20135
PENALTY — section 67(1)(c) VAT Act 1994 — is penalty invalid when raised against persons whose identity is not clear on the face of the invoice — no — did the Appellants, on the facts, issue the invoices — yes — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
					SURJIT CHATHA & RITA CHATHA	Appellants

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: Lady Mitting
	              John M Lapthorne 

Sitting in public in Birmingham on 4 October 2006, 7 & 8 December 2006 and 15 March 2007

Oliver Conolly, counsel, for the Appellants
 
Peter Mantle, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2007

DECISION

1.	The Appellants, Mr Surjit Chatha and his wife, Mrs Rita Chatha, appeal against a penalty in the amended sum of £6,665.15 imposed upon them under Section 67(1)(c) of the Value Added Tax Act 1994 and notified by Notice dated 2 August 2005.   The Commissioners have also issued the Appellants with a demand for recovery of a debt due to the Crown in the amended sum of £44,434.34 under Paragraph 5, Schedule 11 of the 1994 Act.  The Appellants originally sought to appeal against the demand and the penalty but the appeal against the demand was struck out at a preliminary hearing as the Tribunal had no jurisdiction to entertain such an appeal.  It was, however, directed by the Tribunal that the Tribunal could still consider whether the Appellants had any liability for the tax as a necessary condition for the imposition of the penalty.
2.	The Appeal originally came on for hearing on 4 October 2006 when Mrs Chatha appeared and requested an adjournment as her husband was in India attempting to recover relevant documents but whilst there had injured his back.  The adjournment was granted but extensive directions were issued as to documents, witness statements and particularly that, in the absence of exceptional circumstances, no further adjournment would be allowed.  Between hearings, the Appellants submitted, considerably out of time, a witness statement from a Mr Joginder Singh.  This statement was challenged by the Commissioners and the Tribunal had been led to believe that Mr Singh would be attending the hearing.  However when the hearing resumed on 4 October 2006, a further application for an adjournment was made on the grounds that Mr Singh’s passport had been water damaged as he was about to travel and a replacement would not have come through in time.  We refused the application for an adjournment but did allow his witness statement to be put in to evidence with a caveat as to how much weight we would attach to it.  Mr Conolly also applied for Mr Chatha to be allowed to give oral evidence, despite his not having submitted a witness statement.  Despite Mr Mantle’s objection, we granted this application on the basis that it would be inherently unfair to prevent an Appellant giving evidence in his own appeal because of a technical breach of a direction.  
3.	 The Commissioners called no oral evidence, having put in unchallenged witness statements from the following: 
	Sheila Sockett
	Eileen Foster
	Pauline Crinnion
	Howard Higgins
	Caroline Angus
	Deborah Daly
	David Poole
	Mark Sly

4.	Mr Surjit Chatha gave oral evidence for the Appellants, Mrs Chatha not attending the Tribunal, and the witness statement of Mr Joginder Singh was put into evidence.
The Legislation  
5.	VAT Act 1994, Schedule 11:
	“Para 5(2):	
Where an invoice shows a supply of goods or services as taking place with VAT chargeable on it, there shall be recoverable from the person who issued the invoice an amount equal to that which is shown on the invoice as VAT … 
	Para 5(3):
	Subparagraph (2) applies whether or not —
(a)	The invoice is a VAT invoice … or 
(b)	The supply shown on the invoice actually takes or has taken place, or the amount shown as VAT, or any amount of VAT, is or was chargeable on the supply; or 
(c)	The person issuing the invoice is a taxable person; 
and any sum recoverable from a person under the sub-paragraph shall, if it is in any case VAT, be recoverable as such and shall otherwise be recoverable as a debt due to the Crown.
Section 67(1)
In any case where —
(c)	an unauthorised person issues one or more invoices showing an amount as being VAT or as including an amount attributable to VAT, 
he shall be liable, subject to subsections (8) and (9) below, to a penalty equal to the specified percentage of the relevant VAT or, if it is greater or the circumstances are such that there is no relevant VAT, to a penalty of £50.”  
6.	An “unauthorised person” is defined as, inter alia, “anyone other than … a person registered under this Act” (Section 67(2)(a)).
The Companies
7.	The appeal concerns the trading activities of Mr and Mrs Chatha and five companies with which the Commissioners will say that they were involved, namely:
(1)	Cosmetic Enclosures (Birmingham) Limited (“Birmingham”)
(2)	Technocoating Limited (“Technocoating”)
(3)	Cosmetic Enclosures (Frostings) Limited (“Frostings”)
(4)	Cosmetic Enclosures (GB) Limited (“GB”)
(5)	Cosmetic Enclosures Limited (“CE”).
Birmingham, Technocoating and Frostings, we collectively refer to as “the three companies”.
8.	It is convenient to set out at this stage the pertinent details of each of the companies, the details being taken from the witness statement of Mark Sly of Companies House.
Cosmetic Enclosures (Birmingham) Limited
9.	This company was incorporated on 17 October 1997.  The directors were Mrs Rita Chatha from 17 October 1997 to 13 March 1998; Mr Surjit Chatha from 13 March 1998 to 19 September 1998 and Mr Joginder Singh, appointed 18 September 1998.  A Bhajan Singh was company secretary from 17 October 1997 to 19 October 1998 and Surjit Chatha appointed 20 October 1998.  The company was struck off on 9 November 1999.  Its registered office was the Chathas’ home address, 2 Lake Close, Walsall. 
Technocoating Limited
10.	This company was incorporated on 25 October 1999.  Its directors were Mrs Rita Chatha from 25 October 1999 to 15 May 2000; Harvinder Chahal from 27 January 2000 and Darshan Chatha from an unknown date to 30 May 2000.  The company was struck off on 4 December 2001 and its registered office was 60 Bridge Street North, Smethwick.
Cosmetic Enclosures (Frostings) Limited
11.	This company was incorporated on 10 February 1999 and struck off on 27 June 2000.  The only named director is Rita Chatha, date of appointment unknown but resigned 31 July 1999.  It did not have a company secretary.  Its registered office was 2 Lake Close.
Cosmetic Enclosures (GB) Limited
12.	This company was incorporated on 23 July 1998.  It had no directors or company secretary and was struck off on 20 June 2000.  Its registered office was Bridge Street.
Cosmetic Enclosures Limited
13.	This company was incorporated on 30 May 2000 and struck off on 5 March 2002.  Its only named director was Rita Chatha, appointment unknown but resigned 2 January 2001.  Mr Harvinder Singh Chahal was appointed company secretary on 2 January 2001, date of resignation unknown.  Surjit Chatha was company secretary from a date unknown until resignation on 2 January 2001.  The registered office was Bridge Street.  
14.	All the companies were struck off the Register of Companies under Section 652 Companies Act 1985.  It will be noted that not all the companies had appointed officers and it should also be noted that although Mr Chatha was an officer of a number of them, he was in fact disqualified from acting as director or officer of a company for seven years from 25 August 1998.  The trading address for all the companies was Bridge Street.  
15.	The only companies to be VAT registered were GB and CE.  CE was registered with effect from 1 July 2000, the application for registration being signed by Surjit Chatha.  The company never accounted for VAT.  GB was registered with effect from 1 September 1998, the application for registration being signed by Rita Chatha.  Neither did this company ever account for VAT.
The Invoices
16.	The case arises out of the issue of a number of invoices.  The invoices were all in identical format.  In the top left hand corner, they bore a logo, an intertwined “C” and a little “e”, under which was printed “Specialists in the Vacuum Metalisation of Plastic Cosmetic Enclosures”.  In the top right hand corner, they all bore the name “Cosmetic Enclosures” giving the address of 60 Bridge Street North and the telephone and fax numbers of those premises.  The only difference between the invoices was to be found in a single line of small print at the foot of each.  One set bore the company registration number of Birmingham.  These invoices are referred to as the “Birmingham invoices” of which there were 20 dated between 7 January 1998 and 10 January 2000.  The second set, of which there were 75, bore the company number of Frostings (the “Frostings invoices”) and these dated from 1 April 1999 to 11 November 1999.  The third set bore the company registration number of Technocoating and also the company name.  There were 27 of these (the “Technocoating invoices”) dated from 10 January 2000 to 31 July 2000.  The description of the supplies in the invoices were broadly similar.
17.	None of the three companies were registered for VAT but every invoice bore an element of VAT.  It was not in dispute that the invoices were all issued.  Apart from certain invoices to Scott Closures, no invoice displayed a VAT number.
18.	The only records which the Commissioners ever saw were two Frostings invoice books and the invoices forming the basis of the Commissioners’ assessment were those contained in these invoice books and others which the Commissioners managed to uplift from customers.  There may well have been other invoices of which the Commissioners have no knowledge.
19.	It was the Commissioners’ case that these invoices, although purporting to be issued by the three companies, were in fact issued by Mr and Mrs Chatha.
The Commissioners’ Evidence
20.	Mrs Sheila Sockett began an investigation into the trading activities taking place at 60 Bridge Street North in late 2000.  The Commissioners had identified over the past few years a pattern of limited companies registering for VAT from this address.  They would trade for a short period and then cease or be liquidated but would always be replaced by a new company.  The companies appeared to trade under the generic name of Cosmetic Enclosures and Mrs Sockett’s aim was to establish the VAT liability of the trading activity taking place at the premises.  At the time she began her investigation, there were four VAT registered companies trading from the premises, namely CE, GB and two further companies called Technobrand Limited and Technodeal Limited.  CE and GB had rendered no returns and paid no VAT.
21.	Mrs Sockett made her first visit on 14 December 2000 and it was unannounced.  She found no directors on site but she was told that Technocoating trading as Cosmetic Enclosures had been wound up by the DTI and she was shown a copy of a pre-printed letter to that effect, signed by Mr Chatha and giving his telephone number as a contact number.  Mrs Sockett returned the next day when she did see Mr Chatha.  He told her that he was no longer an officer of any of the trading companies but that he was familiar with them.  Cosmetic Enclosures had ceased to trade, he said, around September 2000 and they were now experimenting with a new lacquering process.
22.	Mrs Sockett had ascertained that a company called Scott Closures International Limited was a customer of Cosmetic Enclosures and she raised a reference to Scotts which was dealt with by Mrs Crinnion.  Mrs Crinnion visited Scotts on 16 January 2001 and saw its finance director, Mr Elliott.  She was told that Scotts had begun trading with Cosmetic Enclosures in June 2000 although initial contact had been made in 1996 and formal contact in 1999.   His contacts at Cosmetic Enclosures were Surjit and Rita Chatha and the phone was always answered “Sergico”.  Mr Elliott was able to produce a complete set of invoices dated June to December 2000 from Cosmetic Enclosures and he said that payments were always made by cheque payable to Cosmetic Enclosures.  Initially the invoices had not displayed a VAT number, although VAT had been charged.  Mr Elliott had queried this and thereafter the invoices bore a stamp with a VAT number on.  An analysis of the invoices showed they consisted of four different numbering sequences.  Two of the sequences were printed with the company number of Technocoating but had been overstamped with the VAT number of GB.  Other invoices bore the CE VAT numbers.  We were referred to one invoice bearing the GB VAT number but the overstamp read “Cosmetic Enclosures Limited”.
23.	Mrs Sockett made her next unannounced visit to the premises on 19 February 2001.  She again saw Mr Chatha who told her, contrary to what he had said previously that Cosmetic Enclosures was in fact trading.  The only available records were a few sales ledger cards from which Mrs Sockett identified some of the customers being supplied.  She raised a further reference in relation to a company called Pet Tech Limited.  This company was visited by Mr Higgins.  He checked all their invoices which were headed “Cosmetic Enclosures” and scheduled them.  They ran from January 1998 to August 2000 and between them displayed the company registration number of all five companies.  
24.	As no records had been available on 19 February, Mrs Sockett made an appointment to see Mr Chatha again when she was told that he would have the records available for her.  The appointment took place on 9 March but the only records made available to her were two pre-printed sales invoice books and the corresponding pre-printed delivery books.  On the front covers of the invoice books, there had been written “Cosmetic Enclosures invoices” and the customer’s name.  The company number on both sets of invoices was that of Frostings.  On this visit, Mr Chatha also told Mrs Sockett that the wages would be paid either by himself or his wife and he gave Mrs Sockett an example of the payroll which was in the name of Frostings.  He told her the premises were owned by him, as was all the machinery, for the use of which he was paid £100 per week.  On her return to the office after this visit, Mrs Sockett received a phone call from Mr Chatha who told her that the incorrect company number had, in error, been printed on the queried sales invoices.
25.	A further meeting between Mrs Sockett and Mr Chatha took place on 9 April 2001.  Mr Chatha confirmed that Cosmetic Enclosures continued to trade and that he was in overall charge of production.  Until now, Mr Chatha had never made mention of anyone else being involved in the Cosmetic Enclosures business, other than himself and his wife.  However, in connection with a discussion about banking, Mr Chatha said that he was awaiting the return from India of his wife, Joginder Singh and a Punam Singh who would sign the mandate which Mrs Sockett was seeking.  Even with the mention of Mr J and Mr P Singh, there was no reference or suggestion that either of them were involved in the operation of the business.  
26.	In May 2001, Mrs Sockett visited Mrs Patel who ran the payroll for Cosmetic Enclosures.  It was ascertained that in tax year 99/00, the payroll for weeks 1 – 35 was run in the name of GB but Mrs Patel was then told to operate it through Frostings.  For weeks 36-52 it was in the name of Frostings.  For tax year 00/01, it was run in the name of Frostings for the entire year and for 01/02, in the name of Cosmetic Enclosures.  
27.	In December 2001, Mrs Sockett visited Mr and Mrs Chatha at their home to discuss further how the business operated.  She was particularly interested in Frostings and GB, which, given the absence of officers, had never been properly constituted at Companies House.  Mr Chatha told Mrs Sockett that Frostings had been formed because they had developed a new coating process that they wanted to separate from the remainder of the Cosmetic Enclosures group but in the event the company never traded.  Mrs Sockett pointed out that invoices had been issued bearing the Frostings company registration number and the PAYE scheme had been set up in Frostings’ name.  Mr Chatha’s response was that when Frostings and GB had been formed, bank accounts had been set up in respect of each, with the Allied Irish Bank in Erdington and he signed for Mrs Sockett a form of authority enabling her to visit the Bank and obtain details of the accounts.  There was also a general discussion about the trading ventures from Bridge Street.  Mr and Mrs Chatha had begun a new business in partnership selling flour.  A new company, Cosmetic Coatings Limited, had been formed and was being run by Mr Chatha’s brother along with Technobrand UK Limited.  It was Mr Chatha’s plan to transfer the business to younger members of the family in due course and Mr Chatha would then be in a position to withdraw from the engineering side of the business.
28.	The authority for the Commissioners to approach the Bank which had been provided by Mr Chatha was, on presentation to the Bank, returned as it should have been made out to the Bank of Ireland.  Mrs Sockett prepared a fresh and corrected authority which she sent to Mr Chatha on 23 January 2002 for completion.  It was never returned.  Mrs Sockett was therefore at no stage able to access any of the banking details of any of the five companies.  Neither did she see any records of any of them, other than the two invoice and delivery books which she saw on 9 March 2001.  Mrs Sockett also made enquiries of two other customers of Cosmetic Enclosures.  One such enquiry was directed to Mr Paul Lamb of Geka Manufacturing.  He told Mrs Sockett that in December 2001, he had dealt with a husband and wife team at Cosmetic Enclosures.  In October 2002, he was able to confirm that he was still dealing with Cosmetic Enclosures although they were now trading as Cosmetic Coatings Limited and he showed Mrs Sockett a letter dated 8 October 2002 signed by Mrs Rita Chatha announcing a change of name and that Cosmetic Coatings would henceforth be known as Universal Coatings to reflect an expansion of the company’s activities.  Secondly, she approached a Deborah Daly who was an accounts assistant at VR Plastics Limited from October 1997 to December 2000.  During that period, Mrs Daly dealt on a number of occasions with Cosmetic Enclosures.  In relation to any queries on the invoices, in the main, she dealt with Mrs Chatha and Mr Harvinder Chahal.
29.	On 28 March 2002, the bank mandate not having been returned, Mrs Sockett wrote to Mr and Mrs Chatha setting out her concerns about GB and Frostings and concluding that as neither company was properly constituted, the trading which was being conducted in their names was in fact proper to the Chathas personally and as such they were liable for any VAT charged on the invoices.  Mr Chatha replied on 22 April 2002 to the effect that Frostings had been set up for his nephew for frost spraying and the books had been preprinted for that company.  The secretary had, in error, begun to use these books without checking the company details.  Mr Chatha said that he had no involvement with Frostings or its bank accounts and any further enquiries should be directed to Harvinder Chahal.  This was in direct contradiction to what Mr Chatha had told Mrs Sockett in December 2001 when he had put himself forward as being able to sign a bank mandate for Frostings’ bank accounts.  There had at that time been no mention of Mr Chahal having any connection with the business.  Mrs Sockett later attempted to trace Harvinder Chahal, Joginder Singh and Bhajan Singh but none of them could be traced to the addresses given to Companies House.
30.	Mrs Sockett could see invoices for all five companies being issued from Bridge Street but all apparently reflecting one trading activity.  Three companies had issued invoices including VAT but they were not VAT registered and no VAT had ever been accounted for.  The remaining two companies she believed to be invalid as they were not properly constituted and were therefore in her view trading illegally.  She believed that Mr and Mrs Chatha were controlling all five companies and were responsible for the tax due on the invoices.  She initially made a calculation of the tax due on the invoices of £114,967.  After a reconsideration, a replacement decision was issued limiting the Chathas’ liability to the three non registered companies but Mrs Sockett’s calculation had included a best judgment estimate where there were gaps in the sequences of invoices and on yet a further reconsideration by Mrs Foster, it was decided that such an approach was incorrect in the collection of a debt due to the Crown rather than an assessment to VAT.  Mrs Foster took the view that to calculate the amount of debt due to the Crown, one should only look at the available invoices and the demand was thus reduced again to £44,434.34 and the accompanying penalty to £6,665.15.
31.	We were taken by Mr Mantle through the correspondence which had been exchanged between the Commissioners and the Appellants and their representatives.   We need not set it out in detail but we should refer to some pertinent points.  By letter dated 5 February 2003, Messrs Challinors Lyon Clark maintained that during the period covered by the demand, Mr Chatha had not been a director of any of the five named companies.  This was clearly incorrect as Companies House records show he was a director and company secretary of Birmingham and company secretary of Technocoating.  By letter dated 1 August 2003, Challinors maintained that the invoices were all issued by or on behalf of the companies (this will be seen to be in conflict to the oral evidence which Mr Chatha later gave to the Tribunal).  By letter dated 27 January 2004, Mrs Chatha contended that she had only been a director of one of the companies, resigning soon after being appointed and that she had nothing to do with the trading side of the business.  This also was incorrect as she had been a director of Technocoating for seven months; a director of Frostings and CE for an unascertainable length of time; and a director of Birmingham for five months.
32.	By letter dated 3 February 2004, Mr Chatha again denied being a director of any of the companies although did agree that he worked for some of them.  By letter dated 10 June 2004, Challinors said that Mr Chatha had informed them that Mr Joginder Singh had three boxes of purchase invoices and delivery notes in relation to Birmingham and a letter purporting to be from Mr Singh was received in July, appearing to reinforce this (again it will be seen that this has to be in conflict with Mr Chatha’s oral evidence that Birmingham never traded).
33.	On 9 August 2005, Mrs Foster received a telephone call from Mrs Chatha offering to pay the debt for the invoices issued whilst she was a director of Technocoating and Birmingham.  She also offered to pay the entire debt for Frostings.  Mrs Chatha admitted to a limited involvement in the business on the sales side.  
34.	Mr and Mrs Chatha wrote a joint letter to Mrs Foster on 23 August 2005 agreeing to pay the entirety of the debt for Frostings.  They explained the company had never been meant to trade but they had made an error in leaving the invoice books available for use when they left the company and these had been used in error by Joginder Singh.  They asked for the debt in relation to Birmingham and Technocoating to be reviewed and amended to cover the period of their involvement with those two companies.  They only played an active role up to the date of their resignation as officers.  A similar letter was written on 5 September 2005, this time promising payment in respect of Frostings within three weeks.  No payments were ever received.
The Appellants’ Evidence
35.	Mr Chatha told us that Cosmetic Enclosures had started trading some years previously under the company name of Cosmetic Enclosures (UK) Limited.  This company stopped trading in July 1998.  The three companies, Birmingham, Technocoating and Frostings had each been set up with a specific purpose which, as it happened, never materialised.  Birmingham had been set up to metalise caps for Boots but Boots took their business to Spain.  Frostings had been set up to provide frosting services but it was found that the local authority would object to the use of the chemicals involved in the process.  Technocoating was set up to coat or plate plastic caps but, for reasons which were not explained to us, this did not materialise either.  The companies were set up separately because if there was a product recall, damage would be limited to that particular company rather than to the entire enterprise. 
36.	Prior to October 1998, Mr Chatha had been involved with Birmingham but not thereafter.  The company never traded and if any invoices were issued by Birmingham it would have been done in error by the group secretary, Mrs Kaur.  
37.	In August 1998, Mr Chatha was disqualified from acting as a director or other officer of any limited company.  At the same time, he left his wife Rita and returned to live with his first wife with whom he moved to Canada at the end of 1998.  Approximately every fifth week, he would return to England for ten days or so to see Mrs Rita Chatha and his children.  When Mr Chatha moved to Canada, he told us that he took the view that his wife, Rita Chatha, would not be able to cope on her own so he gave away his business interests.  Technobrand he gave to his brother; Technodeal to his brother in law and the Cosmetic Enclosures business he gave to Joginder Singh and Mr Chahal.  Mr Singh’s involvement would have been with production, delivery and ordering.  However, it was felt that for business reasons, it was important that the customers did not know of the change of ownership and it was decided therefore that externally it would be made to appear that everything was as it always had been with Mr and Mrs Chatha still in charge and running the company.  Mrs Chatha would continue to deal with sales and new job enquiries and it was arranged that any audits by potential new customers would take place when Mr Chatha was present.  Rather than transfer ownership of the existing company, Cosmetic Enclosures (UK) Limited, Mr Chatha decided it would be preferable to make a fresh start and he therefore formed GB to take forward the Cosmetic Enclosures business.  Technoplating had been set up for Mr Chatha’s nephew, Harvinder Chahal and neither Mr nor Mrs Chatha had any involvement with this company.  This company never traded either although pre-printed invoice books were put in place.  Any invoices issued in the name of Technoplating would have been issued by Harvinder Chahal, Joginder Singh or Mrs Kaur.  Any invoices issued in the name of Frostings would have been issued by Mr Singh and the first Mr Chatha knew of the issue of Frostings invoices was when Mrs Sockett visited.  Mrs Rita Chatha had by now set up her own business dealing with flour, a company called Canada Gold.  Because this was being run from the same premises, she would always be on site.  
38.	In cross-examination, Mr Chatha accepted that prior to October 1998 he was in control of all the companies in the group.  He accepted that a number of the Birmingham invoices were issued whilst he was in control but denied any personal responsibility for them.  They would have been issued by Mrs Kaur in error.  He told us that he had instructed Mrs Kaur that she should have rubber stamped all the invoices with the VAT number on, but she clearly had not done so.  He was asked by Mr Mantle what influence he continued to exercise over Cosmetic Enclosures after his departure for Canada.  He told us that it was in his interest for the entire business operation to be successful because he owned the premises and the machines and the various companies were responsible for paying the outgoings on the premises.  Technobrand paid the council tax; Technodeal paid the insurance and ground rent; Cosmetic Enclosures Limited paid for the electricity, gas and water.  He accepted that he talked to his wife and children every day and that he would return to Bridge Street every time he was back in England and would be contacted if there was a major problem.  He accepted that when Scotts picked up the problem that VAT was being charged on invoices bearing no VAT number, he was consulted.  
39.	In answer to questions from the Tribunal at the conclusion of his evidence, Mr Chatha confirmed that none of the three companies, Birmingham, Technocoating or Frostings, had ever traded and he also accepted that no invoices should have been issued in their names.  He confirmed that the inadvertent use of incorrect invoice books was the sole reason why invoices were issued in the names of any of these three companies and that that explanation held in relation to each and every invoice.  He concluded that “they should have checked but didn’t”.
40.	In Mr Joginder Singh’s witness statement dated 11 November 2006, he stated that he had been involved in Birmingham and Frostings and that all invoices issued in the names of those two companies were issued under his instruction.  It was totally his mistake that the wrong invoice books were used.  However, his secretary (Mrs Kaur) was using a rubber stamp with which the VAT number was stamped onto the invoices which were issued and he was quite legally paying the VAT each quarter.  As he was paying the VAT assessments, it really did not matter how many invoices were being issued.  He concluded by saying that he was fully responsible for any monies due during his involvement with the companies.
Case Law
41.	We were referred by Mr Conolly to the following cases:
National Westminster Bank plc v Inland Revenue Commissioners 1994 STC 580
Travis John Pratt v Commissioners of Customs and Excise 17718
WJ Ward v Commissioners of Customs and Excise  15713
Submissions
42.	Mr Conolly raised the meaning of the word “issue” arguing that it was not an ordinary word but that it carried with it a connotation of technicality that in the context of issuing a document, it implied that certain formalities were required of the process.  It was agreed by both parties that the word had to be construed according to its statutory context (National Westminster Bank plc).  In the context of the VAT legislation, we would be construing it in a business, economic sense and it appeared to be common ground that an invoice would be issued when it was sent out.  
43.	Mr Conolly’s submissions were threefold.  First, that the demand under Paragraph 5 Schedule 11 and the Section 67 Penalty Notice were both invalid because they had been raised against persons other than those identified on the face of the invoices, these being the only people against whom such a demand could be made.  Secondly, that if that submission failed, the Commissioners were committed to the unsustainable proposition that the invoices were sham.  Thirdly, that to identify, as a matter of fact, who issued the invoices was incoherent and unworkable.  
44.	The first submission was thus that Paragraph 5 is only intended to be used where the person on whom the demand is made is the same person as that identified on the invoices.  It is not intended to be used in relation to a person not identified on the face of the invoice.  Since the Paragraph 5 demand is therefore invalid, the penalty must fall away.  The Birmingham and Frostings invoices clearly bore the company registration numbers and Technocoating invoices bore the company name and number.  It could therefore only be those companies which had issued the invoices and against which a Paragraph 5 demand could be made.  In support of this contention, Mr Conolly highlighted the absence of any mechanism for the demand to be appealed within the VAT legislation.  He pointed to the right of the Commissioners to have assessed the companies under Section 73 and to have raised a penalty for dishonest evasion which could then have been apportioned to the Appellants, both these giving clear rights of appeal to the Tribunal.  Further, such a penalty under Sections 60 and 61 could be of any amount up to 100 per cent of the tax evaded whereas Section 67 penalties were capped at 15 per cent which would not be appropriate in cases where the Commissioners are alleging that individuals have manipulated corporate entities dishonestly.  If it were otherwise and the Commissioners were entitled to raise a Paragraph 5 demand against individuals not named on an invoice, there would be nothing to stop them raising such a demand, which could not then be challenged, against the officers of a solvent company which had met its VAT liabilities but which had committed some technical irregularity in complying with its company law requirements.  Mr Conolly cited in support of his interpretation the two Tribunal cases of Platt and Ward.  In both cases, Mr Conolly pointed to the underlying assumption by the Tribunal that the person who was named or identified on the invoice was the person who had issued it.
45.	 Responding to this contention, Mr Mantle pointed to the fact that there was no statutory requirement that the scope of Paragraph 5 should be so limited.  He made a clear distinction with the very detailed requirements of what a VAT invoice should contain (Regulation 14 Value Added Tax Regulations 1995), including at Regulation 14(d) the name, address and registration number of the supplier.  An invoice for the purposes of Paragraph 5 was not the same as a VAT invoice and had parliament intended such requirements for an “invoice” they would have so provided.  Mr Mantle also pointed to the lacuna which Mr Conolly’s interpretation would open up in cases where someone draws up an invoice but omits a name or makes up a fictitious name or uses someone else’s name.  Such a person could, if Mr Conolly were correct in his interpretation, escape liability and further, a perfectly innocent person named on the face of the invoice could find himself facing a Paragraph 5 demand.  Mr Conolly responded to this by suggesting that if an invoice were to have been drawn up in the name of a fictitious person, for the purposes of Paragraph 5 no one would have issued it and it would not be open to the Commissioners to make any demand under that paragraph.  There would however be no lacuna because it would be fraudulent and would thus fall automatically within the criminal law.
46.	Mr Conolly’s secondary submission was that if the Commissioners were to issue an assessment in relation to supplies which purported to be made by a company, but issued the assessment not to the company but to the directors thereof, then the Commissioners would have to allege that the invoices were a sham.  Mr Conolly submitted that there was no relevant distinction between that example and what the Commissioners had in fact done here, in making a demand against the “controlling minds” under Paragraph 5.  A sham document has to be created by all parties to a transaction but that was not the case here because the customers who purchased the goods had no such intentions.  The invoices were not therefore sham.
47.	Mr Mantle submitted that the Commissioners did not have to prove that the invoices were sham, all they had to prove was that it was the Chathas who had issued them.
48.	Mr Conolly’s third contention was that the factual analysis upon which the Commissioners appeared to have based their thinking was so confused and unclear as to be unworkable.  Further, that on an analysis of the facts, there was not sufficient evidence from which to conclude that the Chathas had issued the invoices.  
49.	It was Mr Mantle’s contention that the issue before the Tribunal was essentially one of fact and, having answered in detail, Mr Conolly’s submissions on the law, the evidence was such to show the invoices had been issued by the Chathas.  Mr Mantle accepted the Commissioners bore the burden of proof and put the issue before the Tribunal as whether the Commissioners had proved, on the balance of probabilities, that the Chathas had issued the invoices. 
Conclusions
50.	We need to address first precisely how Section 67(1)(c) should be interpreted.  Should it bear the very limited construction advocated by Mr Conolly, namely that liability under both sections can only attach to a person (natural or legal) whose identity is clear on the face of the invoice.  We do not accept this limited construction. First, not only is there no suggestion in the wording of Paragraph 5 or Section 67(1)(c) that such a limitation was intended, neither is such a limitation either hinted at either in the sections themselves or in any definition clause – contrast the requirements of a VAT invoice as defined and as set out in Regulation 14 of the VAT Regulations 1995.  Section 67(1)(c) imposes a liability on any unauthorised person who issues one or more invoices showing an amount as being VAT.  Nothing can be read into that wording to suggest that the identity of the issuer has to be clear on the face of the invoice.  Secondly, it cannot be denied that the limited approach opens up a lacuna.  If this were a correct approach, someone drawing up an invoice in the name of someone else or in a fictitious name would escape liability and this cannot have been intended.  It would be highly unsatisfactory that the Commissioners should be barred from pursuing the relatively straight forward option of Paragraph 5 and Section 67 and have to fall back on the criminal justice system.  Mr Conolly’s argument presupposes that in every case where someone else’s name is used, there is going to be dishonesty or fraud sufficient to found a criminal prosecution.  This is not inevitably going to be the case and there are going to be circumstances where the issue of an invoice by someone whose name does not appear on the face of it, is not dishonest.  It could arise from an honest mistake or be the result of innocent confusion over technicalities, for example the identity of the person making the supply.  Thirdly, a demand under Paragraph 5, whilst not appealable to the Tribunal, is of course open to judicial review so the recipient of such a demand is not going to be left without redress.
51.	We do not believe the cases of Pratt and Ward take the matter much further.  Ward concerned a Section 60 penalty for dishonest evasion of VAT in circumstances where the invoices appeared to have been issued by a company which was identified by name on the invoices but was unregistered.  The Tribunal took the view that the Commissioners had been wrong to deal with the matter under Section 60 and it would have been more appropriate under Paragraph 5, Schedule 11 and Section 67, as what had been obtained by the company (being unregistered) could not properly be described as VAT.  In Pratt, the Commissioners issued a Section 67 penalty in circumstances where invoices were drawn up in the name of a business by a Mr Wilson whose role within the business was not clear.  The Appellant described him as a partner but Mr Wilson described himself as an employee.  The Tribunal concluded that he was a partner.  The invoices included an amount shown as VAT but the Appellant was not registered.  The Tribunal found that although the invoices were drawn up by Mr Wilson, he was acting with the Appellant’s agreement and on behalf of the business and the invoices were, therefore, for the purposes of Section 67(1)(c) issued by the Appellant.  It is certainly correct that in both these cases the invoices bore the identity of the person whom the respective Tribunals found to have issued them.  It cannot, however, follow that because that was so in these two cases, it must invariably be so in all cases.
52.	Neither do we accept that the Commissioners have to show the invoices were a sham.  We offer no criticism of Mr Conolly in putting forward his submission in the way in which it was worded because he was merely picking up on the rather confused thinking of the Commissioners during the course of the investigation.  As we now understand the position, the Commissioners are not maintaining that liability lies on Mr and Mrs Chatha because they were the controlling minds of the companies but because on all the facts and in all the circumstances, including their involvement with the companies, they are seen as the persons responsible for the issue of the invoices.  Under these circumstances, it is not necessary for the Commissioners to demonstrate that the invoices are a sham.
53.	Having rejected the contention that the penalty was invalidly raised, the issue before us and which we now address is whether, on the evidence which we have before us, the Commissioners have shown on a balance of probability that Mr and Mrs Chatha issued the invoices in question.  That they were unauthorised persons is not in doubt as they were not registered.  The matter before us, therefore, is whether they issued the invoices and this we believe to be a matter of fact.  
54.	The three companies never traded and yet invoices were issued in their name, or more accurately in respect of Birmingham and Frostings, in their number.  The supplies evidenced by the invoices were made by the Cosmetic Enclosures business but not by these companies.  The invoices in question were issued over a two and a half year period without any gaps.  On the same day, the Birmingham invoices ceased, the Technocoating ones began.  The Birmingham invoices continued even after the company had been struck off.  The Frostings invoices were to a large extent issued when the company demonstrably had no officers.  It is possible it never had any because, although Mrs Chatha is shown as resigning on 31 July 1999, there is no evidence of her appointment.  It is the Commissioners’ contention that the companies were in effect a front for the issue of the invoices and, on the face of it, in the light of the above, that appears likely.  There is other evidence that the company names were used in circumstances where they should not have been.  Mrs Patel told the Commissioners that the payroll from week 36 of the tax year 99/00 (roughly the date of incorporation of Frostings) through to April 2001 (well after the company was struck off) was in the name of Frostings, a company which as it had never traded, would never have had employees.
55.	It was Mr Chatha’s evidence that, in all cases, the invoices were issued in error through the accidental and incorrect use of the invoice books for these companies.  This was the fault of Mrs Kaur and had never been picked up.  It is hardly credible that this would occur continuously over such a lengthy period.  It is also of note that the Birmingham invoices were being issued for getting on for 12 months before Mr Chatha left for Canada and whilst he was still, by his own admission, very much in control.  
56.	Mr Chatha maintained that once he left for Canada, he basically had distanced himself from the business to the extent that he no longer had much of a hand in it and certainly no longer any control or influence, control having been passed on to various relatives with the formation of new companies.  This, however, is belied by much of the evidence put before us.  We know that Mr Chatha returned to England every fifth week for about ten days but even in between times, he was in daily telephone contact with Mrs Chatha.  When he was in England, he went into the Bridge Street premises.  We know this both from his own evidence and also from Mrs Sockett.  On her first unannounced visit on 14 December 2000, she was told Mr Chatha would be on the premises the following day and he was.  An unannounced visit was made on 19 February 2001 when again Mr Chatha was on site.  He accepted in evidence that he was to be consulted over any problems that arose, even when he was in Canada – witness his evidence that he “vaguely remembered” being consulted when Scotts queried the absence of the VAT number on their invoices.  Mr Chatha retained ownership of the premises and of the machinery.  Mrs Chatha continued to run her own business from the premises and the evidence is that one or other of them paid the wages.  The customers approached by the Commissioners all gave evidence that they dealt with Mr or Mrs Chatha and Mr Chatha would insist on being present on an audit by a new customer.  Mrs Chatha continued in her role on the sales side.  We also note that Mrs Chatha signed the VAT registration application in respect of GB and that Mr Chatha signed it in respect of CE on 29 June 2000.  It was Mrs Chatha who wrote to Geka on 8 October 2002.
57.	In his dealings with the Commissioners, Mr Chatha held himself out throughout as being not only fully informed about all aspects of the Cosmetic Enclosures business but actually in overall charge (meeting of 9 April 2001).  He signed the bank authority in relation to the bank accounts for GB and Frostings.
58.	What of Mr Joginder Singh?  His witness statement was admitted in evidence, and it appears from this that Mr Chatha’s case is that Mr Singh was responsible for the issue of all the invoices in respect of Birmingham and Frostings.  In the same witness statement, however, Mr Singh maintains he paid all the VAT assessments.  In fact, he paid no VAT.  In earlier dealings with the Commissioners he claimed to have boxes of records in respect of Birmingham which he would deliver to the Commissioners.  Birmingham never traded so there would be no such records and of course they were never delivered.  In view of these false assertions, we feel little credibility can be attached to the remainder of his evidence and specifically to his assertion that he was responsible for the issue of the invoices.  No evidence was produced as to his actual involvement with the two companies.  He was never an officer of Frostings and although he was a director of Birmingham from 18 September 1998, only one of the Birmingham invoices was issued in the period in which he was a director.
59.	Mention has been made of Mr Harvinder Chahal’s involvement in the business but no evidence was put forward as to its extent and there was certainly no indication that he was responsible for the issue of any of the invoices.  We also just note that it is perhaps unfortunate that not only did we hear no evidence from him but neither did we hear evidence from Mrs Kaur who may have been able to corroborate Mr Chatha’s assertion that the invoices, which were drawn up by her, were accidentally issued in the way described. 
60.	The evidence is overwhelming that Mr and Mrs Chatha’s involvement with all the businesses trading under the Cosmetic Enclosures umbrella never lessened.  They would appear to have retained active control throughout and it is inconceivable to us that these invoices were issued other than with their full knowledge and authority.  In the light of all the evidence, we find that Mr and Mrs Chatha were responsible for the issue of the invoices in question and as such they are liable for the penalty raised by the Commissioners and which is the subject of this appeal.  The appeal is therefore dismissed.
61.	Both parties indicated that in the event of their being successful, they would make an application for costs.  Each advocate challenged the other’s application.  We therefore reserved the issue of costs with liberty to apply to the Tribunal by written submission if incapable of agreement between the parties.  We therefore suggest that if the Commissioners wish to pursue their application for costs, they should make application to the Appellants and if, incapable of agreement, then application to be made to the Tribunal within 28 days of the release of this decision, such application to be backed up by written submission.  The Appellants are then given ten days thereafter to put in a submission in reply. 

LADY MITTING
CHAIRMAN
Release Date: 26 April 2007
MAN/05/0701