CIVIL PENALTY – Liability of directors etc – False invoices – Cut, make and trim business – Whether services to which disputed invoices related had genuinely been supplied – No – Whether dishonest conduct attributable to Appellant as named officer – Yes – Appeal dismissed – VAT Act 1994 s.61

LONDON TRIBUNAL CENTRE

	I HADJIGEORGIOU	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	STEPHEN OLIVER QC  (Chairman)
						LEON WILKINSON  FCIB
					 	JOHN BROWN CBE, FCA, ATII

Sitting in public in London on 19-22 and 28 and 29 May 2003

Ms T Cotsapa FCCA of Charles & Co, accountants, for the Appellant

Kieron Beal, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	Mr Ioannis Hadjigeorgiou, the Appellant, appeals against the decision of the Commissioners contained in a letter of 29 October 1997.  The decision was to transfer to him a penalty raised under sections 60(1) and 76 of VAT Act 1994 for the dishonest evasion of VAT in respect of Toplands Associates Ltd (“Toplands”).  The decision to transfer the penalty to him was made on the basis that the Appellant was a “managing officer” of Toplands (within section 61(1)) and the penalty imposed on Toplands was wholly attributable to his dishonesty.  

Reasons for the delay

2.	The Appellant appealed in July 1998.  A Statement of Case was lodged in May 1999 following successful applications for extensions of time.  The Appellant’s defence and the Commissioners’ reply were lodged in July and September 1999 respectively.  A directions hearing took place in November 1999.  Preparatory work took some months and the appeal was listed for a five day hearing in late November 2000.  On 28 October 2000 the appeal was stood over, at the tribunal’s direction and unless the Appellant objected (which he did not), pending the outcome of the appeal in Han and Yau v Customs and Excise Commissioners which was concerned with the question of whether penalties of the sort appealed against here were of a criminal nature.  In July 2001 the Court of Appeal decided that the penalties were of a criminal nature. Correspondence then ensued referring, among other things, to the implications of the Han and Yau decision.  In June 2002, following an application from the Appellant, the tribunal ruled that a preliminary hearing should take place to determine whether the assessments to tax and to the penalty were invalid.  In December 2002 the tribunal ruled that the assessments were valid.  In January 2003 the tribunal re-started the hearing procedure for the main appeal and the matter was listed for a four day hearing in May and June 2003. 

3.	We have set out the background to this appeal in order to explain why it has taken so long for it to come to a hearing.  To a large extent the delay has resulted from the Appellant’s own decisions.  The Commissioner’ case has been well-documented from the start.  The Appellant’s defence was lodged in mid-1999.  We have nonetheless kept an eye on the possibility that the long time since the events giving rise to the assessments happened may had prejudiced the Appellant’s case.  No suggestion was made by his representatives that he has been prejudiced and, taking everything into account, we do not think that the presentation of his case has been materially weakened by the passing of time.

The Facts

4.	Toplands started trading on 31 January 1992.  It operated as a “cut, make and trim unit” in the clothing industry from premises in London N4.  It registered for VAT with effect from 31 January 1992.  It ceased trading in May 1997 and went into liquidation in June 1997.  

5.	The Appellant’s wife was the person named in the VAT returns file for Toplands; she was the sole director while the company secretary was Chris Charalambous.  The Appellant has been Toplands’ managing officer; this has been accepted in his defence.  

6.	Officers of the Customs and Excise had visited Toplands’ premises in July and October 1995 to verify a repayment claim.  The circumstances of that claim are not relevant to the present issue.  In October 1996 the Customs officers made an unscheduled visit to the business premises; that same day the Appellant was interviewed.  He had been shown a version of the Customs leaflet N730 translated into Greek before that interview.  Further interviews took place in November 1996 and March 1997.  The Appellant was asked questions about the Notice before the second interview and he confirmed that he had understood it.  We were provided with and taken through copies of the transcripts of the interviews.

7.	Books and records of Toplands were taken by the Customs officers for inspection.  They had spotted certain invoices in respect of which Toplands was claiming credit for input tax and which, they thought, needed checking.  The books and records provided to the Customs officers and those referred to us in evidence showed that the payments relating to all those invoices, covering the period from 4 January 1994 until 24 June 1996, had been entered only in the petty cash records.  

8.	The Commissioners formed the view that the “tax” referred to in those invoices, bearing the names of so-called “cut, make and trim units” in respect of which Toplands claimed input tax relief, did not relate to supplies of services used by Toplands for its business.  Toplands, they considered, had evaded tax by claiming input tax relief for that “tax”.

9.	There were about a hundred of those invoices. The names of eight different alleged cut, make and trim units appear on the invoices.  The first two, in time, bear the name Hanigold Ltd:  there follow nineteen invoices with dates from 10 March 1994 to 26 June 1994 bearing the name Ramore Ltd: there follow 22 invoices with dates from 28 June 1994 to 29 November 1994 bearing the name Baymode Ltd: there follow twenty invoices with dates from 7 December 1994 to 9 May 1995 bearing the name Eurotrex Ltd: then follow five invoices with dates from 15 May 1995 to 16 June 1995 bearing the name M Georgiou: then follow fourteen invoices with dates from 26 June 1995 to 26 September 1995 bearing the name Auburnmist Ltd: then follow thirteen invoices with dates from 4 October 1995 to 21 January 1996 bearing the name Fashion Scene Ltd and the last five invoices (with dates from 15 March 1996 to 24 June 1996) bear the name Respect Ltd.  

10.	When giving evidence the Appellant referred to the companies and to the individuals whose name appear on the disputed invoices as “cut, make and trim units”.  Toplands was itself a cut, make and trim unit; it had the capacity to take on orders from “manufacturers” receiving instructions and the cloth from those manufacturers.  Toplands was able, using its own staff, to carry out the whole process of cutting the cloth, sewing and overlocking the material, making up and finishing the garments, fixing labels and buttons, pressing the finished products and returning them to the manufacturer.  Some of these processes would be carried out for Toplands by “outworkers” or “homeworkers”; most of these would be unregistered and carrying on business in a small way. Outworkers with greater processing capacities might themselves be VAT-registered cut, make and trim units.  The disputed invoices, as noted above, purport to have been issued to Toplands by these registered cut, make and trim units.  

Toplands own staff

11.	Toplands had a number of employees on its payroll at its factory.  When interviewed the Appellant referred to between ten and fifteen employees.  In cross-examination this came down to six to seven employees.  The employees were used mainly for cutting and finishing the garments.  The Appellant’s brother-in-law, Alex Litras, who had been interviewed by Customs in October 1996 but did not give evidence before us, was employed by Toplands and did “a bit of everything”.  As already mentioned Toplands had Mr Chris Charalambous as his company secretary and a Mr Kyriakos as a book-keeper.  The total wage bill for Toplands’ own staff was on average £1,200-£1,500 per week.

Records of  work done for Toplands

12.	Toplands’ outworkers would come to Toplands’ factory and collect the bundles of prepared cloth etc, make up the garments and return them to Toplands.  The Appellant accepted in evidence that he was responsible for placing work with both outworkers and cut, make and trim units.  Bundles sent to these outworkers were recorded on dockets together with the details of the work required.  Toplands kept a top copy of these.  Some of these, contained in “red books”, were produced to the visiting officers (one of whom was Mr Renford Coleman who also gave evidence) and put in evidence before us.  No such records were produced to us of any of the work to which the disputed invoices purported to relate.  

Relevant statutory provisions

13.	The provision relating to civil evasion penalties are set out in section 60, 61, 70 and 76 of the Act.

14.	Section 61(1) provides 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, 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.”

15.	Section 60(2) and (3) set out how the amount of VAT evaded is to be determined for the purposes of that section.  Section 67(7) states that the burden of proving dishonest evasion of  VAT shall lie on the Commissioners.  Nonetheless, by virtue of rule 7(2) of the VAT Tribunal Rules 1986, the Commissioners are not required to prove any matter which is admitted by an appellant in his defence.

16.	Section 61 provides as follows:

“(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 times 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”.

17.	Section 61(5)(b) gives the named officer a right of appeal to the Tribunal. Where the named officer is referred to in this section as a “managing officer” this means any “manager secretary or other similar officer of the body corporate or any person purporting to act in any such capacity as a director” : see section 61(6). 

18.	Section 70 permits the Commissioners to reduce the penalties to such amount as they think proper by way of mitigation.  The same power is afforded to the tribunal on appeal.  

The issues

19.	We have already noted that the Appellant admitted in his defence that he was Toplands’ managing officer.  The issue for us, therefore, is whether the evidence, documentary and oral, relied upon by the Commissioners satisfies us on balance of probabilities that (i) Toplands through the Appellant has dishonestly carried out acts for the purposes of evading VAT, (ii) Toplands’ conduct makes it liable to a penalty under section 60 and (iii) the conduct giving rise to that penalty is wholly or partly attributable to the Appellant.

The contentions in summary

20.	The Commissioners’ case, in essence, is that none of the disputed invoices relates to supplies by the alleged cut, make and trim units whose names appear on those invoices made out to Toplands.  The Appellant must have known that the invoices were not genuine.  Thus Toplands dishonestly evaded VAT and the dishonest conduct was attributable to the Appellant.  The Appellant’s case is that Toplands received the relevant services from each of the cut, make and trim units named on the particular disputed invoice.  He was not dishonest because the supplies were received and input tax shown on the invoices was properly claimed.  The basis for the Commissioners’ case can be summarized as follows:

(a)	None of the suppliers whose names appeared on the disputed invoices has, according to the Commissioners’ researches, declared the output tax shown on the invoice in its own VAT return. 

(b)	The docket books produced by Toplands to the Commissioners are the prime evidence of how Toplands keeps tabs on materials and work passed on to outworkers and are therefore essential “work in progress” records.  These show no records at all of any of the work and materials allegedly giving rise to the disputed invoices.

(c)	None of the disputed invoices contains a receipt showing it as having been paid.  

(d)	As the Commissioners analyzed the accounts and cash records, it appeared to them that throughout the relevant period Toplands had insufficient cash resources to be able to finance the payment (in cash, as is suggested by the fact that the disputed invoices are referred to only in the petty cash accounts) of the sums due on those invoices bearing in mind that the other cash payments or commitments had to be made out of those cash resources.  (We will examine this in some detail later.)

(e)	It appeared to the Commissioners when they investigated the circumstances surrounding each of the cut, make and trim units whose names appeared on the disputed invoices that there were significant doubts as to their authenticity. All those cut, make and trim units were either missing traders or went into bankruptcy/liquidation; all of them had failed to account for VAT on the services referred to in the disputed invoices; or there was some other question mark on their capacity to provide the relevant services.

(f)	It appeared to the Commissioners that the payment by Toplands of such large sums to its rival cut, make and trim units made no economic sense; it would have been cheaper and safer for Toplands to have used its own unregistered outworkers.

The credibility of the Appellant

21.	The Appellant gave evidence before us and he was cross-examined at length.  The Commissioners pointed to a number of features of the Appellant’s evidence that he was not, where it suited him, a witness of truth.  First, it was pointed out, the Appellant had admitted in cross-examination that he had been involved in a number of other failed business enterprises, some of which had led to the liquidation of the company carrying on the trade.  That, it was said, was almost certainly the reason why he had not become a director of Toplands, even though the reason he had given in interview, though subsequently denied in cross-examination, was that he had had a matrimonial dispute with his wife.  In cross-examination, inconsistently with that, he had said that it had been his wife who had set up in business with him.  Second, it was alleged for the Commissioners, the Appellant had had a director’s disqualification order made against him by the Department of Trade and Industry shortly after the liquidation of  Toplands. Third, our attention was drawn to the Appellant’s admission in interview that on a number of occasions Toplands had not accounted for certain off-record sales of  “cabbage” or damaged items.  “Cabbage” is a generic term used in the trade to describe discontinued items, or seconds, which are sold at significantly reduced prices. He accepted that he might have forgotten to tell his own accountant about some of the cash sales.  He said in the course of interview that Toplands would sell the damaged goods this way and not declare them.  This was also admitted in the course of the third interview.  This admission was denied in cross-examination where the Appellant appeared to acknowledge the need for all sales to be declared to the Commissioners.  This inconsistency, it was said, called in question the Appellant’s credibility.  Fourth, our attention was drawn to the fact that Toplands had failed to file any VAT return after June 1996 even though it had continued to trade.  The Appellant was aware that Toplands should have filed returns but said that the company could not afford to pay the VAT.  That factor, said the Commissioners, pointed to dishonesty on the Appellant’s part.  Fifth, and also damaging the Appellant’s credibility, was his admission in cross-examination that he had occasionally signed Toplands’ VAT returns in his wife’s name but had then contended that she had in fact signed most of the returns.  It is on the record that the Appellant’s wife denied signing the VAT returns.  This conflict of evidence not only damaged the Appellant’s credibility; it pointed to his general dishonesty.

22.	We recognize, on the strength of those points, that the Appellant was prepared not to tell the truth if it suited him.  Having said that, we recognize also that it is for the Commissioners to prove their case and a lack of candour, or even a tendency to mislead, on the part of an appellant goes nowhere near proving their case.  Nonetheless, when we have approached the conflicts in the evidence, we have borne these factors in mind. 

No returns of output VAT on alleged supplies

23.	Reverting to the points on which the Commissioners rely as proving the dishonest evasion of VAT by Toplands and its attribution to the Appellant, we are satisfied from the evidence given by the witnesses for the Commissioners (i.e. Mr Coleman and by three other officers, Messrs Mitchell, Spranklen and Rushant) that none of the VAT shown on any of the disputed invoices has been declared by those alleged traders in their VAT returns.  Some of those traders have disappeared without filing returns and are classified as missing traders. Others have gone into liquidation.  Where records have been available from the relevant liquidator, these records have not revealed entries for or copies of any of the disputed invoices. We accept those facts as primary evidence. The Appellant’s representative, Miss Cotsapa, urged us to leave this factor out of account because there was no evidence that the Commissioners had all the relevant records.  Our reaction to this feature of the Commissioners’ case is to say that on its own it would not prove dishonesty in the case of either Toplands or the Appellant.  But it is not inconsistent with the possibility that Toplands and the Appellant have been dishonest in claiming input VAT on non-existent supplies. Taken in association with other evidence pointing to dishonesty, it could, at the least, tend to corroborate that.  

24.	In this connection it is relevant that the same pointer can be discerned from the circumstances of all the eight alleged suppliers who provided disputed invoices.  It will be recalled from the summaries set out above that each of those suppliers was used consecutively and for a relatively short period of time.  In evidence the Appellant said that Toplands had ceased to use all eight of them because there had come a time when their work had been found to have become unsatisfactory.  This strikes us as most unlikely. Why should the work suddenly prove to be unsatisfactory?  Why, when according to the Appellant’s evidence his brother-in-law Mr Litras had checked out the credentials of each of those alleged suppliers, should they all turn out to be producing unsatisfactory work within a relatively short period of time?  We do not accept that by coincidence all the alleged suppliers, in succession, started off making satisfactory supplies and then, following a sudden tailing off in their standards, were dismissed and replaced by new and as yet untried suppliers.  This is too extraordinary to be accepted without strong supporting evidence.  There was none.  

No records of work going out to alleged suppliers

25.	We turn now to the point relied on by the Commissioners, namely that the red docket books which record which garments have been passed on to which outworkers contain no references at all to any of the suppliers whose names appear on the disputed invoices.  No other document has been produced to show how Toplands and the Appellant could have known which items were passed to which of the alleged cut, make and trim units which were said to have carried out some £400,000 of work over the two year period (see paragraph 26 below).  It is particularly significant that those cut, make and trim units will have been in competition with Toplands.  We would have thought that, had the work and the materials been passed on by Toplands to those alleged cut, make and trim units, an elaborate and detailed record would have been kept.   At the present hearing the Appellant referred to some blue books as the relevant records; at no stage was any reference made to those blue books in the course of either the interviews of the Appellant or in his evidence-in-chief.  It was only when he came to cross-examination that he referred to these.  Surely, if something as important as the blue books had existed, these would have been produced, or at least referred to, at a very early stage in order to allay the suspicions of the investigating Customs officers.  We do not accept the Appellant’s evidence about the so-called blue books.

Absence of receipts for payment for alleged work

26.	We move on to deal with the fact, relied on by the Commissioners, that none of the disputed invoices contain any proper receipts for payment by Toplands.  The VAT shown as due on the disputed invoices comes to over £60,000.  They are all standard rated at 17½%.  Consequently supplies of over £340,000 must have been made to Toplands to generate this level of input tax.  This means that Toplands would, according to the Appellant, have made payments of over £400,000 in cash to eight separate cut, make and trim units in a little over two years.  It is noteworthy that none of the invoices is receipted to show that the cash has actually been paid.  Toplands would have no way of proving that it had paid the sums had the invoice in question been re-presented by the alleged cut, make and trim unit for payment.  The only other possible place that could have recorded such receipts is in the relevant blue book referred to by the Appellant in cross-examination. We have already explained that we place no credence on the assertion that a blue book or blue books existed.  

Non-availability of cash resources to cover payment for alleged supplies

27.	The Customs officers made calculations of the cash available to Toplands to determine whether, as the Appellant claimed, it had sufficient cash to make cash payments to each of the alleged cut, make and trim units referred to in the disputed invoices.  Our attention was drawn to the fact that Toplands had at least four claimants for its cash resources.  These were those outworkers who wished to be paid by cash, Toplands own employees, day-to-day petty cash expenses and (allegedly) the cut, make and trim units whose names appeared on the disputed invoices. 

28.	The particular items claimed to have been paid for in cash have been summarized on weekly summaries prepared on behalf of Toplands by its accountant/bookkeeper. This summary shows that the cash withdrawn from Toplands’ bank, coupled with any surplus (or float) from the previous week, is said to have funded all of Toplands’ cash payments. Cash payments have been set out, seemingly in full, in Toplands’ petty cash book. The weekly summaries that we saw in evidence, when analyzed, show a potential problem with Toplands’ cash payments which the Appellant was unable to explain.  They show a number of weeks in which Toplands spent more cash than it actually had available to it.  From this simple fact it follows that it could not have paid for all those items in cash.  The wages items for those weeks were relatively low.  Thus the only supportable explanation is that the alleged cut, make and trim units referred to in the disputed invoices and to whom payments are shown on the weekly cash sheets were not in fact paid in cash, or by any other means, on their invoices.  This feature, commented Mr Beal for the Commissioners, casts significant doubt on the fact that those particular supplies having been made. We were then referred to a handwritten weekly analysis for June 1996 which followed the information on typed up weekly cash sheets.  The handwritten sheets show that the sums to be paid in cash and the VAT appeared to have figured in the workings; but the details of the payee appears to have been left blank.  The Appellant denied that there would have been any reason why the bookkeeper did not have any invoice.  Mr Beal for the Commissioners suggested that the handwritten sheets were awaiting confirmation on the name of the invoice to be used before they could be finalized.  This inference was supported by the fact that the name Baymode found in the bound petty cash book had been tippexed out on two occasions and replaced by the name Eurotrex.  This, it was said, suggested that neither Baymode nor Eurotrex had made any genuine supplies.  There was, we think, no satisfactory evidence to displace this inference.

29.	The Commissioners relied on the proposition that a large part of Toplands’ cash resources had been used up in making cash payments to its own unregistered outworkers.  The Appellant had stated in interview that outworkers were mostly paid in cash, but some had been paid by cheque and in cross-examination he admitted that some would have been paid in cash had they asked for it.  The Commissioners say that a significant proportion of  the outworkers would indeed have been paid in cash and the contested invoices have been used to “cover” substantial cash payments made to unregistered outworkers.  In this connection we heard from Mr Coleman that, from his own experience, most unregistered outworkers would in fact be paid in cash throughout the industry.  Moreover, it was suggested for the Commissioners, that many outworkers have their own machinists and the outworkers in their turn will have needed cash to pay wages to their own machinists.  The Commissioners assembled a table showing a list of names taken from the red books (i.e. the dockets showing work given to outworkers).  The Commissioners analyzed the cheque payments and could find no trace of cheque payments to a large number of those names.

30.	The Commissioners analyzed the (admittedly incomplete) dockets covering work given to outworkers between 26 February 1996 and 30 June 1996.  Those dockets showed that the unregistered outworkers made over 43,000 garments.  We were then referred to the invoices said to have been issued by Respect Ltd, one of the alleged cut, make and trim units; this showed that in the same period it had made only 3,620 garments.  These figures indicated that the percentage of overall production over the relevant period attributable to unregistered outworkers was 92% while that attributable to the alleged cut, make and trim units was 8%.  The disputed invoices, it was pointed out, accounted for nearly £350,000 worth of expenses over a little more than a two year period.  According to Toplands’ accounts the total amount of money spent on subcontractors in the year to 31 January 1995 was £241,000 and for the next year was £365,000.  Adding those figures together, it would be seen that expenses for the alleged cut, make and trim units accounted for nearly 58% of Toplands’ overall expenditure on sub-contractors.  But, by comparison, according to the period over which figures were available (i.e. 26 February to 30 June 1996) 58% of expenditure would have been spent in achieving only 8% of production.  The strong inference from that, say the Commissioners, is that many outworkers would in fact have been paid in cash and this is confirmed by the figures obtained from the cheque stubs.  The Commissioners’ analysis of the cheque stubs from the period from January 1994 to December 1994 shows cheque payments of only £32,000.  Over the same period, the disputed invoices amount to over £19,000 in VAT and this equates with alleged supplies of £110,000.  If the figure found in the accounts (referred to above) of £241,000 for expenditure on sub-contractors for the 12 months to 31 January 1995 is accepted as a broadly correct annual spend, then nearly £100,000 of payment remains unaccounted for (i.e. £241,000 minus £32,000 (for cheque payments) minus £110,000 (allegedly paid in cash to the alleged cut, make and trim units) making £99,000 unaccounted for).

31.	Those factors, we think, call in question the credibility of the Appellant’s assertion that the disputed invoices relate to supplies paid for in cash.  They call for an explanation and none was provided.

32.	Then the Commissioners questioned whether and to what extent each outworker could have been paid by cheque as alleged by the Appellant over the period from 26 February to 30 June 1996.  The Commissioners have produced a table of items of work done by unregistered outworkers for that period.  That showed a total of 43,000 items as having been so produced. The Commissioners’ analysis of the cheque payments shows that those items, if all paid for by cheque, would have cost Toplands some £22,500. That would have equated with a price per item of £0.51.  That, it was said, was unrealistically low given other evidence available. They referred for example to evidence given by a Mr Minas, called before the Commissioners, who explained that he had received £1 a garment for his outworking activities during July 1996.  

33.	All in all, the analysis of the cheques paid to individual recipients as made by the Commissioners indicated strongly that the unregistered outworkers could not have been paid substantially by cheque.  They must have also received substantial payments in cash.  We were referred to an unregistered outworker known as “Nick” who in the period from February to September 1996 had processed over 22,000 garments.  Cheque payments apparently made to that person (including his associates) came to just over £8,000.  £8,000 for 22,000 garments falls far short of the expected payment per garment.  The Commissioners contended on that basis that he must also have received substantial payments in cash.  Other examples led to the same conclusion.

34.	We have attempted to summarize the outcome of the Commissioners’ research into the figures.  Our summary is  necessarily selective.  But we are satisfied from the analysis provided by the Commissioners that the evidence points strongly against the Appellant’s claim that the alleged cut, make and trim units (referred to in the disputed invoices) were paid in cash.  There simply was not cash available to support such payments.  The cash had been used in making payments to the unregistered outworkers.  The inference that no payments were in fact made to the alleged cut, make and trim units is, we think, strong.  

35.	In reaching this conclusion we have also borne in mind the fact that the amount of cash shown to be available on the cash summary sheets and in the petty cash book is insufficient to meet the realistic wage levels of the business.  We know from the evidence and from the notes of interview that the Appellant himself would take about £300 a week in wages and that the same would be paid to his wife.  This has been confirmed by a PAYE slip.  The Appellant accepted in cross-examination that these wages would have been paid in cash and not by cheque.  In this connection we note from the records of net wages that there were some weeks where the amount of cash attributed to wages was actually insufficient to meet the drawings by the Appellant and his wife, let alone any of the 6 to 15 other employees employed by Toplands.  This tends to reinforce the contention of the Commissioners that those employees could not have been paid realistic wages in cash while cash was required to make payments to the alleged cut, make and trim units in respect of the contested invoices.  It follows that the evidence shows that the alleged cut, make and trim units cannot have been paid cash for the work allegedly covered by the disputed invoices.  There is no record of their having been paid by cheque.  The strong inference must be that no supplies were made by the alleged cut, make and trim units and this explains why no payments were made to them.

Circumstances of the alleged suppliers of cut, make and trim services

36.	What we have said so far summarizes the concern of the Commissioners that gave rise to further investigations.  These further investigations led, as we have already noted, to some striking features.  In the first place only one alleged cut, make and trim unit has been used at the time.  Each has, as we have already mentioned, successively fallen from favour within a relatively short period of time and the Appellant’s explanation for this is, we think, simply not credible when it has to be applied to eight separate units.  But that is not the end of it.  Mr Coleman gave evidence (supported by the other officers) as to other reasons why he considered that the disputed invoices did not evidence genuine taxable supplies.  

37.	Starting with Hanigold Ltd, it will be recalled that there were only two invoices issued by this alleged cut, make and trim unit.  Both showed a business address. The Commissioners produced a witness statement from the occupant of those premises which shows that the premises had been her residential address for 32 years.  What is more Hanigold is recorded as a missing trader.  The Appellant stated in evidence that he had in fact dealt with two individuals purporting to represent Hanigold.  They had given him a business card and he had dealt with them on that basis.  A problem we have with that evidence is that it was not explained to the Commissioners at the time of their investigations.  It seems to us inconceivable that the Appellant would not have carried out certain rudimentary checks on units before entrusting work and materials of considerable value to them.  The Appellant said in evidence that he would send his brother-in-law out to make the checks.  We did not have the benefit of any evidence from Mr Litras, the Appellant’s brother-in-law.  Miss Cotsapa representing the Appellant drew our attention to the fact that Hanigold was only dissolved in July 1995 and that it could well have been carrying out work for Toplands irrespective of the fact that it became a missing trader.  That may be so, but it is, we think, mere surmise. What is more, she pointed out, Hanigold had in fact used another address.  But this other address turned out to be the office of an accountant and could not have been a place of  business for Hanigold.  In summary therefore the evidence, such as it is, indicates that Hanigold had not genuinely been supplying services to Toplands.  

38.	The next alleged cut, make and trim unit in the sequence was Ramore Ltd.  The case for the Commissioners was that the business premises, when investigated by an officer of the Customs for purposes of serving a notice requiring the provision of security, revealed that there was no machinery installed that could have provided the necessary work process.  What is more, according to Mr Coleman’s evidence, the premises whose address appeared on the disputed invoices were a small shop and it did not apparently have the capacity to deal with the quantity of garments shown on the disputed invoices.  On the other hand the Appellant claimed that he had personally visited the premises and that they had the capacity to produce the amount of garments on the disputed invoice.  It is however significant that in interview the Appellant had said that he had never visited the premises himself.  Also in the course of interview the Appellant stated that he had visited the factory of Michael Georgiou though he did not mention any others.  He indicated that his brother-in-law, Mr Litras, would have visited the premises.  It is noteworthy however that the Appellant had denied in evidence having visited Mr Georgiou’s factory.  Only Mr Litras could have resolved this and he was not called to give evidence.

39.	Turning now to the invoices alleged issued by Baymode Ltd from 28 June until 29 November 1994, the Commissioners pointed to unexplained oddities about the numbering and sequence of those invoices.  They pointed out that Baymode had ceased trading in December 1994. An entry for an invoice from Baymode in the cashbook of  Toplands appeared to have been tippexed out and the name of Eurotrex replaced on two occasions.  The inference, the Commissioners suggested, was that the bookkeeper had been told to replace a Baymode invoice originally given to him with one from Eurotrex once it was realized that by the date in question Baymode had in fact ceased trading.  And it was pointed out that invoices taken by the Commissioners from Baymode’s subsequent liquidator indicated that only a small number of invoices have been used and the rest were unused.  The company had been run by Michael Georgiou who, according to the evidence that we heard, had had substantial business dealings with the Appellant and had a long record of non-compliance of VAT matters.  The evidence indicates that no used invoices for services by Baymode to Toplands were either issued or found.  The suggestion of the Commissioners is that Mr Georgiou had provided the Appellant with unused Baymode invoices shortly before that company went into liquidation.  Our conclusion is that the evidence in relation to the invoices bearing the Baymode name tends to show that Baymode provided no services to Toplands.  No evidence has been provided to demonstrate the contrary.  

40.	Invoices bearing the name Eurotrex Ltd have dates from 7 December 1994 until 5 May 1995.  There were 20 of these.  The Appellant, when interviewed, stated that he had checked out the premises of Eurotrex before consigning material to them.  The Commissioners obtained a witness statement from the director of Eurotrex, a Mr Pavlou.  A visit from an officer of the Customs (Mr Spranklen) in November 1994 had shown that all Eurotrex’s supplies had been for export (confirming the information obtained from Mr Pavlou). The returns filed by Eurotrex for all subsequent periods showed that no taxable supplies had been made and that it had ceased trading on 31 March 1995.  It is significant that the Appellant seeks to suggest that six invoices raised after this date are nonetheless genuine.  It went into liquidation on 17 May 1995.  When he came to give evidence in chief the Appellant said, for the first time, that he had spoken to Mr Pavlou at Eurotrex who had informed him that his business had been mostly for the export market but that this market had not been performing favourably and that he therefore needed some cut, make and trim work.  We note that this was the first time that this explanation was given for the Appellant who had on an earlier occasion through his accountants given a detailed explanation by correspondence, in the course of which no mention had been made of it.  Secondly, in interview the Appellant had been asked about Eurotrex and had not initially been able to identify who the correct director was.  Thirdly, the Appellant had stated in interview that he had not carried out any checks about Eurotrex prior to giving them the dockets beyond taking car number plates.  Lastly, in the course of interview, the Appellant had stated that he had never actually visited the premises.  In the light of the conflict of evidence it is our view that the Appellant’s evidence is not to be believed.  It is, we think, unlikely that Mr Pavlou would have deliberately misled the Commissioners about the nature of his business.  It is also significant that Mr Pavlou has not been called by the Appellant to substantiate the Appellant’s evidence.  Miss Cotsapa for the Appellant contended that Eurotrex could well have been trading even though the liquidator in his report stated that it had ceased to trade on 31 March 1995.  This, we note, is quite possible; but there is no evidence to the effect that it did continue to trade after that date.  All in all the conflict of evidence on this issue is more in favour of the Commissioners.  And there is, we think, no apparent reason why Mr Pavlou should have been misleading the Commissioners.  The inference is that Eurotrex did not provide the services to which the disputed invoices relate.  

41.	Five invoices were issued bearing the name “M Georgiou” between 15 May and 16 June 1995.  The invoices are not in sequence.  They start with 551 but drop back, for the last two to 406 and 407.  The Commissioners’ evidence was that no VAT had been declared by Mr Georgiou either in respect of the invoices or indeed on this registration. When the premises were visited by the Commissioners and the records removed, none of the disputed invoices was found.  No evidence was put forward on the Appellant’s behalf to controvert the otherwise strong inference that Mr Georgiou had been making no supplies of services referred to in the disputed invoices to the Appellant.  Mr Georgiou might have explained the position to us but he was not called by the Appellant to do so  

42.	The name Auburnmist Ltd appears on 14 disputed invoices issued between 26 June and 26 September 1995. Auburnmist entered into liquidation on 18 December 1995 and the liquidator’s records contained no reference to any of the disputed invoices. The disputed invoices gave an old address which was crossed out on several of them.  No change of address had been given to the Commissioners.  The output tax had not been accounted for by Auburnmist. The evidence of the Appellant was that he had simply dealt with two officers of the company namely Chris Theocarous and a Mr Panyiacous. Mr Theocarous gave evidence. He was unable to explain why the disputed invoices were not in the liquidator’s records.  Nor could he explain why none of the VAT had been accounted for or why no VAT return had been filed by his company after February 1995. He had claimed that the invoices were genuine invoices in respect of supplies to Toplands. He said that it had not been his handwriting on the invoice.  The best he could say was that the invoices looked like Auburnmist invoices.  Miss Cotsapa for the Appellant observed that there appeared to have been far more used invoices referred to in the liquidator’s property register than had been made available to the Commissioners.  There was therefore no reason to suppose that Auburnmist had not carried out the relevant work for Toplands. This again is, we think, mere surmise. Such evidence as is available to us indicates, as with the other companies that we have dealt with, that Auburnmist did not provide the services to which the relevant disputed invoices related.  There is no evidence to rebut this.  

43.	Thirteen invoices issued in the name of Fashion Scene Ltd bear dates between 4 October 1995 and 21 January 1996.  The Commissioners formed the view that no relevant supplies had been made.  This was based on evidence of  Mr Coleman whose evidence was that the premises whose addresses are found on the invoices were either residential premises or later a unit used on occasions for storage.  Mr Coleman said that he had interviewed a security guard who told him that the premises said to have been occupied by Fashion Scene were in fact used for storage and that it had left in February 1996.  Fashion Scene is recorded as a missing trader by the Commissioners and no VAT on the invoices has been accounted for by it.  The Appellant’s response was that he knew nothing about Fashion Scene; however a man had come to the Appellant’s factory and picked up the work.  It is improbable, we think, that the Appellant would not have had some checks carried out on Fashion Scene before Toplands parted with the material. Those investigations would have revealed that Fashion Scene was trading from a residential address.  The Commissioners’ evidence about Fashion Scene indicates to us that none of the services to which the disputed invoices were led were in fact carried out.  There is no evidence to rebut this.  

44.	Five invoices bearing the name Respect Ltd were found by the Commissioners among the records of Toplands.  These were issued between 15 March 1996 and 26 June 1996.  The VAT registration form for Respect Ltd had been signed by a Mr Terry Costa.  The evidence was that he subsequently worked either for Toplands or in the same premises as Toplands for its closely related company, Offshore Associates Ltd.  When interviewed the Appellant admitted that Respect Ltd’s address at Putney High Street was known to be run by a “Mr Hossain”.  The address is a retail address.  When the Commissioners obtained a witness statement from a Mrs Halide Hosseyin, she said that the business sold finished ladies’ garments only.  She also said that the business had ceased trading in January 1995.  The evidence from the landlord of Respect Ltd’s address was that the tenants had left in January 1996, i.e. before the dates on any of the disputed invoices.  None of the disputed invoices has been accounted for by Respect Ltd.  The Commissioners pointed to a cheque drawn by Toplands in favour of a Mr A Hossain.  While it was not clear whether he was related to Mehmet Hossain, a former director of Respect Ltd, the Appellant’s accountant in a letter dated 14 May 1998 described Mr Asif  Hossan as being in charge of Respect Ltd.  The Commissioners asked us to infer that the Appellant was paying for the invoices to be supplied.  This, it was said, was quite possible having regard to the link with Terry Costa.

45.	The response for the Appellants was that Mrs Husseyin had admitted in the statement that she had not been involved in the running of the business; it means that she would not have known whether and where any manufacturing have been taking place.  In fact, it was said, Respect Ltd had been manufacturing from other premises.  There was therefore no reason to conclude that Respect Ltd had not done the relevant work for Toplands.  In response to that the Commissioners observed that the invoices were handwritten.  Why not therefore write the correct address on them?  

46.	The facts relating to Respect Ltd are, as we understand them, in line with those relating to all the other companies named on the disputed invoices.  Respect Ltd, in common with the others, had no records of its own of any supplies to Toplands.  The circumstances of its trading premises suggests that it was not in a position to provide any of the services to which the disputed invoices purported to relate.  The Terry Costa link raises suspicions.  Overall therefore we would be inclined to conclude that there were no supplies of services by Respect Ltd to Toplands unless evidence were provided by the Appellant to indicate otherwise.  There has been no such evidence in the present case.

47.	The only apparently unequivocal evidence put forward for the Appellant to the effect that the work to which the disputed invoices related was done for Toplands and that the invoices were indeed valid is found in five statements each headed “To whom it may concern”.  Each of these letters purports to have been written by an officer of the companies whose names appear on the disputed invoices i.e Auburnmist, Ramore, Eurotrex, Baymode, and Respect. Each statement confirms “that the company did outdoor work for Toplands” and that “all invoices issued to Toplands were valid invoices.”  These letters were produced for the purposes of the appeal. We cannot accept that they have any evidential value, particularly as none of  the writers were called to give evidence.

48.	The last of the six points relied on by the Commissioners was that the provision of services by the alleged cut, make and trim units at a cash cost of some £400,000 made no economic sense to Toplands.  Those cut, make and trim units were, it was said, competitors of Toplands.  They would have had to have charged a margin to cover their cost of running their factories.  And in a competitive market Toplands would have needed to pitch its work at the lowest price.  This could have been achieved by the efficient use by Toplands of its own employees and unregistered outworkers.  The use of such   outworkers would have been cheaper than using the cut, make and trim units.  The Commissioners observed that over the period from 26 February 1996 to 30 June 1996, Respect Ltd had invoiced Toplands for VAT of £2,203.  This would have represented taxable supplies of £12,589.  In return Toplands obtained 3,620 completed garments.  Over the same period the dockets contained in the red books showed that the outworkers had produced 43,000 garments which, on the Appellant’s case, were paid for by cheques totalling £26,622.  Why use Respect Limited when the cost of using outworkers is so much less expensive?

Conclusions

49.	We do not think that any of the individual points relied on by the Commissioners is, on its own, decisive. But the cumulative effect of them all produces a strong inference that the services to which the disputed invoices refer were not made.  For the Appellant’s case to be correct, a remarkable  set of circumstances has to be explained as coincidence.  In the first place, the invoices passed by the Appellant to his accountants for the purposes of making the VAT returns and making the payment claims all went undeclared by the purported supplier in the supplier’s VAT returns.  This would mean that all eight different suppliers had coincidentally each failed to account for taxable supplies on their goods.   Secondly, as we have observed, each of those suppliers would have failed to meet Toplands’ standards of work on a sequential basis after a limited period of time and would have been replaced by a different entity.  By contrast an examination of the unregistered outworkers shows that they were used concurrently and not sequentially.   Third it is apparent that each of the alleged suppliers had either been forced to close or cease trading or had simply disappeared shortly after carrying out the alleged work for Toplands.  Fourth, all record of  the alleged invoices in the books and records of the suppliers must then have disappeared, even where (as in the case of  Auburnmist) they passed directly to the liquidator.  Moreover why should so many of the suppliers have “inadvertently” issued invoices for work done from an address that was no longer the current address for that alleged supplier, or from an address at which that “supplier” could not realistically carry out cut, make and trim work.  Fifth, none of the disputed invoices contains a receipt stating that it has been paid.  Those features, coupled with the fact that Toplands did not draw sufficient cash resources from its bank to pay for these invoices and to meet all of its other cash commitments and the absence of satisfactory evidence of records covering (i) the movement of  material sent out to the alleged cut, make and trim units and (ii) of the return of the particular garments, give the Commissioners good grounds for their contention that they are right to have disallowed those invoices because they were not genuine invoices.

50.	It is significant that the obvious people whom the Appellant might have chosen to give evidence on his behalf did not come forward.  The bookkeeper, Mr Kyriacos, is still employed by the Appellant.  The Appellant’s brother-in-law, Alex Litras, was responsible for drawing the cheques and producing invoices of the business.  His failure to give evidence is significant.  Chris Charalambous, the company secretary, could have come forward and confirmed that he had regular dealings with the cut, make and trim units behind the invoices.  Terry Costa could have given evidence about Respect Ltd.  The fact that none of these people has been called to give evidence is significant and tells strongly against the Appellant.

51.	For those reasons we think that Toplands dishonestly evaded VAT by using the disputed invoices.  The inference that the Appellant was involved in this course of conduct is, we think, irresistible.  On that basis therefore we think that the penalty assessment on the Appellant was properly made.

52.	We have dealt with this appeal so far on the basis that all the evidence gathered in the course of the interviews is properly admissible and can be used in determining whether the assessment was properly made.  

53.	We have read the transcripts of the interviews of the Appellant; and we have read the questions asked and considered the answers that the Appellant gave when asked about them in the course of his examination-in-chief.  The investigation appears to us to have been conducted in a serious and professional manner.  There is nothing that we can find that in any way indicates that it was carried out in an improper way.  The Notice 730 was provided to the Appellant in both English and Greek languages.  Its effect was explained to him and the Appellant was asked if he understood it.  There is no evidence from the transcript of any pressure being put on the Appellant or of the Appellant appearing to suffer from pressure. The record of his answers indicates that he understood the thrust of the questions. Our impression of the Appellant, gained from his oral evidence, was that his grasp of English is now, if not then, quite workable.  The transcripts suggest that it was workable at that time.  In any event there is no suggestion that any particular answer would have been different or would not have been given had the interviews taken a different and less pressurised course.  

54.	Article 6.1 entitles an appellant to a fair trial and to be told the nature of the “charge” against him.  We endeavoured to conduct this “trial” fairly and in accordance with the Tribunal Rules.  The statement of the case and the reply provided by the Commissioners to the Appellant have, we think, sufficiently explained the nature of the charge against him.  

55.	For all those reasons we reject the submission that the way in which the Appellant was treated contravened the terms of the Convention on Human Rights.  We are satisfied in particular that there was no violation of his Article 6 rights; and there is nothing about the way in which the evidence was obtained to render it either inadmissible or questionable.

56.	Finally we ask whether the penalty which has been imposed at 90% of the tax evaded was appropriate.  We think it was.  We have found that there had been a systematic course of dishonest conduct extending over more than two years.  The Appellant stuck to his position throughout the investigation and throughout the appeal.  His position was that the disputed invoices related to services that had been provided by registered cut, make and trim units.  We have found that his position is wholly untenable.  The Appellant’s very limited co-operation with the Commissioners does not therefore justify any greater mitigation.  

57.	We dismiss the appeal and award the Commissioners their costs.  The amount of the costs, if not agreed, should be referred back to us for further consideration.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED:

LON/98/937