18640

VAT —penalty for dishonest evasion  assessed on company — apportioned under s. 61 VATA 1984 to two named officers — appellant one named officer — whether appellant managing officer in part of period covered by penalty assessment — whether conduct giving rise to penalty attributable in part to dishonesty of appellant —appeal dismissed19/05/2004 98 0838 MICHAEL J KIRKHAM Mr J D Demack Mr A E Brown
Mr R Presho York 6 May Mr Christopher Prince, accountant, appeared for the Appellant Miss Lisa Linkater, of counsel, instructed by the Solicitor for Customs and Excise 

MANCHESTER TRIBUNAL CENTRE

 
 	
	MICHAEL JOHN KIRKHAM	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Mr J D Demack (Chairman)
						 Mr A E Brown FCA (Member)	
 Mr R Presho FCMA (Member)

Sitting in public in York on 6 May 2004
Mr Christopher Prince, accountant, for the Appellant

Miss Lisa Linklater, of counsel, instructed by the Solicitor for Customs and Excise for the Respondents 

	© CROWN COPYRIGHT 2004

DECISION

1.	On 4 September 1998 Trade Glass (1995) Ltd (‘TGL’) was assessed to tax of £9,709 for the period between 1 November 1995 and 31 October 1997.  It was also assessed to a penalty of £9,709 under s.60 of the Value Added Tax Act 1994, which penalty was apportioned under s.61 of that Act equally between one W V Forrester and the appellant, Mr Michael John Kirkham.  The penalty was mitigated by 45 per cent for co-operation in determining TGL’s true liability to tax, so that the assessment made on Mr Kirkham was in the sum of £2,669. The tax assessed on TGL was never paid; and despite Mr Forrester not having appealed against the penalty apportioned to him, nor was his portion of the penalty.
2.	In his Notice of Appeal, given on 21 September 1998, Mr Kirkham disclosed his reason for appealing as; “[I] was not an officer of the company during the period in question and had no responsibilities in connection with it.” 
3.	We should explain that by s.61(1) of the 1994 Act:
“Where it appears to the Commissioners –
(a) that a body corporate is liable to a penalty under section 60 [i.e. for dishonest evasion of tax], and 
(b) that the conduct giving rise to that penalty is, in whole or in part, attributable to the dishonesty of a person who is, or at the material time was, a director or managing officer of the body corporate (a “named officer”),
the Commissioners may serve a notice under this section on the body corporate and on the named officer.”
4.	Subsection (2) of s.61 then provides that the portion of the basic penalty specified in the notice of assessment  “shall be recoverable from the named officer as if he were personally liable under section 60 to a penalty which corresponds to that portion”.  And subsection (6) extends the meaning of “managing officer” to “any manager, secretary or other similar officer of the body corporate or any person purporting to act in any such capacity or as a director.”
5.	Mr Kirkham gave evidence to us, as did Mr P K Cole, a former director of TGL, and Mr P Gayler, the Commissioners’ assessing officer.  From that evidence, the contents of the Commissioners’ bundle of copy of documents, and a number of documents provided by Mr Kirkham, we find the following facts to have been established.
6.	Prior to 1995 Mr Cole traded alone as a manufacturer of sealed window units under the style of Trade Glass.  He was registered for VAT under number 613 9548 28.  Late in 1995 he ceased trading but did not immediately de-register. He then went to work for Barnwell Ltd, a company wholly or mainly owned by W V Forrester.  Barnwell Ltd was also involved in manufacturing sealed window units.  But some two months later that company went into receivership.  Mr Forrester then approached Mr Cole with a view to establishing a new company to supply window units.  Omega Window Centre Ltd (‘Omega’) was established in which Mr Forrester held 52 per cent of the shares, and Mr Cole 48 per cent.  As Barnwell Ltd had failed owing a considerable sum in VAT, as had another firm (or company) known as Omega Window Systems in which Mr Forrester had been involved, the Commissioners required security for future taxable supplies from Omega  in a sum exceeding £58,000.  (We were not told whether Omega provided the security, but it would appear that it did so).
7.	On 16 January 1996 Mr Cole wrote to Customs at Southend-on-Sea as follows:
“Ref VAT Account 613 9548 28
Would you please note that I ceased trading as a sole trader on 1 November 1995. I, therefore, have no VAT supplies and enclosed is a NIL return for the last period.  Would you also de-register the above number as of that date.
I look forward to receiving confirmation that this has happened”
8.	Customs de-registered Mr Cole as requested.  
9.	Mr Forrester and Mr Cole also established TGL very late in 1995.  It manufactured some, if not all, of the window units which in turn Omega supplied.  Despite being liable to do so, TGL did not register for VAT.  Instead it charged VAT to its customers using Mr Cole’s VAT registration number.  But notwithstanding its use of that number, it never accounted for any VAT it charged to Omega or anyone else.  (We might also mention that Omega claimed as input tax the VAT said to have been charged on supplies to it by TGL).
10.	Omega and TGL operated from the same or adjoining premises at Tritton Road Trading Estate, Lincoln.  Not only did they initially have the same directors in the form of Mr Forrester, Mr Cole and a Mr Heath, but also the same company secretary in Mrs Forrester.
11.	Mr Kirkham, who qualified as a chartered certified accountant in 1971, practised as an accountant from then until 1984 when he went into management.  He joined Omega as sales manager in April 1996.  In the following month, following the redundancy of Mr Heath, he was appointed company accountant and a director.  
12.	Before us Mr Kirkham maintained that, despite the close business relationship between TGL and Omega and the fact that they operated from the same or adjoining premises, with one exception he had nothing to do with TGL until the middle of 1997. The exception was that, on the instructions of Mr Forrester, he prepared a draft set of accounts shortly after 31 July 1996.  Significantly, in our judgment, those accounts show a liability to VAT of £3,959.
13.	For the reasons which follow, we are unable to accept that Mr Kirkham had nothing to do with TGL until mid-1997.  First, we have the oral evidence of Mr Cole.  He explained that Mr Kirkham “came in” a couple of weeks after Mr Heath left on 30 April 1996.  Mr Cole added that Mr Kirkham was present at and took part in a meeting of TGL on 14 August 1996 at which he, Mr Cole,  was forced to resign as a director.  Mr Kirkham completed the form of resignation for Mr Cole to sign.  Shortly afterwards, Mr Kirkham wrote to Mr Cole on paper headed “Trade Glass (1995) Ltd” saying:
“Dear Pete
I refer to our conversation of today’s date and confirm that wages for the 3 weeks 16th, 23rd and 30th August 1996 amounting to £600 will be paid by cheque on or before Friday 16th August 1996.
Yours sincerely
[ M J Kirkham]
14.	We consider the tone and content of that letter clearly to indicate it having been written by  a person engaged in a managerial capacity within TGL, if not at director level.
15.	But perhaps most telling of all, as coming from a source completely independent of TGL and Omega, are TGL’s audited accounts for the period ended 31 October 1996.  The accounts were audited by Messrs Neville Russell, chartered accountants of Lincoln.  The Directors’ Report in the accounts, “approved by the board on 25 July 1997 and signed on its behalf by” followed by the signature of Mr Kirkham, includes under the heading “Directors” the following information:
“The directors set out below here have held office during the whole of the period from 28 November 1995 to the date of this report unless otherwise stated
…
M J Kirkham (appointed 12 August 1996)”
16.	In evidence, Mr Kirkham sought to convince us that he had been made a director of TGL only in July 1997, and his appointment had been ‘back-dated’ to August 1996.  Apart from the fact that he produced no evidence to support that claim, we are unable to accept his explanation that the ‘back-dating’ was necessary for the ‘signing off’ of the company accounts.  He  maintained that Mrs Forrester, as company secretary, was refusing to sign them, she at the time being in the process of divorcing her husband.  But, as she was only company secretary, there was no necessity for a second director to be appointed to TGL, Mr Forrester having been a director from November 1995. That there may have been the necessity for an appointment of company secretary, we accept. But that is a matter separate from the appointment of a company director.
17.	In April 1997 a Customs officer paid a control visit to Omega in connection with its VAT affairs.  She dealt with Mr Kirkham, who made no mention whatsoever of TGL or its VAT position.  Quite clearly, he had the opportunity on that occasion to draw Customs’ attention to  what he claimed in evidence as their failure to provide VAT returns to TGL (against a background of his further claim that he believed Mr Cole’s VAT registration number to have been transferred to TGL), and to explain that it had not paid any VAT, despite having charged it.  Yet he did nothing whatsoever.  
18.	The evidence speaks for itself, and in our judgment conclusively proves that Mr Kirkham was a director of TGL from 12 August 1996 onward.  But that is not to say that he was not previously a person falling within the definition of “managing officer” within s. 61(6) of the 1994 Act.  We prefer Mr Cole’s evidence to that of Mr Kirkham on the point, the latter’s having been tested and found wanting.  For instance, in response to a question put by Mr Brown, one of the members of the tribunal, he admitted being responsible for TGL’s VAT returns which he knew to be due but were never made, and knowing that Omega was reclaiming as input tax VAT for which TGL had not accounted.  In contrast, we found Mr Cole to be straightforward and honest. (He it was who reported to Customs that TGL was illegally using his personal VAT registration number). Having accepted Mr Cole’s evidence and made the other findings of fact set out above, it follows that we find that Mr Kirkham was engaged by TGL in a managerial capacity sufficient to bring him within the definition of managing officer in s. 61(6) of the 1994 Act from May 1996.
19.	On 24 July 1997 Mr Kirkham wrote to the Chesterfield office of Customs and Excise saying:
“Dear Sirs,
I have recently become involved in the management of the above company as company secretary and note that Value Added Tax returns have not been submitted for some considerable time.  The Company has been trading since 1 November 1995 under the control of Mr Peter Kenneth Cole until his resignation on 12 August 1996, and has been registered and using the number 613-9548-28 since commencement according to his records although I am unable to trace any VAT registration forms or returns and am concerned that these may have been dispatched to his private address.  I am now concerned that matters are regularised and monies due to H.M. Customs and Excise are paid over.  In order to assist you it is unlikely that the total amount of VAT due will exceed £7000 for the whole period of trading from 1st November 1995 to today’s date.
I would welcome your assistance and advice in this matter.”
20.	We should also mention that on 25 July 1997 Messrs Neville Russell wrote to TGL saying, inter alia, “The company should, as soon as possible, register for VAT and pay over any arrears.”  The letter in our bundle of documents contains a stamp saying “Confirmation of the company’s agreement and acceptance of the above points” and the signature of Mr Kirkham.
21.	To say that Mr Kirkham’s letter to Customs is misleading is to put it mildly. As a chartered certified accountant dealing with the VAT affairs of Omega, Mr Kirkham would certainly have known (indeed in evidence, he confirmed that he knew) that companies are required to account for VAT on a quarterly basis.  He would also have known how to go about registering for VAT. Yet despite having written the letter and been advised by Messrs Neville Russell that TGL was not registered for VAT but ought to be, he took no further steps to register it.  Even more importantly in our judgment, TGL continued to charge its customers VAT using Mr Cole’s registration number.  That yet further implicated Mr Kirkham in events.
22.	By September 1997, Customs had become aware of TGL’s VAT position, and on 4 September Mr Gayler wrote to Messrs Neville Russell asking, inter alia,
1.	whether they were aware that TGL was quoting a VAT registration number on its sales invoices;
2.	whether they knew that TGL was charging customers on its sales invoices; and
3.	whether TGL was, or believed itself to be, VAT registered.
23.	Messrs Neville Russell replied to these questions on 12 September 1997 in these terms:
“1. During our preparation of the financial statements we did not inspect any sales invoices.  We were not given any indications by any director or employee that the company was quoting  a VAT registration number on sales invoices issued
2. Our review of the sales day book did indicate that the company was charging VAT to customers.  When this was queried with the company we were instructed that VAT had been charged but had not been paid over to HM Customs and Excise during the period of our review.
3. As a result of our questioning whether VAT had been paid over to HM Customs and Excise the company indicated to us that it was registered for VAT.”
24.	We include Messrs Neville Russell’s replies to Customs for completeness. We particularly note that the firm’s reply to question 3 was inconsistent with its letter to TGL of 25 July 1997, and may have been framed to ensure that no criticism could fall on it.  In all the circumstances and in the light of the evidence before us, we prefer the 25 July letter to the reply to question 3.
25.	Mr Kirkham sought to persuade us that as a result of his having written the letter of 24 July 1997 no blame attached to him for anything which occurred later,.  We are unable to accept that the letter exonerated him from blame for subsequent events.  Having endorsed Messrs Neville Russell’s letter of 25 July 1997, he must have known that TGL was not registered for VAT and that Mr Cole’s VAT registration number had not been transferred to it.  In those circumstances, as a chartered certified accountant, he must also have been aware that to charge VAT on its supplies, TGL had itself to register for tax and use its own registration number for the purpose.  We find that Mr Kirkham remained a managing officer of TGL until at least 21 October 1997.
26.	Mr Prince, for Mr Kirkham, submitted that, as his client had not been cautioned under the Police and Criminal Evidence Act 1984 before being interviewed by Customs, his human rights had been infringed, and we ought not to admit the interview in evidence. That point was dealt with by Potter LJ in CEC v Han and others [2001] STC 1188.  At para 84 (p. 1214) he expressed the view that, if matters are made plain to the taxpayer on the terms set out in para 7 of the decision of the President of these tribunals, His Honour Stephen Oliver QC, in the Han case [2002] VATTR 312 at pp 315-316, at the time the nature and effect of the inducement procedure to co-operate with Customs contained in their Notice 730 is explained to him, “it is difficult to see that there would be any breach of art 6 [of the European Convention on Human Rights].   It also seems to me that, even if the Police and Criminal Evidence Act 1984 were applicable, it is most unlikely that a court or tribunal would rule inadmissible under s. 76 or s. 78 any statements made or documents produced as a result, at any rate in the absence of exceptional circumstances.  On the other hand, it follows from this decision that a person  made subject to a civil penalty under s. 60(1) of the Value Added Tax Act 1994 will be entitled to the minimum rights specifically provided for in art 6(3), [i.e. the right to an interpreter and to legal funding, if appropriate].”  That passage speaks for itself and, in reliance on it, we admit the interview of Mr Kirkham by Customs in evidence.
27.	The Commissioners have proved to the high degree of probability required that TGL dishonestly evaded VAT, and that the conduct giving rise to the penalty imposed on it for such conduct was attributable at least in part to the dishonesty of Mr Kirkham: his conduct would have been considered dishonest by the ordinary man in the street.  
28.	We are somewhat at a loss to understand why the Commissioners mitigated the penalty by 45 per cent: a more blatant case of dishonest evasion of VAT, albeit on a relatively small scale, would be difficult to imagine. By. s70(2)  of the 1994 Act, we do have power to reduce the mitigation given by the Commissioners, and we have carefully considered whether we should exercise our power in this case.    In the event, since Mr Forrester (who is now believed to reside in Spain) did not appeal the penalty apportioned to him, we have decided not to do so.  We therefore dismiss the appeal, and confirm the penalty assessment in the sum of £2669.  We direct Mr Kirkham to pay the Commissioners’ costs of, and incidental to and consequent upon the appeal, such costs to be assessed by a chairman of the tribunals if not agreed.

DAVID DEMACK
CHAIRMAN
Release Date:04/06/2004
MAN/98/0838