points (a) and (b) into account (paragraph 293), but held that these factors were not of sufficient weight to invalidate the assessments on best judgment grounds. They did not mention (c) specifically, but of the points left out of account they made these general observations:
"294. With an exercise as complex and diverse as the present it is unrealistic
to expect one person to have a first hand grasp of all the relevant circumstances.
The ultimate decision to assess is bound to be made on the strength of reports
made and conclusions reached by other officers in the team. Here the evidence
was researched and finely ground by officers in the team, many of whom were
preparing the Commissioners' case in the forthcoming criminal prosecution.
Woolf J in Van Boeckel v Commissioners of Customs and Excise [1981]
STC 290 observed (at 296a-b) of the Commissioners' best judgment exercise:

"If they do make investigations then they have got to take into
account the material disclosed by those investigations."

The factors produced in the course of the investigations but left out of account
in the assessment exercise, such as those relied upon by MC (see paragraph
290 above), were, we think, drops in the ocean of available material. Their
omissions neither invalidated the "methodology" behind the assessments nor
did they result in errors of detail of sufficient importance to upset particular
assessments for particular periods. Looking at the whole team exercise
therefore we think it passes the tests established for the purposes of section
73(1) in Van Boeckel and in Rahman v Commissioners of Customs and Excise
[1998] STC 826. This is the position, even though the Commissioners may
have thought at the time that the present assessments fell within section 73(2)."

The reference to paragraph 290 must, I think, be in error for paragraph 288.
68. The other aspect of the best judgment issue which assumed importance before the Tribunal, as it has in the appeal before me, arises from the fact that the Commissioners thought that they were assessing under section 73(2), where there is no requirement of best judgment at all. It was contended before the Tribunal that the person responsible for assessing proceeded on an incorrect legal basis, as was evident from the Commissioners' Statement of Case, which disclaimed best judgment as a necessary ingredient. It was not until long after the assessments were made that the Commissioners conceded that the assessments were made under section 73(1). The Tribunal expressed themselves as "uneasy" about the implications of that error. That concern was intensified by the fact that the evidence of Mr Marriott was that the figures making up the assessments had all been given to him by a colleague. He was unable to give the Tribunal any first hand account of how any of the decisions leading up to the making of the assessments had been made.
69. Such were the concerns of the Tribunal about the Commissioners' evidence on the best judgment issue that on 14 August 1998, the Chairman wrote to the Solicitor for the Customs and Excise. He said that it was not clear from Mr Marriott's evidence what considerations were taken into account by whoever took the decision to make the assessments. Mr Oliver QC said that it was reasonably clear that the decision to assess was the product of a team effort, and that the Tribunal would be assisted if the officer who was responsible for the decision to assess were called to give evidence as to the decision-making process leading to the making of the assessments.
70. Thus it was that Mr Dayman produced a short witness statement on about 7 September. Mr Dayman is a senior Investigation officer, with responsibility for a team which specialises in the investigation of fraud in the construction industry. He was in charge of investigating the fraud which forms the background to the current proceedings. In his statement, he explained that over a 6 month period he gave careful consideration to the evidence relating to the subcontractor frauds. Drawing on the accumulated expertise of the team that had been assembled, and applying his own mind to the evidence, he decided that an assessment for false VAT input claims was justified against MC. He instructed Dave White to quantify the amount of false input tax that had been claimed, and to make an assessment. Mr Purle objected to the late admission of this evidence. But the Tribunal allowed it in, and gave Mr Purle some time to prepare his cross-examination. The proceedings were, therefore, adjourned from 7 September, and Mr Dayman was cross-examined at some length two days later.
71. In his oral evidence, Mr Dayman amplified his statement. He said that he was satisfied, from his consideration of the material, that each one of the 12 alleged subcontractors was "bogus" in the sense of having made some false supplies of labour to MC. The question of whether any subcontractor had made any genuine supplies was a matter of "quantum", in respect of which he relied on the judgment of Mr White, assisted as may be necessary by other members of the team.
72. In my judgment, the Tribunal were entitled, as a matter of discretion, to admit the evidence even at a late stage of the proceedings. Rule 28(1) of the Value Added Tax Tribunals Rules 1986 provides that: "...a tribunal may direct or allow evidence of any fact to be given in any manner it may think fit and shall not refuse evidence tendered to it on the grounds only that such evidence would be inadmissible in a court of law". Mr Purle's real complaint is about the way in which the Tribunal decided the section 73(1) issue on the basis of the evidence that was adduced.
73. The Tribunal appraised the general approach adopted by the Commissioners at paragraph 292 of the decision in the following terms:
"292. Mr Dayman's evidence showed that the process leading to the
assessments had started with the Commissioners' identification of the
twelve alleged subcontractors whose activities had given them cause
for suspicion. Their investigations reinforced their suspicions in some
cases. In others, such as that of Cassidy Construction, their investigations
did not remove them. They therefore decided to adopt a simple and
pragmatic approach. They assessed for each period in which MC had
claimed input tax relief on the strength of VAT invoices from the twelve
alleged subcontractors; the assessments were designed to recoup all the
input tax that MC had, in the Commissioners' view, wrongly claimed.
That approach was in our view a valid and rational method upon which
to base an assessment whether best judgment was called for or not. In
Rahman v Customs and Excise Commissioners [1998] STC 628
Carnwath J identified examples of situations where an assessment could
be faulted as not being to best of judgment. These situations existed
where the assessment had been reached dishonestly or vindictively or
capriciously, where it had been based on a spurious estimate or guess
on which all elements of judgment were missing or that it had been
wholly unreasonable. We are satisfied, in principle, that the assessments
were made in good faith and were in no sense based on spurious
estimates or guess work. The collective efforts of those involved in the
assessing process demonstrated a real exercise of judgment. The
assessments cannot for those reasons be faulted as offending the
principles set out in Rahman."
The correct approach to the best judgment issue
74. In Van Boeckel v Customs and Excise Commissioners [1981] STC 290, Woolf J said at page 292J:
"What the words "best of their judgment" envisage, in my view,
is that the commissioners will fairly consider all the material placed
before them and, on that material, come to a decision which is
one which is reasonable and not arbitrary as to the amount of tax
which is due".
75. In Rahman v Customs and Excise Commissioners [1998] STC 826, Carnwath J considered the role of a tribunal in relation to an appeal in a best judgment case. He emphasised (page 836E-H) that in the normal case, the important issue would be the amount of the assessment, and that it was only in an exceptional case that an assessment would be upset because of a failure by the Commissioners to exercise best judgment.
76. I accept Mr Parker's summary of the position in these terms: the words "to the best of their judgment" permit the Commissioners a margin of discretion in making an assessment; a taxpayer may only challenge the assessment if he can show that the Commissioners acted outside the margin of their discretion, by acting in a way that no reasonable body of Commissioners could do. In order to succeed, the taxpayer must show that the assessment was wrong in a material respect, and that if so, the mistake is such that the only fair inference is that the Commissioners did not apply best judgment, as explained by Woolf J in Van Boeckel. The primary focus of the attention of the Tribunal, therefore, should be on the objective evidence adduced by the taxpayer in seeking to discharge the burden of showing that the amount of VAT assessed was not due from him. This is because it would be absurd for the Tribunal to conclude that the assessment was correct, but that the Commissioners had made a dishonest or capricious assessment. Parliament cannot have intended that a Tribunal should be required to set aside assessments which are shown to be correct, or which the taxpayer does not show are incorrect.
Mr Purle's arguments
77. I shall start with the complaints about paragraph 294. Mr Purle submits that the failure to take account of the three points to which I referred earlier shows that the Commissioners could not have exercised best judgment. That failure was not explained in evidence. Mr Dayman was unable to explain it, since he left what he referred to as matters of "quantum" to Mr White. Moreover, although Mr White was called to give evidence, he was not asked any questions on this aspect of the matter. In response to the Tribunal's assertion that the factors left out of account were "drops in the ocean" of the available material, Mr Purle makes the point that the total sums of input tax involved in the assessments were not insignificant. They were: £218,580 (Prendergast); £106,482 (O'Leary); and £28,426 (Cassidy). In short, the failure to have regard to these significant factors infects all the assessments. A blanket approach was adopted, but such an approach was not legitimate in the light of the specific and significant circumstances which affected three of the subcontractors.

78. I start with Prendergast. The Tribunal decided that they were not satisfied that any of the supplies to which the Prendergast invoices purported to relate were genuine, or that MC's conduct in relation to the Prendergast invoices came within section 60(1): see paragraph 271 of the decision. I shall have to return to this paragraph in a different context later. The Tribunal dealt with the Officer's report of 14 September 1992 at paragraph 275 and 276, and concluded that they were not persuaded by the evidence of the officer's visit. They said:
"Overall we are not satisfied that any of the services to which the
Prendergast invoices related were genuine. The evidence shows
that he was connected with Lee and others involved in the Hi-Tech
House fraud. Although the evidence is not as strong as that applicable
to the later alleged subcontractors, we think that he was part
of the fraud organised by Lee."
They went on to give their reasons. There is no challenge to them. At paragraph 277, the Tribunal considered the position of MC and dealt with the section 60(1) point. They said that they were suspicious about the Prendergast invoices, but they were not satisfied that the relevant MC employees knew or must have known that Prendergast was not the actual provider of the labour during the periods covered by the extended time limit assessments. Nevertheless, for other reasons, the Tribunal disallowed the appeals against all but two of the extended time limit assessments in relation to the input tax claimed on the Prendergast invoices. For reasons that I shall explain, I consider that the Tribunal erred in disallowing the appeals against those assessments. At this stage, the only relevant point is that the Tribunal found that, if they had regard only to the Prendergast invoices, section 77(4) should not have been invoked to make extended time limit assessments. In my view, this error on the part of the Commissioners (as it was found by the Tribunal to be) comes nowhere near showing that the Commissioners failed to exercise best judgment generally in relation to the assessments as a whole. The Tribunal were suspicious about the invoices. They found that Prendergast was involved in the fraud. The Tribunal were, of course, entitled not to be satisfied that there was dishonesty on the part of the MC employees in relation to Prendergast, but they might well have reached the contrary conclusion. In my view, the Tribunal were entitled to hold that this error on the part of the Commissioners was not sufficient to show that best judgment had not been exercised (see paragraph 293). I think that what the Tribunal meant when they referred to "drops in the ocean of the available material", was not that the value of Prendergast-related input tax was insignificant (which it plainly was not), but that, having regard to the wealth of other material, the error was not of such magnitude as to invalidate the assessments generally.
79. I turn to O'Leary. All the assessments that disallowed MC's claims for input tax in respect of O'Leary invoices were "in-time" assessments. The Tribunal held (paragraph 164) that the alleged supplies by O'Leary in respect of the English sites were non-existent. There was, however, evidence that O'Leary was seen at the Edinburgh sites. This was dealt with by the Tribunal at paragraphs 205-207. They were satisfied that the Commissioners had shown prima facie that a fraud had been committed. The question then was whether MC satisfied them that supplies of labour were made to MC at the Edinburgh sites. For the reasons given at paragraph 207, the Tribunal were not so satisfied. This was a conclusion which the Tribunal were plainly entitled to reach. In those circumstances, it is not surprising that the Tribunal did not consider that the failure of the Commissioners to make some allowance for input tax on the O'Leary invoices in respect of the Edinburgh sites did not justify a finding of lack of best judgment.
80. Finally, Cassidy. As I have already said, the total amount of the Cassidy assessments was £28,426. Of these, £13,999 were extended-time assessments. The Commissioners did not seek to sustain the extended-time assessments before the Tribunal. The Tribunal dealt with the remaining Cassidy-related issues at paragraphs 282-286. They accepted that Cassidy knew Lee. They said (paragraph 286): "It may well be that Cassidy was acting as a ringmaster in Edinburgh coordinating the fraudulent operations in which Keyes and Lee were involved". They recorded that the Commissioners admitted that Cassidy did render services for MC, and that their real complaint was that the labourers he found worked under the 714 certificates of bogus subcontractors. In the opinion of the Tribunal, however, that could not disguise the fact that Cassidy made real supplies to MC. The Tribunal found, therefore, that the Commissioners had been in error to make any assessments in relation to the input tax claimed by MC in relation to the Cassidy invoices. In my judgment, the Tribunal were amply entitled to hold that this error did not mean that there had been a failure of best judgment generally in relation to all the assessments. Cassidy was clearly implicated to some extent in the fraud, but not sufficiently to justify making any assessment to tax against MC. The Commissioners' error was not borne of dishonesty or perversity. In view of the complexity of the fraud in which MC was involved and the difficulty of unravelling and forming a judgment about the facts, it was not surprising that error crept into parts of the exercise undertaken by the Commissioners.
81. I turn to the implications of the fact that the Commissioners thought that they were making an assessment under section 73(2). The Tribunal plainly considered the objective facts with meticulous care and in great detail. They did not misdirect themselves as to the law in relation to the best judgment issue. They clearly had the principles enunciated in Van Boeckel and Rahman well in mind. They heard evidence, in particular, from Mr Dayman, who explained that he had considered the material carefully, and was well aware of the issues. He told the Tribunal how he and his team remained alive to the possibility of genuine invoices. He considered the case regularly with the case officer Mr White. Mr Dayman concluded that each of the subcontractors had made bogus supplies, and it was Mr White's duty to quantify the extent of those supplies. The Tribunal had to decide whether the fact that the Commissioners considered that they were applying section 73(2) meant that they did not exercise best judgment. They held that they did exercise best judgment "even though the Commissioners may have thought at the time that the present assessments fell within section 73(2)". In my judgment, this conclusion is unassailable.
The Prendergast issue
82. This is a discrete point and it arises from paragraph 271 of the decision. As we have already seen, the Tribunal decided that the evidence did not satisfy them that MC's conduct in relation to the Prendergast invoices came within section 60(1). At first sight, therefore, it would seem to follow that the extended time-limit assessments for the input tax in relation to the Prendergast invoices should be set aside. That is indeed what the Tribunal did in relation to the assessments for accounting periods 12/91 and 3/92. That was because they held that there were no other valid assessments for those two accounting periods. But the Tribunal took a different course in relation to the remaining extended time-limit periods, ie 6/92-12/93. The reason for the distinction was expressed as follows:
"271 .....The assessments for those periods are validated on account
of MC's conduct falling within section 60(1) in relation to Martin
invoices (for seven periods), Coffey invoices (for three periods)
and invoices in McCormack's name (for one period). This means
that, even though the Commissioners have not proved all the
ingredients of conduct falling within section 60(1) in relation to
the Prendergast invoices, the amounts assessed (ie the amounts
calculated to recoup the input tax wrongly claimed in relation
to the Prendergast invoices) will be the proper amounts, given
that we are not satisfied that the supplies to which the invoices
related were genuine."
83. The total amount of input tax relating to the Prendergast invoices in respect of the periods 12/91-3/92 is £174,752.40. The argument that seems to have been accepted by the Tribunal is that section 77(4) can be invoked by the Commissioners, and the extended 20 year period utilised, in respect of all irregularities in a tax return for a particular accounting period, provided that VAT has been lost as a result of section 60(1) conduct in relation to at least one of those irregularities. There is no obvious reason why Parliament should have intended such a disproportionate and extravagant power to be given to the Commissioners. In my judgment, the court should be slow to impute such an intention to Parliament in the absence of clear evidence in the statute. The time-limits for irregularities other than section 60(1) conduct leading to a loss of VAT are stated in section 77(1): they are much shorter than the 20 year limit that is imposed by section 77(4). This distinction was plainly made because Parliament recognised the difficulties that fraud causes to the Commissioners, and the need for generous time-limits to ensure, so far as reasonably possible, that taxpayers are not allowed to retain VAT lost to the Commissioners as a result of fraud. But there is no logical justification for extending the section 77(1) time-limit for other irregularities in the return for an accounting period, simply because there also happens to have been a loss of VAT as a result of section 60(1) conduct in relation to the same accounting period.
84. Mr Parker was unable to concede that the Tribunal made a mistake in relation to the Prendergast invoices, but neither did he seek to support this part of paragraph 271 of the Decision with any enthusiasm. In my view, he was right not to do so. As he fairly pointed out, there is no reason why, if necessary, there cannot be a number of assessments in respect of the same accounting period. That is expressly envisaged by section 73(4), which provides that, where a person is assessed under subsections (1) and (2) of section 73 in respect of the same accounting period, the assessments may be combined. Moreover, section 77(6) expressly empowers the making of supplementary assessments otherwise than in circumstances falling within section 73(6)(b) of 75(2)(b).
I would, therefore, allow the appeal in respect of the input tax claimed on the Prendergast invoices for the accounting periods 6/92-12/93 inclusive.
Section 73(6): the sufficient facts issue
85. The Tribunal set the scene to this issue at paragraph 296 in these terms:
"296. The Commissioners' power to assess is unqualified for two
years from the end of the prescribed accounting period in question:
section 73(6)(a). The assessments which are the subject matter of
the present appeal were made in March 1997. The 3/95 assessment
for the period to the end of March 1995 (and subsequent ones) will
therefore be in time in any event. The Commissioners' power to
assess is exercisable over a longer period where "evidence of facts,
sufficient in the opinion of the Commissioners to justify the making
of the assessment, comes to their knowledge"; but in that situation
they have to assess within one year of coming to know of evidence;
section 73(6)(b). On this basis MC challenged the validity of all
assessments up to and including that raised for 12/94. MC say
that the information gathered in the course of the raids of 27 March
1996 was not required to justify the making of those assessments.
All the assessments from 6/90 until 12/94 could, MC say, have been
made earlier."
86. The Commissioners' case is that the information gathered in the course of the raids of 27 March 1996 was required before they could make the assessments. MC relies strongly before me (as it did before the Tribunal) on what J W Bolton stated in an affidavit dated 13 September 1996. Mr Bolton is a senior investigating officer, and he swore the affidavit in answer to MC's application for judicial review of the Commissioners' decision to seek search warrants on 26 March 1996. He said:
" ....Prior to my decision to apply for search warrants the
investigating officers had identified 11 bogus subcontractors
who were registered for VAT and who had issued false invoices
claiming to have supplied McN with labour worth in excess
of £6 million, thus involving VAT of over £1 million. This
had been claimed as input tax in the records and VAT returns
of McN. It was the brokers who provided these false invoices
charging VAT. These services facilitated the fraud."
87. It is necessary to set out the next part of the Tribunal's decision in full:
"298. Taken on its own the above extract from Mr Bolton's
affidavit does not, in our view, establish that facts had come to
the knowledge of the Commissioners which were sufficient to
justify the making of the assessments. It indicates an aggregate
figure of lost tax. But that is not enough to justify the making
of assessments where, as here, these are based on the supplies
made in each prescribed accounting period. The date of the
supplies and the quantum of the supplies for the particular
period, will, therefore, be crucial to the correctness of each
assessment. This feature was, we note, recognised by J J Cooney,
assistant chief investigation officer of Customs and Excise, in an
affidavit which he swore on 13 September 1996 in connection
with the same proceedings. He was the officer who had
authorised the application for the search warrants. He said:
"The offences were very serious, involving a VAT loss to the
public revenue of over £1 million. There was strong evidence
that a sophisticated organization had been set up by use of
accommodation addresses, missing traders and suspected false
identities; that the system was being used by McN employees,
with the benefit from the false VAT invoices accruing to
McN as input tax deductions to offset against their own VAT
liability. It was also likely that such an apparently systematic
VAT fraud would continue until prosecution action was taken
to stop it. I was aware that proper investigation of the fraud
would require simultaneous action against those suspected to
be involved in issuing and using the bogus invoices. Therefore
a detailed analysis of all documentary material such as companies'
official site records, payment certificates, invoices, correspondence,
internal memoranda and books of account would be essential.
In addition any unofficial records such as notes and working
papers recording the true identity, location, means of contacting
those behind the bogus invoices, notes of meetings and specific
arrangements, including the identity of past, current and future
missing VAT traders, records of financial transactions (including
drawings and disposals of cash from the McN accounts for the
value of the bogus invoices) were also vital to the investigation."
299. The extract from Mr Cooney's affidavit makes it clear that,
in the opinion of the Commissioners, it would not have been
enough merely to have obtained the documentary material sought
from the raids. A detailed analysis would also be required. This
seems to us to have been a reasonable conclusion on the
Commissioners' part. The Commissioners' decision to assess
has been based, having regard to the way in which their case
has been presented to us, not just on the suggestion that the
invoices were suspect. At the heart of the Commissioners'
case is the allegation that the VAT invoices were brought into
being as part of a fraud to which MC was party. That is clear
from the statements in the two affidavits and from the way
they presented their cases before us. (This is so notwithstanding
the fact that the Commissioners did not have to prove that
conduct falling within section 60(1) was involved until the law
changed on 17 July 1996. We refer to Finance Act 1997 section
47(10) which substituted "three years" for "six years" (ie the
words found in section 77(4) in relation to assessments made
after 17 July 1996.) In essence, and taking the 9/91 period as
an example, nothing in the statements contained in the above
affidavits supports MC's contention that the Commissioners
would have been justified in raising an asessment on MC before
the raids took place for that period in the amount of £49,068.77.
300. It was suggested for MC that Mr Bolton's statement
showed that the Commissioners had sufficient evidence of
facts, before the raids, to justify the making of a single global
assessment covering all periods. We do not accept that. The
Commissioners were, so the affidavit states, treating this as
a situation where tax was lost because of fraud. A single
assessment covering 1990 onwards would have been highly
vulnerable to attack both on best judgment grounds and on
the basis that not all the tax was lost through fraud. Moreover,
the interest calculation would have been hard to sustain."
88. Mr Purle submits that the Tribunal were wrong to hold that the Commissioners did not have evidence of sufficient facts to justify the making of the assessments before March 1996. He points out that Mr Bolton's affidavit shows that the Commissioners not only believed before the raids that there were 11 bogus subcontractors issuing false invoices, but they knew the amounts involved. These were, in round figures, the very amounts that eventually formed the basis of the assessments. It is also clear from Mr Bolton's affidavit that the Commissioners knew the identity of Messrs P Byrne, Keyes and McHugh, and their alleged role in the fraud. Mr Purle further submits that the Commissioners led no evidence before the Tribunal to explain why the decision to make the assessments was made when it was made. He criticises the Tribunal for substituting their own opinion as to when there was evidence of sufficient facts to justify the assessments. He contends that the Tribunal should have made a finding as to when that position was reached in the opinion of the Commissioners, and then decided whether that opinion was sustainable.
89. In my judgment, the Tribunal's decision on the section 73(6) issue cannot be impeached. As was made clear by the Court of Appeal in Pegasus Birds Ltd v Customs and Excise Commissioners, decision of 19 January 2000, "the question for the Tribunal on appeal was whether the Commissioners' failure to make an earlier assessment was perverse or wholly unreasonable": see paragraph 18 of the decision.
90. In my view, the Tribunal were entitled to find that it was the opinion of the Commissioners that the evidence available to them before the raid was insufficient to make the assessments. It is true that the affidavit of Mr Cooney was prepared in the context of the criminal investigation, but the Tribunal were entitled to decide that the reference to a detailed analysis of all documentary material as being "essential" was relevant not only to the question of criminal charges, but also to the making of assessments. Mr Purle's cross-examination of Mr Dayman included the following exchange:

"Q. And what triggered it? Was it the fear of an impending time
limit coming up?
A. Yes. My superior officer felt that, since the warrant
had been executed in March 1996, that perhaps we should
be wary of the March 1997 as the twelve month deadline.
My own view was that that was not necessarily the deadline.
I felt it was probably some time after that but, just to be sure,
we thought we would stick to that" (Day 19/page8).
91. It is true that Mr Dayman conceded that he was not actually in the case in March 1996, and that he was not able to give direct evidence on the point. Nevertheless, he was able to give indirect evidence, and that was evidence which the Tribunal could accept. Moreover, until the primary evidence was obtained from the raids and interviews, the Commissioners were entitled to take the view that they did not have sufficient evidence as to how the fraud was operated to make VAT assessments against MC
92. More importantly, the Tribunal were able to consider all the documentary material that was recovered during the March raids. It was very voluminous, and included the Hi-Tech House cash books, the Byrne diary, and much other material which enabled the Commissioners to make the necessary detailed links between the subcontractors and the MC employees who were participating in the fraud. As Mr Parker pointed out, it is only now, following the findings of the Tribunal that MC accepts, and indeed asserts, that there was a massive fraud to which some of its employees and the subcontractors were party. In 1996, the position was very different. In my view, having considered all the evidence, the Tribunal were entitled to conclude that the Commissioners would not have been justified in raising an assessment before the raids took place. That conclusion cannot be said to be perverse or wholly unreasonable. That being the view of the Tribunal, it would be remarkable if the Commissioners themselves had thought that they were justified in raising an assessment before the raids took place, particularly when none of their witnesses gave evidence to that effect. As we have seen, Mr Dayman's evidence was to the contrary, and Mr White gave no evidence that supported MC's case on this issue. The burden was on MC to show that the Commissioners had evidence of facts before March 1996 sufficient in their opinion to justify the making of the assessment. In my judgment, the Tribunal were right to hold that MC had not discharged this burden.
Conclusion
93. In the result, save to the limited extent indicated at paragraphs 82 - 84 above in relation to the Prendergast invoices, this appeal is dismissed.

Friday, 16th June 2000