20877

CIVIL EVASION PENALTY – paying centrally issued assessment of £421 when the correct liability was over £3m – whether for the purpose of evading VAT – yes – whether dishonest – yes – appeal dismissed

LONDON TRIBUNAL CENTRE

	PATRICK CONLON	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
					RANBIR SURI

Sitting in public in London on 21 July 2008

The Appellant in person

Alan Payne, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	Patrick Conlon appeals against a decision dated 11 October 2005 to apportion a penalty of £618,791 to him as director of Kundara (LPH) Limited (“the Company”) under s 60(1) and 61 of the VAT Act 1994.  The Appellant appeared in person, and the Respondents (“Customs”) were represented by Mr Alan Payne.  We issued an interim decision to the parties on 1 August 2008 and invited further submissions from Customs on two points, which we deal with below.
2.	The relevant statutory provisions are:
“60 VAT evasion: conduct involving dishonesty
(1) In any case where—
(a)     for the purpose of evading VAT, a person does any act or omits to take any action, and
(b)     his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability),
he shall be liable, subject to subsection (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct.
…
61 VAT evasion: liability of directors etc
(1) Where it appears to the Commissioners—
(a)     that a body corporate is liable to a penalty under section 60, and
(b)     that the conduct giving rise to that penalty is, in whole or 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”),
the Commissioners may serve a notice under this section on the body corporate and on the named officer.
(2) A notice under this section shall state—
(a)     the amount of the penalty referred to in subsection (1)(a) above (“the basic penalty”), and
(b)     that the Commissioners propose, in accordance with this section, to recover from the named officer such portion (which may be the whole) of the basic penalty as is specified in the notice.
(3) Where a notice is served under this section, the portion of the basic penalty specified in the notice shall be recoverable from the named officer as if he were personally liable under section 60 to a penalty which corresponds to that portion; and the amount of that penalty may be assessed and notified to him accordingly under section 76.
(4) Where a notice is served under this section—
(a)     the amount which, under section 76, may be assessed as the amount due by way of penalty from the body corporate shall be only so much (if any) of the basic penalty as is not assessed on and notified to a named officer by virtue of subsection (3) above; and
(b)     the body corporate shall be treated as discharged from liability for so much of the basic penalty as is so assessed and notified.
(5) No appeal shall lie against a notice under this section as such but—
(a)     where a body corporate is assessed as mentioned in subsection (4)(a) above, the body corporate may appeal against the Commissioners' decision as to its liability to a penalty and against the amount of the basic penalty as if it were specified in the assessment; and
(b)     where an assessment is made on a named officer by virtue of subsection (3) above, the named officer may appeal against the Commissioners' decision that the conduct of the body corporate referred to in subsection (1)(b) above is, in whole or part, attributable to his dishonesty and against their decision as to the portion of the penalty which the Commissioners propose to recover from him.
(6) In this section a “managing officer”, in relation to a body corporate, means any manager, secretary or other similar officer of the body corporate or any person purporting to act in any such capacity or as a director; and where the affairs of a body corporate are managed by its members, this section shall apply in relation to the conduct of a member in connection with his functions of management as if he were a director of the body corporate.”
3.	We heard evidence from the Appellant, from officers Neil Rintoul, the case officer, Peter Curwen, Senior Investigation Officer who took the decision to assess the penalty, and Colin Rupert Booker, Forensic Accountant to whom Mr Curwen passed the papers for his comments, and we had an unopposed witness statement from officer Alexander Gordon Speirs, and two from officer Jean Carol Robinson; and we had a bundle of documents.  We find the following facts:
(1)	The Company, called Roseberry Homes (Ealing) Limited until 27 May 2004, proposed to develop a property (“the Property”) in the Elephant and Castle, London SE 11, the London Park Hotel, into a block of flats.  The Company contracted to buy the Property in 2002 but was unable to obtain the finance.  The terms were renegotiated in 2003 into a lease of the Property at a rent of £600,000 pa with an option to purchase.  We should mention that we did not see any documents relating to the Property.  
(2)	According to the Appellant, the Company was owned as to 70 per cent by the Appellant and 30 per cent by another individual, but we notice from the accounts referred to below that only one share of £1 had been issued by 30 November 2003.  As part of obtaining finance for the development of the Property the shares were agreed to be sold (but were never transferred) to an Irish company Kundera Limited of which 50 per cent was owned by First Equity Group Limited and the remainder by the Appellant and the other shareholder in the same proportions as before.
(3)	Funding for the proposed development of the Property could not eventually be obtained and the Company decided to sell the Property.  A purchaser, the Urban Regeneration Agency, was found but the Company had to purchase adjoining land from the London Borough of Southwark for £2m.
(4)	The Company applied for VAT registration on 16 March 2004 and at the same time waived exemption for the Property.  The registration form estimated the taxable supplies in the next year as £17m.  It was registered on 31 March 2004.  The option to purchase the Property was exercised and the Property was sold on 1 April 2004 with a VAT invoice being issued showing a sale price of £17,700,000 plus VAT of £3,097,500.  The Company did not have a bank account and all banking was carried out by an associated company, Roseberry Homes Limited, to which the net proceeds were paid after paying the London Borough of Southwark for the additional land.
(5)	The precise financial position of the Company at the time of sale is unclear.  During the hearing the Appellant produced audited accounts for the Company from 20 June 2002 to 30 November 2003 which showed no turnover, cost of sales of £2,438,019 [made up of land and building costs of £3,463,459 less closing work in progress (which we interpret as capitalised expenditure) of £1,025,440] and administrative expenses £17,329, making a loss for the period of £2,455,348.  The balance sheet shows stocks of the above figure of £1,025,440, debtors £567,168 [rent deposit of £500,000 and prepayments of £67,168], cash £1, and creditors £4,047,956 [bank loans £1,244,906, accruals £58,604 and due to Roseberry Homes Limited £2,744,446], making total liabilities £2,455,347 balanced by share capital of £1 and negative shareholders’ funds of £2,455,347.
(6)	The Company’s first VAT period ended on 31 May 2004 and the due date for payment was 30 June 2004.  No return was made at the time and on 16 July 2004 a centrally generated assessment was issued for £421 which the Company paid on 30 July 2004, the cheque being signed by the Appellant.  The Appellant is concerned with about nine other associated companies that were making monthly returns largely on time during this period.  Customs contacted the Company on 3 September 2004 and spoke to the Appellant on the telephone.  Their note says:
“I asked trader why he has paid the assessment amount for 04/04?  He said that his financial controller is on a holiday, so he paid the amount.  The financial controller, Dorothy Trill completes the returns.  He will ask her to complete the two returns and send them together.
(7)	Customs wrote to the Company on 8 December 2004 saying they would visit the Company on 13 January 2005.  On 7 January 2005 Leonard Curtis & Co, chartered accountants, wrote to Customs saying:
“Although an assessment was raised for the period [05/04] and has been paid by the Company, the correct liability is £3,094,437.50.  It remains the intention of the Company to settle this liability in full and in the light of the lack of assets, it does appear that no funds would be available to you by winding up the Company.  We have therefore been asked to present a proposal for repayment for the debt….
We propose to write to you again shortly with details of the various commercial projects that will give rise to funds to meet the repayment programme together with a projected timetable of events and payments.  We have been provided with a post-dated cheque dated 30 April 2005 for £250,000 and subject to being able to reach an agreeable settlement programme, we are authorised to release this cheque to you.”
(8)	Officer Fenlon visited the Company’s accountants, Munday Long & Co, and met Mr Long on 13 January 2005.  He said that he needed a completed return for period 05/04 by 1600 hours that day otherwise he would issue an assessment.  Mr Long agreed to courier the return to the Appellant for signing and then deliver it to officer Fenlon.  The return is a duplicate form presumably produced by officer Fenlon at the meeting which has the period completed in manuscript as “31-03-04 to 30-05-04.”  Written on the return is “Duplicate issued at Uxbridge Business Centre—original not available.  Please input as original” and signed apparently by officer Fenlon and dated 13 January 2005.  The completed return shows output tax of £3,097,500, input tax of £3,062.50 and net VAT due of £3,094,437.50.  The return shows sales of £17.7m and purchases of £15,445,106.  It is signed by the Appellant and dated 13 January 2005.
(9)	A meeting was held at the offices of Leonard Curtis on 8 February 2005 at which Customs were told by the Appellant that it was expected that a development at Greenwich would provide a £5m profit but there were delays.  The in-house accountant was on maternity leave and returns for the other companies with which the Appellant was connected were completed by a part-time bookkeeper.  As there was a cash-flow problem the Company’s 05/04 return was not completed.  He said that when paying the assessment of £421 he knew that the liability was over £3m.  Customs mentioned the imposition of a civil penalty and gave the Appellant a copy of Notice 730.  Leonard Curtis said that they believed that the notes of the meeting represented in general terms the matters that were discussed.  The Appellant wrote his own note of the meeting and sent it to Customs.  This stated that the proceeds of sale of the Property were used to pay the investments and creditors but did not leave sufficient to clear the VAT.  It was expected at the time that other companies in which he was involved would produce a substantial surplus which would be lent to the Company to pay the VAT.  A sale of the company engaged in the Greenwich development was agreed in early 2004 and solicitors were instructed.  By May 2004 it became clear that the purchaser’s funding was not available but negotiations continued until September 2004.
(10)	On 30 April 2005 Customs wrote to the Appellant inviting him to a formal taped interview on 11 May 2005 in accordance with Notice 730 saying “In your interests, you can be assisted by your tax representative at this meting.”  The notes of the interview contain the following:
Officer	Now I think you will accept that you should have declared that VAT
Appellant	Yes
Officer	Due time
Appellant 	Yes
Officer	And you knew that you hadn’t declared it
Appellant 	Ah
Officer	At the due time, which was May [this should have been 30 June 2004]
Officer	Well you’ve charged the VAT on the invoice and accept that
Appellant 	Yes
Officer	Right so you therefore knew that you should have declared that to Customs & Excise
Appellant	Yeah, yes
…
Officer	Okay.  I think from what you tell us regarding the business, you will accept that in itself was a dishonest act
Appellant	I suppose it was
At the end of the interview the officers said that they would recommend a 20 per cent penalty against the Company.  Later when it became clear that the Company was unable to pay it they apportioned the penalty to the Appellant.
(11)	On 8 February 2005 Roseberry Homes Limited paid £50,000 on account of the Company’s VAT liability.  The Appellant said that further payments were made but Customs deny this.  We are unable to find as a fact that any further payments were made, although even if they had been it would be irrelevant to the point to be decided.  
(12)	A penalty of £618,803 (£3,094,016 mitigated by 80 per cent) was imposed on the Company on 11 August 2006.  On 17 August 2006 Customs apportioned the whole penalty to the Appellant.
4.	The Appellant does not dispute the facts but contends that he did not have a dishonest intent.  When the proceeds of sale of the Property were received the VAT was not due immediately and the proceeds were used in the business of Roseberry Homes Limited in the expectation that it would be paid in full when due.
5.	Mr Alan Payne, for Customs, contends in outline:
(1)	The standard of proof is to the balance of probabilities, but bearing in mind the nature of the factors to be proved this must be to a high standard.
(2)	Dishonesty means that the person acted or failed to act, knowing that according to the ordinary standards of reasonable and honest people, his behaviour would be regarded as dishonest (Ghandi Tandoori Restaurant v Customs and Excise Commissioners (1989) VATTR 39).
(3)	Evasion does not imply permanence (R v Dealy, Court of Appeal, Criminal Division, 17 November 1994).  A claim to have simply deferred or delayed payment of tax with the alleged intention of paying it at some time in the future, could not be a defence.  The circumstances are similar to those in Hodgson and Hodgson v Customs and Excise Commissioners (1997) VAT Decision 15165 in which the taxpayer paid a central assessment knowing that she was liable to pay the true amount, but that she was unable to pay the sums due because the money had been spent on other business activities.
(4)	There was nothing unfair about the interview.  It was clear that it was being conducted in accordance with Notice 730 of which the Appellant had a copy and was invited to attend with his representative.
(5)	The Appellant failed to pay VAT at a time he knew that the Company was liable to pay £3m of VAT, which is evasion of VAT.  As to dishonesty, this is demonstrated by the facts that the Appellant deliberately failed to make the 05/04 return, paid the central assessment of £421 in July 2004, failed to inform Customs of the amount due on the telephone in September 2004 and, only after he was notified in December 2004 of the impending visit on 13 January 2005, through Leonard Curtis informed Customs by letter of 7 January 2005 of the £3m outstanding, and he also made admissions that he had been dishonest at the interview.
6.	Having heard the evidence we make the following inferences of fact:  
(1)	We have the audited accounts to 30 November 2003 and the VAT return from 31 March 2004 to 30 May 2004 but no information in between.  We shall assume that the financial position of the Company did not change between 30 November 2003 and 30 May 2004 except for payment of rent of £200,000.  This is likely to be optimistic since further interest on the bank loans of £1,244,906 would have accrued and there are likely to have been other expenses.  Accordingly, on 1 April 2004 there was a deficiency of £2,655,348.  The Property was sold for the VAT-inclusive price of £20,797,500, the Company had made purchases according to the VAT return of £15,445,106, much of which would be the purchase of the Property (although the input tax of £3,062.50 implies other taxable inputs of £17,500), had paid the London Borough of Southwark £2m for the additional land, and owed VAT of £3,094,437 (according to the VAT return), thus generating additional value of £257,956.  The net deficiency would then be £2,397,392 after payment of the VAT, so that it could never have paid the VAT in full.  So far as liabilities are concerned, on completion the Company owed the amount of the creditors at 30 November 2003 of £4,047,956 plus the rent of £200,000 and VAT of £3,094,437, total £7,342,394.  It had received cash of £3,353,394 [£20,797,500-£15,445,106-£2,000,000], so that the net liability was £3,990,000.  These figures are not findings of fact about what the financial position of the Company actually was on completion, about which we do not have sufficient information, but we draw the conclusion from them that on completion (and also on the due date for payment of the VAT as no other transactions took place before then), the Company was insolvent and would have been able to pay about 46 per cent of its liabilities (including the VAT).
(2)	Accordingly, when the net proceeds of sale of the Property of £3,353,394 were paid to Roseberry Homes Limited that amount was insufficient to pay the liabilities of £4,247,956 owing either to that company for payments made on behalf of the Company or to the bank, quite apart from the VAT.
(3)	When the Company received the proceeds of sale of the Property on 1 April 2004 and Roseberry Homes Limited banked it, the Appellant knew that the Company was unable to pay the VAT as well as its other liabilities, but fully expected to be able to pay the VAT out of profits that he expected to be generated in the short term by the transaction in Greenwich.  Accordingly at that time and at the due date for payment of the VAT on 30 June 2004 he intended that the VAT—at least the amount that the Company could pay out of its assets and hopefully the whole amount—should be paid eventually.  At the time the VAT was due on 30 June 2004 and thereafter he deliberately intended to delay making any payment of VAT.  By May 2004 (which is before the due date for payment) the Greenwich transaction was looking doubtful, although negotiations continued until September 2004.  It must have been clear to the Appellant at least by September 2004 that the VAT could not be paid at all.  
7.	As the Company’s financial position only became clear during the course of the hearing by the production of the accounts to 30 November 2003 we invited further submissions from Customs on whether it would have been a proper exercise of the Appellant’s duties as a director to have paid the VAT in full when the Company was insolvent.  In response they pointed out that the act or omission giving rise to the penalty was failing to submit a return for period 05/04, or paying the central assessment of £421, or failing to tell Customs of the true liability.  The penalty did not arise because of the Appellant’s failure to pay the tax.  Alternatively it cannot be a lawful exercise of a director’s duties to knowingly use funds which belong to Customs to meet business liabilities (and thus for personal gain), see Frank Thornber v Customs and Excise Commissioners 1999 VAT Decision 16235.  We accept this.
8.	The second point on which we invited further submissions related to the dating of the return as the period 31 March 2004 to 30 May 2004 when we would have expected the return to run to 31 May 2004, a point that we noticed only when writing the decision.  Customs pointed out that the return that the Company completed was not the original return and the penalty was for the failure to submit the original return, which would have set out the correct date.  Alternatively, by reg 25(1) of the VAT Regulations 1995 that the return should be for the period “ending on the dates notified either in the certificate of registration issued to him or otherwise.”  There was no limitation on the means of notifying the taxpayer of a date or restriction on the length of the period.  Alternatively, by reg 36(1)(c) where Customs considers it necessary in any particular case to vary the length of any period or the date on which any period begins or ends, they may allow or direct any person to make returns accordingly.  Finally, in the absence of evidence about the registration certificate, and whether the issue of necessity was properly considered there was not reason in law even if the change in the date was not valid this should materially affect the Company’s liability to pay VAT when the tax point was covered by the dates in the tax return or the unchanged tax period.  Irrespective of the dates in the return the fact remained that the Appellant had paid a centrally issued assessment knowing that it did not represent the true liability.  We accept all these points.
9.	The statutory conditions for imposing a penalty are (a) for the purpose of evading VAT, a person does any act or omits to take any action, and (b) his conduct involves dishonesty.  As to condition (a), in R v Dealy (Court of Appeal, Criminal Division, 17 November 1994) the Court said it was bound by R v Fairclough (25 October 1982), in which the Court had approved the direction to the jury that “if the person knows that the time has come [but] deliberately does not send them in, in order not to pay the tax because he does not want to, then from that moment onwards he is in law evading the tax.”  The Court approved the judge’s direction in R v Dealy as being effectively the same: “the person…knows that the time has finally come when he must pay by the 31st of the month, or soon afterwards, anyway, and, if that person then deliberately does not send in the VAT Return and the money, at the time when he takes the decision, quite deliberately, not to send in the return, because he does not want to pay, he is, in law, evading the tax.”  The Court went on to say “The word evasion, does not, to our mind, imply any sense of permanence.”  We find that, although not intending to evade payment of the tax eventually, the Appellant deliberately intended not to pay the VAT at the time when it was due and accordingly we find that condition (a) is satisfied here.  
10.	As to condition (b), it is necessary that the Appellant knew that what he was doing or omitting would be regarded as dishonest according to the ordinary standards of reasonable and honest people (R v Ghosh [1982] 2 All ER 689 at 696).  The issue is therefore whether the Appellant’s conduct in particular in (1) not making a return for period 05/04 due on 30 June 2004 at a time when, although the financial controller was on maternity leave, other associated companies were all making monthly returns generally on time, (2) paying the central assessment of £421 knowing that the true liability exceeded £3m, (3) not telling Customs about the liability on the telephone on 3 September 2004, (4) informing Customs for the first time of the £3m liability in Leonard Curtis’s letter of 7 January 2005 after Customs had written on 8 December 2004 saying they would visit the Company on 13 January 2005, and (5) not making the 05/04 return until 13 January 2005, would be regarded by ordinary people as dishonest.  We do not give much weight to the Appellant’s admissions at the interview because the test of dishonesty is more objective and we consider that the facts speak for themselves.  Even though we have accepted that at the beginning the Appellant had a genuine expectation of being able to pay the VAT out of other profits made by another associated company, this was looking doubtful by May 2004 and it was clear that this was not possible by September 2004.  We have no doubt that ordinary people would regard this conduct as dishonest.  It consists of deliberately keeping Customs in the dark about the amount of the liability for over seven months by the end of which it had become clear that the Company could not pay any of it.  Condition (b) is therefore satisfied.
11.	For the penalty to be assessed on the Appellant it must be the case 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 of the body corporate.  Since the only actions of the Company were carried out by the Appellant we find that this is satisfied.
12.	Accordingly we dismiss the appeal.

JOHN F AVERY JONES

CHAIRMAN
RELEASE DATE: 21 November 2008

LON/06/0308