20719

Penalty:  whether dishonest conduct by taxpayer; whether penalty correctly assessed on taxpayer, yes:  whether a penalty properly assessed on director, yes; amount of penalty.  VATA ss 60(1):  61(1).

EDINBURGH TRIBUNAL CENTRE

	JOHN THORNTON	Appellant

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  T Gordon Coutts, QC
					 (Members):	  Mr K Pritchard, OBE., BL., WS
							  I R Welch, CA, JP

Sitting in Edinburgh on Wednesday 12, Thursday 13, Friday 14 and Thursday 20 March 2008

for the Appellant		Mr John Thornton

for the Respondents	Mr Andrew Scott, Shepherd+Wedderburn, LLP

© CROWN COPYRIGHT 2008.
DECISION

Introductory
The disputed decision with which the Tribunal required to deal was a penalty for dishonest conduct falling within Section 60(1) of the Valued Added Tax Act 1994 which was assigned to the Appellant in accordance with Section 61(1) of that Act.  The assigned penalty was £62,521.00 and the Commissioners assessed the Appellant pursuant to Section 76 of the said Act.  The original penalty for dishonest conduct was imposed upon the Company Grampian Automation Limited (hereafter GAL) of which the Appellant was sole director.  The penalty was the result of various inquiries more fully detailed below.  The Tribunal was furnished with a body of documentary evidence including several writings from the Appellant directed at various persons and bodies.  The Appellant gave oral evidence as did his son David Alan Thornton.  The credibility and reliability of these persons is discussed below.  The Commissioners, who led at the Hearing because of the requirement that they establish dishonesty led evidence from Margaret Adam, who at the material time was an employer compliance officer with HMRC, then Inland Revenue; from David Fyfe a VAT assurance officer with the Respondents, from Michael O’Flaherty then an officer of the Respondents of over 20 years experience who dealt with local fraud.  There was evidence by way of a witness statement from officer Graham Horace King.  No objection was taken to that statement which the Tribunal accordingly accepted as Mr King’s uncontradicted evidence.

The Hearing, after many delays, of an appeal dated 5 December 2005 was ultimately achieved on 12, 13,14 and 20 March 2008.

Since the Appellant in wide ranging contentions and submissions sought to raise a multiplicity of issues concerned with GAL and his part in proceedings certain basic matters require to be set out.  The Tribunal considered that they required to deal with the following issues; (1) were the Respondents entitled to make an assessment upon the company; (2) were the Respondents entitled to impose a penalty upon the company in terms of Section 60 founding upon dishonesty and (3) were the Respondents entitled to assign that penalty to the Appellant?

In relation to the first of these matters, because the Appellant spent much time in dealing with the figures produced in the assessment the Tribunal firstly considered whether the Respondents were entitled to assess and secondly the amount of that assessment.  In so doing they follow the explicit guidelines on that matter set out in Murat v C&E Commissioners (1998) STC 923.  That case determined that once there was an entitlement to assess the question for the Tribunal was what tax was due.

It must be said at the outset that there can be no question of the Respondents entitlement to assess.  Apart altogether from the general body of evidence, a critical document was issued by the Appellant in the company of his own professional advisers which read as follows:

“(1)  Have any transactions been omitted from or incorrectly recorded in the books and records of Grampian Automation Ltd with which you are a director?

Yes.

(2)  Are the books and records you are required to keep by HM Revenue & Customs for Grampian Automation Ltd with which you are a director, correct and complete to the best of your knowledge and belief?

No.

(3)  Are all the VAT returns of Grampian Automation Ltd with which you are a director correct and complete to the best of your knowledge and belief?

No.

(4)  Were you aware that any of the VAT returns were incorrect or incomplete at the time they were submitted?

No.

Signed and dated 24/5/2005”.

In the light of that there might be questions about what tax was actually due.  However no evidence was supplied by the Appellant, at any time, to indicate what he had considered the amount of tax due to be.  Since he had not supplied the appropriate information, VAT being a self assessing tax, and it being incumbent upon the taxpayer to set out the tax due the Tribunal considered that no question could now arise as to the amount assessed on the company.

However the Respondents proceeded to deal with the matter as one of dishonest conduct resulting in under-declarations of output and over-declarations of input tax being made by GAL and imposed a penalty of 70% of the culpable arrears which had been £89,318.00 70% of which was £62,522.00.  Since they considered that the conduct of GAL was solely attributable to the dishonesty of the Appellant they proceeded with the recovery of 100% of the penalty in accordance with Section 61(2) from the Appellant.

The dishonesty of the company and the Appellant were therefore one and the same.  It was for the Respondent to establish before the Tribunal on the balance of probabilities that the arrears above-mentioned were due to dishonest conduct.  The onus upon the Respondents is confined solely to establishing dishonest conduct.  There is no onus upon them to establish the quantification of the arrears and particularly, in the light of the failure by either GAL or the Appellant to put forward any other figure the Tribunal found the under-noted facts to be uncontroverted.  

The Appellant had been associated during his business life with various companies as an individual and also in association with his son David Thornton.  These companies according to the evidence before the Tribunal comprised inter alios GAL, 3 other companies Grampian Gate Systems Ltd, Grampian Door Systems Ltd, and Grampian Security Systems Ltd all of which had been incorporated at or about the same time in April 2002.  Grampian Door Systems Ltd, which was said to be dormant, and the other above companies which were not VAT registered were all controlled by the Appellant.  Other companies with which the Appellant had an association either currently or in the past were Keytask Services Limited of 46A Syon Lane, Isleworth, Middlesex, Chamber-pot Doors Limited previously Grampian Garage Doors Limited whose name was changed to 8 Forres Street Limited on 6 June 2002.  David Thornton was Secretary of Grampian Garage Doors Limited until his resignation on 9 April 2002 in favour of Key-Taskforce of 122-124 Kilburn High Road, London.  Other family Directors associated with Grampian Garage Doors Limited were Brian Edward Thornton, David Thornton and John Thornton.  In addition there was a company called Grampian Automation Group Limited whose function was obscure.  

A further company now Pollokshields Property Company Limited had been incorporated 9/8/02 under the name G A Contract (Services) Limited.  It was originally associated by operating from the same address as GAL.

The company Grampian Garage Doors Ltd operated in 2002 from the same address as Grampian Automation Limited (GAL).  Grampian Garage Doors Ltd had the same telephone number and fax number as was utilised by GAL in 2005.  David Thornton had been a Director of Grampian Garage Doors Limited.  The similarity between Grampian Garage Doors Limited which ceased to trade without any assets and the details of GAL occasioned the interest of the Inland Revenue and in particular the witness Margaret Adam.  Her evidence is discussed below.

GAL began to trade but did not register for VAT until they took advantage of a registration amnesty and applied belatedly.  They were registered with effect from 1 April 2002.

Grampian Gate Systems Ltd and Grampian Security Systems Ltd were not VAT registered.  Those companies obtained supplies with which to trade supplied to them by GAL.  GAL was invoiced by the sellers of those supplies.  It did not ingather any output tax in connection to its supplies to those other companies at any time, nor was tax accounted for.  As a result those companies supplied customers with goods without charging VAT and without accounting for VAT to GAL.

GAL, Grampian Gate Systems Ltd, Chamber-Pot Doors Limited, Grampian Automation Group Limited and Grampian Door Systems Limited were all liquidated at the instance of the Department of Trade and Industry following petitions therefor presented on 5 July 2005.

Part of the material presented to Mr Fyfe for his investigation by GAL consisted of documents purporting to vouch outsourced labour requirements.  It is not clear what labour requirements these were but in any event the documents themselves were completely bogus.  They purported to cover the period September 2002 to February 2004 from a concern described as GACS 124 High Road, London with a VAT registration number 795476370.  There is no such concern at 124 High Road, London although there could have been at 124 Kilburn High Road, London.  There is no VAT registration number for that company GACS.  The number quoted on the purported invoices had been hijacked from a company called Rain Dance Festival Limited which had nothing to do with building supplies nor any connection with Kilburn High Road.

Additional Facts
The Tribunal found the following additional facts admitted or proved and accepted the evidence supporting them.  After its registration, Officer Fyfe visited the Appellant on 26 July 2004.  He had been instructed to investigate GAL following substantial input tax claims.  The Tribunal considered Mr Fyfe to be a meticulous officer and accepted his evidence without hesitation.  He inspected the records and accounts.  He identified that purchases for all of the additional companies were being recorded in GAL’s books, that VAT was not accounted for on the transfers of goods between the companies and no VAT was declared on any sales.  The Appellant refused Mr Fyfe access to the books of the purported purchasing companies which he controlled.  The Appellant asserted to Mr Fyfe that the various companies were a group and that as such VAT did not need to be accounted for on inter-company transactions.

On examination of such books as he was shown Mr Fyfe identified the Appellant, Mrs Thornton and three to five others as employees of the company; made basic checks; identified disquiet about the invoices from GACS for supply of staff and undertook an investigation of the bank account of GAL identifying transfers of cash.

After identifying the hijacked VAT number used on purchase invoices relating to supplies of labour Mr Fyfe referred GAL for investigation by the Local Fraud Unit of the Respondents.

Ultimately and again after considerable delay due to the Appellant being unavailable a meeting took place in the offices of Accountants Skene & Co (who had been engaged by GAL) in the presence of Mr O’Flaherty and Fiona Halcrow of the Respondents, and of Mr Carstairs and Mr Gemmell respectively Tax Consultant and Accountant, for the company.  It was acknowledged that a disclosure report would be appropriate and it was agreed that the Appellant would submit such a report by 30 July 2005.  It was neither prepared nor ever submitted.  By 20 July 2005 Mr Gemmell and Mr Carstairs had ceased to act for the Appellant, because the Appellant had never provided any records to enable a disclosure report to be drawn up and GAL was put into provisional liquidation.

Further investigations with the provisional liquidator noted that the Appellant had not provided the liquidator with all the company’s books and records nor a list of assets.

The Appellant further failed as GAL Director to submit any VAT returns after the period 06/04.

Factors relied upon by the Respondents to establish dishonest conduct
These were set out as undernoted in their Statement of Case:

i)  The company Grampian Automation Ltd was registered for VAT belatedly during a period of registration amnesty.  The company had an effective date of registration of 01 April 2002.
ii)  The company through its sole director Mr John Thornton submitted VAT returns for the periods ending 12/03, 03/04 and 06/04 which understated output tax and over-declared input tax for the following reasons:
(1)  Output tax was not declared with respect to supplies of goods made by Grampian Automation Ltd to other unregistered companies run by the Appellant, namely Grampian Gate Systems Ltd and Grampian Security Systems Ltd.  It was established from the liquidator that the Appellant also ran three other companies which had not been disclosed to the Respondents.
(2)  Input tax was reclaimed in respect of alleged supplies from a non-existent company G.A.C.S. using documents purporting to be tax invoices which used a hijacked VAT number.  It is contended that the input tax claim was deliberately made using false invoices.
(3)  Mr John Thornton had demonstrated knowledge of the VAT system during the interview of 24 May 2005.
(4)  Mr John Thornton in his signed and dated answers to the four questions put to him at the interview of 24 May 2005 has admitted that transactions had been omitted and incorrectly recorded in the books and records of the company Grampian Automation Ltd.
(5)  The Appellant refused to allow access to the books and records of his unregistered companies by the visiting officer on 27 July 2004.
(6)  The Appellant has failed to submit a full and complete disclosure report to the Respondents despite agreeing to do so at the meeting of 24 May 2005.
(7)  The Appellant has failed to submit any further returns in respect of Grampian Automation Ltd apart from period ending 06/04 subsequent to the VAT inspection of 27 July 2004.

Appellant’s Statement of Defence
The Appellant has provided various statements which are prolix, wide-ranging and not particularly directed.  The essence of his defence appears to be that the Respondents have not established dishonest conduct.  The admitted under-declaration was, he said, the result of misapprehension, ignorance or ill health or all three.  He would, he claimed, have managed to rectify matters but for the supervening liquidation.  He set out his position as follows:

“It is correct that output tax was not declared in respect of goods supplied from GAL to other group companies.  However this is because no invoices had been issued, as a result of the internal group accounting problems referred to earlier.  It was my understanding at the time was that VAT was chargeable on invoiced goods, a fact that was later explained to me as in error by the company’s accountants (Skene and Co – now Tenon plc) and VAT advisors (Carstairs & Liddle), who were appointed in early 2004.  Moreover since there were no inter-company accounting procedures, there was no basis at the time of assessing what value of goods should have been invoiced out from GAL to the other group companies.  Furthermore by the time of the group companies’ liquidations in July 2005 no inter-company charging had been established.  This was in part due to the advice of the company’s VAT advisors, who wanted to first establish the overall position and then advise on the nature of the inter-company transactions, which could arguably have been of several types, and would affect the VAT liability in each case.  While this “under-declaration” was an error of understanding on my part it was not intentional, nor does it establish dishonesty.  The value of any such “under-declaration” is also arguable, which would have a bearing on the amount of penalty claimed by the Respondents, and an underpinning factor in their case”.

He was he said ignorant of the niceties of a group company and a group registration mistakenly thinking that he did not require to do so.

He further summarised his position on the case in writing on 30 December 2006 as follows:

“The Appellant contends that:
a.	Insufficient evidence has been established by the Respondents to show that GAL under declared output tax and over claimed input tax during the period 1 April 2002 to 30 June 2004 in the sum of £89,318.00.  The figure is inaccurate since it contains estimates and subject to challenge.  During a telephone call in late 2005 with Dugald Carstairs, the Appellant established that VAT penalties, in normal course of events can be offset against VAT refunds due.  The alleged figures takes no account of probable subsequent tax refunds due in the periods after June 2004 which were not able to be reclaimed due to the ongoing discussions with Michael O’Flaherty, and the eventual liquidation of GAL.  Moreover any refund subsequently claimed or due would not be repayable to the liquidator, leaving the Appellant at an unfair disadvantage.  Moreover the Appellant no longer has control of whether or when refunds have been or can be reclaimed by the liquidator.

b.	The Respondents have provided a distinct lack of real evidence as to dishonest conduct and an even lower degree of probability that any alleged dishonest conduct was wholly or even partly attributable to the sole director John Thornton.

c.	The question of the Respondents’ fairness only arises if the figure claimed is proved to be correct and the reasons valid, which they are not.  Even if any figure is then shown to be correct, the level of mitigation is based partly on inappropriate and devious behaviour on the part of the Respondents.  They knew perfectly well that GAL was in liquidation, and could easily have obtained a contact address for the Appellant from the liquidator well in advance of the Commissioners Hearing.  Even after that Hearing they deliberately sent mail to incorrect addresses, knowing full well that it would not be responded to in time.  They also knew full well that it would be almost impossible for the Appellant to prepare any disclosure report or related material following the liquidation of GAL”.

It is to be noted the Tribunal rejects the arguments that the Respondents required to show that there was of tax due in the sum of £89,318 (being the sum of overclaimed input tax of £27,064 and underdeclared output tax of £62,254).    The figure may well contain estimates.  There is nothing essentially wrong with that and in any event it was not in fact challenged in any detailed or meaningful way.  Fundamentally however it is not for the Respondents to show the extent of an under-declaration.  It is sufficient for them to establish an under-declaration and to make an assessment of its amount.  An under-declaration was admitted.

It is plain from the Appellants first quoted statement above that his claim and ground of appeal is that he was guilty of an error of understanding which was unintentional and did not establish dishonesty.  In order to assess that contention it is necessary to take a view on the credibility and reliability of the Appellant and of the evidence led on his behalf in response to the HMRC case and the evidence HMRC led.  Critical is the evidence of Mrs Adam

The evidence of Mrs Adam
Mrs Adam as above recorded was sent to investigate the income tax position of the staff and employees, if any, of GAL.  She gave evidence about her visit and enquiries and the responses given to her by the Appellant when she sought information.  In particular the Tribunal noted that the Appellant denied having any employees, no doubt with a view to explaining why no PAYE system was in operation and no national insurance contributions had been deducted or paid.  That assertion by the Appellant was patently untrue.  Evidence from the Appellant’s son indicated that there were indeed employees although he did not specify the numbers and the employment of office staff.  This was subsequently conceded by the Appellant.  Mrs Adam continued to press for information about employees and other HMRC officers were also involved.  No list of employees or any explanation of how the enterprise GAL was manned or operated was forthcoming until shortly before a Hearing fixed before the Commissioners.  Prior to that Hearing the selection of invoices above referred to were produced and that was regarded as sufficient for the Appellant’s purpose of discharging the Hearing.

The Tribunal accepted without hesitation the evidence given by Mrs Adam.  She was credible and reliable.

The purported invoices were said to be the work of a person known to the Thorntons, as one S Guriswamy.  That name in fact appears as an employed person in the said invoices, as does that of David Thornton. Mr Guriswamy was said to be in charge of the company GACS who organised the labour.

The so called invoices were produced very late and it is incomprehensible to the Tribunal why they were not readily if not instantly available for production to Mrs Adam when she asked for them.  Mr Fyffe thought they were an afterthought and the Tribunal agrees.

Credibility of Appellant
The events above narrated involving Mrs Adam were in the view of the Tribunal of themselves destructive of any credibility or reliability which the Appellant might have.  In addition each member considered him to be a master in creating unreliable excuses and obfuscation.  He displayed bluster and bad temper under searching questioning.  It followed that the Tribunal were unable to accept the excuses proffered for the failure properly to invoice the other companies for supplies.

Decision
From the whole evidence as above narrated the Tribunal were clear that it had been established on the balance of probabilities that the company were guilty of dishonesty in respect that they must have known that VAT required to be charged and accounted for on the supplies, provided of course they exceeded the threshold limits.  They did and by a substantial margin.  The controlling figure behind the company was no naive trader he, the Tribunal are convinced, knew perfectly well of the VAT requirements in the companies situation.  The supply to the deliberately created “group” companies was a smokescreen device in order to evade accounting for tax and to enable supplies to be made from one source or another under the control of the Appellant of goods without charging the customer VAT.  Apart from the commercial advantage obtained over other legitimate traders, this device permitted the Appellant and his company GAL to make substantial claims for refund of input tax.  It is inconceivable that the Appellant could have thought that that was either proper or honest of himself or the company.

Since it was the Appellant who controlled the whole matter the fixing of liability for dishonesty upon him was entirely appropriate.

Amount of Penalty
It was agreed that there had been a clerical error in computing the amount which was due to dishonest conduct.  A transposition of figures required to be removed from the penalty assessment.  The culpable arrears of GAL were £89,318 and the penalty was calculated at 70% of those arrears transmitted to the Appellant.  However the dishonest culpable arrears were agreed not to include the sum of £7,213.14 which was a straightforward mis-declaration.  Accordingly the culpable arrears were £82,104.86  70% of which is £57,473.40.

Accordingly the Tribunal allows the appeal to the extent of reducing the Section 61 Dishonesty Penalty from £62,522 to £57,473.40  but to that extent only.

Expenses
The Respondents moved for expenses in the event of success.  Since they have had substantial success they are entitled to their expenses and the Appellant is found liable to make payment of these expenses which if they are not agreed will fall to be taxed by the Auditor of the Court of Session in terms of Rule 29 (1)b and c.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  27  JUNE 2008 

EDN/05/105