19149

	VALUE ADDED TAX – Assessment Disputed Assessment – Penalty – Evasion of tax – Conduct involving dishonesty – section 60 VATA – jurisdiction of the Tribunal under section 61(5)(b) – amounts assessed on a “named officer” under section 61 VATA – on the facts assessment confirmed - dishonesty found in relation to some but not all issues raised – Mitigation – Penalties confirmed in reduced amounts.

LONDON TRIBUNAL CENTRE

	M & S LONDON LIMITED (1)
                                     KHAN JOYNAL ABEDIN (2)	                        Appellants

-and-

	HER MAJESTY’S  REVENUE AND CUSTOMS 	Respondents

Tribunal: CHARLES HELLIER  (Chairman)
                                    MS R A WATTS DAVIES MHCIMA; FCIPD

Sitting in public in London on 5 and 6 April 2005

Simon Levine of VAT Consulting UK Limited, for the Appellant 

Jeremy Hyam, instructed by the Acting Solicitor, for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	The First Appeal
1.	There are two consolidated appeals. The first appeal is by M&S London Limited (the “company”) against an assessment notified to the company on 27 November 2000 for £113,720.30 pursuant to section 73 VATA 1994 for the period February 1998 to December 1998. The assessment is effectively in respect of an input tax deduction claimed by the company for sub-contract work alleged to have been supplied to the company by Megaweb Limited and Chartclip Limited in that period. HMRC allege that the invoices supporting these alleged supplies are false and that no such sub-contract supply was made to which input VAT was applicable. The company contends that the invoices reflected genuine supplies.

2.	The Second Appeal
1.	HMRC allege that the company has engaged in dishonest conduct for the purposes of evading VAT. That conduct is alleged to include the contentions that the Megaweb and Chartclip invoices truly represented VATable supplies to the company.
2.	Section 60 VATA provides that where “for the purpose of evading VAT a person does any act or omits to take any action, and… his conduct involves dishonesty… he shall be liable to a penalty.” HMRC have imposed on the company a penalty equal to 90% of the input VAT they allege the company falsely to have claimed. That penalty was imposed pursuant to section 60 VATA and reflected mitigation of 10% in accordance with HMRC’ powers under section 70 VATA reducing it to the sum of £102,327.00. It was notified to the company on 7 January 2002 (although in error the letter was dated 7 January 2001).
3.	Section 61 VATA provides that where it appears to HMRC:
“(a)	that a body corporate is liable to a penalty [the “basic penalty”] under 60; and
(b)	that the conduct giving rise to that penalty is, in whole or in part, attributable to the dishonesty of a person who is, or at the material time was, a director or managing officer of the body corporate (a “named officer”)”,
HMRC may serve a notice stating that they propose to recover from the named officer such portion of the basic penalty as is specified in the notice. By a notice dated 7 January 2002, under section 61 (1) VATA, HMRC attributed 100% of the penalty to Mr Abedin the director of the company. That was on the basis that the conduct of the company giving rise the evasion of VAT was wholly attributable to the dishonesty of Mr Abedin who was the sole director of the company. 
4.	In the second appeal Mr Abedin appeals against HMRC’s decision that the `conduct of the company was attributable to his dishonesty, and against their decision as to the portion of the penalty which HMRC proposed to recover from him.
There has been no formal appeal by the company against the penalty, all of which in the event was apportioned by HMRC to Mr Abedin (with the result that as a result of section 61(4)(a) and (b) none of the basic penalty could be assessed on or recovered from the company).
3.	The evidence
5.	The Tribunal heard oral evidence from:
(i)		Peter Graham Smith, at the time of the hearing a compliance officer for the National Minimum Wage, and at the relevant time a National Insurance Inspector;
(ii)	Lawrence Paul Zussman, an officer with HMRC;
(iii)	Carolyn Sprigg, at the relevant time an officer of Customs and Excise;
(iv)		Muhammad Anu Jamil, who at the relevant time was the factory manager at the company. At that time his name was Jami Ali; and
(v)		Kahn Joynal Abedin, who at the relevant time was the director of the company,
and had before it three bundles of papers to which reference was made (and which included copies of the invoices and other documents referred to below).
6.	We make a preliminary point in relation to the oral evidence of Mr Abedin. In a  letter from WJB Chiltern to HMRC dated 14 August 2000, Mr Hitchen of WJB Chiltern asked that further enquiries be directed in writing through him because both Mr Abedin and Mr Jamil sought to avoid interviews ”due to language difficulties and disruption of the business”. Asked which of these applied to him Mr Jamil told us that it was the disruption to the business issue. It was clear that Mr Jamil had a good command of English. Mr Abedin, on the other hand, did not have as good a command of spoken English, but it was clear to us that he understood the questions put to him and although, on occasion, we had to ask him to repeat certain phrases, he gave his answers readily and his meaning was clear.

4.	Background/Undisputed Facts and Chronology
7.	The company’s business is to make lady’s garments from cloth and patterns supplied by its customers. This is known as a “cut make and trim business” or “CMT” business. The company operated out of a premises on the second floor of 56 - 60 Nelson London E1.
8.	Mr Abedin was the sole director of the company at all relevant times.
9.	The company employed a number of staff who were engaged in cutting cloth, machining, pressing and finishing the garments produced by the company at Nelson Street.
10.	The company was registered for VAT on 5 January 1998, Mr Abedin told us that 1998 was its first year of trading.
11.	Mr Zaman of S.A. Zaman & Co provided accountancy services to the company.
12.	On 13 January 1998 an officer from HMRC visited the company and a “rag trade questionnaire” was completed recording various matters about the company and its business.
13.	On 5 August 1998 Mr Smith of the Contributions Agency visited Mr Zaman’s offices. He says he saw invoices addressed to the company from Florentina Limited.
14.	On 12 February 1999 (6 months later) Mr Zussman of HMRC visited the company at Nelson Street in the company of Mr Smith. No books and records were available for inspection at this visit but enquiries were made of Mr Abedin and others.
15.	On 16 March 1999 Mr Zussman visited Mr Zaman’s offices and inspected the books and records of the company. He saw no Florentina invoices, but inspected invoices addressed to the company from Megaweb Limited and Chartclip Limited.
16.	On 19 March 1999 Mr Zaman wrote to Mr Zussman with “(Audited) schedules of VAT returns for the year ended 1998” and included a schedule showing that £15,682.09 of VAT had been underpaid for 1998. His letter proposed payment by instalments.
17.	On 29 February 2000 (eleven months later) four HMRC officers: Carolyn Sprigg, Mr Zussman, Mr Rashant and Mr Farrow, visited the company’s premises at Nelson Street and interviewed Mr Abedin and Mr Zaman. The interview was tape recorded and the transcript was made available to us. We refer to this as the “tape recorded interview”. At the same time as the visit to Nelson Street HMRC officers made a visit to Mr Zaman’s offices and took away records relating to the company.
18.	About one third of the way through the taped interview with HMRC Mr Abedin was given a copy of HMRC Notice 730. This notice indicates HMRC Policy in relation to criminal offences and penalties. The transcript of the tape recorded interview indicates that the notice was read to Mr Abedin. 
5.	HMRC Case
19.	HMRC say that the sub-contract invoices from Megaweb and Chartclip are fabricated and cannot be relied upon by the company for the purposes of reducing its VAT liability. They say that this is because:
(i)	when Mr Smith inspected the company’s records he saw Florentina invoices. When Mr Zussman visited to inspect the company records, these had been replaced by Megaweb invoices after the company had been made aware that HMRC harboured doubts about the authenticity of the Florentina invoices. This we call the “Florentina invoices issue”;
(ii)	two sets of invoices appear in the company’s records in respect of supplies from Chartclip. They are for the same garments but are for different amounts. HMRC say both sets must be fabricated. This we refer to as the “provisional invoices issue”;
(iii)	the information available suggests that it is not credible that the company should use sub-contractors in 1998. That is because:
(a)	the use of sub-contractors meant that the company had excess capacity which lay idle;
(b)	the cost per garment of work done by sub-contractors was greater than the cost per garment if the work was done indoors: it did not make commercial sense to use sub-contractors in these circumstances;
(c)	it was not credible that the company’s customers would permit the company to use sub-contractors which were known to its customers and which its customers could have used directly;
(d)	the rate of production by each of the company’s machinists was, if the sub-contractor information was correct, so low that the natural inference was that garments said to have been produced by the sub-contractors had in fact been produced by the company;
(e)	the number of machinists declared to be working for the company was smaller than was credible: the inference was that the company had employed more machinists (and so produced more garments indoors) than had been disclosed.
We refer to these as the “garment count/capacity/profitability issues”; and
(iv).	An examination of the records of the company shows that either the records of the company are fictitious or that it did not pay the sub-contractors as claimed or casts doubt upon the statements made on behalf of the company as to the payment in receipt of invoice from the sub-contractors. We refer to this as the “cashflow issue”.
20.	HMRC say that the claim for input tax in relation to the Megaweb and Chartclip invoices was dishonest and made for the purposes of evading VAT. They say this because:
(i)	the Florentina invoices were false
(ii)	there was no credible explanation given for the replacement of the Florentina invoices by the Megaweb invoices;
(iii)	 it was dishonest deliberately to seek to rely upon the allegedly fictitious Megaweb and Chartclip invoices;
(iv)	if the Florentina invoices existed then Mr Abedin’s denial of their existence, and the contradictory explanations of Mr Zaman were dishonest conduct;
(v)	the explanations given for the two sets of Chartclip invoices were false, and dishonest;
(vi)	Mr Abedin’s statements to officers of HMRC about the capacity of the company and its employees were contradictory or false and his later statements dishonest; and
(vii)	the records of the company were written up so as to attempt to mislead. In particular they rely under this heading on a document apparently showing the “building up” of sub-contractors VAT liability.
21.	HMRC say that this conduct was wholly attributable to the dishonesty of Mr Abedin because:
	(i).	Mr Abedin was the sole director of the company and in charge;
(ii)	Mr Abedin gave instructions for the preparation of the records of the company and procured the delivery of documents to Mr Zaman;
	(iii)	Mr Abedin signed the VAT returns knowing them to be false.
6.	Defence of the Appellants
22.	Mr Levine for the Appellants says:
(i)	Mr Zaman made a mistake in treating the Florentina invoices as representing VATable inputs of the company;
(ii)	that and other mistakes were rectified and the correct position declared to HMRC voluntarily;
(iii)	both the Megaweb invoices and the Chartclip invoices properly represent suppliers made to the company;
(iv)	the provisional invoices issue has a simple explanation;
(v)	the issues raised in relation to garment count, profitability and capacity are capable of credible explanation, particularly because this was Mr Abedin’s first time running a business.
(vi)	Mr Abedin was entitled to rely on Mr Zaman, and neither that reliance nor Mr Zaman’s mistakes constitute dishonesty on the part of Mr Abedin; and
(vii)	Mr Abedin was not otherwise dishonest in his dealings with HMRC.
7.	The Detailed Evidence
7.1	How the VAT Returns were prepared
23.	Mr Abedin told us that Mr Zaman prepared the VAT returns and gave them to Mr Abedin. Mr Zaman confirmed this in the tape recorded interview. Mr Abedin signed them. 
24.	Mr Zaman prepared the VAT returns in an unusual way. Rather than showing the gross amount of VAT on supplies made in the output tax box, and all the relevant input tax in the input tax box, he had deducted from the output tax input tax on supplies said to have been made by sub-contractors to the company, but had put in the input tax box the input tax only on other supplies to the company. 
25.	This practice on its own would have had no effect on the net VAT payable by the company, but it was unusual.
26.	HMRC, however, alleged that the deductions made from output VAT for the input tax on sub-contractors’ supplies were not warranted, and that to a very substantial degree there were no such supplies from sub-contractors. As a result, they allege that the VAT payable by the company was, during the course of 1998 understated by £113,720.30.
26.	What struck the Tribunal as odd about the method employed by Mr Zaman was that he was selective in the type of input of VAT he deducted from the output of VAT: why didn’t he deduct all input VAT from the output VAT and leave the input tax box empty? Instead of doing that he deducted only what he took to be sub-contractors’ VAT.
27.	Unfortunately, the Tribunal was deprived of the benefit of evidence from Mr Zaman. We were shown a letter from him to Mr Levine dated 30 March 2005 in which he said that although he was planning to attend the Tribunal Hearing, his 90 year old mother, who lived outside the UK, was seriously ill and he was taking the next available flight.
28.	We did, however, have the benefit of Mr Zussman’s report of Mr Zaman’s explanation on 16 March 1999. Mr Zussman reported Mr Zaman as saying that his approach to the VAT returns was for the “purposes of the management accounts to be shown to the bank to show profits etc”.
Discussion
30.	We accept that Mr Zussman’s report was accurate, but we were unable to understand how the manner in which output tax was declared in the VAT return would have had any bearing on a report or account of the profitability of the business. If the relevant bank manager was interested in the net turnover after sub-contractors, a simple schedule could easily have been prepared: it was, in our view, unlikely that a bank would have appraised the business on the basis of VAT return output figures. We were therefore left without a cogent explanation for Mr Zaman’s approach.
31.	There was another facet of the way in which Mr Zaman prepared the VAT returns that was unusual. That is referred to in 7.2 and 7.3 below.
7.2	The Provisional Invoices Issue
32.	When Carolyn Sprigg visited the company at Nelson Street on 29 February 2000, at the same time another HMRC’ team visited Mr Zaman’s offices. Two sets of invoices were found which appear to relate to the same services.
33.	One set of invoices were on A4 paper and wholly handwritten. They did not bear a VAT number (but do bear a VAT charge) These we refer to as the “A4 invoices”; the other set were on A5 paper which was partially pre-printed coming from an invoice book of the sort available from a stationer. We refer to these as the “A5 invoices”.
34.	The A5 invoices bore no VAT and the words “VAT applied for” until 6 August 1998 when and whereafter they bore a VAT number and a VAT charge.
35.	We were shown how the two sets of invoices corresponded. For example, on the A4 invoice dated 12 November 1998 there was an entry for the supply of the 49 garments in the style fjloloxa; 150 in the style fj149; 138, 3, and 2 in three other styles; and on A5 invoice number 36 bearing the date 12 November 1998 there were entries for the supply of the same numbers of the same styles. This correspondence between in the invoices we were shown covered the invoices in November and December.
36.	What was different, however, were the prices. Those on the A4 invoices were almost always larger than those on the A5 invoice, and the VAT was correspondingly greater.
37.	Mr Hyam said that we should find this suspicious. 
38.	In his oral evidence, Mr Abedin explained that the two sets of invoices arose in the following way.
39.	He said that when a job was sent to a sub-contractor a docket was written out. This set out the styles of the clothes to be made by the sub-contractor and the number of each style to be made. This docket was prepared in a duplicate book. We were shown the original book. The sub-contractor signed the top copy and took it with him together with the cloth from which the clothes were to be made. We shall refer to these dockets later.
40.	When the made up items were returned by the sub-contractor Mr Abedin said that the sub-contractor brought with them a delivery note which specified the styles and the number of garments, but also (unlike the dockets), the price to be paid per item. But that price did not bear VAT. 
41.	Mr Abedin said that, on receipt of the clothes and delivery note, his secretary made out the A4 “provisional” invoices referred to earlier, showing the price per garment which was taken from the delivery note, and adding 171/2% VAT to the total. A photocopy of this provisional invoice was given to Mr Zaman when he next came to call for his weekly visit, and the original provisional invoice was kept with the delivery note.
42.	Mr Abedin said that this procedure was adopted because Mr Zaman had said that he needed the A4 (“provisional”) invoices for the VAT return. The delivery notes did not show the VAT.
43.	We were not shown any delivery notes.
44.	At a later date, Mr Abedin said, a formal invoice would arrive from the sub-contractor. These were the A5 invoices. This invoice was retained at the factory and not sent to Mr Zaman until the end of the year.
45.	The A5 invoices were also generally for lower prices. Mr Abedin told us that that was because he would negotiate the price with the sub-contractor following the receipt of the garments and generally negotiated a lower price, which would be reflected in the “real” A5 invoice.
46.	In the series of A4 “provisional” and A5 “real” invoices which appeared in our bundle of documents, the A5 invoices bore the same date as the corresponding A4 invoice which reflected the same goods.
47.	If the dates on the A5 invoices represented the dates the invoices were delivered rather than the dates on which the garments were delivered, this would cast doubt upon the explanation given by Mr Abedin. There was no evidence, however,  that it was not possible that the date on the A5 invoices was written to reflect the delivery date of the goods, rather than the date the invoice was made out.
48.	We were shown the series of A4 and A5 invoices in relation to the period after 5 June 1998 when the sub-contractor alleged to be used was Chartclip Limited. We saw no such “provisional” invoices in relation to Megaweb in the period up to June 1998. 
49.	Mr Abedin’s explanation to us was foreshadowed by a similar but not identical explanation relayed by Mr Levine in his letter to HMRC of 5 August 2004. In that letter Mr Levin says that he understood that the A4 invoices were a “memo” sent by the sub-contractors in advance of the main invoice. The handwriting on the A4 invoices looked to us very similar to that on the dockets. It seems more likely that they were written, as Mr Abedin told us by Mr Abedin’s secretary.
50.	Mr Levine showed us how each docket could be traced through to an invoice. In the period January to June the items on each of the serially numbered and dated dockets corresponded to a Megaweb invoice, and in the period June to December, to a Chartclip invoice. 
51.	The dockets were all in the same handwriting and bore signatures on their face. Many of the signatures in the Megaweb period were similar to each other, and one looked as if it was signed by Mr Miah whom Mr Jamil had said in evidence was the proprietor of Megaweb. In the July to December period. When the dockets were made out to Chartclip, the signatures changed.
Discussion
52.	If the A4 invoices were prepared from the delivery notes simply with the addition of VAT, we find it difficult to understand why photocopies of the delivery notes were not sent to Mr Zaman (who would have been perfectly capable of adding 171/2% to the price disclosed on the face of the delivery note).
53.	Mr Abedin said that this was the way they did it, and it is possible that this is what they thought they had to do to fulfil Mr Zaman’s needs.
54.	We find that the fact that the A4 and A5 invoices bear the same date may be explainable.
55.	We found Mr Abedin’s explanation of the change in the prices between those said to be on the delivery notes (and therefore on the provisional A4 invoices) and those on the real A5 invoices unconvincing. It seemed unusual that a price would not have been agreed in advance, and even if it had not been agreed, that the sub-contractor would specify an unagreed price on a delivery note.
56.	The detail on the dockets and their correspondence to the invoices suggests that the dockets may truly have represented the despatch of garments but does not go far enough to dispel the doubts raised above. If delivery notes bearing prices existed, we were not shown them; neither did we receive a clear account as to why the prices shown on the delivery notes (if they existed) had to be re-negotiated after receipt.
57.	The lack of evidence as to the delivery of the garments cast doubt upon the claim that the Chartclip invoices represented real VATable supplies to the company.
7.3	The VAT Returns
58.	Under this heading we discuss how the amounts on the invoices, A5 or A4, found their way on to, or were represented in, the VAT returns or the later VAT “audited schedules” supplied to HMRC by Mr Zaman. 
59.	Mr Zaman, in a letter to Dungawala & Co dated 15 October 2003, who at that time were representing the Appellants, said “Mr Abedin provided me with (Draft) bills and vouchers with provisional figures for my VAT return work, during the year, subject to providing with the final vouchers from the sub-contractors at the time of my final accounting and audit work (Including VAT audit).”
60.	It appears that Mr Zaman is saying that he used the “provisional” A4 invoices in preparing the VAT returns.
61.	Mr Zussman’s manuscript note of 19 March 1999 records that when Mr Zussman visited Mr Zaman on 16 March 1999, Mr Zaman produced a schedule of underpayments of VAT for the year ended 31 December 1999 showing that £18,399.28 had been underpaid. On 19 March (3 days later) Mr Zaman wrote formally to the Commissioner enclosing “Audited Schedules of Vat returns” and disclosing an underpayment of £15,682.09. These schedules show sub-contractor amounts for each relevant month which comprise, with one exception, the Megaweb and A5 Chartclip invoices.
62.	The assessment made by HMRC on 27 November 2000 was broadly for additional VAT of an amount equal to the £15,682.09 Mr Zaman had disclosed plus amounts equal to VAT on all the Megaweb and all the Chartclip invoices.

7.4	The Florentina Limited Invoices Issue
63.	Although this appears in the middle of this account of the evidence, the issue was the spark which led to the HMRC’ investigation. There were four aspects to the evidence:
(a)	Mr Smith’s visit;
(b)	Mr Zussman’s visits and Mr Zaman’s schedules;
(c)	documents collected on the visit by the HMRC team led by Carolyn Sprigg; and
(d)	later statements and correspondence.
Florentina Invoices: (1) Mr Smiths’ visit
Mr Smith’s Visit
64.	On 5 August 1998 Mr Peter Smith, of the Contributions’ Agency made a visit to Mr Zaman’s office to inspect the PAYE records relating to the company. His object was to ensure that PAYE and National Insurance were properly accounted for. 
65.	One of the exercises he conducted was designed to determine whether there was any surplus cash withdrawn from the bank which was not accounted for in disclosed wages. To this end he recorded details of:
(i)	cash withdrawn from the bank (from the cash book);
(ii)	the monies paid in cash as wages;
(iii)	the monies paid to the directors;
(iv)	expenses payment; and
(v)	the cash paid to suppliers.
66.	Examination of this record enabled him to conclude that, if payments recorded as having been made to suppliers had indeed been made, there was no unaccounted for cash which might have been paid to employees as earnings or emoluments on which National Insurance or PAYE had not been paid.
67.	Then, in order to determine whether the cash recorded as paid to suppliers had actually been paid, he asked for, and was given, copies of invoices for supplies. At his visit he made notes of the invoices he had been shown. These notes were in evidence before us. 
68.	Mr Smith’s comparison for the period he investigated January 1998 to 26 June 1998 showed suppliers’ invoices with a total value of £301,908, and payments to the suppliers of £233,700. He concluded that there was no evidence of unaccounted for PAYE or NI.
69.	Mr Smith’s note made at Mr Zaman’s offices records, for the period January to June 1998 a number of invoiced amounts under the heading “Florentina Limited”. He gives the address of Florentina as 2 – 8, Fountayne Road, Tottenham and includes the words “Office, Suite 501 Int’l House, 273 Regent Street”. He also records, for the period to June 1998, under the heading “Chartclip” four other invoiced amounts.
70.	Under the heading “Florentina” Mr Smith records a series of amounts and opposite each amount a number of figures. Thus the first entry records:
“£19,846 – 26.2.98 300 + 361 + 208 + 50 + 171 + 454 + 45 + 10”
71.	The figures he told us represented the numbers of garments of the various styles shown on each of the invoices. He told us that the Florentina invoices were addressed to the company, and that he had retained one of the Florentina’s invoices and taken it away with him.
72.	After his visit Mr Smith contacted Mr Zussman. Mr Smith told Mr Zussman that he had seen the Florentina invoices on his inspection. Mr Smith did not give Mr Zussman the Florentina invoice he said that he had taken away. That invoice was not available in evidence.  The fact that he had taken it away was not mentioned in his notes or formal statement.
73.	Mr Zussman suspected that the Florentina VAT invoices were false and made arrangements for a visit to the company.
Florentina Invoices (2) Mr Zussman’s visits and Mr Zaman’s Schedules
74.	Mr Zussman visited the company at Nelson Street on 12 February 1999: He saw no records there but spoke to Mr Abedin about the company’s business. He made a manuscript note of his visit 3 days later on 15 February. In his oral evidence Mr Zussman said that he recalled that on that visit he had said to a Mr Yusuf Ali (who was from Har Fashions but visiting Mr Abedin) that he believed the Florentina invoices to be false. His note of 15 February made no reference to this particular statement although his manuscript note of 30 March 1999 does record it.
75.	Mr Zussman’s second visit was to Mr Zaman on 16 March 1999. At that visit he was shown no Florentina invoices for 1998. Instead he was shown invoices from Megaweb and Chartclip only. However, the Megaweb invoices he was shown (copies of which were in our bundles) showed garment numbers which corresponded with those which Mr Smith had recorded on his visit. Thus, for example:

Mr Smith’s records	Megaweb invoices	

garments	£	garments	£	
30 + 361 + 203 + 50 + 71 + 454 + 45 + 10	19,846	30 + 361 + 203 + 50 + 71 + 454 + 45 +10	18,240.58	
385 + 209 _ 164 + 95+ 127 + 148 + 136 + 26 + 6	20,524	385 + 209 _ 164 + 95+ 127 + 148 + 136 + 26 + 6	17,944.37	
10 + 216 + 158 + 310 + 690	18,663	10 + 216 + 158 + 310 + 690	17,727.67	

76.	The garment details on the four Chartclip invoices recorded by Mr Smith corresponded with the garment details on the Chartclip invoices shown to Mr Zussman and in the bundles before us and, in turn, correspond with the copies of the dockets in our bundles.
77.	The early Chartclip invoices also bear the legend “VAT applied for “ and show no VAT input tax figure.
The Florentina Invoices : (3) Documents collected on the visits by the HMRC Team led by Carolyn Sprigg
78.	Carolyn Sprigg told us that on 29 February 1999 HMRC officers visited Mr Zaman’s office and took away papers relating to the VAT returns of the company. Included in those papers, Carolyn Sprigg told us, were two hand written schedules alleged by HMRC to be in Mr Zaman’s handwriting. We accept that these schedules were taken from Mr Zaman’s office. Copies of the schedules were in our bundles.
79.	The first schedule is headed “summary of VAT Returns M/R 31/8/98” and is a VAT computation. About one quarter of the way down the schedule the following appears:
“Sub-Contractors (direct)
(a)	Chartclip Limited		£41,983.39
	(b)	Florentina Clothing		£51,253.50”.

Mr Zaman’s “(Audited) Schedule of VAT Return” for August shows sub-contractor’s costs (derived from Chartclip invoices only) as £75,294.53.
80.	The second schedule is headed “Sch of VAT for the month November 1998”
The first part of that schedule is as follows:
“Work done:	£81,520.86	£21,141.42	
Less:	Sub-contractors		
To be built up	£27,051.45	£4,028.84	
Totals	£54,469.11	£11,112.48”	

81.	Our attention was drawn to the words “Florentina Clothing” on the first schedule. It was suggested to us that those words indicated an intention in November to claim input VAT on fictitious VAT invoices. It was also suggested that the words “to be built up” on the second schedule evidenced an intention to build up or manufacture fictitious invoices to support an input tax claim of £4,028.84.
The Florentina Invoices (4) later statements and correspondence
82.	Mr Zaman provided the following explanations in relation to the Florentina invoice issues:
(a)	In the tape recorded interview Mr Zaman said he remembered “vaguely there was a name Florentina Limited which was entered in the petty cash book because, all the invoices for Mr Abedin”; and a little later said “I can’t remember what happened to Florentina…”.
(b)	In a letter of 21 July 2000 to Mr Hitchin of WJB Chiltern (who were then representing the Appellants) Mr Zaman explains the Florentina invoices given to Mr Smith on his visit thus:
“I asked my secretary to let me have the sub-contractor invoices for M&S London Limited from its VAT working papers folder with the sub-contractor invoices. It so happened that, through sheer clerical error, she picked up instead, a folder containing the invoices from Florentina Limited for the month of April 1998 relating to S Fashions Limited, Unit 2 Stanley Road, London E5, another client of ours, which she was at the time using for recording the Company’s sub-contract ledger. These invoices were presented to Mr Smith for his inspection purposes, instead, showing the weekly payments, he was particularly interested in.
“As the invoices from Florentina Limited presented to him, were not at all relating to M&S London Limited and, as such, were not recorded in the company sub-contract ledger for the year ended 31/12/98.”
(c)	In relation to the VAT Schedule, in his letter to Mr Simon Levine of 30 March 2005 Mr Zaman says that he is enclosing a copy of a statement made to Messrs Dungawala & Co “for the satisfaction of your query regarding Florentina invoices which I have entered by mistake in my August 1998 VAT return schedule.” In the letter to Mr Dungawala he says that it so happened that, through a mistake, the clerk picked up the folders with the invoices from Florentina Clothing Limited, the sub-contractor for S Fashions, an associated company, she was using to complete the ledger at the same time.
Later in the same letter he explains the errors in the VAT accounting, explaining that he had been suffering from an illness which prevented him from doing very much other than supervising work that was done by his employees.
He then goes on to explain an error in the August 1998 VAT return and says that he “must explain that I have prepared the summary of the month’s VAT return showing two sub-contract companies, i.e. Chartclip Limited and Florentina Clothing Limited, instead of Chartclip only.” He says that this was because he was at the company’s offices preparing the VAT return and, while there, he found he had failed to pick up the schedule of work done by the sub-contract companies during that month and had to obtain them by telephone from his office. He says that “at that time my secretary/audit clerk who, through a clerical error, provided me with the figures from the folder from S Fashions, an associated company instead, showing the details of amount paid to Chartclip Limited and Florentina Clothing Limited for the month.
“Accordingly, I had prepared the VAT return schedule by entering the sub-contract charges from Chartclip Limited and Florentina Clothing Limited as sub-contract companies belonging to S Fashions Limited not M&S London Limited.”
In oral evidence Mr Abedin and Mr Jamil denied that they had used Florentina as a sub-contractor.
The Florentina Invoices 
Discussion
83.	We accept Mr Smith’s evidence that he saw and recorded Florentina invoices addressed to the company. That evidence is supported by his contemporaneous notes. The entries in Mr Zaman’s records also provide support despite Mr Zaman’s reported explanations (we find Mr Zaman’s repeated reliance on clerical error unconvincing). Indeed the comments Mr Zaman made at the tape recorded interview add some support to our conclusion.
84.	We were also persuaded that the invoices Mr Smith saw were replaced by invoices from Megaweb: we were denied the opportunity to hear from Mr Zaman and therefore attached less weight to his written explanations. Even taking those explanations at face value they are not consistent with, and did not explain the correspondence of the garment numbers between the invoices recorded by Mr Smith and those on the Megaweb invoices.
7.5	The garment count/capacity/profitability issues
85.	Carolyn Sprigg had prepared a schedule which showed the following information for each month from 1988:
(i)	the number of garments sold
(ii)	the number of garments alleged to have been prepared outdoors taken from the sub-contractor invoices; and
(iii)	the difference between (i) and (ii) being the garments produced indoors;
(iv)	the number of full-time machinists (which she took to be 15 f		from the statement made during the tape recorded interview);
(v)	the number of days worked per machinist;
(vi)	the garments made per machinist per day.
86.	The calculations in this schedule were revised by Mr Levine shortly before the hearing to reflect the timing of the sales and sub-contractor supplies, and to reflect more detail he had obtained about employee numbers. With good grace and fairness Carolyn Sprigg said that she accepted that this schedule was more accurate and fairer than her own. Because a number of arguments before us turned upon the detail of this schedule a summary is provided below:
Month	Garments
Sold	Garments
Outdoors	Garments
Indoors	Garments per
worker per shift	
Jan - 98	2380	1793	587	1.47	
Feb - 98	6763	5027	1726	4.34	
Mar - 98	4765	3235	1530	3.48	
Apr - 98	5383	3896	1487	3.72	
May - 98	3640	2279	1361	3.58	
Jun - 99	6706	4642	2064	4.69	
	29637	20872	8765		
Jul - 98	10588	6605	3983	8.66	
Aug - 98	8577	5082	3495	8.74	
Sept – 98	7857	4834	3023	6.87	
Oct - 98	7961	4175	3786	8.60	
Nov – 98	5237	2836	2401	5.72	
Dec - 98	5599	2565	3034	7.22	
	45,819	26,097	19,722		
Total for year	75,456	46,969	28,487		

87.	Mr Levine’s  supporting calculations indicated that the average gross wage per hour was £4.40.
88.	Mr Hyam put it to us that this schedule indicated that in fact garments said to have been produced by sub-contractors had actually been produced in-house. It was said that this conclusion was to be drawn because:
(i) 	the number of garments produced indoors as less than the declared capacity of the company. Why go outdoors when you have capacity indoors? ;
(ii)	the number of garments produced outdoors was greater than those produced indoors. This made no sense in the start-up period of the business;
(iii)	the average cost of garments produced outdoors was greater than that of those produced indoors. It made no sense to go outdoors.
(iv)	the number of garments produced per shift per machinist was lower than to be expected.
89.	In addition the following collateral issues arose:
(a)	the number of machinists declared to be working for the company was 20. This was said to be an abnormally low percentage of the total work force. If there had actually been more machinists then the garments produced per machinist per shift would be even smaller, and therefore it was alleged the declared figures were even less believable;
(b)	downtime: each machinist worked between 16 and 22 hours per week. Each was said to have had his or her own work station. This meant that for a large part of the working week machinist’s stations were unoccupied. This was unrealistic.
90.	One of the variations made by Mr Levin in his revision of Carolyn Sprigg’s schedule was to replace the calculation of average garments per day per employee by average garments per “shifts per employee”. He worked on the basis of a notional shift of between 31/2 and 4 hours in length. This meant that a machinist working 20 hours a week would work about 5 shifts.
91.	Mr Jamil told us that the second half of the year was traditionally busier in the rag trade than the first half. That was consistent with the overall sales in the table.
(i)	Declared Capacity of the company
92.	Mr Zussman’s note made after his first meeting with Mr Abedin indicates that Mr Abedin told him “that the capacity of the factory was around 2,000 garments per week but could do more”. 2,000 garments per week is more than 8,000 garments per month. At that rate, Mr Hyam said, all the garments could have been made indoors. 
93.	The table shows that company’s indoor production approached 4,000 only in July 1998; throughout the whole of the first 6 months it was less than 2,100 per month – less than 500 per week. 
94.	In evidence before us both Mr Jamil and Mr Abedin said that the capacity was only 1,000 garments per week (just over 4,000 per month) and not 2,000 or more. The level of production in the Chartclip period approached that figure. Mr Jamil told us that some of the space at Nelson Street was used for the storage of completed garments (from both indoor and outdoor work). By the end of a week, he said there would be a large number of garments awaiting collection. Thus he implied the Nelson Street production capacity could be less than that of equivalent size factories at Megaweb and Chartclip. If almost all Megaweb’s production was for the company (as the sequential numbers of its invoices in our bundles suggest) its production of 2,300 to 6,706 garments per month is not inconsistent with Mr Jamil’s description of its comparative size. But it does suggest that, apart from the garment storage point, the production capability of the company could be up to 8,000 per month. A similar implication derives from the Chartclip period – where, however, missing invoices from the sequence may indicate production by Chartclip for persons other than the company.
95.	Mr Jamil told us that 20 machinists could not produce 2,000 garments per week.
(ii)	Numbers produced outdoors and indoors
96.	For every month except for December 1998 the number of garments made  indoors appears to be less than those sub-contracted out. The alleged sub-contracting was to Megaweb and Chartclip. Mr Jamil said that their factories were slightly smaller than those of the company, yet the table shows that  number of garments produced by them was in each month other than December consistently greater than those produced by the company.
97.	In the first six months of operation it appeared that the company was operating at under capacity (less than 500 garments per week); whereas about 1,000 garments per week were being made by sub-contractors.
98.	Mr Abedin told us that this was because the garments which were sent to the sub-contractors were those which were easier to produce; the more difficult and therefore more time consuming garments were made up in-house. That was, he said, because control needed to be exercised over the production of the more difficult garments. Mr Jamil also told us that meeting deadlines was important and sub-contracting assisted in doing that. This was the reason he said for using sub-contractors.
(iii)	Average cost of garments produced
99.	Carolyn Sprigg said in evidence that she had compared the cost of outdoor garments with the employment costs of producing garments indoors. On her calculation the cost of garments produced outdoors was an average £12.06 (she had calculated this by adding up the total of Chartclip and Megaweb invoices for the year and dividing by 4,669, being the total number of outdoor garments produced for the year); those produced indoors had a marginal average cost of £4.72 plus overheads.
100.	Mr Abedin had said in the tape recorded interview that the wages’ bill was about £6,000 per week. That would be an average £26,000 per month. The cash book extracts before us showed net wages of between £4,200 and £5,000 per week. i.e. about £19,500 per month (but this would we assume be after PAYE and NI deductions). Carolyn Sprigg’s schedule showed an average monthly net payment of £18,116 with larger figures in the second half of the year.
101.	The following table is drawn from the information given to us. We have taken the average wage bill to be £19,000 per month in the first 6 months and £20,000 per month thereafter. It is not intended to be precise, but a rough and ready check on Carolyn Sprigg’s concerns about production costs.
		Megaweb period Jan – June 98		Chartclip Period July – Dec 98		Full Year	
							
OUTDOOR AVERAGE COST							
Total subcontractors’ cost (from invoice schedule)	£	293,570	£	379,924	£	673,494	
Garments produced outdoors (Mr Levine’s schedule)		20,872		26,097		46,969	
Cost per garment	£	14.06	£	14.56	£	14.34	

INDOOR AVERAGE GARMENT COST							
Indoor average total wage cost
(see above)	£	114,000	£	120,000	£	234,000	
Indoor garments (Mr Levine’s schedule)		8,765		19,722		28,487	
Total wage cost per garment	£	13.00	£	6.08	£	8.20	

Indoor average machinist’s wage cost 400 shifts x 4 hrs x £4 p.h. x 6m	
£	
38,400	
£	
38,400	
£	
76,800	
Indoor garments (Mr Levine’s schedule)	£	8,765	£	19,722	£	28,487	
Machinist’s’ wage cost per garment		4.38		1.95		2.70	

We note that:
(i)	the wages cost of indoor production per garment is in each period less than outdoor production. This remains the case across the whole year even if Mr Abedin’s figure of £6,000 per month is taken as the wages cost (when the average is £11.37 per garment indoors as compared to the outdoor average of £14.34);
(ii)	that is the case even if it was the case that the simpler (and less time consuming) garments were generally produced outdoors (as Mr Abedin told us).
Overall we thought the comparisons cast some doubt either upon the accounting records of the company, or upon Mr Abedin’s evidence.
(iv)	The Number of Garments produced per shift per machinist
102.	Mr Levine’s schedule shows that the number of garments produced per shift per machinist in the Megaweb period (first 6 months in 1998) was between 1.47 and 4.69. i.e. between 0.5 to 1.2 garments per hour.
103.	In the Chartclip period (July to December 1998) the range is 5.72 – 8.74 garments per operator per shift (i.e. 1.4 – 2.7 per hour).
104.	Mr Zussman told us that he had 12 years experience of working for HMRC with rag trade taxpayers. He said he had seen hundreds of CMT (cut make and trim) businesses. In his experience machinists would be expected to produce 3/4 “shells” i.e. the outer part of a garment per hour. 
105.	Mr Abedin, who said he had worked in the CMT business for 14/15 years and worked and had worked with the machinists, said that in making jackets it was not possible for a machinist to make  3/4 shells per hour. For very simple garments that might possibly be practical but not for jackets. The more complex garments were made indoors.

(a)	The number of machinist workers
105.	Mr Jamil told us that his recollection was that there were about 20 machinists in 1998 out of a total of 60 to 65 staff employed at Nelson Street.
106.	Mr Abedin also confirmed to us that there were, on average, 20 machinists employed in 1998 (although in the tape recorded interview he had said 15 to 16 machinists he told us that he was at that time referring to the position at the time of the interview).
107.	Mr Jamil described the process of making garments and indicated the roles played by some 30 to 35 other staff in that process. Those roles included those who had been cutters of the cloth, under-pressers, hoffman pressers, suzi pressers, top and final pressers, button hole makers and checkers and quality controllers. 20 machinists plus 35 other workers came to 55.
108.	Mr Jamil told us that he had 14 or 15 years experience in the rag trade. At the company he worked as a machinist and a manager. Previously he had been the proprietor of M&S Style Limited where Mr Abedin had worked for him.
109.	Mr Jamil told us that in his experience the number of machinists, as a proportion of the total workforce would be less than 50% and that the proportion at the company (about 33%), was about normal.
110.	Mr Zussman, on the other hand, told us that from his 12 years experience as a HMRC officer of the rag trade, normally about 55% of the workforce would be machinists. He thought that 33% was low.
111.	We were not able to draw any conclusions from the evidence on this issue.
Piece work or hourly payment
112.	Mr Jamil and Mr Abedin told us that the machinists were paid by the hour and not by the garment. Mr Jamil said that he had never been aware of a machinist being paid by the garment produced.
114.	Mr Zussman told us that, in his experience, machinists were paid by the garment produced, whereas pressers and finishers were paid by the hour.
115.	Mr Jamil explained that machinists were paid at differential hourly rates, depending upon their assessed ability. Each machinist completed a record of the time worked and the garments produced. These work records were used to monitor the activity of each machinist and the time record (but not the garment record) to work out the wages to be paid.
(b) Down time
116.	Mr Abedin said that the factory opened at 8.00 am each weekday and normally closed at 5.00 pm. It was therefore open for 45 hours per week. Mr Jamil said that the machinists worked either full time, which was 20 – 22 hours per week or part-time which was 15 – 16 hours per week. He said that the machinists were generally eligible for  state and council benefits, and that earnings above the relevant thresholds would mean they would lose benefits. Therefore they did not wish to work long hours, for example 30 hours a week or more. They preferred this way of working. If the company didn’t offer it, they would not be able to find machinists.
117.	Mr Abedin confirmed that each machinist had or her own work station which was not used by any other. He confirmed that this meant that out of the 45 available working hours, each machinist work station would lay idle and unoccupied for 23 – 25 hours per week. That, he said, was how he managed his company.
118.	We noted that by paying hourly rates to machinists, costs would be incurred where there was not work available.
(c)	Use of Sub-contractors: Customers’ requirements
119.	Mr Jamil said that before placing an order their customers would visit their premises to examine their facilities, and ask for samples to check. That was why January was slow he said. He said that the customers did not prohibit the use of sub-contractors so long as they were satisfied with the quality of production.
120.	Mr Zussman said that in his experience a customer would not permit sub-contractors: valuable cloth was delivered to the CMT businesses – the customers would not want it sent to establishments they had not checked. Mr Abedin and Mr Jamil said to the contrary.
121.	Mr Jamil also said that the use of home workers would be impracticable: there would be too few garments per home worker.
The Garment Count Issues: 
Discussion
122.	The issues discussed above could be capable of a number of explanations, including bad decision making or uncommercial management by Mr Abedin or Mr Jamil, or the use of home workers or labour otherwise under the control of the company. The first of these was advanced by Mr Levine.
123.	We find, however, that in relation to the Megaweb period, the following factors weigh heavily against Mr Abedin’s explanation to us that that was the way he ran his business:
(i)	in that period indoor production was half Mr Abedin’s declared capacity of 1,000 garments per week. That greater indoor production was possible was shown by the doubled production in the second period. It did not make commercial sense to go outdoors for so much when there was so much unutilised capacity indoors. Although this was the start-up period for the company, Mr Abedin and Mr Jamil had worked together before and had significant expertise. It was not as if they had to learn the ropes and go cautiously. Mr Levine’s schedules show substantially the same number of machinists in both periods and only a modest increase (5%) in the total number of shifts worked in the second period.
(ii)	we did not find Mr Jamil’s explanation of the production of greater numbers of garments outdoors (see para 99 above) – namely that it was because the more complex garments were made indoors – convincing in the light of the substantially increased indoor production in the Chartclip period.
(iii)	in the light of their joint experience in the business, the explanation of the low number of garments produced per machinist per shift in the first period as compared to the second, namely that there was less work in this period makes no sense of the use of Megaweb;
(iv)	the increased rate of production per machinist in the Chartclip period (see paras 103 to 106 above) casts doubt on the indoor production claimed in the Megaweb period.
(v)	even if garments were sent out to ensure that delivery dates were met, this would explain some use of sub-contractors, but not to the extent of such low average productivity levels indoors;
(vi)	given his experience in the rag trade, Mr Abedin must have had some understanding of the economics of his business. He must have known (if the figures based on the company’s records are correct) that the average wage cost of garments made indoors was cheaper than that of those made out-doors – even though as he told us the more complex and time consuming garments were made indoors (which would in fact suggest a higher indoors average wage cost); and
(vii)	it seemed to us it was unrealistic to operate a factory where half the machinists’ stations were unoccupied.
124.	In relation to the Chartclip period some of these points remain persuasive but some are of lesser force:
(i)	indoor production was running at a level close to Mr Abedin and Mr Jamil’s contention before for a 1,000 per week (although well below the 2,000 garments per week level);
(ii)	the number of garments per hour per machinist is significantly higher – and closer to (but still below) Mr Zussman’s experience;
(iii)	the average wage cost per indoor garment was (because of increased production) still significantly below  that of garments produced outdoors.
125.	We conclude that the analysis cast serious doubt over the proposition that the Megaweb invoices truly represented supplies made to the company, and cast some doubt on the supplies said to be made by Chartclip: doubts in each case which require evidence other than that of Mr Abedin and Mr Jamil to dispel.
7.6	The Cash flow issue
126.	Carolyn Sprigg prepared a schedule showing for each month in 1998:
1.	the amount of cash withdrawn from the bank (taken from the cashbook);
2.	the cash paid to employees (from the wages records);
3.	remuneration paid to Mr Abedin, and
4.	the amounts of the alleged sub-contractor invoices arising in the month (this latter amount being comprised of the Megaweb invoices in the period January to June, and the “A5” Chartclip invoices for the period from June to December (together with one invoice from Eurojoy)).
127.	This schedule showed for each month the net cash movement on the assumption that sub-contractors were paid in cash for the invoices rendered from that month. On that assumption the schedule showed that in some months the cash paid out exceeded that which had been withdrawn from the bank.
128.	In January and February 1998 excess payments were £22,000 and £23,000 respectively, but surplus cash of £7,000 is shown in March. In later months the schedules imply substantial surplus cash (representing an excess of cash withdrawn from the bank over payments recorded as made to employees and the amount of invoices for the months): £14,000 in July,  £15,000 in September and £22,000 in October and £17,000 in November. The net position for the year was a surplus of only about £5,000.
129.	Mr Zussman’s note made on 15 February 1999, three days after his interview with Mr Abedin on 12 February 1999, records that Mr Abedin had said that sub-contractors brought invoices to Mr Abedin who paid them in cash.
129.	The transcript of the tape of the interview on 29 February 2000 indicates that Mr Abedin said that the cash was ordered to pay the sub-contractors.
131.	Carolyn Sprigg’s in evidence was that her impression was (although it was an old recollection) that the sub-contractors were said to have been paid in full every Friday.
132.	In oral evidence Mr Abedin said that they did not always pay sub-contractors in full on a Friday. They would take up the four week’s credit. Likewise, he said they gave their suppliers (such as Simon Jersey) up to four weeks’ credit. The arrangement with Megaweb, he said, was that they would pay sums on account rather than the whole of the invoice. He says that he never said that the whole of each invoice was paid on a Friday.
133.	The cash book copies in our bundles showed the legend “sub-contractors on a/c” for payments made in many weeks. The “on a/c” notation is consistent with Mr Abedin’s evidence. That record also showed that no sub-contractor payment had been made in the second and third weeks of January.
134.	The cash book copies taken from Mr Zaman’s office on 29 February 2000 show an entry for “director c/a” indicating monies paid into the business by the director. About £11,000 was recorded as paid into the business in January and about £5,000 in February 1998. In evidence Mr Abedin said that these monies (and others needed for the initial fitting and refurbishment of the factory) had come from his own savings and loans from friends.
135.	We were not shown accounts for 1998 for the business, nor evidence of any outstanding creditors at the end of December 1998.
136.	If Carolyn Sprigg’s schedule is correct, then at the end of the year £5,000 more had been withdrawn from the bank than the sum of the wages, expenses, director’s fees and the sub-contractor’s invoices. The invoices in the last four weeks total £42,000 or thereabouts. If only two week’s credit had been taken that would mean that cash of £26,000 had been taken from the bank in excess of amounts recorded as having paid out together with invoices paid.
Sundry Expenses
137.	Sundry expenses shown in the cash book are  about £500 per week, which would be round about £26,000 for the year. On 19 March following Mr Zussman’s visit, Mr Zaman sent the HMRC an “(audited) schedule of VAT returns” for each month in 1998. This shows sales and VAT thereon, sub-contractors’ invoices (which broadly reconcile with Carolyn Sprigg’s schedules) (and VAT thereon) and amounts paid in overheads. The “overheads” are divided between “bank receipt – s/r and z/r”, and “cash payments – s/r and z/r”. (We take s/r and z/r to mean standard rated and zero rated). The “bank receipts” appear to be intended to indicate payments made by cheque or direct debit rather than in cash.
138.	The total amount of the “cash payments” shown in Mr Zaman’s schedules amount to £43,000. This could be consistent with four weeks credit taken in December of £42,000 and £5,000 excess cash. It is not, however, consistent with the entries in the cash book of £500 per week.
139.	We note that at the end of each of his audited statement schedules Mr Zaman indicates that “there is no VAT in the petty cash overhead”. That is consistent with the heading in his schedule “cash payments” including no amounts by reference to reference to “s/r”. But, when Carolyn Sprigg asked Mr Zaman for an analysis of these expenses he replied, on 6 June 2001, dividing the payments into:
Miscellaneous expenses	£	18,514	
Casual workers (for completing lining work)	£	25,175	

Total	
£	
43,690	

He provided a breakdown of miscellaneous expenses which included payments to which input VAT would normally have been applicable, casting doubt on his statement that there was no VAT in the petty cash overhead. The payments to casual workers cast doubt on Mr Abedins statements that there were no home workers.
140.	One final observation falls to be made in relation to the cash book records. Each week round sum amounts, £10,000, £11,500 etc. are shown as withdrawn in cash. After payments recorded for wages and certain other expenses, the balancing figure appears to be payments to sub-contractors “on a/c”. It seems odd to us that “on a/c” payments should be sums such as £12,303.35. We were also shown no reconciliation of these amounts to the invoices declared. Surely there would have been a record of the amounts due at any time to each supplier after these (rather precise) “on a/c” payments?

The Cash Flow issues:
Discussion
141.	Whatever else it shows the evidence above suggested to us serious deficiencies in the company’s records. This made it more difficult to treat them in any aspect as good evidence that the Chartclip and Megaweb supplies had actually been made.
142.	We find that although it was quite believable that the company took credit from the suppliers, it was somewhat less believable that when it paid them on account it paid sums with odd pence in them, and  more seriously less believable that no record was available to be shown to us of the balance due to each supplier. We were presented with what appears to be either a glorious muddle or a fabrication.
143.	Overall, however, Mr Abedin’s assertion of taking about 4 weeks credit and paying on account is consistent with the cash records – or broadly so as indicated above: in other words consistent with a muddle or incompetence in record keeping. We are not convinced that this exercise provides persuasive evidence that the Megaweb or Chartclip invoices are false, but it does not lend any support to the proposition that they are real.
144.	Mr Zaman’s contradictory statements about the petty cash overheads, and the revelation of payment to casual workers, thitherto denied, go to the questions of evasion and dishonesty discussed below.
7.7	Evidence relating to the existence or otherwise and activities of Megaweb and Chartclip
(a)	Megaweb
(i)	Mr Abedin said in evidence that he had visited Megaweb once. He said the same on the tape recorded interview.
(ii)	Mr Jamil said in evidence that they used Megaweb as a sub-contractor and that he had visited Megaweb twice a week in the period January to June 1998. He described their premises as being initially at Redchurch Street until they moved to Bethnal Green. He said that the premises at Redchurch Street were slightly smaller than those of the company.
(iii)	We were shown a copy of a document said to be the statement of affairs in the insolvency of Megaweb Limited. It took the form of an Affidavit from Lal Miah. The summary of liabilities showed preferential creditors which included £38,662 to Customs and Excise. The report of the director (Lal Miah) to the meeting of creditors held on 21 August 1998 indicated that the work of the company “was that of a sub-contractor in the clothing business on CMT basis”. It records that the company started trading from Saveena House, Vyner Street and after the closure of the premises decided to continue trading from 27 Bethnal Green Road. It states that the company “ceased trading by the end of April 1998”. However,  the word “April” is crossed out and “June” is written in by hand.
(iv)	Mr Levine showed us a photocopy of a Statutory Declaration said to have been made by Azizur Rahman Kahn on 17 March 2005. In that Declaration Azizur Kahn solemnly affirms that:
(a)	he was employed by Megaweb from April 1997 to August 1998 as secretary:
(b)	Megaweb had been originally situated at Saveena House and then moved to Redchurch Street and then again to 27 – 33 Bethnal Green Road where it continued to run until liquidation that took place on 8 August 1998;
(c)	that during the period between January 1998 and June 1998 Megaweb had worked as a sub-contractor for M&S London Limited.; and
(d)	during that period “we used to receive production orders from the M&S London Limited. They supplied us with materials and all the trimmings to produce ladies garments”.
HMRC objected to us looking at this as evidence. The Tribunal indicated that without the opportunity to hear oral evidence from Azizur Kahn and to be able to assess that evidence in the light of cross examination, the weight that could be attached to the Declaration might be much less than otherwise.
We adjourned in order to permit the Appellant to consider whether to seek and adjournment so that oral evidence might be received from Azizur Kahn. The Appellants decided not to seek such an adjournment because, Mr Levine said, that they believed that the deponant would be reluctant to come to give evidence.
(v)	The invoices purporting to come from Megaweb and the corresponding dockets relating to Megaweb.
(vi)	Carolyn Sprigg said that in evidence that she had made enquiries of Customs and Excise (as it then was), but there was no record of VAT payments having been made by Megaweb. The VAT creditor shown in the statement of affairs was less than the total of the VAT on the invoices from Megaweb to the company.
(vi)	The Megaweb invoices were sequentially numbered from 1 to 23 and none appeared to be missing from the sequence.
145.	(b)	Chartclip
(i)	Mr Abedin on the tape recorded interview says he did not visit Chartclip but he dealt with a Mr Haliq. 
(ii)	Mr Jamil said in evidence that they had used Chartclip as a sub-contractor and that he had visited Chartclip once or twice a week at their premises at the second floor 42 Fieldgate Street, London E1. He had met Mr Haliq and Mr Foyzey Rachman. He described their premises as being slightly smaller than those of Megaweb.
(iii)	Mr Zussman told us that on 12 February 1999, after his visit to the company, he visited 42 Fieldgate Street, London E1. He says that on the second floor he saw a machinist called Abdul Hannan who said that the company there was called “Chartlik” and had been there for approximately 8 months, but currently there was no work.
(iv)	We were shown a copy of a document said to be the statement of affairs in the insolvency of Chartclip Limited. It took the form of an affidavit from Mr Shams Uddin Ahmed Chowdhury. The summary of liabilities showed, among others, a liability to HMRC of £27,597. In the report of Mr Chowdhury to the meeting of creditors to be held on 30 April 1999, it was said that the company commenced trading in the last week of May 1988 making ladies garments on CMT basis from second floor of 42 Fieldgate Street, London, E.1 The statement then says that “in June 1998 an arrangement was negotiated to manufacture garments for a Company M&S Limited [it doesn’t say M&S London Limited.] Sadly the company failed to maintain the standard of quality required of it. As a consequence it terminated the agreement with the Company…the Company decided to sub-contract work with a view to improve the standard of its finished products as it was having difficulty of finding skilled workers at the rate of the wages that the Company could pay.”
(v)	As in the case of Megaweb, Mr Levine showed us a photocopy of a Statutory Declaration. This Declaration was said to have been made by Mohammed Foyzur Rahman on 16 March 2005. In that Declaration Mr Rahman solemnly and sincerely declares that:
(a)	he was a secretary of Chartclip Limited from May 1988 to April 1999;
(b)	during the period between June 1998 and January 1999 Chartclip Limited worked as a sub-contractor to M&S Limited; and
(c)	during his employment with Chartclip Limited they used to receive work from M&S Limited who supplied them with material to make ladies garments.
As with the Declaration in relation to Megaweb the HMRC objected to us looking at this as evidence. The Tribunal indicated that it would receive the copy as evidence but, without the opportunity to hear oral evidence from Mr Rahman and to be able to assess that evidence in the light of cross examination, the weight that could be attached to the Declaration might be less than it could otherwise be. The adjournment noted above in relation to Megaweb was also in relation to this Declaration and the same result obtained.
(vi)	The dockets prepared by M&S London purporting to show deliveries to Chartclip Limited corresponded with the invoices received from Chartclip Limited so far as concerns numbers and styles of garments.
(vii)	The invoices purporting to come from Chartclip Limited in the period 5 June 1998 to 23 July 1998 bear no VAT amount and carry the legend “VAT applied for”. On and after 6 August 1998 they carry VAT amounts. Later on 29 August 1998 there is a VAT only invoice representing the VAT on the invoices from 8 June to 30 July 1998.
(viii)	Carolynn Sprigg told us that Chartclip Limited was registered for VAT on 11 June, and that when an assurance officer visited on 24 June M&S London was said to be a customer. She also said that Chartclip’s declared output VAT was lower than that in the Chartclip invoices.
(ix)	On his visit to Mr Zaman on 5 August 1998 Mr Smith recorded, in the notes made at the time of his visit, four invoices addressed to the company from Chartclip Limited. Those invoices corresponded with invoices later shown to him by Mr Zaman, with the invoices put in evidence before us, and the garment dockets.
(x)	The copies of the Chartclip invoices before us were numbered from 1 to 47 but there were missing from the sequence numbers 4, 6, 7, 9, (15 or 16), 18, 20, 23, 34, 37, 39, 41, 43 and 46. In other words, it may have been that Chartclip were supplying other persons as well as the company.
7.8	Evidence as to the roles played by Mr Abedin, Mr Jamil and Mr Zaman
	(a)	Mr Abedin
146.	Mr Abedin told us that before setting up M&S London Ltd he had worked for other rag trade enterprises, his previous employer being M&S Style for which he had worked as a manager and machinist for a long time. M&S London Ltd was therefore his first time running his own business.
147.	Mr Abedin says in evidence before us that he was the director of the company at the relevant time and ran the business. On the tape recorded interview he said that there were no other directors.
148.	Mr Jamil said that although he himself would on occasion speak to Mr Zaman at Nelson Street, Mr Abedin dealt with Mr Zaman: it was Mr Abedin who gave instructions and invoices to Mr Zaman.
149.	Mr Jamil said that Mr Abedin gave instructions to the secretary, and that these instructions would have included the writing out of invoices for the company and the provisional invoices (both of these seemed to us to be in the same handwriting – which is the same as the handwriting on the dockets). Mr Jamil said that Mr Abedin, sometimes in discussion with Mr Jamil, would decide which garments were sent out and which were worked on indoors. The decision would depend upon capacity.
150.	The rag trade questionnaire, signed by Mr Abedin, indicates that Mr Abedin signed the cheques.
	(b)	Mr Jamil
151.	Mr Jamil said he was the factory manager. He said that his job was to looked after the production, sub-contracting, indoor and outdoor, and the factory floor. His responsibility was to know where the garments were. He had worked, he said, for the company for six years. 
152.	He said he was not a director of the company.
	(c)	Mr Zaman
153.	When Mr Abedin said in evidence that Mr Zaman collected the records and prepared the VAT returns, books and records. He said that he trusted Mr Zaman and signed the VAT returns which Mr Zaman presented to him. He says he never saw any of the workings for the VAT returns. 
154.	Mr Zussman’s manuscript record of his meeting with Mr Zaman records Mr Zaman as saying that he had been “chartered” since 1966. His notepaper records him as “FCA”.
155.	On the tape recorded interview Mr Zaman confirms that he prepared the VAT returns.
156.	Mr Zaman says in his letter dated 15 October 2002 to Dungawala & Co  (see para 84 above) that the delivery of the Florentina invoices to Mr Smith and the presence of “Florentina” in the August schedule, were as a result of mistakes made by his staff.
7.9	Other evidence relating to dishonesty 
1.	Outdoor workers
157.	On 13 January 1998 a HMRC officer visited the company at Nelson Street and ompleted a rag trade questionnaire. It was confirmed that Mr Abedin had signed the completed questionnaire. One question was about “outwork” the question was answered: “none now, may be in future”. The first sub-contract docket was dated 12 January 1988. The corresponding invoice was dated 22 January 1998. Thus, when the questionnaire was signed outworkers were being used (if the dockets are true). 
158.	Giving evidence before us Mr Abedin said that he understood “outworker” to mean a person who made work at home. He equated “outworker” with “outdoor”; a sub-contractor was different he said. Thus he contended that his answer on the questionnaire was true.
159.	In the taped interview Mr Abedin was asked whether he had used “outworkers”. He replied yes. He was asked who was the “most recent outworker that” he had used. He replied  “Restyle clothing” – a sub-contractor. Later the transcript records Mr Abedin as answering a question about “other outdoor workers” by referring to Megaweb. It therefore seems that at the time of the tape recording Mr Abedin understood “outworker” and “outdoor” to refer to sub-contractor. 
Discussion
1.60.	The possibilities are:
(a)	Mr Abedin was confused or careless at the time the rag trade questionnaire was filled in. The tone, however, of his evidence before us contradicts this: he was adamant that he understood then, and at the time of the hearing, “outworker” to refer only to homeworker. But in the tape recorded interview his answers make clear that he understood “outworker” to refer to subcontractor. We therefore conclude that if he was confused or careless when filling in the questionnaire, that he did not tell the truth before us.
(b)	that Mr Abedin was not telling the truth when he signed the rag trade questionnaire nor before us; or
(c)	that Mr Abedin told the truth in signing the questionnaire (on the basis that outworker meant home worker) and before us, but his answers on the taped interview were untrue or confused. But his answers in the taped interview were clear. There seemed to us to be no confusion. We reject this possibility.
161.	Mr Abedin told us that he was very nervous at the tape recorded interview. He said that “it sticks in my mind forever”. It was clearly a distressing experience. Under those circumstances it would be natural to be reticent or less measured in giving responses. We have taken this into account in attaching weight to statements made in the interview.
2.	Florentina
162.	Mr Zaman gave two contradictory accounts of the Florentina invoices (see paragraph 83 above).
163.	Mr Smith’s evidence and that of Mr Zaman’s records (see paragraphs 84 and 85 above) strongly suggest that there were invoices purportedly representing supplies from Florentina to the company included or intended to be included in its VAT returns.
164.	Mr Jamil and Mr Abedin deny any involvement with Florentina.
Discussion
165.	If Mr Smith’s evidence is truthful then Mr Jamil and Mr Abedin were not telling the truth:
	(a)	to us; and
	(b)	to HMRC in the taped interview.
Mr Smith’s evidence is supported by:
	(i)	the entry in Mr Zaman’s records ( section 7.4 above)
	(ii)	Mr Zaman’s first response at the taped interview, and
	(iii)	the correspondence of his record with the Megaweb invoices.
We concluded that it was highly probable that Mr Smith’s evidence was truthful and that Mr Abedin was not telling the truth when he contended that Megaweb had supplied the services on the Megaweb invoices to the companies.
8.	Standard and Onus of Proof; Meaning of “Dishonesty”; nature of appeals
166.	In relation to the company’s appeal against the assessment the burden of proving the assessment wrong rests upon the Appellant and the standard of proof is the civil standard – on the balance of probabilities.
167.	As regards the appeal by Mr Abedin, it is for HMRC to prove that (1) the company had done, or omitted to do something, for the purpose of evading VAT, (2) that its conduct involved dishonesty, and (3) that the conduct was in whole, or part, attributable to the dishonesty of Mr Abedin. The standard of proof is the civil standard, namely part on a balance of probabilities, but in view of the gravity of the charge of dishonesty the Tribunal will not be satisfied with anything less than a high degree of probability (Akbar v C&E [2000] STC 237 @ 251).
168.	Mr Abedin’s form of appeal indicates that it is an appeal against a penalty for ax evasion. Under the grounds of appeal it is said that “the penalty is disputed”. The penalty assessed on Mr Abedin under section 61 VATA is subject to the rights of appeal given by section 61(5). That section provides that no appeal shall lie against a notice under section 61 as such, but:
(a)	a “body corporate may appeal against [HMRC’s] decision as to its liability to a penalty and against the amount of the basic penalty”; and
(b)	“where an assessment is made on a named officer… the named officer may appeal against [HMRC’s] decision that the conduct of the body corporate referred to… is, in whole or part, attributable to his dishonesty and against their decision as to the portion of the penalty which [HMRC] propose to recover from him.”
169.	Thus the rights of appeal given to Mr Abedin by section 61(5)(b) are:
(i)	against the decision as to the attribution to his dishonesty of the relevant conduct; and
(ii)	as to the portion of the penalty recoverable from him. 
170.	Section 61(5)(b) does not give Mr Abedin an express right of appeal against the amount of the penalty; the right of appeal against that appears to be reserved to the company. And as Evans LJ said in Customs and Excise Commissioners v Bassimeh [1997] STC @ 41; “[s]ection [61(5)] limits the right of appeal against a section [61(1)] notice, so far as the director is concerned, to… the extent to which the company’s dishonesty conduct is attributable to his own dishonesty and the portion of the basic penalty [HMRC] seek to recover from him. This precludes the director from appealing against the section [60] liability of the Company…” 
171.	However the distinction drawn in the subsection between the issue as to whether the conduct was attributable to dishonesty, and the issue as to the portion of the penalty recoverable from the named officer, suggests that the two questions are not identical and that factors in addition to the attribution to the named officer’s dishonesty may be relevant to the portion of the penalty recoverable from him. Accordingly, in determining the portion of the total penalty to be recovered from Mr Abedin (if any) we should review the basis of the determination of the whole penalty, and to the extent that we conclude that any part of the basic penalty would not have been exigible had the Company appealed against it (or had no notice been served under section 61) we should not apportion that part of the basic penalty to Mr Abedin. To do otherwise would, in circumstances such as the present, where 100% of the penalty has been attributed to a named officer so that by virtue of section 61(4)(a) none of that penalty is recoverable from the Company, have meant that where the company and no reason to appeal or did not appeal against the quantum (or imposition) of the penalty, the named officer could be made liable for a proportion of a penalty which should not in fairness have been levied: the named officer’s liability might be proportionate to his culpability or dishonesty but could not be made proportionate to the tax evaded.
172.	Although this question was not argued before us, this approach to section 61 seems to us consistent with our understanding of the concept of proportionality under Community Law and with the Human Rights Convention. It accords with the doctrine set out by Lord Esher M R in Tuck & Sons v Priester (1887) 19 QBD 629 at 638: “If there is a reasonable interpretation which will avoid the penalty in any particular case we must adopt that construction. If there are two reasonable constructions we must give the more lenient one. That is the settled rule for the construction of penal sections.”
173.	Mr Abedin’s notice of appeal indicates that the name of the Applicant is “K.J. Abedin (Director of M&S London Limited)”. We have taken this as not being an appeal by the company in relation to the basic penalty under section 61(5)(a). However, for the reasons set out above it seems to us that the jurisdiction given to the Tribunal by section 61(5)(b) to review the portion of the penalty recoverable from the named officer should be taken to encompass an ability determine that if, were an appeal made by the company against the penalty, part of the penalty would not be upheld, then that part of the penalty should not be apportioned to the relevant named officer. 
10.	Findings
(1)	Assessment
174.	We were not persuaded by the company that, on the balance of probabilities, either the Megaweb or the Chartclip invoices truly represented supplies made to the company in respect of which input VAT was deductible. 
175.	In the case of the Megaweb invoices the only evidence offered to us that they represented supplies made by Megaweb were the assertions of Mr Abedin and Mr Jamil, and the correspondence of the invoices to the dockets in the docket book. Set against that we have Mr Smith’s evidence of the contents of the Florentina invoices, the appearance of “Florentina” in Mr Zaman’s VAT papers for the company, Mr Zaman’s somewhat contradictory assertions, some doubts case on the accuracy of the company’s records (see section 7.5 above), and the issues relating to garment count and capacity for the Megaweb period (see section 7.4 above).
176.	In our view HMRC showed to a high degree of probability that the Megaweb invoices were false. In reaching this conclusion we have taken into account the Statutory Declaration of Azizur Khan described in section 7.6 above, but set against the other factors, and without the benefit of hearing directly from Azizur Khan, it did not dissuade us from this conclusion.
177.	In the case of the Chartclip invoices the position is less clear. As with the Megaweb invoices, Mr Abedin and Mr Jamil assert that they represent supplies made by Chartclip. The Chartclip invoices were also supported by the dockets. 
178.	That Chartclip had traded from 42 Fieldgate Street was supported by Mr Zussman’s evidence of his visit there on 12 February 1999, as was the period (8 months) for which Mr Hannan was reported by Mr Zussman as saying that he had worked for the company (we take “Chartlik” to be a corruption of “Chartclip”).
179.	The statement apparently made in the insolvency of Chartclip in the Affidavit of Mr Chowdhary (a statement apparently made in proceedings long before this matter became contentious) is also evidence that supplies were made by Chartclip to the company.
180.	The early Chartclip invoices also appeared in Mr Smith’s note taken at the time of his first visit. We also note the omission of VAT from the Chartclip invoices for the period before it was VAT registered.
181.	These points all suggest to us that there may have been supplies made by Chartclip to the company.
182.	Set against these points are:
(1)	the doubts cast on the company’s accounting records;
(2)	the doubts cast on Mr Abedin’s veracity in relation to the Megaweb invoices and in other dealings with HMRC. Although we did not conclude that it was a necessary result of our conclusion on the Megaweb invoices that Mr Abedin’s assertions were false in relation to the Chartclip invoices, 
(3)	the issues relating to garment count and capacity on which we comment in section 7.4 above – although we note there that the position in relation the Chartclip period was less suspicious, 
(4)	the provisional invoices issue which, as noted in section 7.2 above cast some shadow over the records for the Chartclip period;
(5)	the absence from the evidence of the delivery notes or any other third party evidence that the particular supplies described in the Chartclip invoices had in fact been made.
183.	On balance, we concluded that the evidence before us was not sufficient to conclude that the supplies detailed in the Chartclip invoices had in fact been made. The Appellant did not discharge the onus of proving that the Chartclip invoices represented VATable supplies to the company.
184.	However, HMRC did not convince us that this was the case to a high degree of probability.
185.	We therefore dismiss the company’s appeal against the assessments.
(2)	Best Judgment
186.	In the course of his submissions Mr Levine suggested that the assessments were not made to the best judgment of HMRC, as required by section 73(1) of the 1994 Act. The question is whether the assessment made is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable. Given the information available to Carolyn Sprigg at the time the assessment was made, in our view she did her honest best. She was entitled to assess on the basis that the Megaweb and Chartclip invoices did not represent VATable supplies because of the serious doubts which had arisen in relation to them.
(3)	The Company’s Purpose and Dishonesty
The Megaweb Invoices
187.	We have found that, to a high degree of probability,  the Megaweb invoices were false. We can see no purpose for their production and inclusion as supporting the VAT returns and other statements supplied to HMRC other than to evade VAT.  That purpose was, in our view, that of the directing mind of the company in relation to its VAT Returns and therefore a purpose of the company.
188.	The presentation of fictitious invoices and the signing of a VAT Return which  he must have known was based on such invoices were in our view dishonest acts of Mr Abedin which cannot be explained simply on the basis of inexperience or reliance wholly on Mr Zaman. We found that the statements made by Mr Abedin in relation to the question of whether the company used outworkers (see paragraphs 158 to 160 above), the replacement of the Florentina invoices by the Megaweb invoices, and the words “to be built up” in Mr Zaman’s records indicate to a high degree of probability (although not beyond all reasonable doubt) a course of conduct which was dishonest and for the purpose of evading VAT.
The Chartclip Invoices
189	We have not been persuaded to the necessary high degree of probability that the Chartclip invoices were false. Neither were we persuaded necessary degree of probability that the company dishonesty, through Mr Abedin or otherwise, did any act or omitted to do any act for the purposes of evading VAT in relation to these invoices.
The Amount of the Penalty
190.	The additional tax assessed by the HMRC was computed in the following manner. 
191.	Mr Zaman’s “audited VAT schedules” for each period of 1998 were broadly in the following format:
				Gross		VAT	
Sales
Less VAT				A
(VAT in A)		X	
Net Work Done				B			
Sub-contractors (per invoices)				C		(Y)	
Overheads							
     Bank Receipts	S/R	D				(Z)	
	Z/R	E					
     Cash Payments	S/R	F					
	Z/R	G		H			
Less: VAT				I			
Net Cost 				J			
Net VAT payable						K	

192.	The amounts shown as input VAT on the standard rated overheads, Z, in each month correspond more or less exactly to the input tax deduction claimed in VAT return for that month. However, X – Y the figure which would have been the “net output tax” generally exceeds the output tax shown in the VAT returns.
193.	Mr Zaman compared for the year the amount of VAT due in accordance with his schedule (K) for each month with that shown on the VAT returns. The amounts K exceeded the net amounts on the VAT returns for each month and the aggregate underpayment was £15,682.09. This amount should broadly represent aggregate of the excess of X – Y over the output tax declared on the VAT returns for the year.
194.	The figures in Mr Zaman’s schedules for the sub-contractors’ invoices (C) correspond in total, and broadly by month, with the schedule of sub-contractor’s invoice amounts prepared by Carolyn Sprigg, although there are some timing differences (and, in one case, a duplication: Carolyn Sprigg’s schedule of invoices shows a duplication of a sub-contractor invoice for £14,304.51 in December.)
195.	Carolyn Sprigg prepared her assessment by increasing the output tax by the total of the amount of the sub-contractor’s input tax (Y) for each month so that it equalled X. In other words, effectively by treating all sub-contractor’s invoices as not representing VATable supplies made to the company. She compared X with the output tax declared on the VAT returns and assessed the excess of X over that declared. Mr Zaman’s £15,682.09 is derived in substance by comparing X-Y with the declared output tax (although in form he deducts from X-Y the overhead tax Z (which is broadly the same as that on the returns) and compares that with the net VAT declared due – from which Z has already been deducted). Her assessment therefore broadly consists of Y plus Mr Zaman’s £15,682.09.
196.	In her letter of 6 June 2001 in Quereshi & Co, Carolyn Sprigg indicates that this excluded the supply from Eurojoy Limited. That supply was a gross amount of £3,830.50 bearing VAT of £570.50. That supply, made on 15 December 1998 appears to us to have been reflected in Mr Zaman’s schedule of 4 December 1998 and, accordingly, to that extent, the revised assessment in relation to December appears to us to be excessive to the extent of £570.50 if the Eurojoy Limited supply is treated as a real supply to the company (and we accept that it should be). 
197.	HMRC’s assessment therefore comprises three elements:

(i)	an effective disallowance of VAT in respect of the Megaweb invoices. From Carolyn Sprigg’s schedules which were not disputed (and which also generally correspond on Mr Zaman’s audited returns so far as concerns the gross amount of the sub-contractor’s invoices) this amounts to:
(the aggregate figure of VAT input claimed on Mr Zaman’s schedules is 43,974.97)	

£43,317.83	
(ii)	a similar effective disallowance in respect of the Chartclip invoices which on the same basis amounts to:
Mr Zaman’s schedules for the second 6 months show this as £54,824.05).
	
£56,880.94	
(iii)	an amount in respect of the under declaration declared by Mr Zaman of:	£15,682.09;	
	and		
(iv)	a d   	a discrepancy arising from differences between Mr Zaman’s schedules on which Carolyn Sprigg prepared her assessment and the listed invoices combined with the allowance of the Eurojoy Limited invoice of:	

£(2,160.56)	
T A  A total of:	£113,720.30	

198.	The penalty assessed to the company of £113,720.30 (before mitigation) thus comprised each of these elements.
199.	We confirm the amount of the penalty (before mitigation) in respect of the Megaweb invoices namely  £43,317.83. We discuss mitigation at paragraphs 208 to 213 10 below but in relation to this element of the penalty find that it should be 10%. That means a net penalty of £38,986.
200.	So far as concerns the £15,682.09 notified by Mr Zaman, Mr Levine contends that this was a voluntary disclosure and implies that it should not attract a penalty. We note, however, that the disclosure was prompted by the visit of Mr Zussman, and that the visit was Mr Zussman’s second visit in relation to the company. It may also have been prompted by the doubts cast on the Florentina invoices by Mr Zussman at his first visit. In these circumstances we believe that and that some penalty is properly is exigible on this element of the assessment. In reaching this decision we were also influenced by the unresolved doubts over the method of preparation of the VAT returns (see paragraph 31 above), and the doubts which arise in relation to the veracity of the company’s accounting records (see e g paragraph 139, 143, 144, and the general approach indicated by the provisional invoices issues). We discuss the issue of mitigation more fully below, but in relation to this element of the penalty find that the penalty should be reduced by 80% (to £3,136) to reflect early disclosure.
201.	Mr Levine urged on us that Mr Zaman’s mistakes should not be blamed on Mr Abedin. But the errors in VAT returns identified by Mr Zaman’s audited figures were not explained or even shown to be wholly computational and, we find, derived from material supplied, or actions taken or directed, by Mr Abedin with the intention of dishonesty evading VAT. 
202.	In summary we confirm that a total penalty of £42,122 (after mitigation) would be appropriate were we determining the penalty on the company under section 60.
203.	In the light of our findings in relation to the Chartclip invoices we would allow he appeal in respect of the balance of the basic penalty were we determining the penalty on the company under section 60.
(4)	Section 61(1) VATA
204.	Mr Abedin was a director of the company. He is therefore a “named officer” for the purposes of section 61(1).
205.	Mr Abedin accepted on the taped interview that he was in charge and before us accepted that he ran the business. Mr Jamil confirmed that Mr Abedin gave the invoices to Mr Zaman.
206.	It seems to us that there may be others who bear or share some of the responsibility for the company’s conduct. Mr Zaman, on the evidence before us, certainly played a significant role in the preparation of the communications with HMRC. We are unable, however, to accept that Mr Abedin did not know what was going on, or that he did not directly, or indirectly, direct substantially all the company’s actions. The dishonest conduct giving rise to the attempted evasion was, we find, to a high degree of probability,  substantially attributable to him. We allocate 90% of the penalty appropriate to the company (see paragraph 203 above) to Mr Abedin. That would mean a penalty of £37,910.
10.	Section 70 – Mitigation
207.	Section 70 VATA 1994 provides that “where a person is liable to a penalty under section 60, 63…, [HMRC] or, on appeal, a Tribunal, may reduce the penalty to such amount (including nil) as they think proper”.
208.	This provision clearly gives the Tribunal jurisdiction to review the mitigation of a penalty imposed under section 60 but does not expressly give it in relation to section 61.
209.	However, in our view, our jurisdiction under section 61(5)(b) in relation to the “portion of the penalty” enables the Tribunal to consider issues of mitigation either under section 70 in relation to the basic penalty, or to apply a similar approach in relation to determining the relevant portion of the basic penalty to be recovered from the named officer under section 61(5)(b). An interpretation of the legislation which did not provide directly or indirectly for mitigation of the penalty imposed on the director, would not in our view be consistent with the Human Rights Convention or Community Law. The reasoning in paragraphs 171- 173 above applies equally in relation to mitigation. Our approach is thus on the alternative bases that either we should apply mitigation directly to any penalty, or that in determining the amount of the basic penalty to be apportioned we should have regard to the same issues as we would consider in mitigation. The result will be the same on either basis.
210.	This appears to be the approach adopted implicitly by the Tribunal in Qaisar 2003 (VAT Decision 18098).
211.	Mitigation under section 70 is, subject to the excluded matters in section 70(4), at large although it must be exercised judicially. The Tribunal is not bound by the approach of HMRC to mitigation. In determining the “amount… [we] think proper” we have taken into account the culpability of the second Appellant, the involvement of others, and that Appellant’s conduct in relation to the assessment. Below we have treated the penalty as comprised various elements as a means of determining the overall reduction to be applied to what we regard as the attributable basic penalty. 
212.	For the reasons set out above in relation to the £15,682.09 element of the penalty we found that it should be reduced by 80% to reflect early disclosure. In relation to the part of the penalty that relates to the Megaweb invoices we would reduce the basic penalty by 10%. These reductions are reflected in paragraphs 201 to 207 above.
11.	Result
213.	We find that the portion of the basic penalty to be apportioned to Mr Abedin is £37,910.
12.	Costs
214.	Mr Hyam, on behalf of HMRC, asked for an Order for costs if the HMRC were successful. We direct pursuant to section 29(1)(b) of the Tribunal Rules that Mr Abedin pay HMRC 75% of their costs. In setting this figure we have taken into account that Mr Abedin and his advisers produced much of their argument later in the day. This is not a criticism of Mr Levine who appeared relatively recently. We believe that earlier engagement with, and full disclosure to, HMRC could have reduced the scope for disagreement and saved costs of the hearing before us in particular in relation the Chartclip invoices. Taking that, and our decision over the Megweb invoices, the majority of the costs relating to section 60 and 61 VATA issues should be borne by Mr Abedin. Our figure of 75% represents a rough and ready apportionment. The costs are to be taxed if not agreed.
215.	This decision was unanimous.

CHARLES HELLIER
CHAIRMAN

RELEASED: 4 July 2005

LON/2002/314