CIVIL EVASION PENALTY — claim to input tax without valid VAT invoices — trader’s belief in VAT status of the supplier — did the Appellant evade the payment of VAT — yes — was the evasion dishonest — yes — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	ALAN GIBBS	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Lady Mitting  (Chairman)
						Mr F Hazledine	
						Mr R G Grice

Sitting in public in Birmingham on 11 September 2002 and 23 June 2003  

Mr S A Beale, chartered accountant, for the Appellant

Mr R Shaw of the Solicitor’s office of HM Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2003
DECISION

1.	This is an appeal against a decision of the Commissioners notified by letter dated 21 May 1997 to recover from the Appellant personally, under section 61 VAT Act 1994, the full amount of a penalty raised under section 60 against Tristar Scaffold (Midlands) Limited (“Tristar”), of which company the Appellant was sole director.  The original amount of the penalty was £12,080 mitigated by 50% to £6,040.  The penalty was raised because the Commissioners believed the Appellant had dishonestly reclaimed input tax on 6 invoices from SC Scaffold Limited (“SC”) in the company’s return of 2/94.

2.	We heard oral evidence from Mr Robert Townsend on behalf of the Commissioners and from the Appellant.  We also had before us two witness statements, one from Mr Sydney Beale, the Appellant’s accountant which was accepted by the Commissioners and one submitted by the Commissioners from Mr Victor Chiswell of SC.  With the exception of one sentence, Mr Beale accepted Mr Chiswell’s witness statement, expressly “accepting the truth of what was stated” therein.

3.	Mr Townsend’s involvement with Tristar began when he received a reference from a colleague who had himself visited the company and was expressing concern over the following 6 invoices received by Tristar from SC:-
1)	SC/98 dated November 1993 in the sum of £3,360 plus VAT of £588 and date stamped as having been received by Tristar on 5 December 1993
2)	SC/102 dated December 1993 in the sum of £11,500 plus VAT of £2012.50 and date stamped as having been received on 7 January 1994
3)	SC/106 dated December 1993 in the sum of £3,360 plus VAT of £588 and date stamped as having been received on 7 January 1994
4)	SC/116 dated January 1994 in the sum of £4,200 plus VAT of £735 and date stamped as having been received on 3 February 1994
5)	SC/124 dated February 1994 in the sum of £3,360 plus VAT of £588 date stamped as having been received on 25 February 1994
6)	SC/125 dated February 1994 in the sum of £43,250 plus VAT of £7,568.75 and date stamped as having been received on 25 February

4.	On SC/98, SC/124 and SC/125 the date stamp had been signed by Mr Gibbs.  The first 5 invoices were for the hire of materials and the final invoice was for the sale of materials not returned off hire.

5.	Tristar had claimed the input tax on these 6 invoices in its return for 2/94, the return declaring output tax due of £13,700 and input tax of £13,424 of which £12,080 related to the 6 SC invoices.

6.	Enquiries by the Commissioners had revealed that SC had not at the time been registered for VAT.  SC had applied for registration on 10 May 1994.  Their registration was accepted and they were notified of their VAT registration number on 19 May 1994.  The registration was initially effective from 1 March 1994 as requested by SC, this being amended to 1 March 1993 as a result of this investigation.  As the invoices all bore SC’s registration number, they could not have been issued before 19 May 1994, despite the dates they bore.

7.	Mr Hughes, on behalf of the Commissioners, had visited Mr Gibbs at the company’s premises on 13 August 1996.  The visit was unannounced.  The interview was taped and Mr Gibbs was given Notice 730 which was explained to him.  During the course of the interview Mr Gibbs denied ever claiming input tax to which he was not entitled and confirmed that the date stamp on the invoices would have been the date of receipt.

8.	Mr Townsend then visited Mr Gibbs on 19 August 1996 by arrangement, a transcript of this interview being put before us.  Mr Gibbs was again reminded of the Notice 730 procedure.  Mr Gibbs in the course of this interview stated that in 99% of cases incoming mail was date stamped the date of receipt.  He was asked in relation to the 6 SC invoices whether there had been any previous invoices which were replaced by these later ones to which he replied there had not been.  However, during the course of the interview Mr Gibbs produced his purchase ledger which had been entered on 30 March 1994 and which listed all 6 invoices quoting the SC reference numbers, the precise amounts of the later invoices but dated specific dates rather than by month.  It was pointed out to Mr Gibbs that it would have been quite impossible for these invoices to have been in Mr Gibbs’ possession before 19 May 1994 as they could not have been issued before then and it was put to him again that either he had had earlier invoices or he knew the value of the invoices but did not receive them until later.  Mr Gibbs denied both suggestions, still maintaining he had these actual invoices in his possession at 30 March 1994.  The interview ended with Mr Gibbs still being unable to explain the discrepancy.

9.	After this interview, Mr Townsend commenced investigation against SC and discovered that that company had been issuing invoices to other companies prior to registration but charging VAT.  Mr Townsend took a witness statement from Mr Victor Chiswell, and in the light of that statement decided to go back to Mr Gibbs and a further interview with  Mr Gibbs took place on 13 February 1997, an interview lasting some 15 minutes.  During the course of this interview the following exchanges took place:-

“T:	Could I ask you please when you reclaimed that VAT were you in receipt of the sales invoices of S C Scaffold?

G:	No, what I was in receipt of was information given to me by Mr Chiswell of the amount of the invoice and the VAT content.

T:	And were you aware at the time that Mr Chiswell who was the directing mind of S C Scaffold was not registered for VAT at

G:	No.

T:	The time you received the information

G:	I didn’t have the knowledge that he was not er VAT registered but on the further conversations or pursuance of the actual invoices I soon realised that he was not VAT registered.

T:	Right

G:	And what was given to me or told to me was that as soon as I got my VAT registration I will process the invoices.

T:	Right, so he gave you those invoices much later than the date you reclaimed that money through your VAT account.

G:	I can’t remember exactly what it was but it would have been, I, I seem to reflect it was round about the March time, I can’t be positive about that.

…

T:	Yes, so you as the person responsible for Tristar Scaffold knew that you hadn’t got an invoice but you still claimed back that money knowing that there was not an invoice to support it.

G:	Yes that is quite correct

T:	Right and you did that knowing it to be a dishonest act.

G:	Erm I don’t like the way you’ve put it but yes, you’re quite correct in what you say, and I agree with what you are saying.

T:	And you realise that to reclaim any VAT you needed an invoice so therefore by not doing it was, not having an invoice, it was a dishonest act.

G:	Yes.

10.	Mr Gibbs also accepted that he had stamped the invoices with a back dated stamp.  Following this interview, Mr Gibbs signed a schedule of arrears comprising the input tax on the 6 invoices.

11.	Mr Townsend told us that he was aware of Tristar having financial problems and produced notifications from the Commissioners of unpaid cheques in respect of periods 8/93, 11/93, 5/94 and 11/94.

12.	On the basis of what he knew, Mr Townsend considered a penalty was appropriate for dishonest evasion and that the penalty should be recovered from Mr Gibbs as the sole operator of the company.  He did however allow 50% mitigation – 10% for attending interview and producing information; 20% for an early explanation and 20% for substantiating the true amount of arrears.

13.	Mr Chiswell in his witness statement explained that he was employed by SC, a company of which his wife and daughter were the directors.  He explained the background of the contract out of which these invoices arose and set out the arrangement between himself and Mr Gibbs in the following terms (omitting the challenged sentence):-
“I agreed with Alan Gibbs that Tristar Scaffold would utilise my scaffold on the Wimpey contract.  Initially no charge was made for the use of this scaffold.  Then in August or September 1993 I decided to make a charge for the hire of the scaffold.  Mr Gibbs was informed of my decision.  Because S C Scaffold were not at this time registered for VAT I informed Mr Gibbs of the charges I was going to make both verbally and in writing.  I also informed him that I would provide him with a VAT invoice once the business had registered for VAT.  I commenced action to register SC Scaffold Limited for VAT in May 1994.  I eventually received my VAT registration number on or about 24 May 1994.  Following receipt of the VAT number I took action to have some sales invoices printed.  Once I had obtained these invoices I issued a number of invoices to Tristar Scaffold (Midlands) Limited.”

14.	We were also referred by Mr Beale to the transcript of Mr Chiswell’s interview with the Commissioners in which Mr Chiswell had admitted creating, well prior to registration, invoices purporting to come from S C Scaffold Limited but in reality being doctored from the invoices relating to his pervious company V C Scaffold Limited.

15.	Mr Beale opened the Appellant’s case by putting into evidence his own witness statement, the crux of which was as follows:-
“On 19 April 1994 I finalised the accounts of Tristar Scaffold (Midlands) Limited for the period ended 31 December 1993.  Shortly before this date I attended the offices of Tristar Scaffold Limited to finalise the review of the company’s records and during the course of my visit I examined the post Balance Sheet events for any transactions affecting the accounts under review.  I was given a file by Mr Gibbs containing six invoices from SC Scaffold as listed on the notes on page 227.  I recall these invoices were faxed copies on the carbon type fax paper and they were the short six inch deep invoices.  My file notes indicated that VAT was itemised on the invoices as the values had been noted as being exclusive of VAT.  I recall that Gibbs had explained to me that he had been chasing S C Scaffold for these invoices as he was awaiting receipt of the originals before filing them.”

16.	We were told by Mr Beale and Mr Gibbs of the background to the arrangement between Tristar and SC.  SC had been awarded a contract by Wimpeys.  The contract was a 6-month contract beginning in July 1993.  Because of the size of the contract, it was agreed that Tristar would carry it out for Wimpey but using materials owned by SC which Tristar would hire and ultimately purchase.  5 invoices were raised by SC for the hire of the equipment in December 1993 and January and February 1994 and a final invoice was raised in February 1994 for the sale of the equipment to Tristar.  Faxed copies of the invoices were issued to Tristar at the time and entered by Mr Gibbs in the company’s purchase ledger and seen by Mr Beale when he prepared the company’s end of year accounts.  The financial and trading relationship between Tristar and SC was somewhat complex with, we understand, moneys owed both ways.  We also understand that the amounts contained in the invoices would not necessarily have been the final amount due from Tristar to SC.  The invoices were not at the time paid and the amount of the invoices was the subject of a dispute between the two parties.

17.	Mr Gibbs told us that these copy invoices were the basis of the claim for the input tax on the 2/94 return and the later invoices, seen by the Commissioners, merely replaced these earlier copies.  When the later copies were received Mr Gibbs date stamped them the date which the earlier ones had been received.  In his oral evidence, Mr Gibbs maintained he had had no knowledge of SC’s VAT status and it was never discussed between himself and Mr Chiswell as he at all times believed SC to have been registered throughout.  This was the gist of his evidence in chief.  However, in reply to questioning from the tribunal, Mr Gibbs later said that he actually could not recall whether Mr Chiswell had ever said that he was not registered and would let him have invoices when he was.

18.	Mr Gibbs’ explanation for his failure to tell the Commissioners about the earlier set of invoices was that he had not remembered, especially as the first interview had taken him by surprise.  By the time of the hearing, having been reminded of the true situation by Mr Beale, he remembered very clearly that there were two sets of invoices.  His admissions in the third interview he told us were clearly untrue because it was wrong to say that he had not had the VAT invoices when he made his claim because he had and his claim had been perfectly properly made on the basis of these invoices.  His incorrect admissions were, he told us, prompted by a desire to get out of the building and to have the whole matter done and dusted as he had had enough.  He did not now believe that he had acted dishonestly because since the third interview he had looked more carefully at his book work which he had not done before and the existence of the earlier invoices justifying his claim for input tax had been brought to his attention by Mr Beale.  He had not sought to be represented at any of the interviews and had not sought Mr Beale’s advice because he felt there was no need as the matter he believed was not particularly serious.

19.	For the sake of completeness we should say that during the course of the evidence it emerged that Mr Gibbs did not enjoy good health and we were concerned that there may have been medical reasons why Mr Gibbs gave obviously inconsistent and incorrect answers in interview and why he persistently through his oral evidence claimed not to remember.  At the conclusion of the evidence we therefore adjourned the case for submissions but requested the Appellant should submit a medical report from his GP.  This he did and while it clearly disclosed long standing problems it did not take matters a great deal further and Mr Beale told us that no medical grounds would be submitted for any failings on Mr Gibbs’ part.

20.	The Commissioners accepted that Tristar had some documents in their possession in March 1994, as witnessed by the entries in the ledger and Mr Beale’s witness statement.  Their case however, was that, whatever those documents were, they were not valid VAT invoices which could support a claim for input tax.  Mr Shaw relied on the admissions made by Mr Gibbs in the course of his interviews and his certificate of the schedule of irregularities as a full disclosure of dishonestly over claimed VAT.

21.	Mr Beale’s contention was that the earlier set of invoices held by Mr Gibbs at the time of the submission of his return were to the best of Mr Gibbs’ knowledge valid invoices.  He referred us to the fact that Mr Chiswell had admitted doctoring his old VC invoices and had also admitted falsely charging output tax on invoices submitted since  SC’s commencement of trading.  Referring to Mr Gibbs’ clearly untrue answers in interview, he submitted that the only logical explanation was that Mr Gibbs could not remember because the untruths served no useful purpose, in fact they merely prompted further investigation.  Inability to remember was not evidence of dishonesty, was his submission.  The answers in the third interview were made because Mr Gibbs could see no other way of settling the investigation.  He knew his previous explanation to the Commissioners had been rejected and that they believed that he had acted dishonestly and that any hope of mitigating the penalty was dependant on his cooperation.  The acceptance by the Commissioners and the Tribunal of the existence of the original faxed copy invoices should, in Mr Beale’s submission, remove any suggestion of dishonesty as Mr Gibbs was not attempting to deceive but merely replacing faxed copy invoices with originals and date stamping the latter with the date which the earlier ones had been received.

22.	The relevant statutory provisions are contained in sections 60 and 61 VAT Act 1994:-
	“Section 60 VATA provides:
(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.

(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.

Section 61 VATA provides:
(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 that material time was, a director or managing officer of the body corporate (“a named officer”) the Commissioners may serve a notice under this section on the body corporate and on the named officer.”

23.	It is for the Commissioners to prove to a higher degree of probability that Mr Gibbs has acted to evade the payment of tax and that his conduct involved dishonesty.  The test of dishonesty to be applied is that set out within R v Ghosh [1982] 2 AER 698, namely in determining whether the accused had acted dishonestly, the test was first whether the accused’s actions had been dishonest according to the ordinary standards of reasonable and honest people and if so, whether the accused himself had realised that his actions were, according to those standards, dishonest.

24.	In Tristar’s return for 2/94, Mr Gibbs reclaimed the input tax on the 6 SC invoices.  It is his contention he was entitled so to do being in possession of valid VAT invoices and believing SC to have been validly registered.  It is the Commissioners’ contention that these documents were not valid invoices and that Mr Gibbs knew that.

25.	It is clear first, that there were two sets of documents; secondly that the earlier documents had the appearance of VAT invoices, being headed SC Scaffold Limited and bearing a VAT element; thirdly the later invoices were not merely the originals of the earlier faxed copies; fourthly SC was not registered until May 1994 and the earlier set were not therefore valid VAT invoices.  However, Mr Gibbs could not be said to have dishonestly evaded payment of VAT if at the time he submitted the return he held a genuine belief that SC was registered and that the invoices were valid.

26.	We find Mr Gibbs’ evidence to be neither consistent nor credible.  Looking at the interviews, the admissibility of which was never challenged by Mr Beale, we readily accept that in the first interview which was not prearranged and Mr Gibbs would have had no knowledge of what was to be discussed, he would have been at a loss to explain matters.  However, by the second interview, he had looked at his paperwork and had in front of him the purchase ledger clearly recording the invoices upon which he had based his claim.  It was clearly not possible that the invoices he had entered up were the ones now in the possession of the Commissioners.  It was equally obviously not possible that the later invoices were in fact received on the dates he had stamped them and yet he still insisted they were and that he had never had any earlier documents.  This was patently untrue.  We cannot put these false statements down to a pure inability to remember.  It cannot have been a common transaction for one set of invoices to have been replaced many months later by a further set which he then backdated.  We believe this is something which he would have remembered and if not in the forefront of his mind on the first interview would have come back to him once he saw his ledger and the later invoices.  We would have thought that these transactions would also be memorable because they enabled Mr Gibbs to meet his VAT liability in that quarter without difficulty, unlike the periods preceding and following.

27.	We believe that what happened is in fact precisely what he told the Commissioners in his third interview.  This is also borne out by the unchallenged witness statement of Mr Chiswell.  Mr Gibbs told the Commissioners he was not in possession of the sales invoices when he made his return.  He knew that this was correct because he knew that whatever the nature of those documents they were not valid invoices such as to substantiate a claim for VAT.  Mr Chiswell gave him “information” as to the amount of the invoices and the VAT element, thus enabling a claim for input tax to be made.  Mr Gibbs is silent as to the manner in which this “information” was given but Mr Chiswell says it was given verbally and in writing.  We assume that the “in writing” was the set of invoices seen by Mr Beale.  Crucially Mr Chiswell says he told Mr Gibbs he would only get a VAT invoice when his VAT registration came through.  This is consistent with Mr Gibbs saying that although he may not have known at the outset that SC was not registered it became apparent in later conversations.
“and what was given to me or told to me was that as soon as I’ve got my VAT registration I will process these invoices.”

28.	We reject Mr Gibbs’ evidence in chief that he never discussed SC’s VAT status with Mr Chiswell as it is inconsistent with his answers to the Commissioners, with Mr Chiswell’s evidence and his answers to questioning from the tribunal.  

29.	We therefore find that at the time when Mr Gibbs submitted his return he knew SC was not registered.  He was an experienced VAT trader and knew that to reclaim his input tax he must be in possession of a valid VAT invoice which could only be issued by a registered trader.  He therefore deliberately submitted a claim for input tax knowing he was not in possession of valid invoices and as such was not therefore in law entitled to make any such claim.  By so doing he enhanced the company’s claim for input tax in that quarter to the extent that it almost cancelled out the output tax, thus minimising considerably the amount of tax payable.  This amounts to the evasion of VAT.

30.	Was this evasion dishonest in terms of Ghosh?  We believe so.  The manipulation of the date stamp would clearly be regarded as dishonest as its purpose and effect was to give these invoices, received after May 1994, the appearance of having been received very much earlier and certainly by the time the return was submitted.  His denial of having done this is evidence, in our view, of his belief that what he had done was dishonest and would be so regarded by ordinary standards.

31.	We therefore find that Mr Gibbs did dishonestly evade payment of VAT in the company’s 2/94 return.

32.	Mr Beale made no submissions in respect of mitigation.  The Commissioners have allowed 50% mitigation.  Mr Shaw reminded the tribunal of their power to vary the amount of mitigation and suggested that the allowance given for admissions should be withdrawn as Mr Gibbs himself was seeking to go back on his explanations.  We reject this suggestion.  

33.	The appeal is therefore dismissed.

34.	Mr Shaw made an application for costs.  Mr Beale informed us that he had previously discussed the question of costs with another officer and had been told that the Commissioners would not claim their costs.  This would be an unusual statement as it is normal in civil evasion cases for the Commissioners to claim costs.  Mr Beale had apparently mentioned this discussion on a previous occasion and the Commissioners had tried to ascertain whether or not this statement had been made and if so by whom but with no result.

35.	We fully accept that at some stage Mr Beale was told by an unknown officer that the Commissioners would not claim their costs and this may well have influenced Mr Gibbs  in the pursuit of his appeal.  We therefore reject Mr Shaw’s application for costs. We should also say that we advised Mr Shaw that this would be our intention and he certainly did not argue.

36.	In summary therefore we find that Mr Gibbs was guilty of dishonest evasion.  We uphold the 50% mitigation given by the Commissioners and we make no order as to costs.

LADY MITTING
CHAIRMAN
Release Date: