Giles v Revenue & Customs [2009] UKFTT 109 (TC) (18 May 2009)

TC00077 Giles v Revenue & Customs [2009] UKFTT 109 (TC) (18 May 2009)

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First-tier Tribunal (Tax)

You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Giles v Revenue & Customs [2009] UKFTT 109 (TC) (18 May 2009)
URL: http://www.bailii.org/uk/cases/UKFTT/TC/2009/TC00077.html
Cite as: [2009] UKFTT 109 (TC)

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Giles v Revenue & Customs [2009] UKFTT 109 (TC) (18 May 2009)
VAT - PENALTIES
Evasion

[2009] UKFTT 109 (TC)

TC00077

Appeal number MAN/2007/0836

Value Added Tax – company liable to a penalty for dishonest evasion of VAT under s.60 VATA – penalty proposed to be recovered from the Appellant (as a "named officer") under s.61 VATA – dishonesty on the part of the Appellant admitted – decision to apportion the whole of the penalty to the Appellant disputed – Appellant submitted on the facts that other directors of the company had knowledge of the dishonesty – that submission rejected – held that the Appellant's dishonesty rendered him liable to the penalty in any event – Appeal dismissed

FIRST-TIER TRIBUNAL

TAX CHAMBER

GARY GILES Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS (Value Added Tax) Respondents

TRIBUNAL: JOHN WALTERS QC

MRS. E. POLLARD

MR. W. SNOWDON

Sitting in public (as the VAT and Duties Tribunal) in North Shields on 9 and 10 February 2009

The Appellant appeared in person

Julian Winkley, Advocate, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction

Mr. Gary Giles ("the Appellant") appeals against his liability to a penalty of £7,274 imposed, pursuant to section 60(1) VAT Act 1994 ("VATA"), on the company We Are Ltd. ("We Are") and proposed by the Respondent Commissioners ("HMRC") to be recovered from the Appellant, pursuant to section 61(2) VATA. We Are carried on a printing business, making standard and zero-rated supplies.

Section 60(1) VATA relevantly provides as follows:

"(1) In any case where-

(a) for the purpose of evading VAT, a person does any act or omits to take any action, and

(b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability)

he shall be liable … to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct."

Section 61(1) and (2) VATA relevantly provide as follows:

"(1) Where it appears to the Commissioners-

(a) that a body corporate is liable to a penalty under section 60, and

(b) that the conduct giving rise to that penalty is, in whole or n part, attributable to the dishonesty of a person who is, or at the material time was, a director or managing officer of the body corporate (a "named officer")

the Commissioners may serve a notice under this section on the body corporate and on the named officer.

(2) A notice under this section shall state-

(a) the amount of the penalty referred to in subsection (1)(a) above ("the basic penalty"), and

(b) that the Commissioners propose, in accordance with this section, to recover from the named officer such portion (which may be the whole) of the basic penalty as is specified in the notice."

Section 61(3) VATA goes on to provide that where a notice is served under section 61 VATA, the portion of the basic penalty specified in the notice given under section 61(2) shall be recoverable from the named officer as if he were personally liable under section 60 VATA and the amount of the penalty may be assessed and notified to him.

As will be seen, section 61(1) VATA requires a notice stating the amount of "the basic penalty" and the fact that HMRC propose to recover a stated portion of it from a named officer to be served on the company and the named officer.

There was with the papers before the Tribunal at the hearing of the appeal, a copy of a letter dated 16 December 2004 sent by Michael O'Flaherty on behalf of HMRC, and addressed to the Appellant at an address in Norton. Mr. O'Flaherty was the officer of HMRC who assessed and notified the penalty. He gave oral evidence to the Tribunal (see below). The letter to the Appellant informed him that We Are had rendered itself liable to a penalty under section 60(1) VATA of £36,371, which had been reduced to £7,274 by the exercise of HMRC's powers of mitigation under section 70(1) VATA. The letter stated that this reduction had been made "taking into account the early and truthful explanation as to why the arrears arose, the full disclosure and the cooperation given by We Are when invited to do so". The letter further stated that HMRC intended to recover the full amount of the penalty from the Appellant and none of it from We Are.

At the hearing, however, we did not have before us a copy of the letter in similar terms which section 61(1) VATA requires to have been sent to We Are Ltd. The Tribunal therefore directed HMRC (through their representative, Mr. Winkley) to provide a copy of that letter. HMRC did so under cover of a Note to the Tribunal dated 23 February 2009. That letter, also sent by Mr. O'Flaherty, and dated 16 December 2004, fulfilled the requirements of section 61(1) VATA.

It was not disputed by the Appellant that We Are was liable to the stated penalty of £36,371 for the period for which the assessment was made, namely the period from 1 June 2002 to 28 February 2003. That is, the Appellant accepted that We Are, for the purpose of evading VAT, had taken action (the submission of false VAT returns) and that its conduct involved dishonesty.

Nor did the Appellant dispute that the conduct giving rise to the penalty for which We Are was liable was in part attributable to his own dishonesty, or that he was at the material time a director or managing officer of We Are.

The Appellant did, however, dispute HMRC's decision that the conduct giving rise to the penalty for which We Are was liable was wholly attributable to his own dishonesty.

It had been alleged in statements made to HMRC by Joe Sykes, Tracy Muir or Sykes, Graeme Wilkinson and Leslie Morris, former directors of We Are, that, in summary, "[the Appellant] was solely responsible for this fraud".

The Appellant's case was that the other directors of We Are were attempting to shift the blame for We Are's dishonest conduct entirely onto him. As he states in his grounds of appeal:

"I was not solely responsible for the book-keeping within the company. Laura McGowan, the common law wife of one of the directors, Leslie Morris, was responsible for converting the 2003-04 tax year to Sage of which I had no knowledge, but which the other directors are trying to portray I am [sic]. The other directors are attempting to put greater emphasis on my culpability by saying so.

The other directors are attempting to give the impression that they had no knowledge of the inaccuracies, but in a board meeting in September 2002 I made the directors aware that a mistake had been made in the VAT return and that I believed we owed an additional approx £15,000 extra [sic]. As the company was at the time in financial difficulties I suggested going into administration to which Joe Sykes stated "what about my money", he having at that point invested approx. £25,000 into the business. It was for his benefit that the mistake was not highlighted to Customs and Excise. The statement that the other directors were not aware of this till March 2003 is a lie!

I left the company in April 2003, having had 8 weeks off due to stress. I am confident that one of the returns was not prepared by me. I have asked Customs and Excise for copies of the returns to check handwriting etc. but none have been forthcoming.

All dealings about any investigations by Customs and Excise took place after I had left We Are Ltd. and the other directors have attempted to shift any apportion of blame [sic] away from themselves and onto my shoulders as I was not present to defend myself.

I accept that a proportion of the blame does fall to me, as it does equally to the other directors and feel this penalty should be split equally between all directors."

It will be apparent that an unusual feature of this case is that (a) HMRC reduced the penalty from £36,371 to £7,274 because of the other former directors' cooperation in disclosing the arrears, specific mention being made of "the early and truthful explanation as to why the arrears arose"; (b) the Appellant impugns the other former directors' truthfulness, while at the same time (c) apparently wishing to retain the benefit of the reduction of the penalty, and (d) seeking to shift the full burden of the reduced penalty from himself by "split[ting] it equally between all the directors".

The inconsistency in the Appellant's approach between seeking to rely on the reduction in the penalty afforded by HMRC because of the other directors' truthful explanation and cooperation and nonetheless branding as "a lie" their statement attributing the entire blame for the "fraud" to the Appellant is a major difficulty in the Appellant's way to success in this appeal. The Appellant apparently hopes that by this appeal he will achieve a reduction in the amount of penalty recoverable from him personally, by splitting liability for the reduced penalty of £7,272 between himself and the other former directors.

The evidence

The Tribunal had before it two bundles of documents. We heard oral evidence from Mr. Barry Rush (an Officer of HMRC), Mr. Michael O'Flaherty (a former Officer of HMRC), the Appellant, and Mr. Michael Giles (the Appellant's father).

Officer Rush's evidence was as follows.

The first relevant approach made by We Are to HMRC was on 1 August 2003, when Laura McGowan, the partner of Leslie Morris (who was one of the directors of We Are) attempted to contact Officer Rush. Officer Rush returned Ms. McGowan's call on 5 August 2003 and she asked for a visit to We Are and volunteered that there were VAT problems. The visit took place on 11 August 2003.

Officer Rush's visit report states that he interviewed Ms. McGowan. She said that she had been brought in to help with the accounts in June 2003. She told Officer Rush that all VAT returns were prepared by the Appellant, and the accounting function of We Are, including the raising of sales invoices, had been performed by him. He had carried out all input onto the computer (Sage software) until November 2002, when this duty had begun to be shared with Tracy Muir. At the time of the visit (11 August 2003), the business was being run down. Ms. McGowan stated that whether the business would be revived depended on the results of the VAT visit.

Ms. McGowan told Officer Rush that over the period December 2002 to January 2003 the Appellant had said that he was going to Australia, but did not formally give notice. The other directors asked him to produce accounts for We Are before he left. In March 2003, no accounts having yet been produced, the other directors required the Appellant to produce them within a month. There was a crisis in May 2003. The accounts had still not been produced and the Appellant was escorted from the premises.

Ms. McGowan told Officer Rush that she thought that all the information for the production of accounts and VAT returns was on the Sage system, but that the VAT return figures had just been made up. She said that she thought that a plastic card embosser and mailer equipment, which had been purchased using HSBC finance under the VAT registration of EEZEEPrint Limited – an associated company – had been treated as giving rise to deductible input tax in We Are's VAT returns.

Officer Rush obtained accounting information and business records for examination. He examined them in his office on 26 August 2003. He prepared a schedule in which he compared the VAT returns received from We Are with the information on the Sage system. The comparison showed:

for the period 08/02, output tax understated on the VAT return by £3,492.05, and input tax overstated on the VAT return by £17,328.38;

for the period 11/02, output tax understated on the VAT return by £1,398.06, and input tax overstated on the VAT return by £5,735.71;

for the period 02/03, output tax understated on the VAT return by £1,183.92, and input tax overstated on the VAT return by £4,352.48;

for the period 05/03 output tax correctly stated and input tax understated by £71.25.

Ms. McGowan had prepared the VAT return for the period 05/03, which almost agreed with the Sage records. The reason for the discrepancy in the input tax returned (which was in HMRC's favour) was that late invoices received had not been recognised in the return of input tax.

The VAT returns for the periods 08/02 through to 02/03 (inclusive), which Officer Rush understood had been prepared by the Appellant showed discrepancies in We Are's favour totalling £33,490.60. Officer Rush analysed the errors. He recommended the case for further investigation into fraudulent evasion of VAT. Eventually on 15 October 2003 Officer Rush produced a schedule of assessment showing a total potential under-declaration of £41,342.51. This amount, together with interest, was assessed. The assessments were made to the best of Officer Rush's judgment. The Appellant confirmed at the hearing that he was not contesting the accuracy of the assessed amounts.

Officer Rush also produced a report of a visit to We Are carried out by Officer Julie Sinclair on 30 July 2002. Officer Sinclair met the Appellant at We Are's place of business at the Appellant's request. The visit report states that the trader (presumably the Appellant) had asked for the visit to check the records because he "felt that he may have made errors in accounting for VAT on sales".

Officer Sinclair had apparently checked the VAT return for the period 05/02, which was a long period covering the 9 months between the VAT registration date of We Are (1 September 2001) and 31 May 2002. This was the VAT period before the first of the VAT periods with which this appeal is concerned. Although the records were not available for inspection on the occasion of the visit, the Appellant attended at Officer Sinclair's office on 1 August 2002 with the information she had requested and the visit report includes Officer Sinclair's comment that the trader (the Appellant) was cooperative and helpful, the records were reasonably kept and such problems as were found had occurred due to the Appellant having belatedly asked for registration.

The visit report referred to manual sales invoices raised from May 2001 to 30 September 2001 being "with book-keeper". As stated below, when the Appellant's evidence is summarised, the Appellant told the Tribunal that this must have been a reference to Laura McGowan.

Officer Michael O'Flaherty, at the time a fraud investigation officer for HMRC based at Newcastle, took up the civil investigation, when Officer Rush referred the case to him. Officer O'Flaherty's evidence was as follows.

In mid-February 2004, he wrote to the Appellant at two addresses, one at The Flat, Builders Yard in Sunderland, and the other at Norton. In the letters he invited the Appellant to a meeting on 4 March 2004 to discuss "your VAT affairs", stating that his aim was to reach agreement with the Appellant on the nature and extent and reason for irregularities in the VAT affairs of We Are. This was in the nature of a form letter but a special paragraph was added to the letters to the Appellant stating that "if after reading the attached documentation you decide that you wish to co-operate, then I require a signed declaration from you stating that you fully understand the procedures detailed within them and wish to proceed". The attached documentation was the VAT Notice 730 December 1994 (including Addendum, September 2000) entitled Civil evasion penalty investigations: statement of practice.

Having had no response from the Appellant, on 20 February 2004, Officer O'Flaherty wrote a chasing letter to him asking for urgent confirmation of his attendance at the proposed meeting on 4 March 2004.

Officer O'Flaherty said that the Sunderland address for the Appellant was given to him by the other directors of We Are (in circumstances which were unclear) and he "could only suggest" that the Norton address also was given him by the other directors.

Officer O'Flaherty tried to visit one of these addresses for the Appellant – in cross-examination he said he thought it was the Norton address but he could not remember when he tried to visit it. He could not explain why on 10 February 2004, 20 February 2004, 15 June 2004 and 29 June 2004 he had written to the Appellant at the Sunderland address, and on 19 February 2004 and 16 December 2004 he had written to the Appellant at the Norton address.

Officer O'Flaherty wrote in similar terms (without the special paragraph referred to above) on dates in May and June 2004 to Graeme Wilkinson (at two addresses), Leslie Morris, Tracy Sykes and Joe Sykes. No date for a meeting was specified in those letters.

Officer O'Flaherty (with Officer Rush) met Tracy Sykes and Leslie Morris on 14 June 2004. They also had been supplied with copies of VAT Notice 730.

According to the note of the meeting produced by Officer O'Flaherty, Tracy Sykes and Leslie Morris "stated that they had no idea how the fraud was perpetrated and what [the Appellant] had actually done. We were not allowed to touch the Sage system or accounts." They also stated that the other directors had no idea what had been done and confirmed that the Appellant was in total control of all accounting and VAT returns completed and submitted. They stated that the Appellant had admitted that he had not paid VAT (and other tax) due and that the accounts were "not worth the paper they were written on". Leslie Morris, in answer to Officer O'Flaherty's question: "Are you aware of [the Appellant's] whereabouts – any address?" stated "5 Stanley Street [the Norton address] and some builders yard in Sunderland". Tracy Sykes said that she would give Officer O'Flaherty a telephone number for the Appellant and Leslie Morris added "He goes under Gary Jones a lot".

Copies of the VAT returns for We Are for the periods 08/02, 11/02 and 02/03 were exhibited by Officer O'Flaherty. They were all completed by the Appellant and bore his signature.

On 15 June 2004, Officer O'Flaherty wrote to the Appellant at the Sunderland address. The letter referred to "our telephone conversation today" and was otherwise in the same format as the letters sent to him in February 2004. It proposed a meeting at HM Customs & Excise premises in Middlesbrough on 2 July 2004 at 11:00a.m. and asked the Appellant to notify Officer O'Flaherty by letter or phone if he was not going to attend the meeting.

On 25 June 2004, Officer O'Flaherty received a document undated and not stating the address from which it was sent, but sent for his attention purportedly from the Appellant (it contained a signature). It advised Officer O'Flaherty that We Are had gone into receivership in the autumn of 2003 and suggested that Officer O'Flaherty speak to the Official Receiver in relation to matters concerning We Are. There was a post script which read: "I will not be attending your meeting dated 2/7/04".

On 29 June 2004, Officer O'Flaherty wrote again to the Appellant at the Sunderland address. Officer O'Flaherty informed the Appellant that the placing of We Are into receivership did not affect the Appellant's responsibilities in relation to irregularities in the VAT records of We Are and that the purpose of the proposed meeting on 2 July 2004 was to give the Appellant an opportunity to explain the irregularities which Officer Rush had highlighted. Officer O'Flaherty referred to the Appellant's position as former financial director of We Are. Officer O'Flaherty said that the investigation would continue irrespective of the Appellant's attendance at any proposed meeting and that it was open to the Appellant to provide any explanations which would be helpful by telephone, if not at a meeting.

Officer O'Flaherty (with Officer Carl Abbott) met Joe Sykes and Graeme Wilkinson on 30 June 2004. Joe Sykes and Graeme Wilkinson stated that the Appellant had been in full control of the financial affairs of We Are (including VAT matters). When asked at what point they became aware of VAT problems, Joe Sykes and Graeme Wilkinson replied that they had asked to see a financial statement in December 2002 and each month thereafter until approximately March 2003, and that at a meeting in March 2003 the Appellant had told them that they knew that he had been altering the VAT (and PAYE) returns and that about £40,000 was owed.

Joe Sykes told Officer O'Flaherty that he had consulted a Mr. Woods, of Benson Wood who had made a report stating that no returns had been made to Companies House and that penalties had been imposed. Mr. Wood had advised Joe Sykes to notify HM Customs and Excise and the Inland Revenue (in relation to PAYE) and to resign as a director of We Are.

After the interviews, Officer O'Flaherty was supplied by Joe Sykes, Tracy Muir, Graeme Wilkinson and Leslie Morris with a signed "Statement of Fact", their signatures being witnessed by a firm called Jacksons of Stockton-on-Tees.

It stated that the Appellant had always been in sole control of the finances of We Are, as finance director "as he is a qualified accountant". It also stated that Joe Sykes had invested £34,000 and was becoming concerned as to where these funds were being used. It stated that at a meeting on 12 December 2002 the Appellant had been asked for a full set of management accounts. It stated that this request was repeated at a meeting on 24 February 2003. It further stated that at a meeting on 24 March 2003 the Appellant had been informed that an independent audit of We Are was to be arranged by Benson Wood & Co. and at that meeting the Appellant had informed the other directors that he had been misaccounting for VAT for a number of years, giving rise to a debt of about £42,000, and that no PAYE had been paid, giving rise to a debt of about £12,000. It stated that the other directors had informed the Appellant that this would have to stop immediately and that an audit would have to be arranged urgently. On the same day (24 March 2003) the Appellant had resigned from We Are and the associated companies EEZEEPay Ltd. and EEZEEPrint Ltd.

The statement also recounted that Joe Sykes had had a meeting with Peter Wood of Benson Wood on 25 March 2003. Later, Peter Wood had informed the directors that a formal statutory set of accounts would have to be filed for the period 25 September 2000 to 31 December 2001 as a matter of urgency. The statement said that the directors gave the Appellant until 28 April 2003 to provide a set of accounts for Benson Wood to audit. It also said that the Appellant had insisted that the directors attend a meeting on 3 April 2003, which they did. At that meeting, which was also attended by the Appellant's mother, the Appellant had stated that the directors were all aware of the accounting irregularities which he had performed over a long period of time. The statement said that the directors all categorically denied this. The statement also said that it had transpired that the Appellant had claimed back VAT on the embossing machine bought through EEZEEPrint both genuinely through that company and falsely through We Are.

Tracy Sykes subsequently sent a schedule of VAT arrears to Officer O'Flaherty.

Officer O'Flaherty considered the evidence before him and concluded that there had been a combination of underdeclared VAT on sales and overclaimed input tax credit. He concluded that there had been dishonest conduct and that there were grounds to attribute the dishonesty 100% to the Appellant. He stated in evidence that this conclusion was mainly derived from what the directors had told him, but also from an appreciation that this type of false accounting was generally associated with fraud rather than error.

Officer O'Flaherty took into account that the incidence of VAT evasion had been voluntarily reported to HMRC in August 2003 and that the "significant and cogent cooperation" by four of the directors had merited 80% mitigation of the penalty due for dishonest evasion. He recommended that the balance of 20% of the penalty should be recovered from the Appellant from whom no cooperation or assistance had been received.

In cross-examination it emerged that Officer O'Flaherty had no record of a telephone conversation with the Appellant on 15 June 2004. A Land Registry document was also put in evidence which indicated (although it did not state as much in terms) that the Appellant had disposed on the Norton property to unconnected third parties on 14 January 2004.

The Appellant's evidence was as follows.

He stated that he was not a qualified accountant.

The Appellant was a director of We Are, and of the associated companies EEZEEGroup and EEZEEPrint.

At any rate at the initial stages of the business of We Are, the Appellant issued handwritten invoices. The Sage accounts package was purchased in order to computerise the system. Information had to be loaded onto the Sage system from handwritten spread sheets and other accounting documentation.

The Appellant himself requested the visit from Officer Julie Sinclair on 20 July 2002 to check with her whether the implementation of the Sage system had been satisfactory, at the stage when he was trying to get the VAT return for the 08/02 period produced by the Sage system.

Some of the manual sales invoices which Officer Julie Sinclair had wished to see had been with a "book-keeper" at the time of the visit (see the reference in Officer Julie Sinclair's visit report). The Appellant confirmed that the "book-keeper" was Laura McGowan.

The Appellant stated that in completing the 08/02 VAT return for We Are, he had duplicated a number of invoices on the purchase side – thus overclaiming input tax credit. That return, which was a net repayment return – was completed and signed off by the Appellant on 2 September 2002. The Appellant's evidence was that when the return was submitted, he thought that it was correct, but later he realised that it had not been correct.

Later in the month of September 2002, the Appellant said that he had told the other directors at a meeting of the error. He wasn't sure that Tracy Muir was at that meeting but he said that Joe Sykes, Graeme Wilkinson and Leslie Morris were there. He thought at the time that the repayment of VAT claimed had been about £15,000 too much (it was £19,367 in total).

Because the error was more than £2,000 the correct procedure was to inform HMRC (by a voluntary declaration) and not to simply correct the error in the next return. The Appellant said that the other directors were not happy with this proposal.

We Are had had a very bad summer and was getting into cash flow difficulties.

The directors considered they had 2 choices, either to report the matter to HMRC and possibly stop trading, or attempt to trade out of the situation and sort the matter out later.

They decided to attempt to trade out of the situation and not tell HMRC about the error for the time being.

The Appellant accepted in evidence that that was a wrong decision and that "we should have held our hands up at that time". He said in evidence that We Are was "going bust and I was doing all I could to keep it afloat in the knowledge of the other directors". He said he should have gone to HMRC in September 2002.

The Appellant stated that Joe Sykes in particular did not want to cease trading. He had said: "What about my money?"

A meeting took place on 12 December 2002 at which all the directors were present. Management accounts available from the Sage system at that time confirmed that We Are was trading insolvently and should have ceased trading. Soon after that, still in December 2002, the Appellant went off sick. He was absent for 6 to 8 weeks. During his absence, Tracy Muir was very much more involved in the business. Officer Rush in his witness statement confirmed that from November 2002 the Appellant shared his duties with Tracy Muir.

The Appellant said that in relation to the VAT returns for the periods 11/02 and 02/03, completed by him respectively on 30 November 2002 and 21 March 2003, both of which were net repayment returns, he had been involved over the telephone.

His evidence was that he came back to work in late January or early February 2003.

The errors in these returns were, for the most part, input tax claims for items bought for associated companies. This was, the Appellant said, a way of getting VAT back to help cash flow. He admitted that he knowingly under-declared output tax in these periods.

The Appellant left We Are in March 2003.

The Appellant stated in evidence that he did not receive any of the correspondence posted to him by Officer O'Flaherty. He was not at either of the addresses to which the correspondence was sent (the Norton and the Sunderland addresses). He had lived with his mother in the first part of 2004 (at Seaton Carew) and with his father (at Sunderland) in the second part of 2004.

He stated that the letter received on 25 June 2004 by Officer O'Flaherty, which did not state the address from which it was sent, but was sent for Officer O'Flaherty's attention purportedly from the Appellant (it contained a signature), was not sent by him and did not bear his signature. He stated that he had not received the correspondence (the letter written by Officer O'Flaherty on 15 June 2004 and sent to the Appellant at the Sunderland address) to which that letter was apparently a response.

He denied having had a telephone conversation with Officer O'Flaherty on 15 June 2004, as referred to in Officer O'Flaherty's letter of the same date.

He referred to the note of the meeting on 14 June 2004 between Officer O'Flaherty and Tracy Sykes and Leslie Morris in which Tracy Sykes is recorded as volunteering to give Officer O'Flaherty a telephone number for the Appellant.

He suggested that Officer O'Flaherty had been given a telephone number which was not his and that the telephone conversation which Officer O'Flaherty thought he was having with the Appellant on 15 June 2004 was in fact with another person.

The Appellant's evidence was that he knew nothing about what had happened in relation to We Are's VAT liability from the time he left We Are in 2003 until mid-2006. The first indication he got that action was being planned against him was when the Department of Trade and Industry began to take action to have him disqualified to be a company director. This was in the summer of 2006.

The Appellant said that he approached HMRC to find out if they contemplated any action against him. He had had a telephone conversation with HMRC's office at Middlesbrough.

Correspondence on the Tribunal's file indicated that Officer A. Webb had written to the Appellant at an address in Redcar on 15 May 2007 informing him of his liability to a penalty of £7,274 and referring to two letters received from the Appellant "dated 3 November 2007 (Sic) ? and 24 April 2007 indicating you wish to appeal the penalty".

This elicited an undated letter from the Appellant indicating that it was his intention "to continue" to contest the matter, and asking for help on the procedure for obtaining an extension of time to appeal.

The Appellant accepted that his evidence about the other directors' knowledge of the VAT irregularities was entirely at odds with their evidence. He repeated in cross-examination that the other directors had been aware of the situation from September 2002 and that they were lying insofar as they had stated otherwise.

The Appellant's father, Mr. Michael Giles, gave evidence. He said that he had sold his builder's yard in Sunderland in the summer of 2003 following his retirement. He had no arrangements to pick up post after he had sold the yard. He went down occasionally and he thought that if there had been any correspondence for the Appellant form HMRC he would have made sure the Appellant got it.

Mr. Winkley pointed out to the Appellant, in cross-examination, that the Appellant had not amended his defence in accordance with the liberty granted to him in that regard by Mr. Barlow at the pre-hearing review on 8 April 2008 (which the Appellant attended).

Submissions

Mr. Winkley submitted, on behalf of HMRC, that we should prefer the version of the facts given by HMRC's witnesses, which was that things came to a head in March or April 2003, when the Appellant was asked to leave We Are. Laura McGowan's approach to HMRC was made soon thereafter (on 1 August 2003). He reminded the Tribunal that the VAT return for We Are submitted after the Appellant left – the return for 05/03 – was satisfactory. He reminded the Tribunal of Officer O'Flaherty's evidence of the cooperation given by the other directors. He invited the Tribunal to accept Officer O'Flaherty's account of the efforts he had made to contact the Appellant and in particular his account of the telephone conversation he had with the Appellant on 15 June 2004. Mr. Winkley asked us to reject the Appellant's evidence that he did not write the undated letter for the attention of Officer O'Flaherty stating that he (the Appellant) would not attend the meeting planned for 2 July 2004.

On the question of dishonesty, Mr. Winkley referred the Tribunal to the judgment of HH Judge Pelling QC sitting as a Deputy Judge of the High Court (Chancery Division) in the Manchester District registry in Sahib Restaurant Limited v Commissioners for HM Revenue and Customs (Case M7X 090, Judgment handed down on 9 April 2008). Judge Pelling stated the test as follows (ibid. at [40]):

"The knowledge of the person alleged to be dishonest that has to be established if such an allegation is to be proved is knowledge of the transaction sufficient to render his participation dishonest according to normally acceptable standards of honest conduct. In essence the test is objective – it does not require the person who is alleged to have been dishonest to have known what normally acceptable standards of honest conduct were."

We record this submission for completeness. The Appellant did not deny that his conduct giving rise to the penalty to which We Are was liable was attributable in part to his dishonesty.

The Appellant's case was that, as stated in his grounds of appeal, the other directors had been aware of (and had condoned) the dishonest conduct in relation to VAT from September 2002, and not from 24 March 2003 as they had stated in the Statement of Fact obtained by Officer O'Flaherty. He submitted, therefore, that they had been aware of the dishonesty at the time the VAT returns for periods 11/02 and 02/03 had been made.

He reminded the Tribunal of Officer Rush's evidence that Tracy Muir had begun to be involved in input into the Sage system in November 2002, and that this contradicted the evidence of what Tracy Sykes (previously Muir) and Leslie Morris had told Officer O'Flaherty (in Officer Rush's presence) at the meeting on 14 June 2004 – "we were not allowed to touch the Sage system or accounts".

He submitted that he had had no contact with Officer O'Flaherty in 2004 and that the other directors were behind the series of events which led Officer O'Flaherty to believe that he had spoken to him (the Appellant) on the telephone on 15 June 2004 and had been in contact with him to give him the chance of putting his side of the story to Officer O'Flaherty before he reached his conclusions on the case. He alleged that the document received by Officer O'Flaherty on 25 June 2004, which purported to be a letter from him (the Appellant) declining to attend the meeting on 2 July 2004 was a forgery.

Discussion and decision

As we have noted above, this case is unusual because the Appellant, although freely admitting that his dishonest conduct gave rise to the liability to a penalty, and apparently wishing to take advantage of the 80% reduction in the penalty which HMRC (through Officer O'Flaherty) have made on account of the other directors' "early and truthful explanation as to why the arrears arose", nonetheless disputes the attribution of the remaining 20% of the original penalty (before reduction) on the grounds that the other directors have also been responsible for the VAT arrears.

So far as the facts of the case are concerned, the areas of conflicting evidence concern the state of knowledge of the irregularities on the part of the other directors (or some or any of them) between September 2002 and March 2003, and whether there was any contact between Officer O'Flaherty and the Appellant before Officer O'Flaherty reached his conclusions on the case and issued the decision which is the subject of the appeal, on 16 December 2004.

We accept the undisputed evidence before us which relates to matters other than these points.

We do not accept the Appellant's evidence that the document received by Officer O'Flaherty on 25 June 2004, which purported to be a letter from him (the Appellant) declining to attend the meeting on 2 July 2004 was a forgery. We conclude, from examining it, and in particular the signature, that it is unlikely to be a forgery and we take into account that the allegation that it was a forgery was not made before the hearing. This suggests to us that it was not a forgery, but the Appellant made the allegation in an attempt to support his case that he had no contact with Officer O'Flaherty before Officer O'Flaherty made his decision.

We find that he did have such contact. We find that he was party to the telephone conversation with Officer O'Flaherty which took place on 15 June 2004 and that he avoided meeting Officer O'Flaherty because he did not want to be involved in the officer's investigation of the VAT irregularities.

We also find that the Appellant received notice within section 61(1) VATA of HMRC's proposal to recover from him the penalty to which We Are was made liable. The notice received was (if not the letter dated 16 December 2004 sent by Officer O'Flaherty to the Norton address) the letter written by Officer A. Webb to the Appellant at the Redcar address on 15 May 2007 or an earlier communication which had given rise to the letters referred to in Officer Webb's letter "indicating [the Appellant] wish[ed] to appeal the penalty".

As the requisite notices were served under section 61 VATA on both the Appellant and We Are there is no procedural bar to HMRC's recovery of the penalty from the Appellant.

These findings clearly influence our assessment of the Appellant's credibility in relation to the other area of conflicting evidence – the state of knowledge of the irregularities on the part of the other directors (or some or any of them) between September 2002 and March 2003.

There is little other than the Appellant's unsubstantiated oral evidence to suggest that his version of events was correct and the other directors knew of the irregularities as early as September 2002.

We do note, however, that the Appellant's case on this issue was put fairly and squarely in his grounds of appeal and we find as a fact that Tracy Muir (or Sykes) did have access to the Sage system as early as November 2002.

It is in our judgment perfectly possible that the other directors did have knowledge of the irregularities from a date in September 2002, as the Appellant alleges. However we find that they did not, on a balance of probabilities, for the following reasons.

First, the Appellant's credibility on this issue is undermined by the conclusion we have reached on the issue of his contact with Officer O'Flaherty in 2004.

Secondly, we are reluctant to conclude that the other directors have deliberately given false evidence in their statements to Officer O'Flaherty without their having been present at the hearing to answer the allegations made by the Appellant against them.

Thirdly, the fact that the Appellant had the opportunity to put his case to Officer O'Flaherty before he reached his decision, and chose not to do so, tells against the credibility of his case, which was put forward for the first time after Officer O'Flaherty's decision had been made.

We should say that even if we had accepted the Appellant's case that the other directors did have knowledge of the irregularities from a date in September 2002, we would not have allowed the Appellant's appeal.

On the basis of his admitted dishonesty, we consider that the penalty of £7,274 proposed to be recovered from the Appellant was a penalty for which he was properly liable and was, in amount, proportionate to his own dishonest conduct.

This would also have been our conclusion even if we had found that the other directors had had knowledge of the irregularities from a date in September 2002.

We therefore dismiss the appeal.

Costs

Mr. Winkley applied for costs in the event that HMRC were successful in the appeal. In the absence of a costs estimate he asked for a contribution of £750 towards HMRC's costs. We direct that the Appellant pay HMRC this amount (£750) towards their costs within 42 days after the date of the release of this Decision.

JOHN WALTERS QC

JUDGE OF THE FIRST-TIER TRIBUNAL

RELEASE DATE: 18 May 2009

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