CIVIL PENALTY – Dishonesty – Failure to register – Appellant’s turnover found to have exceeded registration threshold throughout a two year period – Appellant’s right to occupy business premises might at any time have been removed – Whether Commissioners have proved Appellant’s dishonesty – No – VAT Act 1994 s.60
CIVIL PENALTY – Liability of directors – Dishonesty – Full amount of civil penalty apportioned to Appellant as sole director – Whether company failed to register through dishonest conduct – Yes – VAT Act 1994 s.61(1)

LONDON TRIBUNAL CENTRE

	MAJID BORNOOSH	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	STEPHEN OLIVER QC   (Chairman)
						SHEILA EDMONDSON FCA					 		            CATHERINE FARQUHARSON ACA

Sitting in public in London on 26 & 27 January 2004

The Appellant in person

Caroline Neenan, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	Mr Majid Bornoosh, the Appellant, appeals against decisions assessing him to penalties pursuant to sections 60 and 61 of the VAT Act 1994.  He has been assessed for two periods.  For the period 1 February 1995 to 6 February 1997 he is assessed as sole proprietor of “Pizza and Pasta Takeaway”.  From 7 February 1997 to 28 February 1999 he is assessed as sole director of Kirtlings Ltd, trading as “Pizza and Pasta Takeaway”. At all times the trade was carried on from the same address in Plumstead High Street SE18.

Introduction

2.	The penalty in respect of the period from 1 February 1995 to 5 February 1997 relates to tax evaded in the sum of £20,509 which, when reduced to reflect the allowed mitigation at 35%, is £13,331. The amount of the penalty imposed under section 61 on Mr Bornoosh for the period from 7 February 1997 to 28 February 1999 is in respect of tax evaded in the sum of £44,843, which when reduced by 75% to reflect mitigation is £11,202.  

3.	Evidence for the Customs was given by Mr Allen M Glynn, a Customs officer who had visited the Plumstead High Street premises on 8 March 1999 and conducted an interview of Mr Bornoosh on 11 March 1999.  Mr Martin Corbett, another officer of Customs and Excise, gave evidence: he had conduct of the case after the penalty assessments had been issued.  

4.	Mr Bornoosh conducted his own case and gave evidence.  Mr Bornoosh appealed using the name Majid Barnoosh.  His Passport and identification particulars refer to him as Majid Bornoosh.  He said that he was content for this decision to refer to him as Majid Bornoosh.

5.	Section 60 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 … to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct.”

Section 61 enables the Commissioners to allocate the section 60 penalty imposed on a company to a director or managing officer of that company where the conduct giving rise to the penalty is, in whole or in part, attributable to the dishonesty of the director or managing officer.

6.	The notice of assessment to the section 60 penalty imposed on Mr Bornoosh as a sole trader is dated 8 August 2001.  The letter records his failure to notify liability to be registered for VAT at the proper time and to account for the full amount of VAT due for the period from 1 February 1995 until 6 February 1997.  The letter goes on to state that the Commissioners consider that Mr Bornoosh has rendered himself liable to a penalty under section 60(1) “for an evasion, through dishonesty, of VAT in the sum of £20,509.”  

7.	The notice of a section 60 penalty apportioned to Mr Bornoosh under section 61 is dated 8 August 2001.  In this notice the Commissioners record their decision that Kirtlings Ltd had, by its failure to account for the full amount of tax due for the period from 7 February 1997 to 28 February 1999, made itself liable to a section 60 penalty of £44,843.  The notice goes on to record the decision that the conduct giving rise to the penalty was wholly attributable to Mr Bornoosh’s dishonesty and that the penalty (subject to the 75% reduction for cooperation) is assessed on him.

8.	The Commissioners have to prove, as regards the penalty for the period from 1 February 1995 to 6 February 1997 (“the first period”), that Mr Bornoosh’s failure to register and make VAT returns constituted conduct involving dishonesty on his part.  As regards the penalty for the period from 7 February 1997 until 28 February 1999 (“the second period”), the Commissioners have to prove that Kirtlings Ltd failed to take whatever steps were required to notify its liability to the Commissioners and failed to account for VAT, in both cases for the purpose of evading tax and dishonestly; the Commissioners further have to prove that the dishonest conduct of Kirtlings Ltd was in whole or in part attributable to the dishonesty of Mr Bornoosh.  It is well established that there is a heavy burden of proof on the Commissioners when they allege dishonesty.  Dishonesty is, as Carnwath J observed in Stuttard v Customs and Excise Commissioners [2000] STC 342 at 348b, an ordinary English word, and in most cases it is a straightforward jury question whether there has been dishonesty on the part of the Appellant.  It follows that the Commissioners have to prove, on the strength of evidence adduced by them which matches the seriousness of the allegations of dishonesty, that £20,509 and no less was evaded as the consequence of dishonesty in the first period and that £44,843 was evaded as the consequence of dishonesty in the second period.  

9.	It is not in dispute that Mr Bornoosh had, until early 1994, owned and operated a VAT registered business called “Garland Pizza”.  This was de-registered on 5 January 1994.  

10.	The Commissioners contend that from 19 May 1994 until 6 February 1997 Mr Bornoosh traded as a sole trader in the Pizza and Pasta Takeaway business.  It is not in dispute that from 7 February 1997 until 28 February 1999 Kirtlings Ltd traded from the same premises with Mr Bornoosh as sole director and effectively sole shareholder.  Kirtlings applied to register for VAT, following the intervention of the Commissioners, on a VAT 1 Form completed on 1 July 1997.

11.	In or about September 1998 the business carried on at the Pizza and Pasta premises had caught the attention of the Commissioners.  Observations and test purchases had been made.  On 8 March 1999 Mr Allen Glynn, who gave evidence, entered the premises and took away the business records.  Following an examination of his, he conducted an interview on 11 March 1999 with Mr Bornoosh accompanied by his accountant, Mr Mehmet Kemal.  

Date of registration

12.	The effective date of registration for Mr Bornoosh trading as a sole proprietor was calculated using the records taken from his premises.  The only records available for the early part of his trading are records for a three week period in late 1994 and early 1995, namely the week starting 26 December 1994 (showing takings of £1,864), the week starting 2 January 1995 (showing takings of £1,529) and the week starting 31 January 1995 (showing takings of £1,820).  The first date of trading was taken to be 19 May 1994 on the basis of Mr Bornoosh’s records for payment of rent.  This is the earliest date on which there is a record of such a payment being made.  None of those facts are in dispute.  

13.	The average weekly takings figure on the basis of the three week’s records referred to above is £1,737. The Commissioners reduce this by 10% to reflect the changes in the retail price index and any price changes. On that basis the Commissioners employed an average weekly takings figure for 1994 of £1,564.  The registration limit with effect from 31 November 1994 was £46,000.  It follows from those figures (and again this is not in dispute) that Mr Bornoosh exceeded the registration limit in December 1994.  From 19 May 1994 to 31 December 1994 (a period of 32.42 weeks) the takings have been calculated as £50,039 (being £1,564 multiplied by 32 weeks).  The date from which Mr Bornoosh ought to have been registered was therefore 1 February 1995.

Method of calculations of VAT arrears : 1 February 1995 to 6 February 1997

14.	The Commissioners have calculated the net VAT that ought to have been accounted for by Mr Bornoosh trading as sole proprietor as follows:

He was liable to account for VAT for a period of 104 weeks and 2 days during which his average weekly takings were £1,737.  Adding in two further days of trading amounting, on average, to £496, the total outputs for the period were calculated to be £181,191.  Allowing for input tax at 24% (a percentage that was not disputed) the next tax due worked out at £20,509.

Method of calculations of VAT arrears : 7 February 1997 to 28 February 1999

15.	The calculated arrears for Kirtlings Ltd were taken from the takings sheets found for 1997 and 1998.  Two sets of records were found on the premises for 1998.  It was admitted by Mr Bornoosh at the interview on 11 March 1999, and the admission was repeated in the course of the present hearing, that one set of figures represented the true level of takings and another set of figures represented a suppressed level of takings.  The latter set of figures were produced to his accountant.  

16.	The calculations of VAT arrears were made on the following basis:

(i)	Records for 228 days within the period 7 February 1997 to 31 December 1997 showed takings of £97,862.  There are 95 missing dates within this period.  The average daily takings figure from these records is £429.  The figure for 95 days is therefore £40,775.  The total outputs for this period were therefore calculated at £138,637.

(ii)	Records for 273 days within the period 1 March 1998 until 2 February 1999 showed takings of £166,972.  There are 90 missing days within this period.  The average daily takings figure for the period is £612.  The takings for the missing 90 days therefore amount to £55,073.  The total outputs for this period were therefore calculated as £222,044.

(iii)	There were no records for the periods 2 January 1998 until 28 February 1998, a period of 58 days.  Using the same average as for the period 1 March 1998 until 28 February 1999, the outputs for this period were calculated as £35,491.  

(iv)	The total outputs from 7 February 1997 until 28 February 1999 were calculated as £396,172.  The output tax due on those figures was calculated at £59,004.

Input tax was allowed on the same basis as set out previously, at 24% amounting to £14,161.  The net tax due is calculated as £44,843.  The tax due was included in an assessment notified to Kirtlings Ltd on 14 March 2000 in the sum of £63,890.  That latter sum included amounts of output tax that had become due for the period to 30 November 1999.

The case for the Commissioners

17.	The Commissioners say, as regards the penalties for both periods, that the failure to register is equivalent to the false underdeclaration of input tax involving the deliberate and dishonest decision by Mr Bornoosh not to register.  In support of the case alleging dishonesty in relation to the first period the Commissioners rely on the following factors:

(a)	Mr Bornoosh’s admission of his knowledge of the VAT system in the course of interview and of his practical experience as a registered trader operating the Garland Pizza.  

(b)	Mr Bornoosh was at all times the sole owner of the business.  He had paid rent for the premises and he had paid the gas bill; he had installed his own fridge and his own till at the premises.  Thus he owned and managed the business and had personal responsibility to register and comply with the VAT requirements.

(c)	Mr Bornoosh had been trading over the registration threshold by 1995. The records in Mr Bornoosh’s handwriting covering three weeks of trading at the end of 1994 and in January and February 1995 evidenced this.  Mr Bornoosh admitted in the course of giving evidence that those figures and other figures of takings drawn from daily records in 1996 were accurate.  Mr Bornoosh had admitted, when giving evidence, that his failure to have registered had been his mistake.  Moreover, when it was put to him in cross-examination that he had been dishonest in not registering, he had replied that he should have registered.

18.	In support of the case alleging dishonesty in relation to the second period the Commissioners rely additionally on the following factors.

(a)	Mr Bornoosh was sole director and manager of Kirtlings Ltd’s Pizza and Pasta business.

(b)	Mr Bornoosh admitted in the course of interview and in the course of giving oral evidence that he had kept two sets of records and his purpose in doing so had been to have a version showing a lower turnover for presentation to his accountants (K & Co).

(c)	Even if (which was not accepted by the Commissioners) Mr Bornoosh had acted on advice in keeping two sets of records of sales, he must be taken to have known that this was dishonest conduct.

(d)	Mr Bornoosh admitted, as regards the higher daily takings record for the period March-November 1998 that these were the correct records.  Mr Bornoosh accepted in oral evidence that the VAT assessments on Kirtlings Ltd were for the correct amounts.

The case for Mr Bornoosh as regards the penalty for the first period

19.	Mr Bornoosh at no stage clearly identified his case.  As regards the first period  he pointed out that he had understood his arrangements with the previous owners of the Pizza and Pasta business, who had been occupying the Plumstead High Street premises as tenants and were still the tenants when Mr Bornoosh arrived in May 1994, to have engaged him as manager at the start.  There had been, he said, a dispute between those previous owners, who had operated the business in partnership.  This dispute had resulted in the closure of the business.  Mr Bornoosh had been desperate for work of some sort and when the previous owners of the business had put a contract in front of him he had signed it without considering its implications.  Mr Bornoosh did not provide us with a copy of that contract.  He explained his understanding of the arrangements as requiring him to manage the business at the start and then, when he was making a go of it, to take it over as his own.  He was required to pay £350 rent each week and to meet certain other expenses, i.e. insurance and Council taxes.

20.	One of the previous owners of the Pizza and Pasta business, said Mr Bornoosh, told him that they had not registered for VAT and he need not do so either.

21.	As time went by the turnover improved but Mr Bornoosh was aware that the previous owners who were still lessees of the premises were engaged in a continuing dispute with the landlord at the premises who, as Mr Bornoosh explained to the interviewing officers at the start of the 11 March 1999 interview, “was going to chuck me out”. While this “legal battle” (to use his words) was going on between the landlord and the previous owners of the business premises, Mr Bornoosh claimed to have been uncertain as to whether he would be able to continue to occupy the business premises.  He said that he did not know what to do and consequently he did not register.  

22.	At some time well into 1996 Mr Bornoosh met the landlord who agreed to grant him a lease of the premises.  Mr Bornoosh then consulted an accountant, a Mr S; the question of registration was, said Mr Bornoosh, raised with Mr S.  According to Mr Bornoosh’s account given in evidence, Mr S advised him that the business should be incorporated and that the new company would have a year of trading before it needed to register for VAT.  Mr S also advised Mr Bornoosh, so Mr Bornoosh claimed, to keep two tills and two sets of sales records.  (Mr Bornoosh, when managing Kirtlings Ltd, did not keep two tills, but he admitted to keeping two sets of records.)

Conclusions

23.	We accept that Mr Bornoosh came to the business in 1994 with enough experience of VAT to know that registration was required when sales overtopped the registration threshold.  The fact that one of his predecessors in the Pizza and Pasta business may have told him that they had not registered and that registration was unnecessary counts for nothing in Mr Bornoosh’s favour.

24.	We are satisfied that, whatever the arrangement may have been between Mr Bornoosh and his predecessors, who had remained tenants of the Plumstead High Street premises until well into 1996, Mr Bornoosh was the sole proprietor of the business by February 1995.  He had his own bank account and he had supplied his own till and fridge.  The only payments made to his predecessors at the Pizza and Pasta were to do with the property, such as building insurance and council taxes.  There is no evidence that Mr Bornoosh was accounting to his predecessors, as agent or manager, for the profits of the business.  At the same time we cannot overlook the fact (which we accept) that Mr Bornoosh’s tenure of the business premises was precarious.  This was one of the first points Mr Bornoosh made when interviewed and he stuck with it throughout his evidence.  He claimed on several occasions that the landlord and his predecessors had been involved in a legal battle. This is substantiated by the fact that Mr Bornoosh got no rights of occupancy of the business premises until well into 1996.

25.	The insecurity of Mr Bornoosh’s tenure of the business premises strikes us as a factor that Mr Bornoosh could and did take into account when he considered how his sales were performing.  They may have been strong one week but could stop completely at any time after that.  Hence, while we were impressed by the strength of the Commissioners’ evidence in the form of the records of sales for the three separate weeks falling in December 1994 to February 1995, which Mr Bornoosh freely admitted to be the right figures, we have to balance this against the existence of his uncertain and precarious tenure of the business premises until the time when he was granted a formal tenancy in 1996; and, as we have already indicated, we accept Mr Bornoosh’s evidence that he himself was uncertain as to whether he could continue in business.  

26.	With those factors in mind we turn to the question of whether the Commissioners have satisfied us that the penalty for the first period, i.e. £20,509 (before abatement for cooperation) is “equal to the amount of VAT evaded or sought to be evaded by” Mr Bornoosh’s dishonest conduct.  The balance of the evidence does not satisfy us of this. We accept that the failure to register was inexcusable; but this does not establish dishonesty on Mr Bornoosh’s part in the relevant sense.  Because of the continuing uncertainty as to Mr Bornoosh’s tenancy of the Plumstead High Street premises and the effect that this had on Mr Bornoosh, we are not satisfied that he acted dishonestly in omitting to register and in continuing to trade while unregistered.  We therefore allow the appeal against the penalty for the first period.  

27.	The second period is a different matter.  By then there was security of tenure of the Plumstead High Street premises as between the landlord and Mr Bornoosh and between Mr Bornoosh and Kirtlings Ltd.  On 4 January 1997, we record as a fact, Mr Bornoosh granted Kirtlings Ltd a formal licence to occupy the premises.  

28.	We have already summarized the facts upon which the Commissioners rely.  Mr Bornoosh’s response was to stress that while he kept two sets of books (and did so in case the Customs and Excise visited him without warning) he did not keep a second till (as, he asserted, he had been advised to do by Mr S): and all his takings went through that one till.  Mr Bornoosh accepted that the records showing the lower amount of sales were kept as records for his accountants.  The record showing the higher amount of sales was, he admitted at the hearing, correct.  

29.	The inference that Mr Bornoosh was acting dishonestly throughout the second period by not registering the business then carried on by Kirtlings Ltd and therefore by procuring that Kirtlings Ltd did not account for VAT when it should have done so is we think irresistible.  The only hint of a defence is that Mr S advised Mr Bornoosh to keep two sets of books.  But Mr Bornoosh knew about VAT and about the need to register when turnover exceeded the threshold.  And a person who does something dishonest on advice does not cease to be dishonest if he knows that what he is doing is dishonest.  Here, we think that Mr Bornoosh must have known that what he was doing was dishonest.  We cannot accept his defence and we think that the penalty (before mitigation) was in the right amount.

30.	The Commissioners have allowed mitigation of 75% for cooperation.  Mr Bornoosh argues that it should be more than that.  He pointed out that in the course of the present hearing he had admitted that the penalty (before mitigation) had been correctly calculated as representing the tax evaded throughout the second period.  But, we note, in interview he had admitted only that the higher of the two sets of records from March to November 1998 was the correct amount of turnover.  He could have admitted at that early stage that he had records showing that Kirtlings Ltd had been making sales above the registration threshold throughout the second period.  In that respect we think that his cooperation was partial.  We therefore think that the penalty should not have been reduced by more than 75%.

31.	We allow the appeal for the first period.  We dismiss the appeal for the second period.  We direct that Mr Bornoosh should pay one half of the costs reasonably incurred by the Commissioners in relation to the hearing.  If that amount is not agreed it should be referred to us (chairman alone) for further directions.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED:

LON/02/347