ASSESSMENT — Underdeclaration of takings of trader as gun dealer — Unidentified sums paid into business account — Sale of private collection of guns said by Appellant not to be part of business — No evidence of source of payments in to bank — Whether receipts of business — Appeal dismissed

	PENALTY — Dishonest evasion  — Underdeclaration of tax — Alleged that appellants recorded sales of standard-rated goods as zero-rated  — Whether appellants acted dishonestly — No — Appeal allowed — VATA 1994 s. 60

MANCHESTER TRIBUNAL CENTRE

 
 	D J FREER & A P FREER
	T/A SHOOTING & FISHING	Appellants

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Mr Angus Nicol (Chairman)
						 Mr John Lapthorne			

Sitting in public in Birmingham on 3 April, 6 and 7 June, and 13 and 14 September 2000 and 28 September 2004 

David Freer, partner, for the Appellant

James Puzey, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

History

1.	This appeal first came before us on 3 April 2000.  It was adjourned because the Appellants Mr and Mrs Freer, were to have been represented by a VAT consultant, a Mr Martin, instructed by Mr Freer some six weeks earlier.  That was because his previous accountant no longer undertook VAT work.  However, Mr Martin was not available on 3 April, as he was engaged on a case in Bristol.  The appeal next came on for hearing before us on 6 June 2000. The Appellants appeared in person, the appeal largely being conducted by Mr Freer.  It was listed for two days, but a further two days were necessary.  The appeal was adjourned part heard until 13 and 14 September 2000.  On 14 September it became necessary to refer to the Appellant’s VAT returns for the relevant period, which were not at court.  The officers concerned could not be contacted.  The Appellant also indicated that he would need to call further evidence, and Mr Puzey, for the Commissioners, said that it might be necessary to recall one of his witnesses.  The appeal was therefore adjourned, part heard, until 30 November 2000.  Directions were given as to the future conduct of the hearing. After that, for reasons which were never made clear to us, the appeal remained in abeyance until it was relisted and the adjourned hearing took place on 28 September 2004.

The appeal

2.	The Appellants, who trade in partnership, are appealing against an assessment to VAT in respect of the period from 1 June 1988 to 31 October 1995, in the sum of £49,687 (later amended to £49,487).  There was also an assessment to a civil penalty under section 60 of the Value Added Tax Act 1994, in the sum of £39,582, representing 80 per cent of the total amount of tax alleged to have been evaded.

3.	The principal issue in the appeal related to the sale of a large number of guns, which the Appellants said were a collection belonging to Mr Freer personally, and were not part of the stock of the business, although they had been sold in order to finance the business.  The Appellants also denied any dishonest conduct.  The notice of appeal said simply, “We have not evaded VAT; private guns were sold.”

The Commissioners’ evidence
The visits

4.	Evidence was given by Mr Roger Watts and Mr Nigel Freebury, both officers of Customs and Excise, for the Commissioners.  The Appellants called a number of witnesses who gave evidence about the business and about Mr Freer’s private collection of guns, to whose evidence we shall refer later.  

5.	Mr Watts said that he had visited the Appellants’ business premises in January 1995, to carry out a routine credibility test.  The shop, he said, was a part of a terraced area.  The armoury was on the first floor, to which the public had no access.  He observed that there was a stock of knives, pistols, airguns, darts, and pellets, also leather goods and clothing, cartridges and spare parts.  He saw no children's clothing.  There were also a few books, occupying a part of one shelf.  He asked some questions about zero-rated sales, and was told that the Appellants had ceased to stock books and children’s clothing the previous Christmas. In cross-examination he was referred to a number of photographs produced by Mr Freer.

6.	A check of the Appellants’ VAT returns showed that the business was making constant repayments returns, which did not seem credible to Mr Watts.  He therefore looked at the records relating to zero-rated goods and analysed the purchases between March 1992 and February 1993.  He found the following:

March to May 1992:	no zero-rated purchases.
Period 8/92		no zero-rated purchases.
Period 11/92		books bought, to a total of £86.10
			no zero-rated clothes bought.
Period 2/93		no zero-rated purchases.

Mr Watts also looked at the zero-rated sales of the business between August 1993 and May 1994, and found the following recorded:

Period 8/93		zero-rated sales of £1,687
Period 11/93				      £1,380
Period 2/94				      £1,452
Period 5/94				         £911

However, Mr Watts said, there were in fact no zero-rated sales, all of the above having been totally overstated.  He said that the invoice book recorded purchases, but he saw no sales invoices or sales ledger.  On the till there was a button for standard-rated items and another for zero-rated items.

7.	Mr Watts saw the Appellants’ annual accounts for the years to 31 May 1991 and 1992, and a third set headed “for the period from 1.6.92 to 31.5.94”.  Mr Watts noted that some £95,000 of capital had been introduced over those four years.  There had been drawings of between £6,000 and £9,000 over those years.  He had not discussed this with the Appellants, nor had he asked what was the source of the capital introduced.  However, the accounts did not reflect what Mr Watts saw in the purchase books.  The accounts also showed losses of £20,000 and £15,000 respectively in 1993 and 1994 as the result of burglary.  But Mr Watts contacted Loughborough police, who told him that no burglary had been reported.  There had been a report of a smashed window in each of July and September 1993, but no burglary.

8.	The accounts for 1991-92 showed purchases of £69,696, and there were purchases recorded in the purchase book of £51,965.  The accounts for 1992-93 showed £41,394 of purchases, while the purchase book showed £49,000, and the accounts for 1993-94 showed £47,098 and the purchase book £59,758.  The accounts showed losses for each year, and of £23,213 in 1992-93 and £19,517 in 1993-94.  Such losses did not seem realistic.  The business in fact showed constant losses sustained by capital introduced.  On that occasion Mr Freer did not mention to Mr Watts that he was selling his own guns to finance the business.  He never indicated that any of the guns were his own personal property.  Mr Watts said that nothing in the shop was hidden from him, and he recorded everything that he wanted to see.  Mr Watts handed the case over to Mr Freebury in April 1995.  

9.	Mr Watts was recalled later in the hearing to deal with some new documents containing workings relating to purchases and sales of zero-rated goods in the period 11/92.  He had examined seven accounting periods, and found that the zero-rated sales for the period 11/92, consisting only of sales of books, amounted to £86.10, while those for all seven periods examined, also only sales of books, amounted to £224.47.  He also analysed the total zero-rated sales, and found that for those seven periods the zero-rated sales amounted to £8,261, which represented a mark-up of 3,271.8 per cent.  
The interviews

10.	Mr Freebury was the assessing officer.  He said that Mr Watts had referred the matter to him, and because fraud was suspected there was an interview with Mr Freer, which took place on 16 May 1995.  Mr Freebury was aware that the Appellants were also under investigation by the Inland Revenue, and Mrs Stone, from the Inland Revenue, was present during the interview.  Also present was Mr Kansagra, the Appellants’ accountant at that time. The interview began with Mr Freebury handing Notice 730 to the Appellants and asking them to read it, which they did.  Mr Freer said that their sales varied with the season, and were mostly standard-rated.  His zero-rated sales were books and children’s clothes.  He was asked how it was that between March 1992 and February 1993 his declared zero-rated sales were over £8,000 when the zero-rated purchases were only £200.  He answered that he bought a lot of books from rummage sales.  He said that he did not think that his zero-rated sales had been overstated, but he could not explain the difference.  He agreed that the difference was too big to be accounted for simply by purchases at rummage sales.  The following exchange then took place:

	“Freebury:	...Zero rate sales have been overstated, haven’t they?
	Freer		Yes, not deliberately - the two buttons are close together on the till - as with typing you don’t look where your fingers are going.
	Freebury:	Have your sales in general been understated?
	Freer:		No
	Freebury:	Are you sure about that?
	Freer:		If it is it is because the till hasn’t recorded a number it would only be a small amount.
	Freebury.	So some things may not have been recorded?
	Freer:		Not accurately recorded.  If you want 11.00 and you hit 1-1.00 and it misses a figure out.
	Freebury:	Do you feel things like that have happened?
	Freer:		Not knowingly.  But our till plays up.”

11.	The interview then turned to the matter of sales of Mr Freer’s own collection of guns. Mr Freebury observed that Mr Freer had told Mrs Stone that he had introduced cash into the business from the sale of private stock.  Mr Freer agreed that he had.  Mr Freebury asked him whether the stock was introduced into the business as capital.  Mr Freer replied, that although the bank knew that he had it “it was not down as capital we have an overdraft to start the business.”  The interview continued:

	“Freebury:	So your initial accounts show capital introduced.
	Freer:		We did put some guns in but not all of them.
	Freebury:	They show £28,000 capital introduced.
	Freer:		I don’t know.
	Kansagra:	Yes it is there.
	Freebury:	Does that figure relate to the guns?
	Freer:		Some, there was other stock as well.
	...
	Freebury:	How much of it was your private stock of guns?
	Freer:		About half the guns we brought in.
	Freebury:	So perhaps £7,000 worth.
	Freer:		Yes.
	...
	Freebury:	Aside from this £7,000 worth of guns you introduced what was the value of the other guns you had in your collection when you started? 	
	Freer:		I never valued them.
	Freebury.	You’ve introduced about £100,000 into the business.
	Freer:		Yes.”

12.	Mr Freer went on to say that there were no records of the private guns, because in those days it was not necessary.  The collection was not insured.  He had kept the majority of them at the shop, and they were insured under his business insurance policy.  Mr Freebury told him that the Commissioners considered that they were part of the Appellants’ business, and that he could not produce any separate records to disprove that. Mr Freer agreed that he could not.  He said that the proceeds of sale of the guns were paid into a Barclays business premium account, adding, that he had never intended to sell the guns.

13.	When asked about the losses amounting to £35,000 due to burglary shown in the accounts, he said that the figures were not reported to the police.  He agreed that the losses were not in total due to thefts of stock.  Mr Freer put to him that on that point the accounts were not true accounts, and Mr Freer answered, “Not exactly, no.”  He said that he did not know what the exact figure was, but agreed that it was not £35,000.  He said that they had “added up all the other stuff taken over the time”, including knives, guns, air pistols, air rifles, bits of clothing, and they had “also lost some stuff upstairs when the wet got in.”  He said that he had no list of the goods lost, and could not prove that he had lost it.  Mr Freebury then put to him that they had been understating sales with a view to the evasion of tax, which Mr Freer denied, and that their zero-rate sales had been overstated for the same purpose.  He agreed that zero-rated sales had been overstated, as he had already said, but not for the purpose of evading tax.

14.	A further interview took place on 7 December 1995, at the Commissioners’ offices in Loughborough, this time with only Mr Freer, of the Appellants, present.  Once again Notice 730 was drawn to Mr Freer’s attention.  It was pointed out to Mr Freer that he had declared 7 per cent zero-rated sales, while less than 1 per cent of his purchases were zero-rated.  He agreed, though saying that he had not worked out the proportion.  When it was put to him that his zero-rated stock was negligible in comparison with his normal stock he agreed, but said that he had got some zero-rated stock, perhaps a little more than £1,000 worth.  He explained again that the zero-rated sales were overstated as a result of the till keys having been mis-hit, and was purely accidental.

15.	Mr Freer said that some of his private collection of guns had been sold at a loss.  He was asked why the Appellants were continually trading on repayments of VAT, and he said that it was the result of bad working practices, and they had lost some stock.  The interview continued:

	“Freebury:	You don’t sell enough zero-rated goods to justify repayments.
	Freer:		No, I understand what you are saying.
	Freebury:	The stock figure on your accounts - you told me they were a guess.
	Freer:		Yes.
	Freebury:	As far as we can see it’s not a very good guess.
	Freer:		An estimated value.
	Freebury:	These are the accounts for the year-end 1993-1994.  They were all done at the same time.
	Freer:		Yes.
	Freebury:	They done end of 1994 [sic].  
	Freer:		Yes.
	Freebury:	Basically guesses were made of what your stock might have been.
	Freer:		I can only agree.
	Freebury:	You have steadily increasing your stock and steadily decreasingly sales.
	Freer:		Yes.
	Freebury:	That really just justifies your repayments.
	Freer:		Yes....
	Freebury:	When the level of stock reached £95,000 - losses of stock due to burglary appear in your accounts.
	Freer:		We have always lost stuff due to theft.  Perhaps it should have been put in earlier years.
	Freebury:	As explained to you last time we have checked with the police. There were no losses due to burglary.
	Freer:		No.
	Freebury:	The statement in your annual accounts is false.
	Freer:		All the stock was put in on one/two years.”

Mr Freer went on to agree that he had kept no records of the stock that had been lost, that he had not kept a stock record, and that he had not kept a record of his private sales.

16.	Mr Freebury asked about the sale of the private collection, and pointed out that if Mr Freer considered that he was carrying on a separate business selling his collection then he had crossed the VAT registration threshold some time in 1988.  Mr Freer said that he was selling the guns to put money into the business and that it was not intended to be a separate business. Mr Freebury said that Mr Freer must have known that selling the guns was making taxable supplies, and Mr Freer said that he had not realised that, he thought he was just putting money into the business.  Then Mr Freebury asked if he had charged VAT on the guns in the shop, and Mr Freer answered:  “Yes.  I sold them as my private stock to put money into the business.”

17.	Dealing with the Appellants’ annual accounts, Mr Freebury said that Mr Watts had found that the purchases were understated.  He asked, “In 1993 you declared £41,394, the true figure is £49,000.  The 1994 figure recorded £47,098, true figure is £59,758.  That’s a difference of £7,500 in 1993 and £12,000 in 1994.  In 1993 you drew £6,240 and in 1994 £6,410.  How did you pay for those purchases?”  Mr Freer said that he did not know, and mentioned that an insurance was paid out of £5,500 and a further £3,500 the next year.  He was unable to explain where the balance of £9,000 had come from.  He said that he did not know where £13,983, introduced in 1994, had come from.  It was pointed out to him that the accounts did not balance, and he agreed that they were broadly based upon his records. He agreed that none of the money paid into the Barclays premium account was ever declared on a VAT return because it was his private money.  He agreed that his VAT returns were not 100 per cent accurate, but did not think they were very far out.  Mr Freebury put to him:  “For each of the years between 1991-1994 you have introduced half as much again as you have turned over.  I suggest to you what you banked in the business premium account was unrecorded sales.”  Mr Freer said that that was not so.  Finally, Mr Freer agreed that the Appellants had made mistakes, but not dishonestly.

Further evidence

18.	Mr Freebury said that Mr Watts had examined six tax accounting periods, and had found that less than 1 per cent of purchases were zero-rated, yet zero-rated sales amounted to between 7 and 10 per cent of total sales, which was not credible.  The zero-rated sales figures were calculated by subtracting taxable outputs from total outputs.  As to zero-rated stock, Mr Freebury said that he had seen some books at the shop, perhaps occupying two to three feet of one shelf. He saw no children’s clothing, but the Appellants had ceased selling children’s clothing by that time.

19.	By the time of the first interview, in May 1995, Mr Freebury had, he thought, seen the Appellants’ accounts.  He did not then know when the accounts had been prepared, but he later heard from Mr Kansagra that all of them had been prepared at the same time, at the end of 1994, as the result of pressure from the Inland Revenue.  He observed that the opening stock figures in each set of accounts were exact numbers of thousands:  in 1990-91, opening stock was £45,000 and closing stock £61,000; in 1991-92, opening stock was £61,000 and closing stock £85,000; in 1992-93, opening stock was £85,000 and closing stock £95,000; and in 1993-94 opening stock was £75,000 and closing stock £80,000.  There was no explanation of why the opening stock for 1993-94 was a different figure from the closing stock in 1992-93.  The fact that these were all round figures indicated that the stock figures had been manipulated to minimise sales, also that they were guess-work which was confirmed in interview by Mr Freer.  These guesses were made at the end of 1994, and it was noticeable that the figure went on increasing.  From June 1990 to the end of May 1993 the stock figure increased by 50 per cent.  Mr Freebury admitted that he had not noticed the difference between the closing stock for 1992-93 and the opening stock for 1993-94 until after the investigation.  

20.	 Over those years approximately £95,000 was introduced into the business, Mr Freer said, from the sale of his private stock of guns.  Mr Freebury said that Mr Freer had not told him about any private guns on the premises, and he supposed that they had all been sold.  He had inspected only the shop area, and not the rest of the building.  He had not been upstairs.

21.	Mr Freebury said that he had come into possession of the bank statements on the day of the second interview, in December 1995.  He asked Mr Kansagra for his working papers, upon which the accounts were based.  He also had the business premium account statements for the period from October 1988 to September 1992, which showed a total of money banked over those years of £182,371.76.  The other bank statements showed regular bankings, often in round figures.  It appeared to him that all takings had been added together and part paid into one account and part into another.  There was also a business account.  The money paid into the business premium account was not included in any VAT return.  There were no statements after September 1992 because the Appellants had stopped using that account.  But money continued to be introduced from some other source.

22.	No records had been produced relating to the private collection of guns until 6 August 1997, when Mr Freer produced a list of guns.  He had also produced letters from people who said that they had bought guns from him.  Mr Freebury said that he had attached little weight to the list, since it had been produced long after the investigation had started, it was imprecise, and the items listed were not always clear.  There were, for instance, several entries, which were simply “.177 Pre-war”, with no further indication what the item was.  The first page appeared to be a list entirely of air guns.  The list, Mr Freebury said, appeared to have been compiled from memory.

23.	Mr Freebury said that he had spoken to the police about the burglaries mentioned by Mr Freer.  He was told that there had been two broken windows reported, but no report of any subsequent theft.  There was a mention of a theft of a knife and another article, valued at about £50.  Mr Freer had said that no insurance claim had been made.

The assessment

24.	In a letter of 15 March 1996, Mr Freebury set out the calculation of the amount of tax assessed. The full calculation was included with the letter. This, he said, fell into four components.  

(a)	The first covered the periods from 10/88 to 5/92, and consisted of the application of the VAT fraction, either 3/23 or 7/47, to the whole of the bankings shown for those periods in the business premium account.  That amounted to £26,593 of tax.  

(b)	The second component covered the periods 8/92 to 11/94.  There were no further banking records, but cash was still being introduced.  The error rate was based upon the previous period, component (a).  The calculation of the error rate gave additional takings of £160,882, which was 47 per cent of the total takings of £340,352.  That rate was reduced for ease of calculation to 45 per cent and applied to the declared takings for 1992-94.  The tax due was calculated to be £15,676.

(c)	The third component covered periods 2/95 and 5/95.  Mr Freebury described these as anomalous, because they followed on from Mr Watts’s visit.  The Appellants were declaring more tax than before, and were making payment returns.  To apply the rule set out in component (b) would have been excessive.  The calculation was made by averaging the true amount of tax due in all periods covered by components (a) and (b) and comparing the result, £886.72, rounded down to £800, with the amount declared, giving an amount of tax due of £775.

(d)	The fourth and last component dealt with zero-rated sales.  Since less than 1 per cent of purchases were of zero-rated goods, Mr Freebury allowed 1 per cent of total sales in respect of zero-rated sales.  The period 5/91 showed £9,911 of zero-rated sales declared.  The tax due was calculated at £6,643.

25.	Mitigation of the penalty of 20 per cent was allowed.  A total of 75 per cent may be allowed, broken down into three parts.  For production of records and attendance for interview, a maximum of 10 per cent.  For assistance in calculating the true amount of arrears, a maximum of 25 per cent.  For an early and true explanation as to how the arrears arose, 40 per cent.  In this case, 5 per cent was allowed under the first heading; the Appellants did attend for interview, but took months to produce records, and said that there were no records of some things.  No reduction was allowed under the second part.  Under the third, there had been no admission of dishonesty, but it appeared to Mr Freebury that there was such a range of anomalies that they could not have been accidental or the result of incompetence.  All the errors were in favour of the business, whereas usually accidental errors work both ways.  However, there were some admissions, such as guesses at stock figures.  That made up the balance of the mitigation. 

26.	In cross-examination, Mr Freebury said that he was unaware that the Inland Revenue had said, after their investigation, that there was no case for Mr Freer to answer.  He agreed that Mr Freer had shown him that the till-roll mechanism was not working properly and that the date shown on the till roll was wrong.  He agreed that Mr Freer had said that zero-rated sales were entered in the till on a separate button from standard-rated sales, and that sometimes the wrong button was pressed.  Mr Freer produced some weekly sales figures.  These were undated.  They were intended to illustrate that his zero-rated takings were significantly more than 1 per cent of the total takings.  For four weeks, numbered 82 to 85, the figures showed that the proportion of zero-rated sales varied between 5.02 per cent and 9.76 per cent.  Mr Freebury said that the method set out in the sales sheets was a fair way to split zero-rated sales from standard-rated, provided that it was accurate.

27.	Mr Freebury agreed that the Appellants had not refused anything he wished to see, though records were produced slowly, and some were not produced at all because, Mr Freer said, they did not exist.  He said that he accepted that the Appellants had books in stock, but added that there were no purchase invoices for zero-rated stock.  Mr Freer had pointed to a few books in the shop, and said that there might be more upstairs.  He said that he did not believe that Mr Freer had such a collection of guns at home, worth some £180,000 and uninsured.  He agreed that the photographs produced by the Appellants showed a substantial number of guns in the shop.  These were a mixture of new and second-hand, air guns and shot-guns, particularly the latter.  

28.	Mr Freebury said that he had never seen the main business account statements. Payments into that account were declared in the main accounts, though not those into the business premium account.  The VAT assessment was based upon the prime record of the main account, the statements of which he had never had.  He regarded the business premium account as an “off record” account.  He assumed, therefore, that the VAT returns were based on the banking and the records with the premium account omitted.

The Appellants’ evidence

29.	The Appellants called a number of witnesses, all of whom had made statements, to tell the Tribunal about his private collection of guns and about the shop and the goods sold there.  The first was Mr Ivan Simpson.  In his statement, he gave his address simply as Yarmouth, Isle of Wight. He said that he had first become friendly with the Appellants in 1970.  He said that he allowed Mr Freer to use machinery in his workshop to restore guns.  Mr Simpson said that he came to the workshop most nights with guns and old cartridge loading tools and flasks.  He continued to do this for many years, and brought a large number of items to the workshop. He further said that he had seen a large number of Mr Freer’s guns, both at his house and at the shop.  He did not know whether the private collection was at the house or the shop.  Some of the guns were old shot-guns with what he called mottled barrels, hammer guns, and muzzle-loaders.

30.	Miss Justine Smith said that she had been employed at the Appellants’ shop during her school holidays between 1987 and 1989.  She too had made a statement.  At that time, she said, most of the stock was bought in to fill particular orders.  All other stock was what had been bought with the shop or, in the case of second-hand goods, traded in by a customer.  She was aware that Mr Freer was an avid collector; she agreed that he was an enthusiast about guns, and said that if there were a stronger word, she would use it.  In the shop she dealt with decoys, lures, snares and similar goods.  She was not old enough to deal with firearms, except dealing with the paper-work and writing labels.  It was part of her job to be familiar with the stock, so as to be able to deal with customers’ inquiries. All sales were written down and put through the till, and, if of a firearm, recorded in a book.  Miss Smith said that she had been to the Appellants’ house, and knew that he had probably hundreds of guns there.  These, she said, were not modern guns, such as were in the shop; some of them were not whole.  Mr Freer’s collection was separate from the stock in the shop, and was not sold in the shop.  She could remember only one occasion on which one of the guns from the collection was brought in, to be shown to a customer.  It was taken home again afterwards.  Miss Smith did not remember any stock book.  She said that the stock of guns was kept on the ground floor.  The first and second floors were full of stock of the previous proprietor.  The shop did buy second-hand guns; there were two shelves for guns, one for air guns and one for shot-guns, with new ones at one end and second-hand the other.  If she sold a gun, Miss Smith said, she had to record it in the fire-arms register.  The photographs of the shop looked just as she remembered it: organised chaos.

31.	Mr Terry Ferrin also used to work at the Appellants’ shop on Saturdays and occasional evenings, from when the shop opened until some time in 1992.  In his statement he said that when sales were made they were always rung into the till, in the correct category, whether vatable or non-vatable, there was a button for each on the till, clearly marked VAT or non-VAT, as were the goods themselves. Sales were also written down on the day’s sales sheet.  He said that the shop sold books, both new and second-hand, and also clothing for all ages, air guns, shot-guns, cartridges, pellets, security cabinets and sporting goods in general. In 1986, he had helped Mr Freer to put a new floor, with heavy-duty joists, in the attic of his house to accommodate his collection of guns. While doing that he saw Mr Freer’s collection, stacked up in a corner.  He never saw any of the guns in the collection in the shop; there was nothing in the shop of a specialist nature, and that was what Mr Freer’s collection was.  Some of the guns in the collection were not the normal sort of gun seen in the shop.  The shop, he said, was chaotic, though everything was findable.  He agreed that the photographs showed how it had been.

32.	Mr Owen Freer, the Appellant’s father, gave evidence.  His statement said that he acted as buyer of second-hand books for resale by the Appellants.  He bought books relating to the gun trade, and later others on natural history and other subjects such as might interest those coming into a shooting and fishing shop.  He bought quite a lot at church bazaar stalls, where they were very cheap.  He made no charge for the books he bought.  He remembered that Mr Freer had had his first gun on his 13th birthday, or about then, in about 1960.  After that he bought a pair of Greener shot-guns, and also a First World War Lewis machine gun which had been rigged up with a camera.  He had started collecting from the time when he had his first gun.  The photographs gave a fair impression of the shop, including the stuffed bookshelves.  Mr Freer said that he had given his son three guns all told.  One was a long Indian matchlock gun, another was a percussion cap pistol, early 19th Century, which had belonged to his grandfather, similar to that shown in the photograph. Also a cartridge loader.

33.	Mr Roger Whitmore became acquainted with the Appellants when he was the Firearms Enquiry Officer with Leicestershire Constabulary, in 1993.  He frequently visited the shop, and said that it was usually in a mess, but everything was secure.  He was referred to the photographs, and said that they depicted the shop as he knew it.  He had seen books in the shop.  He had been lent, free of charge, a small arms manual and a book on ballistics, of which he had never seen other copies: he thought they might be hard to find.  He said that there was always a good and varied selection of books on all subjects, though he was most interested in those on guns and other weapons.  He had from time to time purchased books from the Appellants.  So far as he knew the purchases were recorded.  He had never bought guns from the Appellants.  He said that in about 1995 the Appellants were deemed unsuitable to have either a firearms or a shot-gun certificate for the shop.  Mr Freer’s personal certificates were also revoked.  His premises had been raided, and things were seized.  No reasons were given, but the police are not obliged to give reasons.  The matter was dealt with by officers from another area, since Mr Whitmore was a friend of the Appellants.  Mr Whitmore was never told what was said to be wrong, and added that he had never found anything wrong, and that the security in  the shop was satisfactory.  He had suggested to Mr Freer that he should apply to have his certificates reinstated.  Mr Whitmore said that he had seen some of Mr Freer’s private collection, when he was checking security in 1993 to 1995.  He remembered that there was a blunderbuss with a spring bayonet, a pair of muskets, amongst many others, he thought well over 100 guns.  They were kept in the loft at his house, not in the shop.  But Mr Whitmore was not aware that Mr Freer made private sales from that collection.  There were one or two rifles and one or two hand guns on his personal certificate; anything that was made in the 20th Century would not be exempt as an antique.  When he had last checked the Appellants’ records he had found them satisfactory and that they accorded with the register.

34.	Mrs Ann Lovell used to help in the shop on a Saturday when it first opened.  Normally she works for the local authority.  The photographs, she said, were a fair picture of the shop.  The Appellants sold shot-guns, airguns, waxed clothing, wellingtons, anything to do with shooting.  Fishing was a very small part of the business.  The clothing was of various sizes, some of it for children, and for all sizes of adults.  Sales were recorded on a day sales sheet.  She would put money received in the till, on which there was a button for VAT and another for non-VAT goods.  She said that she helped in the shop from 1987 to 1990, when the shop was much less busy, and other things now claimed her time.  To the best of her knowledge, Mrs Lovell said, Mr Freer kept a private collection of guns at home.  She was not aware that any of it had ever been sold through the shop.

35.	Mr Anthony Fowkes said that he had a keen interest in shotguns and had used the Appellants’ shop since before they took it over, for something like 24 years.  In those days he mainly bought fishing tackle there, and a few cartridges.  He habitually attended antique and gun auctions.  He was shown a cartridge loader, and said that such things were collectables, and would cost anything from £40 to £80.  If cased and with a set of tools to go with it they could go for up to £12,000.  A pin-fire revolver of 1860 -70, an ordinary workaday gun, would be worth between £80 and £180.  Now it would be classed as an antique, and a dealer would pay £400 for it.  He had also bought books in the Appellants’ shop, and had sold books to both Mr Freer and to the shop.  Mr Fowkes said that he had often seen Mr Freer’s private collection.  He remembered seeing a pair of Purdy muskets, a blunderbuss, powder flasks, more than 100 shot-guns some of which were hammer guns, some interesting pistols, and a lot of bits and pieces.  He was last in the shop in 1993 or 1994, and it was then that he saw the Purdy shot-guns.  The muskets were of about 1820 to 1840 and the shot-guns later, 1880 to 1890, they were keepers’ guns.  The pistols were mostly pin-fire, and there were a couple of incomplete flintlocks.  There were more than a dozen rifles.  He did not know what happened to the guns after Mr Freer lost his dealing licence.  He remembered that in about 1988 or 1989 the collection was in cabinets and properly catalogued.  He and Mr Freer used to shoot with some of the hammer guns.

36.	At the adjourned hearing, on 13 September 2000, Mr Stephen Foss continued the Appellants’ evidence.  He said that he had been using the Appellants’ shop since before the Appellants took it over, and had continued after that.  He bought a brand new Biretta left-handed over-and-under shot-gun from the Appellants, who sold it for a better price than anywhere else.  Mr Foss was principally interested in Webley and Scott guns.  He knew that Mr Freer had a private collection of guns. In about 1987, Mr Foss asked Mr Freer if he had a Webley and Scott Mark II, and this was discussed in the shop.  Mr Freer had, and took it to Mr Foss’s house and sold it to him privately.  He also showed Mr Foss a number of other guns from his collection.  He had also bought new Webley air rifles from the shop, for which he had paid cash, the money being put into the till.  That was in 1997 or 1998.  On another occasion someone brought a Webley .410 into the shop, and Mr Freer put him on to Mr Foss, who bought the gun directly from the customer.

37.	Mr Freer, in his oral evidence, told us that he had been interested in guns from a very early age, and that the older and more obscure they were the more interesting he found them.  He was also fascinated by the old machinery for making guns.  As a boy he had worked on farms, for which he was never paid.  But the farmers knew of his interest in guns and gave him a lot.  He also did an apprenticeship in engineering, using old machines, and he worked in a garage.  He bought or acquired guns from other people in the garage, in the days when the sale did not have to be recorded.  Eventually he started working for himself.  People still gave him guns.  The best, he said, was an Army and Navy side-by-side 12-bore with Damascus barrels in nearly pristine condition.  Mr Freer also enjoyed making parts for old guns, and endeavoured to emulate the old processes.  When he married in 1979 he and his wife rented a cottage near Loughborough.  He worked on farms, repairing machinery.  During this time he would go to gun auctions, where he bought quite a few guns.  The Freers had two sons, and after a time their house was not big enough for the family and the guns.  They bought a bigger house in 1981 or 1982.  When that house also became too small to house the guns, he had the attic reinforced and kept them there.  He produced the architect’s drawing of the modification.  

38.	After a time Mr Freer began to suffer from stomach trouble, and spent some time in hospital.  He then acquired a gun shop in Loughborough, which was in a badly run-down state, and for which he paid rent of £25 a week.  He borrowed £7,500 from his bank, and refurbished the shop, with the assistance of an overdraft of £16,500.  Then his landlord told him that he must either buy the shop or move out, so he bought the shop.  That shop is the present shop premises where the business was carried on.  That was in 1987.  In 1988 he was overtaken by further ill health, from which he recovered but was subject to strict diet control. It was at about that time, he said, that they decided that he would probably have to sell the gun collection in order to keep the shop going.  The gun collection was to have been their pension, Mr Freer said, and so the gun shop became the pension fund instead.  Mr Freer did building work on the shop.  The top room was steel-lined on all four walls and ceiling, and had steel bars on the windows.  All the work was a drain on the shop finances.  It had an earth floor, and was damp.  New racks were fitted in the front of the shop for guns.  The Fire Brigade carried out quite rigorous checks.  A double-skin floor was put into the cartridge room, and a new fire door.  The police did not wish them to close the back, and the light was always left on.  Mr Freer said that he was always a bit nervous about this, and therefore he had a steel gate with a sliding bolt and padlock fitted.  The fire officer wanted a roll-top door fitted to the gun rack.  The Crime Prevention Officer checked the premises.  All that was done prior to the second VAT inspection.  

39.	In 1981 the Appellants took out a mortgage on their house.  They were also advised to have an endowment policy to go with the mortgage, which they did.  The house was fully paid for by about 1992 by the endowment policy and because Mr Freer had paid more than the demands for the mortgage repayments.  That policy also produced a further £5,000, which was put into the shop.  He also had a “super-saver” insurance policy, which produced a further £4,000.  When that was paid into the bank, Mr Freer said that he asked for an overdraft, and was allowed £4,000.  This was used to buy stock for the shop.  That overdraft was running until about 1999, when it was finally paid off.  Mr Freer said that he was unable to produce evidence of this because both the bank and the building society said that it was all in the pre-computer days, and they were still searching their archives.  He produced a note of a telephone conversation with one Lesley Bates of Colonial Life (UK) Ltd, which stated that policy number 46549671 had matured in 1993 and yielded £13,316.55 which was paid to Chelsea building Society to pay the mortgage debt.  He also produced a letter from Chelsea Building Society, dated 4 May 1993, confirming receipt of £13,316.55 from the Colonial Mutual on 27 April 1993 in redemption of the mortgage.  They also enclosed their cheque for £4,117.73 as the balance of monies not required for redemption. Another policy was surrendered in 1990 for £1,779.24.  The note said that all 1993 records were in the archives and therefore they had been unable to provide proof of the transactions.  In about 1993 or 1994, Mr Freer said that his bank manager told him that the bank had not been charging for the mortgage and that he owed the bank twelve payments of £450.  The bank therefore increased the overdraft, and collected the payment in three or four instalments.  At that same time, the police revoked the Appellants’ licence to deal in firearms.  

40.	The tragic events at Dunblane and Hungerford had both hit the gun trade very hard.  Both prices and sales dropped sharply. The Appellants had, Mr Freer said, a shelf of 50 guns which they could not sell.  By 2000 they dealt only with Webley.  Much of the repair work was lost.  There was little profit on the sale of cartridges, only about £4 on a thousand cartridges, and they stocked them only to get the customers through the door.  There was more profit in the sale of a tin of gun oil.  When guns from his private collection were sold, the money was put into a business premium account, which carried a little interest.  This was a new account for that purpose.  Money was transferred out of it when it was needed for the shop.

41.	In October 1997 Mr Freer had the misfortune to suffer severe injury when, as he put it, he ran himself over with a tractor.  He was in hospital for over eight weeks, and on his back at home for some months after that.  In addition, he was found to be MRSA positive, a condition of which he was not free until some time in April 1998.  As a result, he is now in a wheelchair.  He also has problems with memory as a result.

42.	Mr Freer said that at the first VAT inspection nothing was said to him to indicate that there was any problem with selling his private collection.  Mr Freebury said in evidence that he knew about the business premium account and that Mr Freer was selling his private collection, though Customs were not happy about it.  That being so, Mr Freer said, why had he not been asked to keep records of sales after the first visit?  Also, in the interview, when Mr Freebury asked if the business was run by the Appellants in partnership, Mr Freer had said “We’re married,” and Mr Freebury said “I’ll put it down as a partnership then.” That, however, was not what he had said in the transcript of the interview.

43.	Mr Freer said that they had been making repayment returns because they had not been making a profit.  The reason why they stopped making repayment returns after the visit was that he stopped carrying out repairs to the shop, since it cost money to do the repairs.  He agreed that the accounts for 1990-91 and 1991-92 showed amounts of expenditure on repairs at £207 and £257 respectively.  He said that the figures were either put in the wrong category or were not as high as they should have been.  It was probably his own fault for not noting on an invoice what it was for.  The accounts for 1992-93 and 1993-04 showed no amount for repairs at all; it might have been entered as purchases or as part of cost of sales.  The repairs did not prevent the Appellants making a profit, he said, but they did not help. It would not take much to lower the profit.

44.	In cross-examination, Mr Freer said that the business premium account had been opened for the purpose of receiving the proceeds of sale of his private collection of guns.  No VAT had been charged on the sales, and they had not been declared for VAT purposes. The money was used to fund the business.  The shop still made a loss, but without the money from the private collection the losses would have been greater. He had decided to sell the collection because of the cost of purchasing and doing up the shop.  He agreed that only one of his witnesses had actually bought a gun from him privately.  He agreed that between 31 May 1989 and April 1992 £182,371.76 had been paid into the business premium account, all of which was from the sale of the private collection.  The partnership accounts showed turnover of £66,000 for 1990-91, £54,000 for 1991-92, and £39,000 for 1992-93.  He said that he had been successful in selling his private collection but not successful in the business.  The amount of stock had gone up from £45,000 to £90,000 because they went on buying stock hoping to turn the business round.  There was a difference between selling old guns and new ones.  He had not advertised his collection, there was no need.  It got around by word of mouth.  Everyone knows where to go to buy such guns, and would-be purchasers approached him.  He was selling, he said, to other collectors and to America, Spain, and Pakistan.  He sold to approximately a hundred people, or perhaps more.  One man (whom he named) bought ten guns.  A Purdy was sold for £4,500.  It was irregular: he might sell nothing for a week or so and then two guns over a week-end.  The witnesses said that they did not know that he was selling the collection; they wouldn't have known, he said, as they were working in the shop.  He said that he had brought a cross-section of witnesses who knew that the collection had not been sold through the shop.  He said that he had never told Mr Freebury that he had kept the collection in the shop.  He had misunderstood.  There was no need for them to be at the shop. He said that he did not know why it said, in the transcript of the interview, that he said that some of the collection were at the shop.  The sales had always taken place either at this own house or at the buyer’s.

45.	The three-page list of guns which he had produced to the Commissioners was the product of his own recollection.  For the hearing Mr Freer had produced another list, which was put together by him with the help of friends who had seen the collection, and people who had bought guns from him.  The guns listed were all in his collection, but there were more besides those.  The prices listed were the sale prices, from memory.  He was unable to give the names of the buyers, or the dates, or the method of payment.  The second list contains guns not listed in the first.  If anything, the prices were understated.  They amount to £66,314.  There was no obligation to keep records of sales of a private collection, though a shop had to keep records of sales.  The private collection was not insured as a whole, only a few guns which Mr Freer used regularly.  The house was secure and there was no need to insure them, and he said that it had never occurred to him.  He had never put a price on the collection, nor had he ever photographed it.  The stock at the shop was insured.

46.	Mr Freer was asked about the stock figures in the accounts.  He said that he did not know why the opening stock for 1992-93 was £20,000 less than the closing stock for the previous year.  He mentioned the loss due to burglary of £20,000 recorded in the accounts.  He said that that was a sum of petty pilfering over the years which had been lumped together. He had told the accountant that there had been a smashed window, and he must have put it down as burglary.  The stock figures were an assessment, an approximation of what was there.  There was no stock record, and Mr Freer had made an estimate of the stock.  He did not know what the loss of stock of £15,000 in the 1993-94 accounts was.  He agreed that the stock figures were guesses, as he had said in the interview.  He had also estimated the amounts that had been lost or written off.  There had been some goods lost when the window was broken, but he did not know how much.  It would have been a matter of hundreds, not £20,000.  The introduction of the sum of £13,983 mentioned in the second interview was probably the money from the endowment policy.  Mr Freer said that he had never made sales which were not declared simply to keep the business going.  He said that he had been in the shop only rarely, and he trusted those who worked there, and was confident that they had rung the money into the till.  

47.	He did not accept that the zero-rated sales figures were overstated.  He disagreed with the Commissioners’ estimate.  As to the purchases, less than 1 per cent, that was very likely since he obtained most of the books free.  The mark-up for zero-rated goods was much higher than for standard-rated.  The figure of £9,911 for zero-rated sales in the period 5/91 was all from the sale of second-hand books, though he was surprised that it was so high.  In 1994-95 he had only one shelf of books, but in 1991 he had specialist books which people wanted.  Not all the books were on the shelf in the shop, there were a lot upstairs.  The cheapest book would have been priced at 20p, and the most expensive at about £120.  Children’s clothes were also zero-rated.  There was always one child’s coat in the shop, to show that they were stocked.  Outside the shooting season the shop carried as little clothing stock as possible.  They normally ordered in January for September.  The schedule produced by the Commissioners showed that no zero-rated clothing was purchased between May 1992 and May 1994.  Mr Freer said that the shop might have had enough in stock remaining from earlier years.  The figures given by the Commissioners in their analysis of zero-rated sales could not be relied upon, and that cast doubt upon their other figures

48.	Mr Freer said that the revocation of the dealer’s licence had nothing to do with his not keeping proper records.  The police had said that it was because he was a danger to the public.  It was also true that Mrs Freer had been convicted of two offences of trading without a licence.

49.	The Inland Revenue had issued assessments on the business, Mr Freer admitted.  These were for the same periods as the Customs assessments. He could not remember the figures.  He had had a meeting with the Inland Revenue, and the result was that they accepted his accounts and that the money was from private sales and had been used for the business and there was no additional tax to pay.

50.	At the adjourned hearing on 14 September 2000, the fourth day of the hearing, Mr Freer produced some further documents.  These included a schedule of zero-rated and standard-rated sales for the period 5/91.  It showed that the total of zero-rated sales was £1,444.92, and of standard-rated sales, £7,034.23.  Those figures had been taken from the weekly takings sheets also produced.  That was very much less than the estimated figure of £9,911; it was impossible to get a figure of over £9,000 from those takings sheets.  The total declared sales, both zero-rated and standard-rated, for that period were £8,479.15: even those did not amount to £9,911.  The Commissioners had all the takings sheets in their possession.

51.	Attempts, which were unsuccessful, were made at that point of the hearing to contact the officers in order to obtain the VAT returns.  After the short adjournment that day, a print-out of the trader report was available.  It showed that the total tax for the period 5/91 was £1,084.44, which was 15 per cent (then the rate of VAT) of £7,229.60.  The figure of £9,911.40 was obtained by subtracting that figure from £17,141, which was an erroneous figure for inputs.  Subtracting £7,229.60 from the amount of standard-rated sales gave a negative, and therefore absurd, result.

52.	The hearing was then adjourned again, since Mr Puzey said that it would be necessary to recall Mr Freebury.  Directions were given, first, that no further oral evidence was to be called by the Appellants, except for Mr Terry Wilson, without leave, and that any further documentary evidence relied upon by the Appellants should be served not later than 16 October 2000.

53.	On 28 September 2004, the adjourned hearing opened with a prolonged discussion about witnesses.  Mr Freer wished to call further witnesses, and had put in a further bundle of witness statements, but had no witnesses available at court.  A further difficulty was that although the case had been listed for two days, it appeared that the Commissioners thought that it was only one day; Mr Puzey had another professional engagement on 29th September.  Mr Freer then made telephone calls to ascertain if any of the Appellants’ witnesses could attend on that day, only to find that none could.  In the end, Mr Puzey consented to the witness statements being put in evidence, on the basis that they were not accepted by the Commissioners, and would be open to comment, and that the witnesses would not have been cross-examined.  That being so, no further evidence was adduced.  Mr Puzey very helpfully reopened the Commissioners’ case briefly.

54.	Mr Freer added a little to his evidence already given.  He said that during 1990 a VAT inspector had visited him and had been made aware that he was selling his private collection of guns and using the proceeds as a loan to  the business.  The officer did not request him to keep detailed records of the sales, since it was not part of the business.  He said that he had tried to find witnesses who had purchased guns from him privately, but without success until someone suggested to him that he should appeal for help in gun circles.  That produced immediate results.  As a result, Mr Freer was able to provide 14 witness statements.

55.	One of these witnesses was John Freer, the Appellant’s brother, who made a statement dated 4 September 2003.  He said that Mr Freer had been interested in guns from childhood, and had the knowledge and ability to repair old guns even as young as ten years old.  By the time he left school he had accumulated a sizeable collection of guns.  He had purchased several second-hand air rifles for Mr Freer to sell, as well as giving the Appellants his own shot-gun to sell in the shop.  He often visited the shop over the years, and had never seen any of the private collection there.

56.	Mr Roy Keeling’s statement, dated 9 October 2000, said that he was a gun collector, but his main interest was in antique reloading tools.  He met Mr Freer at arms fairs and sales, and had heard of his collection, but did not realise how vast it was until he went to the Appellants’ house in 1989 and saw it.  He bought from Mr Freer Hawksley, Sykes and other patent reloading rollover powder flasks, powder and shot measures, and two Hawksley snuff boxes with sporting scenes on them.  This was a private sale, and VAT was not charged.  Mr Keeling also gave Mr Freer a lot of old shooting magazines of about the 1950s and some shooting books that he no longer wanted, for Mr Freer to sell in the shop.  These amounted to several car loads.

57.	Mr G W Porter’s statement, dated 26 August 2002, said that he had been going to the Appellant’s shop since about 1987, and had bought guns there, and the money was paid into the till and he received a receipt.  He gave details of a number of guns that he had bought, and also crossbows and ammunition.  He also saw books and all sizes of clothing in the shop.  He was aware that Mr Freer had a collection of guns, but said that he never saw any from that collection in the shop.

58.	In a statutory declaration, dated 5 September 2003, made before a Commissioner for Oaths, Mr Alan Robinson said that in 1989 he purchased two flintlock pistols from Mr Freer of 102 Shelthrope Road, Loughborough, no VAT being involved in the purchase price. 

59.	Mr Peter Wilson said in his statement which was dated 28 July 2002m that he had known Mr Freer since 1969, and had been to his house regularly.  He knew and had seen a lot of his gun collection.  He had also frequently been to the shop, and had never seen any of the gun collection for sale in the shop.  He was aware that Mr Freer had sold the collection to fund the shop, because Mr Freer told him so at the time and he had sent people to him to buy.  He also said that in the early days of the shop they sold more clothing than latterly, and one Christmas he bought children’s waxed clothing for his grandchildren all of whom were under 9 years of age.

60.	Mr Adrian Fletcher’s statement, dated 14 February 2003, said that he had known Mr Freer since they had worked together.  He said that Mr Freer always had with him a new acquisition or a different gun, and that he became interested in the antiques and unusual mechanical contraptions.  He visited him in the shop, and bought guns from them.  He used to shoot with the two Appellants at Loughborough Town Rifle Club.  Occasionally he served in the shop.  He had never known Mr Freer to sell any of his private collection in the shop.  There had been non-VAT items in the shop, including books and children’s jackets, and they were entered into the till using the appropriate key to indicate that VAT was not charged.  Mr Fletcher added that he had always found Mr Freer trustworthy and honest.

61.	A statement dated 9 August 2003 made by Mr Alan Cadman said that he had been calling at the Appellants’ shop for some 12 years in the course of his business of selling Webley and Scott and other air gun related goods.  He said that he had seen only modern guns for sale in the shop, but was aware that Mr Freer had a vast collection of antique guns at home.  There were also piles of books on display, and he sold waxed cotton jackets of all sizes down to very small children’s sizes.

62.	Mr R K D Hoad made a statement in the form of a letter dated 2 May 2003.  In it he said that he had got to know the Appellants when they became members of the Loughborough Town Rifle Club, of which Mr Hoad is also a member.  He said that towards the end of the 1980s, one evening, Mr Freer was talking about his collection of guns.  Mr Hoad said that he had not known of this before, as there was nothing like a collection in the Appellants’ shop.  Mr Freer told him that he had collected guns of various types over the years.  Mr Hoad went to Mr Freer’s house and saw “an amazing array of firearms of all descriptions”.  He bought a Britannia air rifle, made in 1926, and two Webley air pistols, for which he paid cash, about £500.  He understood this to be a sale from a private collection, and VAT was not mentioned.

63.	Mr N Salt made a statement on 23 October 2002.  He said that he had heard of a collection of guns being sold, and tracked this down to Mr Freer.  He visited Mr Freer’s house, and saw a collection of which he said “the scope was phenomenal and the range of guns unbelievable.”  He bought a Douglas muzzle-loading single barrelled fowling piece, and a number of other smaller pieces of gun related memorabilia, for which he paid cash.  This was a private transaction, and no VAT was incurred.  Mr Salt also called at the shop on other occasions to purchase modern guns and requisites.  On these occasions VAT was charged, and the sales were rung into the till.

64.	Mr Neil Fairbrother, in an undated statement, said that he was introduced to Mr Freer by one Paul Jordan in about 1988, and was told that he had some guns for sale.  Mr Fairbrother went to Mr Freer’s house, and bought a match-lock rifle.  He said that he could have had a choice of any amount of guns of any type of ignition.  He paid for his purchase in cash.  VAT was not mentioned.  No suggestion was made that if he paid cash VAT would not be charged.

65.	Mr A Campsall made a statement dated 21 February 2002. At a meeting of the Leicestershire Wildfowlers, he said, he learnt that a collection of all types of guns, air rifles, and pistols was being sold.  Being a collector himself, he went to view these, at the seller’s house.  He did not actually name the seller. This was in about 1988-89.  The amount of guns of different types that he saw was, he said, unbelievable.  He bought several air rifles in original boxes, and a percussion double-barrelled shotgun, for which he paid about £2,500 in cash.

66.	In a statement dated 23 June 2002, Mr Malcolm Merry said that he had heard from a friend that Mr Freer was selling his collection of guns, and he went to his house to see them.  He was only interested in air rifles, and bought two very unusual ones.  He said that this was a personal deal between the two of them.  He saw a lot of books as well, and Mr Freer told him that he had more in his shop which were for sale, because he did not mix his private stuff with the shop stock. Mr Merry said that he went to the shop and bought a number of books, mostly second-hand but a few new ones.  The most expensive, he remembered, cost £65.  He spent about £500 on books, and said that every sale was rung up on the till.  He said that Mr Freer had all sorts of books in the shop on many subjects. 

67.	Mr K Hall made a statement dated 18 March 2002.  In it he said that he knew Mr Freer because he traded with a man who had been at school with him.  He heard that Mr Freer was selling some guns, and went to see him at his house, in about 1990 or early 1991.  He bought a double-barrelled muzzle-loading gun by Patterson of Nottingham and some air rifle parts.  This, he said, was a private deal, and no VAT was involved.  He said that although he knew that Mr Freer had sold a lot of guns, there were still a great many to look at.  Since then he has bought things at the Appellants’ shop, and said that sales were always rung up on the till and a receipt given, though he had not kept them.  He added that Mr and Mrs Freer were not always in the shop, but left people in charge when absent.

68.	The last statement, undated, was made by Mr Ian Bishop, on paper headed “Ian Bishop Shooting Services”.  He said that he had known both the Appellants for some 20 years, and was familiar with Mr Freer’s collection of guns.  This, he said, consisted mainly of guns with a rare patent or very early examples of classic designs.  Most of them were Victorian.  The guns in the collection would not, he said, have been suitable for mainstream use.  Whilst interesting and valuable, such guns were rarely reliable or efficient.  These guns were not kept in the Appellants’ shop, and he had never seen any of them at the shop.  It was his belief that Mr Freer never sold any of the collection through the shop.  The guns sold at the shop were of a modern and mainstream type, he said.  The shop also had a regular business in books related to field sports, including second-hand and out-of-print editions.  He also sold clothing for all sizes and ages, though Mr Bishop said that he was not much interested in that.

69.	There were also produced some weekly sales records.  These covered the 13 weeks from 4 March to 2 May 1991.  They were accompanied by till slips, on which the ink was so faint that the printing was illegible.  These sales sheets were divided into VAT sales and non-VAT sales.  The total of VAT sales for those weeks was £7,034.23, and of non-VAT sales £1,444.95.  We assumed the VAT sales to be VAT-inclusive.  Subtracting that amount of VAT (£380.22) gave a total of net sales of £6,654.01.  The proportion of zero-rated sales to total sales was therefore 17.84 per cent.  The sales sheets also showed that there were days upon which there were no zero-rated sales.  The week beginning on Monday 29 April gave the highest figures for both standard-rated and zero-rated sales, of £885.21 and £326.59 respectively. The total of all sales, including VAT, for the 13 weeks was £8,479.15.

The Appellants’ contentions

70.	The Appellants had put in a document, in August 1999, headed “Defence to allegations of HM Customs and Excise”, and that document was before us.  In it the Appellants said that in making the assessments the Commissioners had not taken the truth of the situation, as put forward by the Appellants, into account.  He made the following points:

“(a)	The first problem is the quantum of the zero-rated sales and purchases.  On one visit to the shop the Customs officers were offered the facility of examining the stock books in the flat over the shop.  That offer was declined.  

As the books were not purchased in a ‘conventional’ way e.g. from suppliers but at inter alia car boot sales, there are no purchase invoices but that does not prove that these books were not obtained and sold.  A letter will be provided from one customer.  Other evidence or proof is now, after this length of time, difficult to obtain.

(b)	The other problem is with the monies banked which were the proceeds of Mr D J Freer’s personal gun collection.  The gun collection was reluctantly sold and photographs and lists will be produced.  Also witnesses will be called to evidence the substantial gun collection.”

71.	Mr Freer’s defence document went on to say, that although the Appellants were unable to produce the kind of evidence looked for by the Commissioners, first, they were telling the truth, and secondly it should be clear to anyone visiting the shop that such a business could not produce a turnover such as was suggested by the assessment.  Further, he said, the Commissioners accepted that the business was a partnership.  As such, it had no title to the private gun collection of Mr Freer, and was therefore unable to sell the guns.  That being so, the business could not be liable to pay VAT in respect of those sales.  If they were partnership sales, there should be purchase invoices.  The Appellants had not had the means to purchase those guns, which was a lifetime’s collection built up by Mr Freer.  

72.	The Appellants relied upon the evidence, including the statements of the witnesses who were not called.  Mr Freer said that the evidence showed that the shop had sold books and children’s clothing.  The Commissioners’ evidence was that they had not been upstairs at the shop premises, and therefore they could not know how many books there were.  Other witnesses had stated that Mr Freer’s own collection was never in the shop, and that a large collection was seen at his house.  The Customs officers had had all the Appellants’ records, including daily sales sheets and records of weekly banking, which they had collected on a visit, for the purpose of making the assessment.

73.	As to the burglaries, Mr Freer said that the Appellants had stood the loss of the burglaries for two reasons.  First, because if they had claimed on their insurance the premium would go up, and they were already paying over £8,000 a year in insurance.  Secondly, because if one reported the loss of a gun one would get, as he put it, a lot of grief from the police.

74.	Mr Freer also handed in a photo-copy of digests of two Tribunal decisions from a publication which we could not identify.  The two decisions were R W K Stirling v Customs and Excise Commissioners [1985] VATTR 232 and M R Atkinson v Customs and Excise Commissioners (Decision No 12763).  In each of those cases the taxpayer succeeded in establishing that certain sales had been made otherwise than in the course of the business which they carried on, and the Tribunal held that the sales were, therefore, not subject to VAT.  In the first of those cases, the taxpayer was the owner of a house which he had leased and which contained a number of valuable paintings.  At the end of the lease, the taxpayer sold the house.  The paintings were sold separately, and the proceeds of sale paid into the taxpayer’s business account. He was assessed to VAT on the basis that the paintings had been business assets.  The basis of the Tribunal’s decision was that Article 2 of the EC Sixth Directive provides that supplies shall be taxable when made by a taxable person acting as such.  In the second case, the taxpayer was an engineer who had made a collection of machinery, as a hobby.  He sold some items from his collection and was assessed to VAT.  He successfully contended that the sales had not been made in the course of his business, but were the realisation of private assets.

The Commissioners’ contentions

75.	Dealing first with the new witness statements, Mr Puzey commented that they had not been submitted at the first hearing.  They were suspect, because a lot of them were written in the same type face, on blank sheets of paper; it appeared possible that they could have been prepared for the witnesses.  Mr Keeling’s statement bore no date and mentioned no prices of his purchases.  It was unlikely that he had produced car-loads of books; photographs 37a and 37b showed that there were very few books displayed. Mr Robinson gave no price for his purchases, not did he say whether he had bought the guns at the shop or at Mr Freer’s house.  Mr Wilson said that he never saw any of the collection at the shop, but just because the guns were not in the shop did not mean that they were not sold in the business.  Mr Freer was a gun dealer, and a sale by him would be likely to be a business sale.  No inventory of the collection was put in evidence, and therefore there was no evidence of what was and what was not part of his stock or collection.  His customers were unable to provide that information.  Mr Puzey said that he took no point on Mr Fletcher’s statement.  Mr Cadman had also referred to books, but, Mr Puzey repeated, there had been very few on display.  Mr Hoad’s statement referred to a time long before the assessment period.  Mr Fairbrother and Mr Salt gave no particulars of their purchases or of the guns which they saw at Mr Freer’s house. They and Mr Campsall said that they paid in cash.  Mr Freer said that he only banked the excess cash in his pocket; there were no sales records and there had been no payment in of cash.  In all the statements it was difficult or impossible to trace the transactions.  Only ten witnesses had been produced, and those nearly ten years after Mr Watts’s first visit, yet £182,000 had been paid into the bank in six years, and £45,000 introduced into the business.

76.	The payments into the business premium account had been made regularly, and were just like the regularity of a business, rather than the payments in from time to time resulting from sales of a private collection, and not consistent with casual sales.  Mr Freer is a gun dealer, and there was nothing to demonstrate that the sales were private sales of private possessions, there being no detailed stock records.  On the evidence, there is no distinction between private sales and sales by the business.  The only evidence was what Mr Freer himself said.

77.	Mr Puzey acknowledged that the burden was upon the Commissioners to prove dishonesty.  The annual accounts of the business were, he contended, a work of fiction. There was the fact of the opening stock for 1993-94 being £20,000 lower than the closing stock for 1992-93.  Drawings were shown at only about £6,000 a year, on which the Appellants apparently lived.  The losses of the business were up to £20,000 by 1994.  The accounts depended upon capital introduced, but there was nothing to show where that came from, and the explanation was very unlikely.  Such a business would not be kept afloat to the tune of £220,000 in six years by sales now and again from a private collection.  There were huge stock increases; it was difficult to see why a private collection should be sold in order to buy large amounts of stock which nobody was buying.  The accounts show a total of £35,000 of losses due to burglaries, yet Mr Freer could only point to the loss of one air rifle.  One of the lists of weapons showed no value and no dates.  The other showed prices but no dates, and came to a total of only £66,000.  Producing that list was an extraordinary feat of memory, the prices being given to the last pound.  

78.	If the sales of items from his collection were private sales, Mr Puzey said, one would have expected Mr Freer to pay the proceeds into a private account, and transfer to the business account so much as might be needed from time to time.  The account given by Mr Freer was so devoid of credibility, and lacked any sort of documentary evidence or credible witnesses, that it was not to be believed.  The only believable explanation was that the money came either from business sales or from misdeclared zero-rated sales.  Mr Watts had found £220 worth of zero-rated purchases and over £8,000 of zero-rated sales over a period of 18 months.  Mr Freer accepted that the zero-rated figures were wrong, because the wrong keys on the till had been hit.  That argues that his staff were careless, but their evidence was that they were careful to distinguish between zero-rated and standard-rated goods.

Conclusions

79.	As the evidence in this very long drawn-out appeal has shown, there are three factual issues to be determined.  The first is whether the £182,000 paid by Mr Freer into the business premium account was consideration for supplies made by the Appellants in the course of their business, or whether it was the proceeds of sale of Mr Freer’s private collection of guns. The second is whether the Appellants were underdeclaring their standard-rated sales and treating them as zero rated, thereby reducing their liability to VAT and enabling them to make repayment returns. The third is, whether the Appellants dishonestly conducted their business in such a way as to underdeclare and evade their liability to VAT.

80.	Before considering the issues, we should mention the witness statements produced at a late stage by the Appellants.  We do not consider that the fact that some of them are on blank, as opposed to headed, paper, and in the same type faces, casts any suspicion on them. The same would be true of witness statements adduced by the prosecution in criminal proceedings. They are signed, though the signatures have not been proved, and the contents of the statements have not been tested by cross-examination. It is true that the statements are wanting in particularity.  Mr Puzey consented to their being put in, rather than there being another adjournment, subject to his comments upon their evidential value, which he contended was slight, and that we should give them little weight.  In principle, we agree with him.  However, we do not think that the deponents are dishonest and have made untrue statements.  We take the view that they are the product of inexact recollection, after a substantial period of time, but are otherwise honest attempts to tell the truth.  The statements fall so far short of the evidence which the Appellants wished to adduce, that we think it most unlikely that they fabricated the statements.  We do find them helpful on certain limited matters.  First, that Mr Freer had a collection of guns, which he kept in the attic at home. Secondly, that it was a large collection, though just how large does not emerge.  Thirdly, that he sold that collection or parts of it.  Fourthly, that both books, in quite large numbers from time to time, and children’s clothes were sold in the shop; and lastly, that the Appellants were given at least some of the books.  We do not think that the statements establish either way whether or not any of Mr Freer’s collection of guns found its way into the shop or was or was not sold there.

The first issue: whether the sums paid into the business premium account were consideration received for taxable supplies of goods made by the Appellants’ business.

81.	It was not disputed by the Commissioners that Mr Freer had had a collection of guns, nor that he had sold the whole or part of that collection.  The difficulty which confronts the Appellants is establishing that such items from that collection as were sold were sold privately and not through their business.  There is no evidence which gives any clear notion of the size of the collection.  Although Mr Freer said that at one point the collection was catalogued and stored in cabinets, no catalogue, not even an out-of-date one, was ever produced.  We therefore do not know how many guns and other items were comprised in the collection, nor what they were.  There was no valuation, not even for insurance purposes, so that we have no idea of the value.  The only evidence there is that there was a collection, that it was kept at Mr Freer’s house, that it was in the attic which had been reinforced to hold it, that guns were stacked up in corners, and that there were “hundreds” of them, or perhaps “at least a hundred”.  Some witnesses said that they never saw any guns from the collection in the shop: however, it was not clear, their evidence being in such general terms, how they would necessarily have known.  The photographs showed large numbers of guns stacked up in the shop, and appeared to include at least one muzzle-loader.  

82.	The corollary to that is, that Mr Freer paid something over £182,000 into a business premium account over a period of years.  None of that sum was entered in the business accounts, and had not been included in the calculation of VAT for any period.  The explanation was that since it was the proceeds of a number of private sales, it was outwith the business and therefore outwith the scope of VAT.  The reason why it was paid into a business premium account, Mr Freer said, was that he was not allowed by the bank to open a private account.  We certainly saw no statements from any private account, but the explanation appears to us to be unlikely.  The money from the business premium account found its way into the business, because, Mr Freer said, the purpose behind his reluctant sale of a collection built up since he was a boy was to finance the business.  The accounts certainly show that the business was making losses every year, but also that stocks were increasing substantially year by year.  Mr Freer having told us that the gun trade had been severely hit by both Dunblane and Hungerford, and the measures taken thereafter to control the owning of guns, it was  as surprising to us as it had been to the Customs officers in the case that the Appellants were paying out substantial sums to buy stock which they would, at best, have difficulty in selling, and apparently did not sell.

83.	The Commissioners’ interest in the business was attracted by successive repayment returns.  When they looked at the business they discovered anomalies relating also to zero-rated goods.  It appeared strange to them, as well it might, that there were extremely few purchase invoices covering zero-rated goods, and that expenditure upon such purchases was a very small proportion of zero-rated sales.  But if the purchases were so very low, because most of the zero-rated goods were bought at such sources as car-boot sales, or were given to the Appellants, then there would have been very little input tax relating to zero-rated goods.  If the sales sheets mentioned in paragraph 69 above were for a typical quarter, that would suggest an annual turnover in the region of between £30,000 and £35,000, of which between £5,000 and £6,000 was in respect of zero-rated sales. The amount of output tax would have been of the order of £1,500 to £1,600.  We know nothing about the mark-up on any of the goods, so that we cannot make any estimate of input tax.  But it may well not have been typical, since the accounts for the year to the end of May 1991 showed a turnover of £66,442. The three earlier quarters, therefore, produced sales of £58,344, or £19,448 a quarter (neglecting seasonal variations).  March, April and May are outside the shooting season for game, but not for target shooting nor for shooting rabbits and pigeons.  However, it may well be that the other three quarters would have produced higher figures than that one.  But we heard no evidence on that subject either.  The circumstances of the Appellants’ business was, for these reasons, such that the Commissioners thought it right to investigate.  They found a very unsatisfactory state of affairs, as the evidence in this case has vividly illustrated.  As a result, they raised an assessment, which was directly related to that aggregate sum of £182,000.  After that, it was for the Appellants to establish that the assessment was wrong, in particular, to show that the monies paid into the business premium account were not derived from sales in the course of their business.  A taxpayer would normally do this by establishing exactly where such receipts had come from, and would normally be able to produce evidence of the source of the funds.  This, unfortunately, the Appellants have been unable to do.

84.	We accept that Mr Freer had a collection of guns, and we accept that he sold it or perhaps the greater part of it.  That is as far as the evidence goes.  It is not possible on the evidence to gather what guns and other articles were sold as Mr Freer’s collection or for how much, or precisely when.  It was also apparent that the business was run on highly unsystematic lines, to the extent that it appeared to us that Mr Freer himself did not know what the situation was at any given point of time.  That is illustrated by the guess-work figures in the accounts. We received the impression that the whole of the business was imbued with this casual and inexact approach.  Add to that situation the fact that the money was paid into a business account, and that it was used in the business, and also that Mr Freer is a gun dealer.  We suspect that, put to the test, Mr Freer would probably not have known what he had sold or for how much, with any exactitude. We accept Mr Freer’s submission based upon the two decisions to which he referred.  As a matter of principle, if the Appellants were able to show that certain sales were transacted otherwise than as part of their business, they would succeed.  But the evidence just does not achieve that.  The Appellants have failed to establish that the assessment was wrong, either in quantum or in that the receipts were not receipts of the business.  We therefore conclude that the first issue must be decided in favour of the Commissioners.

The second issue: whether the Appellants were underdeclaring their standard-rated sales and treating them as zero-rated

85.	In this sphere as well, evidence of how the business was run was scanty.  However, we accept, from the evidence as a whole, that the Appellants did sell books and a very small amount of children’s clothing.  The visiting officers did not venture upstairs in the shop, and it appears to us not unlikely that they may have missed seeing quite a lot of books.  We also accept that such stock was acquired by the Appellants in unconventional ways, by being bought at garden fêtes, car-boot sales and similar sources, and that a substantial number were given to them.  It is also clear that the zero-rated goods formed a small proportion of the business.  While we can see how the suspicion may have arisen in the minds of the Customs officers, uncontradicted during the investigation, we do not think, on the balance of probabilities, that the Appellants were passing off standard-rated sales as zero-rated.

The third issue: whether the Appellants acted dishonestly in order to evade tax

86.	It is for the Commissioners to prove on the balance of probabilities that the Appellants acted dishonestly, intending to evade tax.  Since dishonesty is alleged, a high degree of probability is required.  Mr Puzey contended that the only reasonable inference from the evidence was that the Appellants were acting dishonesty, since all their explanations, such as they were, were supremely unlikely.  There is no direct evidence that the Appellants or either of them were or was acting dishonestly.  We take the view that their business was run on chaotic and negligent lines.  As we have said, we doubt whether Mr Freer or his wife knew exactly what the situation was.  We accept that the round figures of stock in the accounts were guesses, as Mr Freer said, but also that they were attempts to achieve a figure, in the absence of any proper basis for producing exact figures, which was nearly right.  We consider that there was probably a significant degree of confusion as to what money from what source went where.  The business was characterised by massive inefficiency and an unbusinesslike approach.  However, in our judgment, the evidence does not establish on the balance of probabilities, achieving a high degree of probability, that they acted dishonestly.  We therefore decide the third issue in the Appellants’ favour.

87.	For the above reasons, we dismiss the appeal so far as it applies to the assessment based upon the monies paid into the business premium account.  We allow the appeal against the penalty under section 60.  A small adjustment may have to be made to the assessment in view of our findings in respect of sales of zero-rated goods (see paragraph 85 above).

88.	The Commissioners said that they would not be making an application for their costs in the event of their succeeding.  The Appellants said that they would apply for costs. We have allowed the appeal in part.  It has also to be observed that the length of the hearing was in part the fault of the Appellants not having their case well prepared.  In all the circumstances, we consider that the proper direction is that we give no order as to costs.  However in case either party may wish to be heard further as to costs, we give liberty to each party to apply.  Any such application should be made not later that 30 days after the date of release of this decision.

ANGUS NICOL
CHAIRMAN
Release Date: 21 February 2005
MAN/99/91