19065

	 CIVIL EVASION PENALTY  — acceptance of centrally issued assessments in three periods and failure to render returns in two further periods — dishonesty admitted — penalty apportioned to directors — amount of mitigation in issue — mitigation discount increased — appeal allowed 

MANCHESTER TRIBUNAL CENTRE

 
 	
	MRS ALISON JUDITH JEPP and MR ROBERT JEPP	Appellants

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Lady Mitting (Chairman)
						Robert Grice	

Sitting in public in Birmingham on 15 November 2004 and 26 April 2005

The Appellants appeared in person 

Miss H Redmond, counsel, of the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

1.	Mrs Alison Jepp and her husband, Mr Robert Jepp, were at all material times directors of their company, Production Automation Limited, (“the company”).  By Notice dated 4 January 1999, the company was issued with a civil evasion penalty under section 60(1) Value Added Tax Act 1994.  The penalty was in the original sum of £26,283 and was mitigated by 60 per cent to £10,513.  The Notice covered the periods 01/97, 07/97, 10/97, 04/98 and 07/98.  The penalty was by Notices of the same date apportioned equally to Mr and Mrs Jepp.  Mr and Mrs Jepp accepted before the Tribunal that they had acted dishonestly and did not appeal the imposition of a penalty but maintained that greater mitigation should have been allowed and the issue before us therefore concerns the quantum of the penalty only.
2.	We heard oral evidence from Mr and Mrs Jepp, who represented themselves, and on behalf of the Respondents, from Mrs Susan Batten.  With the consent of both parties, the order of proceedings was reversed.  We should mention one preliminary point and that concerns the Statement of Case.  Originally, this case was categorised as a Category 1 case and was treated as an appeal against the imposition of the penalty.  This necessitated the service of a Statement of Case which the Respondents drafted but did not serve when they realised that Mr and Mrs Jepp were only challenging the amount of mitigation and not the penalty itself.  The Respondents, at this stage, applied for the case to be re-categorised but Mr and Mrs Jepp objected to the re-categorisation and the case therefore remained a category 1 case.  However this was not notified to the Respondents who proceeded to hearing believing that a Statement of Case was not necessary.  We dealt with this by showing the Statement of Case to Mr and Mrs Jepp on the morning of the first day of the hearing and giving them the opportunity to request an adjournment if matters were raised of which they had had no notice and sought further time to address.  The offer was refused and Mr and Mrs Jepp opted to proceed.
3.	The following facts were not in dispute.  The company was involved in the manufacture of robotic machinery until it went into liquidation in November 1998.  Mrs Jepp was company secretary and dealt with the administration and finances.  Mr Jepp was in charge of the engineering side and ran the company.  
4.	In the absence of returns, the Commissioners issued centrally issued assessments in respect of periods 01/97, 07/97 and 10/97, these assessments all being paid.  Following this, the company was selected for a control visit which was conducted on 28 April 1998 by Mr Richard Vivash.  He saw Mrs Jepp on that occasion.  He checked the company’s books and records, which were all complete and he was able to ascertain immediately the true level of the company’s liability and that that liability, for each of the three periods, exceeded the amount assessed centrally.  He asked Mrs Jepp why the company had paid the centrally issued assessments, to which Mrs Jepp readily answered that the company had had insufficient funds to meet the true liability.  Mr Vivash then passed the case on to Mrs Batten of the Local Fraud Office and she interviewed Mrs Jepp on 16 September 1998 in the presence of her husband and a Mr Sean Heatley, for the Respondents.  The interview was carried out under the Notice 730 procedure, a copy of which was handed to Mrs Jepp and was discussed.  Mrs Jepp explained in interview how the company operated, the accounting procedures and confirmed that she and her husband clearly understood the company’s VAT obligations.  She repeated, as she had told Mr Vivash, that the returns had not been submitted and the centrally issued assessments paid when the company had had insufficient funds to meet its liabilities.  By the time of the interview, returns were outstanding for periods 04/98 and 07/98.   In relation to these returns, again Mrs Jepp explained that the company had not submitted them because they did not have the money to meet them.  Mrs Jepp accepted that the company was on cash accounting and the VAT would therefore have been received and banked but such was the level of indebtedness that it could not be reserved for payment to the Respondents and was withheld by the bank against the company’s overdraft.  It had never been the company’s intention to withhold payment permanently but just until there were sufficient funds to pay the balance.  Mr and Mrs Jepp were repeatedly asked if they accepted they had acted dishonestly which they consistently denied.  There had been no intention to deceive and every intention to pay the full amount when finances permitted.  
5.	Mrs Batten decided the company, through its directors, had acted dishonestly and she raised the civil evasion penalty.  In her evidence, she explained her reasoning in respect of the mitigation which she allowed.  The Notice 730 procedure permits reduction from the penalty figure for three reasons to a maximum specified percentage:
(a)	an early and truthful explanation as to why the arrears arose and the true extent of them – up to 40 per cent
(b)	co-operation in substantiating the true amount of arrears – up to 25 per cent
(c)	attending interviews and producing records and information as required – up to 10 per cent
6.	Under (a), Mrs Batten allowed 35 per cent.  The full 40 per cent was denied because Mr and Mrs Jepp had not accepted they had acted dishonestly.  As they clearly were being dishonest, this was untruthful and they had not made a full and frank disclosure.  They had received the money from their customers but had not passed it on.  They could have, but did not, render their returns without payment or with part payment and an accompanying explanation.  
7.	Under (b), Mrs Batten allowed 15 per cent.  She explained to us that after her visit, she had asked Mrs Jepp to put in the returns for 04/98 and 07/98 but she had failed to do so and neither return nor payment had been received for either of these periods.  Although she had seen the records for these two periods and was able to raise an assessment, the records were incomplete because they lacked certain input tax details.
8.	Under (c), the full 10 per cent was allowed.
9.	In her evidence, Mrs Jepp told us that the appointment for the September interview had been made by a telephone call from Mrs Batten who had merely said that she was coming to visit Mrs Jepp, but there was nothing to worry about.  The impression given was that this was to be an informal meeting and there was no suggestion of a formal interview or of the interrogation which it became.  Because of this, Mrs Jepp had seen no reason to arrange representation at the interview or to seek advice ahead of it.  It was only chance that her husband was available and he had to insist on being allowed to sit in at the interview.  She did not recall being asked to put in the returns for 04/98 and 07/98.  As far as Mrs Jepp was concerned, Mrs Batten had seen and noted the figures for these two periods from the records and all that was missing from the records were some expenses of her husband’s which would have reduced the liability in any event.  Mrs Jepp believed the necessity to put in the returns had been overtaken by the visit.  At all times, Mr Vivash and Mrs Batten had been made welcome and treated courteously.  They were denied nothing which they asked to see and nothing was hidden from them.  That this was so was not disputed by the Respondents.  
10.	In relation to the penalty, Ms Redmond submitted that the Respondents had been more than lenient and that no further discount should be allowed.  She stressed that Mr and Mrs Jepp had never, of their own volition, contacted the Respondents and had made no attempt to submit their own calculations.  All they had done was to open their books and nothing further.  Mr and Mrs Jepp now concede that they had been dishonest but they had not been truthful in interview because they had denied this.  Ms Redmond also took us through the reasons already outlined by Mrs Batten for the discount which she had given.  
11.	Mr and Mrs Jepp, in their submissions, stressed the unexpected nature of the interview and that they went ahead with it against their better judgment.  They described it as aggressive and intimidatory and without professional representation, they had been completely unprepared.  They had been worried about the legal implications of accepting dishonesty and this was why they had refused to concede that point.  They both felt that they were being bribed into using certain words or phrases which the Respondents wished to hear.  
12.	Mr Jepp referred us to the “New Approach” introduced in April 2002 under which, with “full co-operation” a penalty would not exceed 20 per cent of the tax evaded.  We were also referred by Mr and Mrs Jepp to a letter which they had written to the Respondents dated 8 July 2002 in which they had set out much of what we were told during the hearing; had accepted, by implication that a penalty was due, but had offered to pay the penalty which they recalculated, discounted by the full 75 per cent.  They concluded their letter by saying “we look forward to receiving your agreement in due course”.  By letter dated 30 September 2002, this offer was rejected by the Respondents as being “out of time”.  
Conclusions
13.	Although Mr and Mrs Jepp accepted before us they had acted dishonestly, for the sake of completeness, we wished to satisfy ourselves that this concession had been correctly given.  In respect of the earlier three periods, it is well established that to pay, knowingly and deliberately, centrally issued assessments which under assess one’s true liability is to act dishonestly, notwithtstanding the intention to make good the shortfall if and when the financial opportunity to do so arises.  
14.	With respect to the latter two periods, when no centrally issued assessments were paid and the dishonest conduct alleged consisted of Mr and Mrs Jepp failing to do anything at all, we asked Ms Redmond to address us on this issue and we are obliged to her for her very full skeleton submission which she had presented both to us and to Mr and Mrs Jepp several weeks prior to the reconvened hearing.  Having heard Ms Redmond, we are perfectly satisfied that Mr and Mrs Jepp’s conduct in failing to render returns did amount to dishonest conduct.  We were referred by Ms Redmond specifically to the case of Stevenson and Telford Building and Design Limited v Customs and Excise Commissioners 1996 STC 1096 CA.  In the Court of Appeal, Peter Gibson LJ stated at pages 7-8, 
“For my part, I do not find any ambiguity in the language of section 13 of the 1985 Act (now section 60 of the 1994 Act).  Subsection (1) on its face imposes a liability on a person for any act or omission, provided that that act or omission was for the purpose of evading tax and the persons’ conduct involved dishonesty.  I stress the generality of the words “does any act or omits to take any action”.  They are not limited to cases involving some misrepresentation to the Commissioners, and in my judgment the dishonest omissions by a person to register for VAT or, having registered, to make a return, even though he has collected VAT from customers, would plainly fall within the scope of subsection (1)”.
15.	This, of course, is precisely what Mr and Mrs Jepp did.  We are therefore satisfied that in respect of all five periods, Mr and Mrs Jepp did act dishonestly within the meaning of section 60(1) and we now therefore turn ourselves to the issue before us, namely the amount of the mitigation.
16.	We are concerned at the manner in which the interview appears to have been conducted.  Mr and Mrs Jepp’s description of how the interview was set up was not challenged by the Respondents, Mrs Batten merely questioning why the Jepps should have been surprised.  Mr and Mrs Jepp went into the interview without any prior knowledge of the course it was to take, of the questions they were to be asked or of the allegations of dishonesty that were to be made against them.  Because of this lack of preparation, they had had no opportunity to seek legal advice and we can well understand their reluctance to admit dishonesty without having any idea of what the legal implications of that admission could be.  Throughout the interview, it appears to us, and again this was not challenged by the Respondents, that Mr and Mrs Jepp were open in their explanation as to why full payment had not been made for any of the returns.  There were quite simply insufficient funds.  They accepted during the interview that it had been wrong to accept centrally issued assessments and the only thing they failed to do was to admit that their conduct had been dishonest.  This would have added nothing to “an early and truthful explanation as to why the arrears arose and the true extent of them”.  They did explain how and why the problem had arisen and by providing their records without any prevarication to the Respondents, they enabled the true extent of the liability to be assessed immediately.  Merely to refuse to accept, in interview, that they had acted dishonestly does not to us make their comments in interview untruthful.  It does not prevent their disclosures from being full and frank.  We believe that Mr and Mrs Jepp are entitled to the full 40 per cent discount under (a) rather than the 35 per cent offered by the Respondents.
17.	 Under (b), the full 25 per cent was denied to the Jepps because they had been asked to but had failed to submit the returns for 04/98 and 07/98.  Mr and Mrs Jepp deny that they were asked to do so.  In cross examination, they asked Mrs Batten how the request had been made.  Mrs Batten could not remember.  She accepted that there was no letter to that effect and that it was not contained within the interview.  She could only say that she would have probably asked them after the interview.  We believe that Mr and Mrs Jepp are being perfectly truthful when they tell us that they were not asked to put in the returns.  There may have been some mention of it in an oblique way but not, in our view, sufficiently for the Jepps to appreciate that they were being requested to do so.   They knew that Mrs Batten had seen the records and she was therefore aware in any event of the true liability and it is disingenuous of the Respondents to say that the records were not complete when all that in fact was missing were some expenses of Mr Jepp which would in any event have served to reduce the liability.  We believe that Mr and Mrs Jepp did give full co-operation in substantiating the true amount of arrears and we believe they are entitled to the full 25 per cent discount.
18.	They have already been given the full 10 per cent discount under (c).
19.	We do not believe that we should follow the “New Approach”.  By the wording of the protocol, this very much puts the responsibility upon the trader of preparing a disclosure report himself and quantifying the arrears which, of course, Mr and Mrs Jepp did not do. 
20.	We believe that the correct amount of mitigation here is 75 per cent rather than the 60 per cent and as this was what was being sought by Mr and Mrs Jepp, their appeal is allowed.
21.	Mr and Mrs Jepp made an application for costs.  Normally, in cases such as this we would be reluctant to make such an award but we are mindful of the fact that by their letter of 8 July 2002, they offered to settle in precisely this sum but their offer was rejected.  We were told that they had made that offer repeatedly at the pre-hearing reviews of this case and on each occasion had been turned down.  We therefore believe that they should be entitled to their costs of attending the hearing and we make an award of costs in their favour of £250.  This sum is in addition to the earlier award of costs made by Mrs Gilliland in the same sum of £250.

LADY MITTING
CHAIRMAN
Release Date: 16 May 2005

MAN/03/0036 

££Jepp & Anor v Revenue and Customs [2005] UKVAT V19065 (16 May 2005)