PENALTY—Conduct involving dishonesty—Appellants proprietors of sports and leisure club—Membership subscriptions paid annually or monthly—Monthly subscriptions entitled members to use of club month by month—Aggregate of monthly subscriptions higher than annual subscription—Difference described as “credit charge”—Appellants claimed that difference was exempt—Commissioners ruled that whole of monthly subscription was standard-rated as consideration for monthly membership—Appellants continued to treat difference as exempt in spite of ruling and having taken advice—No appeal against ruling—VAT returns rendered on that basis, and tax at standard rate withheld—Whether conduct dishonest—Appeal dismissed

PENALTY—Conduct involving dishonesty—Mitigation of penalty—Commissioners allowed 65 per cent mitigation—Whether mitigation sufficient—Appeal dismissed

LONDON TRIBUNAL CENTRE

P D TAYLOR AND G TAYLOR
	t/a RIVERSIDE SPORTS AND LEISURE CLUB 	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	MR ANGUS NICOL  (Chairman)
						MRS ANGELA WEST FCA
						MRS ELIZABETH MACLEOD CIPM				 	

Sitting in public in Bristol on 5 and 6 December 2002 

Mr Peter Smallwood, VAT consultant, for the Appellant

Mr Ben Collins, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	The Appellants trade in partnership, though Mrs Taylor takes no active part in the business.  The Appellants carry on business at two premises: the Riverside Sports and Leisure Club (“Riverside”) in Gloucester, and the Abbey Sports and Leisure Centre (“Abbey”) in Nuneaton.  They provide sports and leisure facilities for the clubs’ members.  There are several categories of membership, for all of which an annual fee is payable.  In addition, for most of the categories of membership the fee can be paid monthly by direct debit.  In such cases the fee is higher.  In the Membership Details for March 2000 the fees are stated as, e.g. “Peak Membership - £290 per annum or £29 per month”.  In the membership application form it is stated that paying by monthly instalments “incurs an interest charge which represents approximately 30% of the annual rate”.  The Appellants claimed that the 30 per cent was for the provision of credit, and that therefore it should be exempt from VAT under Item 3 of Group 5 of Schedule 9 to the Value Added Tax Act 1994 (“the 1994 Act”).  In November 1997, having sought and been given advice, the Appellants wrote to the Commissioners claiming to have overpaid VAT, by accounting for tax on the 30 per cent “interest charge”, over the previous three years, and claiming a repayment of £16,905.10 in total.  The Commissioners took the view that the monthly charges at the higher rate were fees for supplies of monthly, rather than annual, membership, and were taxable at the standard rate.  They rejected the Appellants’ claim in a letter dated 26 January 1998.  The Appellants’ accountants took issue with the Commissioners, who reviewed their decision and affirmed it in a letter dated 2 June 1998, and advised the Appellants what they should do if they wished to appeal to this Tribunal.

2.	At all times the Appellants had continued to treat the difference between the annual and monthly fees as exempt.  They did take some further advice.  Officers visited the Appellants in November 1999, and discovered that VAT was not being accounted for on the 30 per cent of the monthly fees, which was admitted by Mr Taylor in an interview.  He denied any intention of evading tax and denied having acted dishonestly.  The Appellants were assessed to VAT in respect of the arrears in the sum of £28,210, and to a penalty under section 60 of the 1994 Act.  The penalty was reduced to £9,869 in view of the degree of co-operation given by Mr Taylor.

3.	The Appellants appealed against the penalty, on the ground, first, that they, or Mr Taylor, had not acted dishonestly, and, alternatively, that greater mitigation should have been allowed.

The legislation

4.	Section 60 of the 1994 Act provides, so far as bears upon this appeal, as follows:

“(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 ... to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct.
. . .
(7)	On an appeal against an assessment to a penalty under this section, the burden of proof as to the matters specified in subsection (1)(a) and (b) above shall lie upon the Commissioners.”

Mitigation of the penalty is provided for in section 70:

“(1)	Where a person is liable to a penalty under section 60 ... the Commissioners or, on appeal, a tribunal may reduce the penalty to such amount (including nil) as they think proper.

(2)	In the case of a penalty reduced by the Commissioners under subsection (1) above, a tribunal, on an appeal relating to the penalty, may cancel the whole or any part of the reduction made by the Commissioners.

(3)	None of the matters specified in subsection (4) below shall be matters which the Commissioners or any tribunal shall be entitled to take into account in exercising their powers under this section.

(4)	Those matters are—
(a)	the insufficiency of the funds available to any person for paying any VAT due or for paying the amount of the penalty;
(b)	the fact that there has, in the case in question or in that case taken with any other cases, been no or no significant loss of VAT;
(c)	the fact that the person liable to the penalty or a person acting on his behalf has acted in good faith.”

The facts

5.	There was no significant dispute as to the facts, except as to advice given to the Appellants by their accountant.  The Appellants had carried on business and been registered for VAT since September 1988 in respect of both Riverside and Abbey.  These two clubs provided sports facilities, such as squash, tennis, and a gym, and other leisure facilities such as a sauna.  The Membership Details referred to a once only joining fee of £50 for peak membership, £25 for off-peak membership, and £75 for joint membership.  The details contained the following paragraph:

“Thereafter subscriptions are paid annually or monthly by direct debit, with no contractual obligation to pay your membership for any set length of time.  This allows you the flexibility to retain your membership for just as long as you wish....”

There are ten categories of membership for which fees may be paid either annually or monthly, and another three with annual fees only.  In this document there is no suggestion that the monthly fees are instalments of an annual fee, nor that there is interest or any other credit charge.

6.	The membership application form contains the following statement:

“For those who prefer to pay membership fees by instalments a direct debit mandate must be completed.  The joining fee and first month’s fee are due when joining, with the direct debit starting one month later.  If rates are to be altered Riverside will notify you 10 working days in advance.  You are not obliged to continue paying the direct debit for any fixed period.  You are responsible for cancellation.  Paying by direct debit incurs an interest charge which represents approximately 30% of the annual rate.”

The difference between the annual fee and the monthly fees over a year for the several categories of membership vary between 20 per cent and 32.5 per cent.

7.	In November 1997, Mr Taylor sought advice about the VAT position, and approached a Mr Hincks of Mentor Tax Consultants Ltd.  He advised in a letter dated 13 November 1997 that it must be established that the price charged for the monthly membership did include an element of credit, and that exemption applied only where a separate charge for credit was made and was disclosed to the customer.  His opinion was that to succeed with a claim for a refund of VAT the Appellants would have to satisfy the Commissioners that members paying monthly had enough information from which the credit charge could be calculated.

8.	On 24 November 1997 Mr Taylor wrote to the Commissioners saying that the Appellants (though he expressed it in the first person singular) had been overpaying VAT on membership income.  He continued,

“I have operated an approximate 30% credit charge for standing orders since 1990 at Riverside and from day 1 at Abbey (February 1997).  By accumulating the standing order income for both clubs and taking 30 % of that value I can assess the value of membership income which should not have attracted VAT (see below) over the last three years.”

He then set out the calculation for the three years 1995 to 1997 inclusive for both Riverside (£15,094.23 overpaid) and Abbey (£1,810.87).  In answer to the Commissioners’ request, Mr Taylor sent a copy of the constitution and terms of membership, and of the document which explains the details of the terms.

9.	The Commissioners’ reply, dated 26 January 1998, ruled as follows:

“The view of Customs is that the monthly charge is for a series of separate and successive supplies of monthly membership.  There cannot, as a consequence, be a supply of credit but simply a comparably larger consideration for each month’s membership than might be paid if an annual membership were taken out.  The whole of the membership charge, whether paid monthly or annually, is liable to VAT at the standard rate.

There has been no overpayment of VAT on the membership income and, therefore, no refund of Vat is due.”

Duckett Parker replied on 2 March 1998, taking issue on the Appellants’ behalf, with the Commissioners’ reasons.  That letter was answered on 14 April 1998, with the following advice:

“Your letter is being processed as a request for a local reconsideration and I will inform you of the outcome as soon as the reconsideration has been completed.  However, if after receiving our decision, you still wish to appeal to an independent VAT tribunal you will need to apply to the Tribunal for an extension of time to hear the appeal as your letter was received outside the statutory 30 day time limit for an appeal.”

The Commissioners' decision, having reconsidered the matter, was contained in a letter of 2 June 1998 in which they affirmed their previous decision.

10.	The Appellants did not appeal that decision as the earlier letter had suggested.  At all times after the Commissioners’ original decision letter of 26 January 1998, the Appellants continued to treat the difference between the annual and monthly fees as exempt.  On 18 March 1999 Duckett Parker wrote again to the Commissioners, challenging their decision on the same grounds as before.  On 7 April 1999 the Commissioners replied, saying that their decision had already been reviewed, upholding the view that there was no separate supply of credit.

11.	On 26 November 1999, officers visited the Appellants’ premises, and observed that the output figures were not consistent with VAT being accounted for and paid at the rate of 17.5 per cent, and revealed that since 12/97, 30 per cent of membership fees had been treated as exempt, contrary to the Commissioners’ ruling of 2 June 1998.  On a further visit, on 28 April 2000, Mr Taylor was asked for an explanation.  He said that he had thought that the decision was “only a local decision”, and that other clubs were doing the same as he, and that treating that portion of membership fees as exempt was accepted nationally.  We pause here to observe that no evidence was adduced either that such schemes were operated nor that the practice was accepted nationally.

12.	Evidently Mr Taylor sent the letters he had had from the Commissioners to Mr Hincks, who wrote to him again on 6 July 2000 making reference to them.  In that letter (which was copied to Duckett Parker), having summarised the Commissioners’ ruling, Mr Hincks referred to item 3 of Group 7 of Schedule 9 to the 1994 Act, and repeated his former view, that the exemption applied only when a separate charge for credit was made and was disclosed to the customer.  Later he said, inter alia:

“We need to look at what the member thinks he is getting.  I am sure that any member would consider that they are obtaining an annual membership payable by way of monthly instalments of the period of 12 months.  Where there is instalment credit I am of the view there is an exempt supply with the consideration for that supply being by way of interest or the finance charge paid and included in each instalment over the term of the agreement.

From the literature issued to members with regard to annual membership rates it is clear that the monthly instalment includes an element of instalment credit (interest), it actually says so.  I therefore feel that there are sufficient grounds to dispute Customs’ earlier ruling.  If it is necessary to appeal the matter to the VAT Tribunal it will be most advantageous if a number [of] members could act as witnesses to confirm what they consider is actually being received e.g. an annual membership payable by 12 monthly instalments, for which there is an interest charge, or simply monthly membership.  I must say however that from the membership literature a certain statement made under the heading ‘Joining fee’ is not particularly helpful.  This reads, ‘... with no contractual obligation to pay for your membership for any length of time.  This allows you flexibility to retain your membership for as long as you wish.”  What does this actually mean?  Is it that a member may, should he/she so wish, be a member for say just 3 months, 6 months etc.  If so do we have a case to answer and are Customs correct when they say there is a monthly membership for a higher fee.  We should continue to argue there is not, but even if there is, it remains clear from the literature that the additional fee is for interest and not simply a higher fee for monthly as opposed to annual membership.”

13.	On 14 July 2000, Mr Hincks sent a copy of that letter to Mr Parker of Duckett Parker, and added,

“I have seen the Membership Application Form (copy enclosed) that has been in existence since 1994/95 and this actually states that paying by Direct Debit incurs an interest charge representing approximately 30% of the annual rate.  There is of course, as said in my letter, the reference under ‘Joining Fee’ to the fact that ‘there is no contractual obligation to pay membership for any set length of time’.  This is not particularly good.  However, notwithstanding this I am of the view that there is a very good chance of success.  If this is not the case Phil should consider whether appealing [sic] the matter to the Vat Tribunal.”

He also advised that if the Appellants were minded to appeal to the Tribunal they should obtain evidence from one or two members as to what they considered that they were getting for the subscriptions. In a further letter, dated 27 October 2000, Mr Hincks quoted passages from the Commissioners’ letters of 26 January and 2 June 1998, and commented that the Commissioners gave no explanation for their ruling nor did they say what evidence they had to support it.  He also said, 

“... I did however point out [in my letter of 8 July] that the membership literature was not particularly helpful in that it says ‘...with no contractual obligation to pay for your membership for any length of time.  This allows you flexibility to retain your membership as long as you wish.’  This may indeed indicate that the members were in fact taking out a membership on a monthly basis as long as they required.  If this is the case I tend to agree with Customs that the increased monthly membership subscription does not include an element of credit.  At the end of the day what was your intention and you will I think need to decide what you are actually supplying.”

14.	On 25 April 2000, Mr Patrick Finn and Mr Dumper interviewed Mr Taylor at Riverside, between 10.43 and 12.10.  Although the Commissioners said that they did not rely upon this interview as evidence of dishonesty, there were parts of it which were of evidential importance.  Mr Finn referred to the letter from the Commissioners of 26 January 1998 and Mr Parker's reply dated 2 March 1998.  Mr Taylor said that the latter had been written on his instructions.  Asked if he had taken advice from his accountant, Mr Taylor replied,

“As a result of getting previous correspondence, I obviously discussed it with my accountant and his view was that it wasn’t as clear cut as the VAT office were claiming, and that there were grounds for contesting their view.  Consequently he suggested that he would go ahead and contest correspond with the VAT office and contest the issue.”

Mr Finn then referred to the Commissioners’ answer to that letter, dated 14 April 1998, containing the suggestion that the Appellant might wish to appeal, and asked if Mr Parker had shewn that letter to Mr Taylor, who said that he had not.  There then ensued the following exchange:

“PF	Now, that as I say was the 14th of April 98.  On the 2nd of June 98 Officer Clarke wrote a second letter to Duckett Parker and in this letter he gives his own ruling that ‘There has been no overpayment of  VAT and no refund is due.’  Are you aware of that, were you aware of that letter to Duckett Parker?

PT	No.

PF	Are you saying that Duckett Parker didn’t draw your attention to the response to their letter?

PT	I’ve not seen a copy of that.”

Mr Taylor did say, however, that he might have discussed it with Mr Parker.  When it was suggested to Mr Taylor that he had instructed his accountant to press the matter with the Commissioners, Mr Taylor replied,
 
“I wouldn’t suggest I’ve instructed my accountant to press the matter.  I mean what’s happened is the accountant has said ‘I don’t believe that is the case, I don’t think it’s as clear cut as that and it’s my belief that this can be contested.’”

Mr Taylor agreed that he had taken  a decision and had decided that the matter should be contested, and he said,

“... My attitude towards this matter is of it being an ongoing not clear-cut situation.  Now whether that’s gleaned from my accountants saying ‘Look’, you know.  Whether he’s rung me and explained that he’s had correspondence from yourselves, and he’s saying that ‘I still don't believe this to be as black and white as they’re making out, and it can be referred to tax consultants’, and that sort of situation.  It was still not a clear situation in my mind, of it being, no you can’t....”

15.	Mr Taylor went on to say that that was his state of mind until the day on which Mr Dumper came and looked at his books, and that if his accountant had said to him that what he was doing was not correct he would have stopped then and repaid any tax that had been withheld.  He explained why he had carried on the “scheme” in these terms:

“I was operating this scheme and the reason why I felt it was okay for me to operate this scheme, as you call it, was because I had attended seminars of fitness professionals, and had been in discussion in workshops with other fitness professionals, operating other clubs, and they were indicating to me that this was common practice....”

“... this is why it’s being operated by other, it was being operated by other people and therefore it was something that I should, I could do.  It wasn’t something that you know you can get away with or anything.  It was just something that people were doing you know....”

It was pointed out to Mr Taylor that he had received the letters from Bristol and from Graham Clarke, and he replied,

“At this stage and at no other stage was my accountant saying to me this is no, you must not do this, this is not, you know.  I know this sounds ridiculous, in looking at the two letters that I've received or he’s received one.  But for him to say ‘Look, I’ve received this notification from them etc. etc.’ and the conversation ended up with you know ‘This isn’t as black and white as it appears.’”

The interview continued on this theme.  Mr Taylor said, more than once, that if he had consulted a tax adviser and had been advised that he should stop treating the 30 per cent as exempt, he would have done so, but that neither accountant nor tax consultant had so advised him.

16.	Mr Taylor was asked why it had taken him so long to take further advice after receiving the Commissioners’ letter of 26 July 1998.  Mr Taylor said that the officers’ visit had caused the Appellants to consider the issue with concern, but that before that it had been a matter that was being dealt with by his accountant, and conversations on the subject had been held on an ad hoc basis, and there was no hurry.  He was not concerned that, if the ruling eventually went against the Appellants he would have a large amount of tax to pay, since if that happened it was money that they were due to pay anyway.  He said that the Appellants had taken no action as yet on the letter from their tax consultant.  There then took place the following exchange:

“PF	... although Customs and Excise had written you letters saying ‘This is the view of Customs and Excise’, you believed that Customs and Excise were wrong?

PT	Yes

PF	And your accountant was encouraging you in that belief?

PT	Yes.

PF	Yes, and that you were making whatever enquiries you felt appropriate to get enough evidence, or persuade Customs and Excise to change its mind?

PT	Yes.

PF	And that only when your own researches led you to a conclusion that Customs and Excise were not wrong, but were in fact right, if that were the case.  If the tax consultant had said to you ...

PT	I see where you’re going.

PF	... had said to you ‘No, we think, having looked at every avenue we can, that Customs and Excise unfortunately are right,’ you would then have looked back through your records and made a voluntary disclosure to Customs and Excise, is that what you’re saying?

PT	Yes.”

Then in a later passage,

“PF	Right, so your accountant didn’t say to you, ‘Don’t pay the VAT, we’ll argue’?

PT	I, I, again, not quite as black and white as that.  It’s a case of saying...

PF	Well, you either did or you didn’t.

PT	Well, you know, I felt that this was an acceptable practice and therefore I applied it.  I may have notified my accountant that I was applying it, and probably would have done, but whether he would have said ‘No don’t’, or whether he would have said ‘Well, you know, in light of ... or wait’.  I don't think he would have said ‘No don’t do that, wait until we get a review from the VAT office’, because I would have waited, but....
. . .
PF	Did the accountant say to you ‘Don’t pay the VAT and we’ll argue it’?  Did he say that?

PT	The straight answer to that straight question is no.

PF	Okay, that’s all right.

PT	That’s, that’s, that’s no.  That’s cornering.

PF	No I just wanted to be quite clear.

PT	All right, let me explain that that’s not ... that’s cornering.  That’s almost putting words in mouth.  It’s not a case of saying ‘The accountant ...’ no he didn't at the same time he didn’t say the other side of the comment, he didn’t say ‘Pay the VAT’.”

17.	At the end of the interview, Mr Taylor said that he had had no intention of evading VAT, and that he had not acted dishonestly.  He was reminded at that stage about the contents of Notice 730.

18.	Mr Alan Dumper, an officer of Customs and Excise, gave evidence relating to the visit to the Appellants’ premises at Riverside on 8 March 2000.  He said that the visit had been selected because of the apparent inconsistency between the output tax declaration and the sales figures declared.  He said that he had a suspicion of what the situation was, but without a visit he did not actually know.  It became apparent that the Appellants were not accounting for VAT at 17.5 per cent, and the fact that the Appellants’ records shewed the correct liability to VAT but that they chose not to pay confirmed the suspicions.  On that first visit neither Appellant had been present.  Mr Dumper met Mr Taylor on a subsequent visit, on 28 April 2000, when Mr Dumper put his findings to Mr Taylor and the matter was discussed.  Mr Taylor said that he thought the decision that he was not entitled to treat the 30 per cent as exempt was only a “local decision”, and Mr Dumper said that, although he had not make a note of it, he was sure that he would have explained that there was no such thing as a “local decision”.  In any case, the Appellants’ liability to tax had already been established in correspondence.  Mr Dumper said that he was not aware of any other health club treating monthly payments in the way the Appellants had.

19.	Asked about the interview, Mr Dumper said that he had no recollection of Mr Finn asking if Mr Taylor wished a legal representative to be present, nor saying that having a legal representative would delay the interview and his presence might affect the matter of co-operation.  He could not remember if the Notice 730 had been given to Mr Taylor only at the adjournment of the interview: he had done hundreds of interviews since then.

20.	Mr Finn gave evidence relating to the interview.  He said that the transcript was accurate.  He had asked Mr Taylor if he wished to be legally represented, and had not said that that might affect the matter of co-operation, but he had said that if a legal representative were to be present the interview might have to be postponed.  It was normal practice to give the Notice 730 at the beginning of an interview, and it was unlikely that it would have been done at a break.  He had not mentioned Mr Taylor’s right to silence, since this was not a criminal interview and he was not under caution.

21.	As to mitigation, Mr Finn said that if there was enough evidence to establish dishonesty, then that ought to be admitted and acceptance of dishonesty would earn full mitigation.  Notice 730 does not say that.  But, Mr Finn said, he reported the matter and it was for someone else to make the decision about mitigation.  He had, himself, recommended that less mitigation should be allowed, and his recommendation had not been followed.

22.	As to the interview itself, Mr Finn said that he was asking what was in Mr Taylor’s mind when he decided to ignore the Commissioners’ advice.  Mr Taylor had made it clear that he felt that it was an ongoing matter, and still felt the same; but it was up to the Appellants to challenge the ruling, which they had not done, and to make part-exemption adjustments, which, again, they had not done.  Mr Finn agreed that if a trader ignored the Commissioners’ advice in such a matter it did not necessarily mean that he was dishonest.  The Commissioners considered that this was a case of dishonesty.  VAT is a self-assessing tax, and it is up to the taxpayer to get it right.  

23.	After the conclusion of the Commissioners’ evidence, Mr Smallwood, on behalf of the Appellants, submitted that there was no case to answer on dishonesty, on the ground that there was no evidence of dishonesty.  It was the Commissioners’ case that dishonesty was a matter of inference, and that it was a reasonable inference from Mr Taylor’s conduct that he had been dishonest.  We ruled that there was a case to answer.

24.	Mr Taylor gave evidence for the Appellants.  He said that the Appellants had acquired Riverside, then a squash club, in 1988, and Abbey in 1996.  He said that he had written the letter of 24 November 1997 because after attending leisure industry meetings and seminars, and talking to proprietors of other clubs, it had become clear that others were operating systems under which interest on monthly subscriptions was not liable to VAT.  He had also been approached by financiers about setting up financing schemes.  The Appellants had not needed any such scheme.  He had had no wish to go down the route of selling the membership to a financier, as such a contract was detrimental to the membership.  He added that he disliked binding annual contracts.  He was, he said, paying VAT on all membership income, and was aware that some clubs were not.  These were schemes which took advantage of a loophole, and he thought that they would antagonise Customs and Excise and was advised against such a scheme.  So he wrote the letter of 24 November 1997.  In the light of the Commissioners’ response, he could not understand how other clubs managed not to pay VAT.  So, Mr Taylor said, he thought it was a local decision and that the matter should be taken further.

25.	The Appellants offered annual membership, Mr Taylor said.  A member could pay annually, or monthly with a charge for deferred payment.  A member who paid by monthly instalments got the same membership as if he had paid for the whole year.  The annual rate was one rate, and the monthly rate was a little more.  A new member would be asked to sign a standing order as he walked through the door.  After that he would pay the first instalment, paying in advance on a monthly basis.  A member would be allowed to use the club facilities, on making such a payment, for one month.  There was annual membership and there was monthly membership.  He said that he had thought that the Commissioners’ letter of 26 January 1998 was just a local ruling.  If that letter had quoted the relevant legislation, or decisions of the Court of Justice, he would have passed it on to his accountant; if advised by his accountant that he could not carry on the scheme he would have stopped.

26.	Mr Taylor agreed that Mr Dumper had said that the whole of the monthly payments were taxable, but that he had said that he had discussed it with his accountant who said that that was wrong.  The advice that he had received from Mr Hincks in the letter of 6 July 2000 was that the monthly payment included a credit charge.  He had received similar advice in the letter of 13 November 1997.  It was still an ongoing issue after the interview.  In a final conversation with Mr Dumper, Mr Taylor said that Mr Dumper told him definitively that the scheme must be stopped and that the Appellants would have to pay the tax, with interest, and possibly a penalty.  Mr Taylor said that he asked what the penalty would be for, and Mr Dumper said, “We’ll see.”  Mr Taylor said that he thought that the issue was not resolved because of a conversation with his accountant, who said that the matter was not as black and white as the Commissioners maintained, and had written to the Commissioners on 18 March 1999 challenging the ruling.  At no time had his accountant nor any tax adviser told him that he could not carry on this scheme.  Professional advice said, all along, that it was not certain that the Commissioners’ ruling was right.  It was put to Mr Taylor in cross-examination that no accountant or tax adviser had told him that he could carry on with the scheme;  Mr Taylor said, that they had said so in conversation but not in correspondence.  His accountant was fully aware that the Appellants were carrying on the scheme and that it was an ongoing issue.  Mr Taylor said, that he had said to his accountant, “Should I carry on with this scheme?” and received the answer, “Carry on with it and we’ll deal with it.”  No-one actually said to Mr Taylor, “You should continue not to pay”, it was there by inference.  His accountant had said that the Commissioners’ ruling was a local decision, as you would expect from a local VAT office, and that it must be taken further.  Mr Taylor agreed that there had been no appeal, but said, again, that the matter was still ongoing, in that his accountant had said that there was still ground to be covered.

27.	On the second day of the hearing, Mr Taylor read out a statement, copies of which he provided for the Tribunal, with the stated intention of clearing any inconsistencies.  In the statement he said,

“I have known Duckett Parker, the accountants, for many years - Gerry Duckett having been my father’s accountant.  In 1997 I introduced the concept of nil VAT on interest charges to them.  They advised me of the retrospective claim and when a negative response to the concept came from the local Customs and Excise office they said they would take the issue further on my behalf.  At this and all other stages they advised me to do 3 things:

	1.	Continue to operate the concept.
	2.	Make clear calculations in my records.
3.	Be prudent and budget for repayment should the concept ultimately be rejected.

This statement is not reflected in the transcript when, as you have already noted, there was a great deal of hesitancy on my behalf in responding to questions relating to the advice given by my accountants.  The reason for this was that I had no wish to put Duckett Parker in a position where HM Customs and Excise would penalise them for a concept I had introduced to them.... This would have put a relationship created over decades with my father into difficulties.

Now is the time to bring this to your attention because, firstly, I believe enough of this came to light from conversations held yesterday and secondly, because there comes a time when you have to look after your own interests.”

28.	Asked about the exchange in the interview, when he was asked whether his accountant had said, “Don’t pay the VAT and we’ll argue it” and he answered “The straight answer to that straight question is No” (see paragraph 16 above), in the light of his statement, Mr Taylor said that it had never been put in those terms between himself and the accountant, the suggested words coming from Mr Dumper.  The principle was as stated, that the accountant was fully aware of what the Appellants were doing.  Mr Taylor said that he could not raise the matter before today, and he felt culpable because I had introduced the concept to Duckett Parker.  He had no desire that Customs should penalise them on the score of a conversation with himself.  He said that his accountant had not attended the hearing because he did not think it was necessary, and he did not think that he should involve them.

The Commissioners’ submissions

29.	Mr Collins, for the Commissioners, said that the Commissioners’ case turned upon inferences to be drawn from the Appellants’ conduct between 1997 and 2000.  The background was that of a successful venture, and it was clear that Mr Taylor had been familiar with VAT from some years.  On the face of it, he contended, it was a deliberate decision by Mr Taylor not to pay the VAT, or at least to delay payment, in the face of clear instructions from the Commissioners.  His explanations do not alter that fact.  His explanation that he thought the Commissioners’ ruling was only a local decision was disingenuous:  having asked for a ruling and received one he then treated it as if it did not matter.  It did not assist his credibility.  His criticisms of the way the interview was conducted, that he was not told of his right to silence, that legal representation would have postponed the interview and might have been regarded as a want of so-operation, were not accepted; but even if true they made little difference, since the interview contained nothing that harmed the Appellants and no admissions.  His explanations were that he was aware of other clubs operating the same scheme, that it was an ongoing issue and never clear cut, that nothing was hidden from the Commissioners, and that he was never advised to go on with it.  But he had received clear rulings from the Commissioners, and those should have been followed.  There was no evidence until the last morning of the hearing as to his being advised, or not advised, to carry on with the scheme.  The officers had had difficulty in obtaining straight answers.  His statement came very late in the day, and in view of what was said in it it was surprising that no evidence had been heard from the accountant.

30.	The consequence of the Appellants continuing not to pay the VAT was that they obtained a financial advantage, either long- or short-term.  The fact was unlikely to have been discovered until the Appellants’ file was pulled for a visit; indeed it was little more than luck that the file had been pulled when it was.  It was not a question of not hiding anything: VAT is a self-assessment tax, and it is for the taxpayer to get it right.  The Appellants were told in plain terms what they should do.  That the matter was an ongoing issue was not borne out by the evidence.  There was a clear ruling, almost nothing was done for two and a half years, then the same points were raised again.  Most significant was that there was no appeal against the Commissioners’ ruling.  It might have been expected that there would be an appeal after the Commissioners’ letter of 26 November 1999, if not earlier.  But nothing was done until the officers’ visit.  The fact that the matter was left for so long was inconsistent with there being an ongoing dispute.  Nothing had been heard from the Appellants’ accountant, so that it was hard to tell what advice he had given.  But it was unthinkable that the accountant would advise the Appellants to ignore the Commissioners’ ruling.  The conclusion, Mr Collins contended, was that there was a proper inference that the Appellants intentionally made inaccurate returns when they had been given a clear ruling, and that must amount to dishonesty.

The Appellants’ submissions

31.	Mr Smallwood contended that the initial letter, of 24 November 1997, was not a request for a ruling but a voluntary disclosure of an overpayment of VAT.  The suggested adjustments to the later returns would have been the wrong way to go about the matter.  It had been conceded by Customs that the matter was relatively complex: two views were expressed on the matter by Customs in an internal letter dated 23 January 1998 relating to VAT policy.  Also, Mr Hincks had expressed the view that there was a very strong case to be argued for the Appellants.  The letter of 18 March 1999 was a cry for help, asking for further observations, it was not another letter making the same points as before.  The answer offered no further observations.  The Commissioners could have sent copies of the relevant Notices, they could have made it clear that their ruling was not just a local decision.  There was no reference to any authority or statute.  Clearly at that date the matter was still an ongoing issue.  Further, the Appellants had an expanding business, and the matter was not in the forefront of their minds.

32.	From 1996 onward there had been a number of schemes operated by similar clubs, and from 1 January 2000 there had been a change in the law to counter these schemes.  Group 10 of Schedule 9 to the Value Added Tax Act 1994 referred to these changes, which were effected by SI 99/1994.  The Appellants were aware of the schemes, which made use of loopholes, and did not wish to adopt one because they did not wish to alienate the Customs and Excise.  It would be incredible that a person who took that view should alienate Customs by pursuing a dishonest course.

33.	The evidence of and contained in the interview had been unsatisfactory, because of its surroundings, it was a witch hunt, the officers’ memories were not perfect, and Mr Finn’s statement conflicted with the interview as to the matter of the mention of legal representation.

34.	At the very end of his submissions, Mr Smallwood raised a matter under Article 6 of the European Convention on Human Rights.  This was that the matter should have been dealt with within a reasonable time frame.  The penalty had been issued on 9 November 2000 and the notice of appeal put in on 14 December 2000.  Thereafter extensions had been sought by the Commissioners.  The statement of case had been served on 14 March 2001, the list of documents on 17 April 2001, the Appellants’ defence on 8 May 2001, and the Respondents’ reply on 14 June 2001.  The appeal was then ready for hearing.  Dates to avoid were asked for and given five times between early December 2001 and August 2002.  The Commissioners should have pressed harder for a hearing date.  It took so long to bring the matter on for hearing that the officers’ memories had faded.  This had affected the case.

35.	The Appellants contended that the Commissioners had not proved to the high level of probability that the Appellants had acted dishonestly.  In the event of the Tribunal finding against the Appellants, it was asked to bear in mind that Mr Taylor was a man of good character.  The only want of co-operation was his failure to admit dishonesty, and the amount of mitigation should therefore be increased.

36.	Mr Collins replied that Article 6 had not been canvassed before.  If it was contended that the appeal had been delayed so much that it ought to have been allowed on the ground that a fair trial was not possible, an application should have been made at the beginning of the hearing.  The Appellants had not pressed for the hearing to come on.  No evidence had been adduced that the point was one of substance.  Mr Smallwood said that it was not the intention of the Appellants to make any application on this ground.

Conclusions

37.	We approach this matter bearing in mind that it is for the Respondents to prove that the Appellants have acted dishonestly.  The standard of proof required is the balance of probabilities, though, being a matter involving dishonesty, a high degree of probability is required.  The reality of the matter is that it is the dishonesty of Mr Taylor that is under consideration, since there was no evidence that Mrs Taylor was involved in the matters the subject of this appeal, except only in so far as she is in law a partner.

38.	We find the salient facts to be as follows.  Mr Taylor has been involved in this business since the purchase of the Riverside premises in 1988.  He is familiar with VAT and the submitting of VAT returns, which he has been doing since that time.  It may well be that he had heard tell of schemes whereby similar clubs managed to reduce the amount of VAT for which they were liable in respect of membership subscriptions.  If that is so, and if these schemes were carried on lawfully, it appears to us that they may have been schemes which differed from that operated by the Appellants in some essential features.  In any event, during 1997 the Appellants consulted their accountants on the matter.  This eventually resulted in the letter of 24 November 1997.  It is not expressed as an inquiry or a request for a ruling, and appears to us to be more like a voluntary disclosure.  It stated that the Appellants had overpaid VAT by a total of £16,905 over the previous three years.  However, the Commissioners’ reply of 23 December 1997 expressly requested further information for the purpose of enabling a ruling to be given.  There can, in our view, have been no doubt in the Appellants’ minds, and in particular in Mr Taylor’s mind, that the letter of 26 January 1998 was and was intended to be a ruling, that the monthly payments by direct debit for membership were consideration for supplies of monthly membership, that no supply of credit was involved, and that the payments attracted tax at the standard rate:  no overpayment of VAT had therefore been made.  The next letter from the Commissioners, of 14 April 1998 can only, in our view, have underlined the Commissioners’ ruling.  By that date, Mr Taylor can have been in no doubt as to the nature and effect of that ruling.  Moreover, the Commissioners had, in that letter, advised Mr Taylor what he should do if he wished to appeal to the Tribunal.  After nearly eleven months of inaction, Duckett Parker wrote again to the Commissioners, no doubt on the Appellants’ instructions, effectively repeating the arguments previously advanced, and received the Commissioners’ letter of 7 April 1999, once again repeating their ruling.  In November 1997, and then after the twice-repeated ruling from the Commissioners, and after their visits, The appellants received further advice from Mr Hincks of Mentor Tax Consultants.  

39.	The advice that they received mentioned, more than once, the possibility of appealing to the Tribunal, with the caveat on 27 October 2000 that Mr Hincks himself was tending towards the view that the Commissioners’ ruling may be correct.  That was on the basis that the note on the membership form appeared to mean that members paying by monthly direct debit were receiving monthly membership for as long as they wished (see paragraphs 5 and 13 above).  Before that, the advice received from Mentor had been more optimistic, and yet the Appellants had still not appealed against the Commissioners’ decision, but continued to treat the 30 per cent of monthly fees as exempt.  We find this failure to appeal to be very strange conduct on the part of a person who, if we have correctly understood him, took the view that his conduct in respect of VAT was correct and also that there was an ongoing issue.  It seems incomprehensible to us that he should not have pressed ahead with an appeal if he was really desirous of resolving the matter and truly expected to succeed.

40.	The Appellants had an accountant, Mr Parker of Duckett Parker.  They appear to have sought his advice, and he apparently advised that the Commissioners’ decision should be contested.  Yet it appears that he was never instructed to launch an appeal to the Tribunal, though he was instructed to correspond with the Commissioners. Surprisingly, in the interview, Mr Taylor said, in terms, that he had not seen a copy of the Commissioners’ letter to Mr Parker of 2 June 1998, though he also said that he might have discussed it with Mr Parker.  It would be very strange indeed if an accountant failed to shew to his client what was, at that stage at least, the most important piece of correspondence, and we had difficulty in believing that that could have been so.  Then again, in the interview, he said that Mr Parker had not told him that he must not treat the 30 per cent as exempt, that his accountant was encouraging him in the belief that the Customs decision was wrong, that his accountant did not say to him “Don’t pay the tax, and we’ll argue it” nor did he advise paying the VAT.  Then came that remarkable statement, in which Mr Taylor states that at all times Mr Parker was advising him to continue to operate the concept of nil VAT on interest charges.  He then sought to explain why the matters contained in the statement (see paragraph 27 above) were not to be found in the transcript of the interview.  We found that this statement did considerable damage to Mr Taylor’s credibility, especially when taken together with the interview.  As a result, we found it necessary to look at Mr Taylor’s explanations, both in the interview and in evidence, and also in the statement, with considerable caution.  There was also the fact that, if Mr Taylor’s evidence as to the ongoing issue and the advice he had received were right, this could have been corroborated very easily by calling Mr Parker as a witness.  That corroboration was absent.

41.	It was also the case that Mr Taylor said, in evidence, that if a member of either club paid his subscription monthly in advance he had the right to use the club for that month but not thereafter unless he paid another monthly subscription.  Mr Taylor added, that there was annual membership and there was monthly membership.  These two pieces of evidence shewed us clearly that the monthly payments were, indeed, payments for supplies of monthly membership, not monthly payments for annual membership.  We are not required to come to any decision on the appeal that might have been pursued against the Commissioners’ decision, and we simply remark that that evidence is clearly in accordance with the conclusion expressed by Mr Hincks in his letter of 27 October 2000, that the Commissioners’ decision had been right.  It also follows therefrom that no element of credit was involved.  That must have been within Mr Taylor’s knowledge at all times.

42.	The nature of dishonesty has been considered by the courts on many occasions.   The test is that, to act dishonestly, a person’s acts must be dishonest according to the ordinary standards of reasonable and honest people, and if they were dishonest in that way, the person must have realised that his actions were, according to those standards, dishonest: see R v Ghosh [1982] QB 1053.  His acts must also be deliberate. 
       
43.	In our judgment, Mr Taylor received a ruling from the Commissioners, which was repeated twice, and which he ignored.  He continued to treat as exempt supplies of monthly membership in spite of the Commissioners’ decision, and the Appellants continued to render VAT returns which understated their liability to VAT.  This was done deliberately; there was no room for mistake.  Mr Taylor was aware at all material times, having been so advised, of what he ought to do in order to prosecute the matter if he genuinely intended to contest the ruling, and he did nothing.  We do not accept that Mr Taylor thought that the Commissioners’ decision was only a “local decision”; we were not entirely sure what that expression was supposed to mean, though it appeared to connote that that decision was, in some way ephemeral or was not a definitive decision.  If that was what was meant, we do not accept that Mr Taylor so regarded it.  We do not accept that he regarded the matter as an ongoing issue, nor that, in the light of advice received and in the knowledge that the monthly payments were for monthly membership, he believed that the Commissioners’ decision was wrong. By his conduct, the Appellants obtained a substantial financial advantage.  In our judgment, Mr Taylor knew that the Appellants were not entitled to that advantage, but nonetheless continued to obtain it.  We find that those actions were dishonest according to the standards of reasonable and honest persons.  We find also that the evidence establishes that Mr Taylor was aware that his actions were wrong according to those standards.  In our judgment, therefore, we find, on the balance of probabilities, and with the requisite high degree of probability, that Mr Taylor, acting as he was as a partner in the Appellants, was acting dishonestly.

44.	For the above reasons, we have come to the conclusion that the penalty under section 60 of the VAT Act 1994 was correctly imposed.  We have also considered the degree of mitigation allowed by the Commissioners.  We can see no ground upon which it could rightly be said that insufficient mitigation was allowed, and we therefore consider that the mitigation allowed by the Commissioners should be left undisturbed.

45.	For the above reasons, this appeal is dismissed.  The Commissioners applied for their costs of the appeal in the event of their being successful.  Accordingly we direct that the Appellants should pay the Commissioners’ costs of and incidental to the appeal on the standard basis.  In case there should be any dispute or failure to agree as to costs, we give liberty to both parties to apply to the Tribunal on the matter of costs.  Any such application should be made not later than 56 days after the date of release of this decision.

ANGUS NICOL
CHAIRMAN

RELEASED:

LON/00/1387