E00996

ASSESSMENT – Appropriate rate of VAT – Assessment on basis that Appellant had dishonestly sold gas-oil (VAT at 5 per cent) as diesel road fuel (VAT at 17½ per cent ) – Contaminated diesel found in Appellant’s storage tanks – Diesel contaminated with laundered red gas-oil – Whether evidence proved that Appellant had knowingly sold gas-oil as road fuel – Appeal allowed

PENALTH – Dishonest evasion of VAT – Burden and standard of proof – Whether, on the evidence, the Appellant had knowingly and dishonestly sold gas-oil as diesel road fuel – No – Appeal allowed
 
LONDON TRIBUNAL CENTRE

	HARDEV SINGH JOHAL	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	ANGUS NICOL (Chairman)
						SHEILA WONG CHONG, FRICS
					 	ALEX McLOUGHLIN

Sitting in public in London on 10, 11 and 12 April 2006

Richard Barlow, counsel, instructed by Hassan Khan & Co, solicitors, for the Appellant 

Christopher Mellor, counsel, instructed by the Acting Solicitor for Her Majesty’s Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	The Appellant, Hardev Singh Johal, is the sole proprietor of the Aylesford Service Station at Forstal Road, Aylesford, in Kent, from which he sold, inter alia, petrol, diesel, DERV and gas-oil.  In May 2001 the Appellant was compulsorily registered for VAT, backdated to 1 June 1998; this was because he had been trading under a different registration number, which was in fact that of one of his brothers, since June 1998, but it appeared that since that date the Appellant had been the sole proprietor of the business, and the brother concerned was no more than the owner of the freehold of the premises on which the Aylesford Service Station traded. That compulsory registration is not the subject of this appeal.

2.	In April 2000 the Commissioners received information which led them to believe that DERV supplied by the Appellant was contaminated with gas-oil. After samples had been taken from the Appellant’s tanks, it appeared to the Commissioners that the fuel in those tanks was contaminated with gas-oil. Customs officers examined the Appellant’s records and found a discrepancy between the quantities of gas-oil purchased by the Appellant and the amount of sales of gas-oil declared by him.  There were also found to have been sales of DERV in excess of the amounts of DERV purchased.

3.	As a result of the investigations, an assessment under sections 12 and 12A of the Finance Act 1994 for the period 1 March 1999 to 29 April 2000, in the total sum of £60,350. Of that sum, £821.63 represented the duty due on the seized mixed fuel, under section 20AAA of the Hydrocarbon Oil Duties act 1979 (“HODA”), and the balance of £59,528.65 was in respect of the rebated gas-oil not accounted for in the declared sales, which was deemed to have been supplied for a non-qualifying use.  An excise penalty under section 8(1) of the Finance Act 1994 was also imposed, in the sum of £51,297.50  (after mitigation of 15 per cent) in respect of the sales of gas-oil for non-qualifying uses.

4.	Through his accountant, the Appellant requested a review in a letter of 31 May 2001.  The Appellant admitted that there were discrepancies in the book-keeping and that sales were understated, and that VAT in respect of undeclared sales of 127,915 litres of gas-oil was due, in the sum of £1,215.19.  He also admitted that he was liable for the duty of £821.63.  Mixing of fuel and sales of gas-oil as anything other than gas-oil were denied.  Reviews were carried out and the Commissioners’ decisions were upheld in full.

5.	The assessment to excise duty was later withdrawn by the Commissioners, as it had been issued under the wrong statute.  However, the Commissioners maintain that the tax is still due, since the gas oil was sold as road fuel, which was a non-qualifying use.

6.	The Appellant failed to account for VAT, following the compulsory registration, for the periods before 1 June 2001, and a penalty under section 60(1) of the Value Added Tax Act 1994 was imposed, which was mitigated by 15 per cent to £12,075.

7.	The decisions of the Commissioners which remained under appeal were, therefore:

	(1)	The assessment to VAT under section 73 of the VAT Act 1994, issued on 24 October 2001, in the sum of £14,206 plus interest, being VAT due on sales of gas-oil based on the average selling price of DERV;

	(2)	The civil penalty under section 60(1) of the VAT Act 1994 in respect of the dishonest failure to account for the full amount of VAT on the sales.

8.	The Appellant had also sought to appeal against the penalty under section 8(1) of the Finance Act 1994.  However the Appellant had failed to request a review of that decision under section 14 of the Finance Act 1994, as a consequence of which no appeal lies to this Tribunal. Accordingly, on an application made by the Commissioners, the Tribunal struck that appeal out on 7 January 2004.  (A request was made by the Appellant by a letter dated 2 August 2004 for a review of the section 8(1) penalty decision, which was refused by the Commissioners as being long out of time.) 

The legislation

9.	The relevant parts of the Value Added Tax Act 1994 are sections 73 and 60, which provide, so far as bear upon this appeal as follows:

“73.-(1)	Where a person has failed to make any returns required under this Act ... or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him.”

Section 60 provides for a penalty for dishonest evasion:

“60.-(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.”

The evidence

10.	The evidence which started the whole chain of events was that of Mr Miles Arthur Drury, who had carried on business as a haulier for some three years and traded with  four vehicles.  He did not attend to give evidence, and the Appellant was content for his statement to be read.  He said that all his vehicles ran on DERV, and that he was well aware that red marked gas oil was prohibited for use in road vehicles such as his.  There came a time, before 11 April 2000, when he had some problems with one of his vehicles as a result of which that vehicle had to go in for repairs.  He took it to ERF Medway Ltd, which specialised in repairs to ERF vehicles.  Their workshop foreman, a fully qualified mechanic, worked on Mr Drury’s vehicle.  Mr Drury’s statement said that “The garage stated that there were major engine problems and from their analysis of the repairs needed, I felt that it may have been as a result of a fuel contamination of some description.”  He telephoned Customs and Excise, and arranged for a fuel test, which took place on 11 April 2000.  A sample of fuel was taken from the vehicle concerned.  At that time, Mr Drury’s statement went on to say, he had been purchasing his fuel from the Appellant’s service station on a regular basis since about January 2000, as his prices were two to three pence a litre cheaper than elsewhere. He added, “I may have exceptionally bought fuel elsewhere, but this would have been most unlikely.”  Mr Drury had produced, and it was exhibited to his statement, a schedule of fuel purchases from 9 February to 13 April 2000. This shews that he had purchased fuel from the Appellant on 22 occasions. He had also bought fuel from six other sources on 12 other occasions between those dates including dates within the month before 11 April 2000. The Government Chemist’s analysis shewed that the fuel taken from Mr Drury’s vehicle was contaminated and that there was evidence that the oil had been laundered.  

11.	The workshop foreman at ERF Medway was Mr Martin Fernley Hake. He, too, made a statement, and was not called to give oral evidence. He said that the trouble with Mr Drury’s vehicle was first identified on 3 April 2000. Mr Drury told him that the vehicle’s engine was surging and had power problems, which were, initially, believed to be electrical. Mr Hake’s assistance was needed again on 10 April 2002, on which date the vehicle was taken to the ERF Medway workshops. Mr Hake’s statement said that a number of checks were carried out and that they pointed to a fuel problem as the cause of the trouble. The vehicle’s fuel system was drained and cleaned and fresh fuel put in, which appeared to cure the trouble. Mr Hake submitted two invoices for his work. The first, dated 3 April 2000 was for a cooler unit and some tubing and labour. The second, dated 10 April, described the work done in the following terms:  

“Call out to Bluebell Hill, lack of power called out to vehicle checked for lack of power checked celect side  no fault found with the engine followed back to the work shop checked all pipe work removed and replaced filter as required carried out road test re-piped fuel system into a can but used the fuel from the tank still no good. Vehicle run with fresh fuel all O/K suspect poor fuel system.”

Mr Hake’s statement then said that he examined the fuel removed from the vehicle and “I noted that whilst it looked like normal DERV fuel it did have a very unusual smell to it.”

12.	Then Mr Hake said that he discussed the work that he had carried out with Mr Drury, and that Mr Drury had told him that other drivers whom he knew had experienced similar problems and that they had been obtaining fuel at the same site as that from which Mr Drury was buying it: no such witnesses were called or had given statements. At that point, he did not name the site from which the fuel had been obtained. Then he said that some months later another customer had a similar complaint, and was advised to change his fuel filter and fuel supplier. Mr Hake changed the fuel filter for him, and he apparently had no further trouble. The customer said that he had purchased fuel from “a site in Aylesford”. Mr Hale did not name the service station, but described its location. The invoice for that work was also produced, and gave the date of the job as 21 September 2000. We pause here to observe that there was no evidence that this other customer of Mr Hake’s had had any contaminated fuel in its tanks or fuel system.

13.	In the context of Mr Hake’s statement, we note from Mr Drury’s schedule of fuel purchases that he purchased fuel from the Aylesford Service Station on 30 and 31 March and 4 April, from M25 Services on 6 April, from Aylesford Service Station on 8 and 10 April, and from Parkfoot Service Station on 11 April.  Mr Drury did not say which of his vehicles was fuelled at which source on what date, nor whether any of his vehicles other than that which was attended to by Mr Hake suffered from any similar problems.  The examination of his tanks and the taking of samples took place at the end of April 2000, some five months before the complaint by Mr Hake’s other customer.  It is also the case that the Commissioners took a sample from the vehicle on 11 April 2000, and, notwithstanding that Mr Hake had, on 10 April, drained the fuel system and loaded fresh fuel oil, the sample taken on 11 April was found to be contaminated.  Further, a sample was taken from the Appellant’s tanks on 29 April 2000 and no contamination was found.

14.	The officer who first attended at the Appellant’s premises, on 28 April 2000, was Mr Neil McEachen, together with a colleague, Mr Carnachan.  Samples were immediately taken from the diesel pumps.  The sample from pump number 1 was orange in colour, with a specific gravity of 844 at 13º C.  A field test carried out at that time shewed a 10 to 15 per cent quinizarin contamination.  A similar sample was taken from pump 3 with similar result.  What were termed formal samples were then taken from each of tanks 3, 5 and 9, and sent for analysis.  Mr McEachen explained that the normal colour of uncontaminated diesel was a clear yellowy-green, not unlike Chardonnay wine.  The specific gravity of normal diesel was about 830.  Referring to the sample test notes, he explained that coumarin was a marker, of which there was no trace in the present case.  Quinizarin is a red marker for diesel.  The quinizarin comparator is a purple dye strip in a test tube, which shews the percentage of contamination.  The contamination found in the field test of pump 3, 15 per cent, was a significant degree of contamination.  On the test notes there was a request for tests for all markers and for evidence of laundering.

15.	Documents referred to by Mr McEachen as the results of the government chemist’s analyses were produced, which purported to shew that there had been contamination in three of the appellant’s tanks.  However, close examination of these forms reveals no apparent connexion between them and the tests carried out at the site, except the number of the forms: the test notes are designated C&E 140 RF (Original) and the test result C&E 140 RF (Original) reverse (08/95).  The original documents were not produced.  The only pair which were specifically identified by Mr McEachen as being the obverse and reversed of the same were pages 368 and 371, which dealt with the uncontaminated test sample taken after the new fuel had been delivered on 2 May 2000.  The remainder shewed contamination ranging between 5 per cent and 10 per cent.

16.	Mr McEachen prepared schedules of all diesel and gas oil products supplied to the Appellant.  The suppliers were all contacted.  Mr McEachen also carried out an audit over the period from 1 March 1999 to 28 April 2000 to make a fuel use analysis and to test the Appellant’s business records.  Accounts had been supplied by the Appellant and by his accountant, which covered supplies to and sales from the site of bunkered fuel and of actual sales by the Appellant.  It appeared to Mr McEachen that not all deliveries had been accounted for by the delivery notes supplied, and for that reason he contacted two of the suppliers of diesel and five suppliers of bunkered fuel.  Mr McEachen was also given details of pump readings for the period in question, together with weekly sales figures of diesel, gas oil and DERV.  The result of his analysis was as follows:

Diesel deliveries between 1 March 1999 and 28 April 2000

Bunkered diesel fuel			1,598,500 litres
Purchased diesel			   811,933 litres
Total delivery				2,410,433 litres

Diesel metered through pumps, from pump readings at start and end of audit:

Total through 5 pumps		2,301,758 litres

Declared diesel sales:

Total declared sales			2,299,376 litres

Mr McEachen noted that between 18 March and 23 March 2000 the pump readings were all changed and appeared to have been rewound.  That, he said, had the effect that the amount of diesel which passed through the pumps was increased by 157,859 litres, to a new total of 2,459,617 litres.  That amount, he said, was 49,184 litres more than the fuel that had been delivered to the site.

17.	As for gas oil, the total delivered to the site during that period was 295,053 litres.

	Pump readings shewed gas oil metered out		           139,962 litres

	Pump 10 also appeared to have been rewound by		 27,130 litres

Excess purchase therefore				           127,961 litres

Declared sales of gas oil				           167,138 litres

Therefore gas oil delivered and not accounted for:	           127,915 litres

18.	Mr McEachen produced three sales schedules.  The first shewed sales as from the pump meters for the month from 1 March 1999 and for the five weeks ending on 1 April 2000.  The second shewed purchases and sales of gas oil from 1 March 1999 until 28 April 2000, and the third diesel sales for the same period.  There was also a schedule of supplies to the Appellant’s site over that period.

19.	The first schedule gave the meter readings of each of the ten pumps, including the opening and closing readings for the month of March 1999 and for each week of the last five weeks.  It also gave the selling price per litre for each commodity at that time: DERV at 74.9 pence, unleaded petrol 75.9 pence, four star at 81.9 pence, and gas oil at 20 pence.  The principal significance of this schedule was that the opening meter reading for the week ending 18 March 2000 was 008017 and the closing reading 026773, but the opening reading for the next following week was 001793.  Mr McEachen pointed out that to get from 008017 to 001793 it would be necessary for the meter to pass through 999999 and then start again at 000001, a total throughput of 993,775 litres. For that reason he concluded that the meter must have been rewound.  If so, the amount of fuel having been delivered by the pump must include the amount of the rewind, which gave a discrepancy of 49,184 litres.

20.	In cross-examination, Mr McEachen said that he had never come across anyone selling DERV with laundered gas-oil in it before.  The tests had been carried out on oil from the pumps.  Oil from the gas-oil tank was not tested.  Referred to the sample numbered 166062 dated 28 April 2000, and the analysis of 19 May 2000, Mr McEachen agreed that there was nothing in those documents to confirm that the analysis referred to that sample, but for the fact that in the original the analysis was on the back of the sample notice.  But he was not able to explain why the analysis shewed the particular levels of contamination which were stated on them, nor whether they shewed contamination from some other source.  He said that adding markers to oil did cause a higher specific gravity, but he could not say what effect temperature had on the oil. He knew of no differences that could be detected by any unsophisticated test: one could only tell the difference between gas-oil and DERV by the colour.  On delivery, Mr McEachen agreed, the oil would go into the tank without being seen, in fact it would not be possible to see it.

21.	Mr McEachen said that it had been found that 49,184 litres of diesel had been sold more than had been delivered to the Appellant’s site.  He could not remember the significance of that figure, except that it was part of the total passing through the pumps of 2,459,617 litres: it was 0.019 per cent of that total.  The total capacity for diesel on the site was 45,600 litres. Possibly a part of that figure may have been the opening stock of diesel.  As to gas-oil, 127,961 litres more were bought than had been sold.  There had been no VAT assessment in respect of the 49,184 litres.

22.	The weekly sales schedules, Mr McEachen said, had been provided voluntarily by the Appellant later.  He had not known of their existence.  He agreed that the Appellant could easily have suppressed them or altered them, and Customs would never have known.  He agreed that some of the figures written on the schedules were in his hand-writing.  They referred to the previous week’s readings.

23.	The schedules of gas-oil purchases and sales included the extra deliveries, of which, Mr McEachen said, Customs had been informed by the suppliers and not by the Appellant.  He said that there was no evidence that the Appellant had tried to conceal those purchases, nor that anything underhand had been done.  But there were delivery notes which were not in the Appellant’s possession, and which Customs had obtained from the suppliers.

24.	Asked about Mr Drury’s statement, Mr McEachen said that on 11 April 2000 he had bought diesel from Parkfoot.  He had also bought fuel from other service stations, and he operated more than one vehicle.  He had been buying diesel from the Appellant since February 2000 without any ill effects to his vehicles.  It was possible, Mr McEachen conceded, that there had been a mixture of gas-oil with DERV only in April 2000.  He also agreed that fuel oil delivery companies did employ subcontractors and that it would be possible for those subcontractors to deliver contaminated fuel that the suppliers knew nothing about.

25.	Mr McEachen said that mixing fuels was a big operation, and would be difficult to do, from a subcontractor’s point of view. Tankers arrived at filling stations three or four times a week and made their deliveries without spilling a drop.  Mixing could be done in barrels, which would be cumbersome and would probably involve spillage. There was no suggestion that there were pipes between the Appellant’s tanks, though the officers had made no search. Mr McEachen said that he had come across a van which had pumping equipment pumping oil from one tank to another, but there was no evidence to suggest that the Appellant had done that.

26.	Statements had been put in by directors of companies which supplied the Appellant. Mr David Flynn, director of Linton Fuel Oils Ltd, said that his company had a fleet of delivery vehicles driven by its employees. It also used third party suppliers for distribution. He said that two deliveries were made to the Appellant on 11 April 2000 on behalf of UK Fuels Ltd, one of 3,000 litres and one of 10,000 litres.  He said that the risk of loading an incorrect batch was minimal in the extreme. No complaint had been received from any customer that the fuel was in any way irregular. Any possible contamination would be limited to the amount required to wet the interior of the hose.

27.	Mr Franco Bussandri, director of Futura Petroleum, said in his statement that inquiries had been received from Customs in early May 2000, as a result of which he undertook investigation at Futura’s two main storage depots up to 28 April 2000, where products were tested for quinizarin with negative results.  At one of the storage depots there were no delivery points for red gas-oil, and no red gas-oil had been delivered from the other to the Appellant.  He said that the haulage companies had reported that they had made no deliveries of red gas-oil to the Appellant, so that there would be no residual traces left in the tankers.  Futura had, he said, received no complaints of contaminated diesel having been delivered. Mr Bussandri produced notes of the previous deliveries from his own company and a number of subcontractors, none of which shewed deliveries of gas-oil.

28.	The operations manager of British Benzol, Mr John Meikle, produced records relating to deliveries to the Appellant in March 2000. There were deliveries of both DERV and gas-oil, and also of petrol, between 15 and 21 March. On 15 March 2000 there appeared to have been a delivery of both DERV and gas-oil at the same time.  There were further deliveries of DERV.  Mr Meikle also said that his company made regular supplies of gas-oil to the Appellant during the period.  He went on to say that the driver “would be extremely aware of the need to ensure that each separate product would be delivered into the correct storage tank.... It was possible to have a minor contamination of gas-oil in DERV in such cases due to the use of the same delivery pipe. This would be minimal.” He said that drivers collecting oil from the major storage depots “would be subject to stringent checks to ensure that they loaded the correct products.” There was no record, he said, of the Appellant having made any complaint that any delivery had been contaminated. 

29.	Mr Ian Abbot, of PetroPlus Marketing Ltd, said that his company delivered 30,000 litres of DERV to the Appellant on 10 March 2000, and that only deliveries of DERV had been made by that vehicle to the Appellant immediately prior to that of 10 March.  The delivery came from a major storage depot in Grays, Essex.  Mr Abbott said that “stringent checks would be in place ... to ensure that the correct product was loaded....”  Further, he said that any haulage company providing delivery services to his company would have to provide a certificate of competence in respect of delivery of petroleum products.

30.	Mr Craig Hunter, of CPL Petroleum, said that from his company’s records he could say that his company delivered fuel oil to the Appellant.  He said that there were five supplies of DERV during March 2000.  In each case it came from a major wholesale supply and distribution facility.  From his knowledge of them he could say that “strict controls would be in place to ensure that DERV was loaded if that was the product ordered, and any instance of an incorrect product load would have been identified and brought to my notice.”  So far as Mr Hunter was aware, no reports had been received of contaminated DERV having been received by any of his customers.  There could only be very minimal amounts of any previous product remaining in a tanker when a different product was loaded and delivered.  The levels involved would be unlikely to be detectable.

31.	Mr McEachen said that he had handed over the proceeds of his investigations to Mr Gary Inkersole. Mr McEachen was also present at the interviews of the Appellant and each of his brothers. We deal with the interviews below. Mr Inkersole made two witness statements, one on 1 November 2005 and one on 9 February 2006.  The latter refers to a previous statement of 11 September 2005.  We take that to be an error and to intend reference to the statement of 1 November.  No statement made by Mr Inkersole and dated 11 September 2005 was put before us.

32.	Mr Inkersole explained how the matter was referred to him, and said that he interviewed all three of the brothers under caution on 21 September 2000, the interviews being recorded on tape. The Appellant’s accountant, Mr Stuart Spurling, was present at all three interviews. Mr Inkersole said that in those interviews no admission was made of any dishonest conduct, nor was any satisfactory explanation given for inconsistencies in the fuel purchase and sales records.  It was during those interviews that it became apparent that the VAT registration number used by the Appellant was the wrong one, being the registration number of his brother Surinder Singh Johal, while Hardev Singh Johal was the proprietor of the business.

33.	In his statement, Mr Inkersole said that on 28 February 2001 Mr Spurling spoke to him on the telephone to arrange a meeting date.  During that conversation, Mr Inkersole said, Mr Spurling “said that his clients were ready to admit to ‘off record’ sales of fuel in line with the audit figures produced by [Customs].  He also said that Mr Hardev Singh Johal was ready to sign up to a schedule of duty on suppressed sales but might not accept any schedule relating to the ‘partnership’ status of the business, if allegations of dishonest mixing of fuels were pursued.”  On the agreed date of 2 March 2001, the Appellant and Surinder Singh Johal were interviewed, the interviews being recorded on tape.  Mr Inkersole referred to it as a “civil interview”, though the criminal form of caution was administered to each of the brothers.  At those two interviews no admissions were made of dishonest suppression of sales, “contrary,” as Mr Inkersole said, “to the telephone statements of 28/02/2001.”  The discrepancies, he said, “were attributed to ‘imperfect bookkeeping’ and related to gas-oil sold to ‘qualifying customers’ and hence only liable to VAT at 5%. The mixed fuel detected at the site was attributed to some ‘third party contamination’, possibly tanker deliveries received.” 

34.	Mr Inkersole conceded that there had been a discrepancy between the statements of Mr Drury and Mr Hake.  Mr Hake had stated in a service invoice issued to Mr Drury, of which the job date was 10 April 2000 and the invoice date 18 May 2000,

“Called out to vehicle checked for lack of power checked Celect [sic] side no fault found with the engine followed back to the workshop checked all pipework removed and replaced filter as required carried out road test repiped fuel system into a can but used the fuel from the tank still no good.  Vehicle run with fresh fuel all OK suspect poor fuel system.”

Mr Inkersole said that he had not noticed the discrepancy.  We note also that another invoice from Mr Hake, in respect of a job on 3 April 2000 on the same vehicle, said, “Called out to Strood, lack of power and surging.”  On that occasion it seemed to have been treated as an electrical fault, and a new cooler unit was supplied.

35.	Mr Inkersole said that, having considered the results of the investigation, he had come to the conclusion that there was no acceptable reason for the excess purchases of fuel.  Apparently, Mr Inkersole said, more diesel had passed through the pumps than the declared sales.  Something else was going through the diesel pumps which gave rise to the higher readings, taking into account the apparent fact of the pump meters having been rewound.  It was likely that gas-oil had been supplied with diesel as a road fuel.  Accordingly duty became due and assessable.

36.	Mr Inkersole referred to a letter dated 31 May 2001 from Mr Spurling, containing an admission of book-keeping errors and a denial of mixing gas-oil with diesel or of selling gas-oil otherwise than lawfully.  The letter contained a calculation of tax owed: “Discrepancy  of 127,015 litres @ an average price of £0.19 per litre @ 5% VAT = £1,215.19.”  Mr Inkersole said that if the gas-oil had been sold for lawful purposes he agreed that 5 per cent was the correct rate of VAT; the selling price of 19p might need to be revised to allow for variations in price, which at the relevant period moved between 20p and 29p.

37.	It had been considered, Mr Inkersole said, that some of the Appellant’s purchase invoices had been omitted from the records.  However, in the end Mr Inkersole accepted that all the purchase invoices had been produced..  But he said that nothing had been produced which was evidence of any meter reading problem.  He was unable to understand how so large an amount, 43 per cent, could have been overlooked, nor why such a discrepancy had not been found in a 14-month period.  He said that the weekly analysis sheets were fundamentally flawed, and that it was difficult to see how the error could not have been detected, if it was an error.  In the list of gas-oil sales there was nothing to shew the usage of fuel sold.  There was very little evidence that users of gas-oil would have bought it from the Appellant, since some kept their own stock and could therefore buy it at the same price as could the Appellant.  The location of the Appellant’s site is off the M20 and there was not much passing traffic, though vehicles might patronise it because of advantageous pricing.  Probably motorway construction companies would have their own supplies of gas-oil.  He did not accept that gas-oil had been genuinely and innocently omitted from the records, and could only conclude that it had been done dishonestly and deliberately.

38.	In cross-examination, Mr Inkersole said that the only mixture that Customs knew about, in connexion with the Appellant, was in mid-April 2000.  There was no evidence of any tests on the gas-oil tanks, and Mr McEachen had said that no tests had been carried out. The gas-oil found in the DERV was all laundered gas-oil.  The suppliers of gas-oil to the Appellant were all identified and were all well-known businesses and legitimate suppliers. They were not supplying laundered gas-oil. It followed that the excess supplies of gas-oil were from suppliers who would not sell laundered gas-oil. When the Appellant bought it it would not be laundered. There was no evidence as to what was happening to the gas-oil; there was no evidence that the Appellant had laundered it, nor was that ever suggested. The fuel went to the Appellant’s site as gas-oil.  On one single occasion a mixture had been found.

39.	The evidence of Mr Drury, Mr Inkersole said, was only the factor which drew the attention if Customs to the Appellant.  Mr Hake said that he had drained the tank and refilled it with fresh fuel.  Mr Drury had bought diesel on 11 April from Parkfoot.  The tank had been drained according to Mr Hake, on 10 April. The vehicle concerned was the same one, T535MKK. It therefore followed, Mr Inkersole conceded, that on 11 April Mr Hake innocently bought DERV containing a mixture of gas-oil from Parkfoot.  Mr Inkersole went a little further, and conceded that he had heard of cases of a filling station having innocently bought mixed fuel. There was always the possibility that that could happen. There was no evidence as to how the mixture had found its way into the Appellant’s tanks. Mr Inkersole said that he was aware of criminal organisations which laundered fuel and sold it to unknowing parties.  But if a rogue driver bought laundered gas-oil it might be identified by his employer.

40.	Mr Inkersole said that he had tried to identify types of business in the area of the Appellant’s site which might use gas-oil.  He produced some photographs of the immediate area, including the Appellant’s site, taken when diesel was priced at only 89.9p a litre.  In the immediate vicinity there appear to be a Safeway shop, a medium-sized office block, and other unidentifiable commercial buildings. A number of lorries and vans and a large cement-mixer are also visible. Also depicted are storage tank inlets on the Appellant’s site, each clearly labelled “diesel” or  “gas-oil”.

41.	Mr Inkersole said that he had made no inquiries at Safeway or at the office block as to whether they purchased fuel or whether they purchased gas-oil at all.  He agreed that companies providing hire services usually charged considerably more than the pump price to fill the tank of a hired vehicle on its return.  The occupier of the office block was such a company.

42.	Referred to the Customs calculation of excess purchases and gas-oil delivered but not accounted for, Mr Inkersole agreed that the throughput of diesel appeared to be 2,459,617 litres between 18 March 2000 and 25 March 2000, which was 49,184 litres more than had been delivered to the site.  He noted that the total capacity of the site for diesel was 46,000 litres.  He said that between those dates the pump readings had been changed, and appeared to have been rewound, which had the effect of increasing the amount of diesel which had apparently passed through the pumps from 2,301,758 by 157,859 to the total mentioned above.  But Mr Inkersole said in his oral evidence that it had never actually been shewn that the pump meters had ever been physically altered. On 16 February 2001 the Kent County Council Trading and Standards Department, at the Appellant’s request, had checked the meters and found that all the seals were intact, though one of them required to be restamped. One of the pumps was also found to have a leak.

43.	Mr Inkersole said that the meter readings had been used by the Appellant for his records, and he could not see how they could have been moved backwards. The Appellant’s weekly analysis sheets did not actually say that the figures were meter readings, but it was clear that that was what they were. They also shewed readings from the console by the till. He agreed that there was no need to consider the possibility of the meters having been rewound. The “rewinding” figures had been added to the throughput that was indicated by the first and last readings.  The declared diesel sales, of 2,299,376 litres, subtracted from the diesel metered through the pumps taken from the pump readings at the start and finish of the audit, of 2,301,758, gave a difference of 2,382 litres. With that in mind, Mr Inkersole said, it would be necessary to revise the throughput figures. If there were book-keeping errors, that would be a different matter. Mr Inkersole said that he had not been aware, until after the last of the interviews and the correspondence, that the Trading and Standards Department had found that the meters were sticking and were repaired, and that the computer console by the till had also been changed.

44.	Referred to the telephone conversation with Mr Spurling on 28 February 2001 (see paragraph 33 above), Mr Inkersole said that “there would have been a note of that conversation.”  No such note was in fact produced.  Mr Inkersole said that he could do no more than recollect that that was what Mr Spurling had said.  There had been an admission of dishonesty.  He was very surprised, he said, at what had been said in the interview on 2 March 2001, which was wholly inconsistent with what had been said on the telephone.

The Appellant’s evidence

45.	The first witness for the Appellant was his brother Surinder Singh Johal, who, we understood, is usually known as Bobby. We hope, therefore, that he will not think it impertinent if we refer to him as Bobby, for the sake of brevity. He had made a witness statement on 10 January 2006, which largely stood as his evidence-in-chief.  He said that he was the owner of the freehold of the site of the business of which the Appellant was sole proprietor. Bobby was in full-time occupation as accounts manager of a non-governmental organisation which did conservation work, and he had been in that occupation since October 1998.  However, he continued to help out at the service station on Saturdays, and did the paper-work.  He had also worked in the family’s other garage businesses since about 1985.

46.	Bobby said that he worked at the site on most Saturdays.  He normally got all the invoices and paper-work relating to the pump readings together, and would send this to the accountant.  It was not his job to consider the figures nor to reconcile them: all of that was left to the accountants.  He admitted that the book-keeping system was “less than perfect”, and pointed out that he had said so in interview on 2 March 2001.  He said that the gas-oil sales for the period 1 March 1999 to 29 April 2000 were underdeclared due to an oversight on the part of the Appellant and himself, which had resulted in an underpayment of VAT. However, there was no deliberate intention to do so.  He said that as far as he was aware, gas-oil had never been sold as road fuel, and there could have been no point in understating the sales figures deliberately.  Poor book-keeping was the cause of the figures not tallying.  Answering a question  which had been put to Mr Inkersole, who had not known the answer, he said that there was a pipe link between the two gas-oil tanks.

47.	Bobby referred to a list, compiled in March 2001 after the interviews with Customs, of gas-oil sales during the week beginning 10 March 2001 which, he said, also indicated the types of vehicles or machinery for which gas-oil was sold. The list comprised 121 sales (though there are five others for which no quantity is given).  These sales account for 8,261.24 litres. The average sale was 68.27 litres, the smallest being 8 litres and the largest 1,000 litres. The indications of the purposes for which the gas-oil had been sold were scanty, nearly all shewing no more than a vehicle registration number. But there were some indications, such as “boat”, MAP Plant Hire, Blue Van Drains, a tree surgeon, West Malling Surfacing, Birby Construction, J & T Tarmac, Ringway, M Anderson Plan, Key fuels.  That list, Bobby said, had been sent to Customs in May 2001.

48.	Customs had at first said that the Appellant had sold more DERV than had been purchased, Bobby said, but now insist that DERV sales had been suppressed.  He said that no purchase invoices were missing, as was eventually accepted by Customs, and all had been recorded in the VAT records.  Bobby said that DERV sales had not been suppressed. He admitted that he had been partly responsible for the book-keeping errors, and that he was responsible for the wrongly recorded meter readings, but that they were innocent mistakes which had contributed to the errors.  There had been problems with the meters, which had been sticking. Customs had suggested that they had been tampered with, but the local council had checked them and confirmed that there was no evidence of tampering.

49.	As a result of the Customs investigations, Bobby said, a number of changes had been made in the Appellant’s book-keeping procedures.  There had been a change of accountants, and the Appellant’s wife now kept the books and compiled the VAT returns. All supplies of fuel were checked monthly with the suppliers. A list of customers who purchased gas-oil has been maintained since the Customs investigation.  As a result of the changes, one or two other discrepancies had appeared and been corrected.  Under the new system, all purchases of gas-oil are recorded.  If a purchase is less than 100 litres only the registration number of the vehicle is recorded.  For a purchase of more than 100 litres, a form is filled in, as instructed by Customs, giving the name and address of the purchaser and the nature of the intended use.

50.	At the end of March 2000, Bobby said, the business changed from recording sales on the computer console to the pump meters.  That was in the week ending 25 March. The console shewed each pump individually, with an opening and closing reading each day, and ran continuously, without being zeroed daily. There was a meter on each pump. A double check could be obtained by dipping the tanks, both diesel and gas-oil. That was done so that the Appellant would know how much of which fuel to order for the following week. A discrepancy or meter error could be spotted as soon as the tanks were dipped. There had, Bobby said, been a problem over Christmas, when the meters could not be reconciled and the business did actually run out of stock. If the accountant had erroneous figures it could be due to the meters sticking, which is what had happened. The meters should shew the amount of fuel sold, while dipping shewed what was remaining in the tanks. As a result of the problem with the meters, in March 2000 they had changed to the console, then back to the pump meters a year later. Bobby agreed that the local council, having checked the meters, did not mention in its report checking to see if the meters had been sticking.

51.	Bobby accepted that there had been a discrepancy of 127,915 litres of gas-oil, or 43 per cent of the total purchased, and that that shewed a weekly discrepancy.  That, he said, was due to imperfect book-keeping and was the result of an oversight.  In interview, he said that the book-keeping was very imperfect: that was what he meant by saying that it was an oversight.  He said that he was employed as accountant for a charity, though he was not a qualified accountant. He had a degree in business and finance.

52.	In the interview, Bobby said that he was responsible for taking manual meter readings, and because of the way the gauges were positioned it was not easy to read them; he also dipped the tanks on Saturdays as a double check. Occasionally there were discrepancies between the meter readings and the dips, because the dip was not very accurate, though he could remember no major discrepancies. On one occasion he had found that one of the pumps had been delivering more gas-oil than it should have been, but that was the only major discrepancy.  It had been discovered when the tank was dipped. He had not been aware that he had not been giving the correct information to the accountant.  He had not taken any account of the deliveries nor of the cash received. It would be necessary to do so in order to tell from dipping how much oil had been sold.

53.	Bobby said that he was quite sure that the Appellant had not been mixing oils.  Nor did he know where laundered gas-oil might have come from.  There would be no means of knowing if someone brought a load of laundered oil and delivered it into the tanks.

54.	The Appellant, Hardev Singh Johal, made a witness statement on 6 January 2006, which also was treated as his evidence-in-chief.  He said that he was the sole proprietor of the Aylesford Service Station, and had been so since 1998, though he had worked there since 1996 and in the same trade since 1978. He denied emphatically that he had been guilty of any dishonesty, or that he had consciously set out to commit any wrongdoing. He admitted that certain gas-oil sales had been underdeclared which had resulted in an underpayment of VAT, but said that that had not been done deliberately. The discrepancies were the result of flaws in the book-keeping system and accidental oversights during the period under consideration (March 1999 to April 2000).  In particular, he said that the meters on the pumps had not been tampered with, as had been confirmed by the Kent County Council Trading Standards Department.

55.	In his statement the Appellant said that gas-oil had never been sold for any other than a lawful purpose.  Since July 2003 he had operated a system under which the registration number of the vehicle of a customer buying gas-oil was recorded, and in the case of purchases of more than 100 litres the customer’s name and address and the purpose for which the gas-oil was purchased was also recorded.  He said that his service station is situated in a very busy industrial estate and close to a motorway and to a town. His customers had a wide range of requirements. As to gas-oil, the purposes for which the Appellant supplied it included boats, agricultural machinery, and machinery used on construction sites.

56.	The Appellant said that he had never mixed gas-oil with DERV, not had he permitted such mixing. He considered that if someone had done so at this site there would have been evidence such as traces of spillage. He pointed out that Customs had never referred to any evidence of spillages, nor suggested how such mixing could have been done. The Appellant was unable to explain how the DERV tested in April 2000 came to be contaminated. He had received no complaints about contaminated diesel except the one raised by Mr Drury. As to that, he pointed out that Customs had taken samples from Mr Drury’s vehicle after Mr Hake had drained it and put in fresh fuel: it was the fresh fuel that had been found to be contaminated.

57.	The Appellant said that he was aware that small haulage firms often delivered fuel for the larger suppliers.  Sometimes haulage firms collect the fuel on one day and deliver it on the next, so that the fuel would be left sitting in the tanker overnight.  If the tanker had previously carried a different fuel contamination could occur. He had also been informed by a driver employed by one of the principal oil suppliers (which he named in his statement) that traces of gas-oil had been found in diesel depot tanks and in that supplier’s road tankers.  It was, he inferred, therefore at least possible for DERV to be contaminated before reaching the delivery point.

58.	At some time in 2005, the Appellant said, he had received a refund of VAT of £35,900, as the result of an overpayment. By that date it was possible to claim repayment for only three previous years, although the overpayments had been going on since 1998.  He had, he said, been paying VAT at the rate of 17½ per cent instead of 5 per cent in respect of phone cards, gas-oil, and coal. The Appellant’s then accountant had failed to advise him that he was paying at the wrong rate.

59.	Cross-examined, the Appellant admitted that there had been a discrepancy of 127,915 litres in the gas-oil sales.  He accepted that declared sales for the period had been 167,138 litres and should have been 295,053 litres. This, he said, was an unintentional error. He had purchased the fuel and relied upon his brother Surinder (Bobby) and his accountant to deal with the paperwork.  He had had nothing to do with the weekly or monthly work sheets. The diesel was metered through the pumps, and that was the basis of the work sheets which Bobby produced. The Appellant agreed that the work sheets should be kept accurately; it had become evident from the discrepancy that they had not been. The Appellant agreed that on one of the weekly work sheets it looked as if the pump meter had been turned back. However the Council had inspected the meters and had found that they had not been tampered with.    All the gas-oil sold was sold through pump number 10, which was fed from two tanks.  The Appellant agreed that there must have been a problem with the weekly work sheets; there had evidently been flaws in the book-keeping as well as accidental oversights. 

60.	The Appellant said that he had been accustomed to dip the tanks every Monday morning and again during the week. He also relied on the dips taken by Bobby every Saturday. The meter readings were always taken on Saturdays. Bobby did not come in on Mondays. The Appellant said that he never reconciled the dip measurements with the meter readings, since he never looked at the meters. These were difficult to read, and he always estimated the amount he needed to order from the dip measurements. Even if there were a significant difference between the two, he would not know that anything was wrong. He was unable to explain the difference between the amount bought and the amount sold.  It was possible that the meters were sticking and not recording some sales. The Council had found that the meters were sticking when they examined them. That was not in their report, because the purpose of the examination was to see if the pump meters had been tampered with.  He added that he had never done any book-keeping.  He had not been aware of the discrepancy until March 2001.

61.	Asked about his profit from sales of fuel, the Appellant said that he never knew how much money was coming in. He knew what fuel cost and what the profit margin was on each line. But he did not know how much was coming in weekly or monthly, though he knew the annual figure. He said that he was not interested in the daily sales or profit. He agreed that over the 14-month period there had been a significant discrepancy and that £25,583 extra, which was underdeclared, had come in. He had not been aware that that extra was coming in, and he had not failed intentionally to declare it.

62.	Asked about the locality of the service station, the Appellant said that it was less than half a mile from the M20, and that there were industrial estates before you reached the village. Large vehicles could not go into the village. The nearby hire companies had their own fuel tanks, but if they ran low and were unable to get a delivery they would come to the Appellant.  He agreed that the construction companies did buy in bulk, but they sometimes ran out, and then would buy from the Appellant.

63.	The Appellant accepted that there had been contaminated fuel in three of his tanks. He said that the tanks were clearly labelled, and that the diesel tanks were separated by the width of the forecourt from the gas-oil tanks.  There had never been any incidents of accidental mixing. He was unable to say where the contaminated fuel had come from, but he believed that it must have arrived contaminated.  He was aware of what the suppliers said, and accepted that stringent checks were made.  He knew that the main suppliers used a lot of subcontractors as well as their own tankers.  He said that he was aware that contaminated fuel had been found in a couple of service stations within the previous year or two, though none within the period under consideration. There had been complaints about it.  But there had been no complaints about the Appellant’s service station. At the time when Mr Drury purchased fuel from the Appellant, so did a large number of others, including Dawsons, who bought about 5,000 litres a week. There had been no complaint from them, and they were still good customers. They would have been the first to notice if there had been anything wrong.

64.	The Appellant said that he had done nothing to the gas-oil in the way of laundering, nor had be been mixing oils. The laundered fuel must have come from outside, possibly supplied by a subcontractor or haulier.  He said that he had no idea how laundering of oil was done.  It would not be possible to mix gas-oil with DERV without spillage. There would also be traces of the marker round the tank and its inlet.  There was  no means of pumping gas-oil across to a diesel tank.

The interviews

65.	The first interview was conducted by Mr Inkersole, with Narinder Singh Johal, who did not give oral evidence at the hearing. We hope that he will not mind if we refer to him, for brevity, simply as Narinder. He said in the interview, which took place on 21 September 2000, that he was primarily responsible for the shop and receiving payment for supplies of fuel. On infrequent occasions if the Appellant himself was absent he might have to superintend the receipt of a delivery of fuel. He was also responsible, most of the time, for dipping the storage tanks to see how much fuel had to be ordered. He said that there was no particular time for making deliveries.  They would be told that a tanker would arrive on a given date and either a.m. or p.m., and that was all. Sometimes a delivery would be made very late on the day mentioned, and sometimes not until the following morning. They would probably receive three or four deliveries in a week, and then perhaps only one the next week.  He said that it had recently become a rule that they were not allowed to dip a tanker coming with a delivery, and had to take on trust that the tanker contained the required amount. The third brother, Surinder Singh Johal, or Bobby, came in on Saturdays. He was responsible for the paperwork, and also dipped the tanks every Saturday. He would also take pump gauge readings. He added that the gauges were rather hard to read and difficult to see.

66.	Narinder said that all the tanks were labelled, and the tanker drivers had to make sure that they put the right fuel into the right tank, since if, for instance, they discharged petrol into a diesel tank it would close the service station down. The Appellant (or Narinder in his absence) would ensure that they delivered to the right tanks.  He had never known of a delivery to the wrong tank in the two years he had been working there. 

67.	Narinder said that the Appellant had a few customers who filled drums of oil, about 200 litres, for their yards and machinery. These were dealt with just as any other sale. The largest sales were big lorries, some of which had fuel tanks that would take up to 1,500 litres. The biggest sale he had ever made to a single vehicle had been 1,300 litres.  Again, that was treated as a normal pump sale.  

68.	The Appellant was interviewed on the same day.  He said that he was the sole proprietor of the business. (He was first asked about the VAT registration number that he had been using, which was actually the number under which Bobby had been registered in 1998.) He said that he provided information to his accountant from which the accountant compiled the VAT returns, and which he, the Appellant, signed.  He was aware of what he was signing, because he and the accountant, Mr Spurling, would go through the return. Apart from that, he said that he had little knowledge about VAT, though he understood the concept. The Appellant said that he had always ensured that everything relating to the business went to his accountant. At one time there had been missing paperwork, and it was after that that they asked Bobby to come in and deal with the paperwork.  

69.	The Appellant said that he was responsible for about 95 per cent of the ordering of fuel for sale, and for goods for the shop sales as well.  He explained about the system for ordering and delivery of bunkered fuel, which was delivered usually in amounts of between 25,000 and 32,000 litres at a time. The arrangement was made directly with the bunkering company. He had no control over where that fuel came from. For fuel to be sold through the normal pump sales, he could control where he purchased the fuel, but had no control as to the contractor who delivered it.  He could order fuel from one of the principal suppliers, but they did not have their own tankers nowadays, and contracted all deliveries out.  He agreed that if he was present at the site he would be responsible for receiving the deliveries, and if he were absent, perhaps 10 per cent of the time or less, this would be done by Narinder.  His usual procedure had been to dip the tanker as it arrived, to check the quantity, but now they were not allowed to do that.  

70.	The Appellant said that quite often a tanker would have two or three kinds of fuel on board, probably petrol, diesel, and four-star. When the tanker arrived he checked which product was coming from which part of the tanker, and that it was going to the right storage tank. This was checked with their paperwork and that of the tanker driver. He had never known of a delivery of the wrong type of fuel into the wrong tank. As to diesel and gas-oil, the Appellant said that they were never delivered in the same tanker; it would be either diesel or gas-oil. A delivery would be diesel, or diesel and petrol, or red gas-oil alone. The gas-oil tanks were separate from the diesel tanks, and about 20 feet away from them.

71.	The Appellant said that he was confident that all the deliveries received were accompanied by the relevant paperwork, and that all of that had been sent on to the accountant. It should therefore have been an accurate representation of the business.  He said that they had freedom of choice as to which supplier they used; they were not contracted to take supplies only from particular suppliers. They could, for instance, shop around for an advantageous price. However, they normally took supplies from either of two principal suppliers. He said that it was usually on Mondays that he organised the fuel deliveries for the next following week, by means of dipping and reading the meters and reconciling them. He had had no problems with the figures. If a supplier delivered significantly too much, that was his problem, not the Appellant’s; if he had room he would take the excess, if not he would simply say that he could not take it.  He said that he had had no problems recently with the meter readings, though one of the meters had got jammed in the past and had to be replaced. The pumps were old ones.  The local council checked the meters annually.

72.	The Appellant agreed with Narinder that now and again long-distance lorries would make purchases of up to about 1,200 litres. He had known of no occasion of anyone turning up with a small tanker and buying say 5,000 for his yard, though that had happened once or twice very recently because of the current fuel crisis.

73.	The Appellant said that he had been away on holiday for about 15 days in April, returning on or about 25 April, two or three days before Customs arrived. He had arranged for a delivery of fuel a day or two before he left, which would have been delivered after his departure. The delivery would have been dealt with by Narinder or Bobby, a day or two after the Appellant had left. After that, they would have sold fuel and would have had to order further supplies. What had been supplied would be apparent from the records. On his return, the Appellant had not been told of anything that had gone wrong nor that it had been necessary to order from some source other than the usual suppliers. Both Narinder and Bobby knew how to deal with any problem. On the Tuesday after his return a delivery had been made, with which the Appellant had dealt. Part of that load would still have been in the tanks when Customs arrived. The load had been about 30,000 litres, of which he had probably sold about 10,000. The remaining 20,000 had been taken away by Customs. The Appellant had, he said, no idea how contaminated fuel could have been present in his tanks. He thought that it had probably been contaminated when it arrived. It had been bunkering fuel from Securicor. As far as he was aware there should not have been and had not been any problem with mixed fuel.  

74.	Neither could the Appellant explain why there should have been an imbalance with purchases and sales of fuel. He said that so far as he was aware there were no major differences between purchases and sales. No purchase invoices had been kept back, though it was possible that an invoice could get lost: it would be a very isolated case. All sales of gas-oil went through the meter, and no sales were made that did not or were not accounted for. He could not account for gas-oil purchases having exceeded sales. He specifically denied ever having mixed diesel with gas-oil. Any mixture of diesel and gas-oil that had gone through his pumps had been sold unknowingly. He said that he was not aware that people sometimes sought to clean the red marker out of gas-oil and had never heard of its being done. He had never been involved in any such thing. Nor had anyone ever approached him and offered to sell laundered or mixed fuel, nor offered to sell him cheap fuel.

75.	Also on the same day, Bobby was interviewed. He explained that he worked at the site on Saturdays, and was largely responsible for the paperwork. All the paperwork generated during the week was put in a box beside the till. Formerly, such papers had been put in a pile beside the till and had sometimes been lost’ putting them all into a box, it was now very rarely that an invoice would be mislaid and they would have to contact the supplier for a copy. Saturday morning being quiet, Bobby would go through the box, and would write out the cheques for bills that needed to be paid.  He would be on the till for most of the day, and when he locked up at the end of the day, at about 5.30, he normally did all the pump meter readings and not them down on a pump reading sheet.  He then would work out the sales for the week.  All that would be passed on to the accountant.

76.	Bobby said that he thought the Appellant had been away for three or four weeks in April. He had had to make some orders for fuel during the time he was away. He mentioned that previously when a delivery arrived he would go on top of the tanker and dip it. This was now not allowed. He said that there had been deliveries of diesel and gas-oil during the Appellant’s absence, but they had arrived during the week when he had not been at the site. There had been deliveries of between 2,000 and 4,000 litres of gas-oil a week, but it did not all come in one tanker, but in pots of 2,000 litres each.

77.	Sales of fuel, Bobby said, were recorded on the till, as were all sales. There were pump meters, but they were difficult to read, though he did read them. He also did tank dips on Saturdays. He said that he had on a few occasions come across discrepancies between the gauge readings and the tank dip readings. In winter it was possible to misread the dips. He said that he had sometimes found discrepancies between the dip readings and the pump meter readings, though usually it was easy to reconcile these as he knew that there was a difference.  Occasionally it might appear that there was less in the tank than was to be expected, which gave cause for concern in case there should be a hole in the tank. He could, however, recall no major discrepancies, except for an occasion just before Christmas 1999, when he could not reconcile the difference between the two sets of readings. It was then found that one of the pumps was actually giving out more than it should have been, and this was not realised at once.  The product concerned was gas-oil.  He had asked Customs to come and recalibrate the meter.

78.	Asked if there was any reason to suspect that any fuel delivered had been contaminated when received, Bobby said that he could not suspect that as it was difficult to tell once the diesel was in the tanker. However, he remembered an occasion when a tanker had come in with half a pot of fuel oil missing, the driver being unable to account for where it had gone to.  The pot was leaking.  He should have had 5,000 litres in it, but had only something over 2,000.

79.	When asked if he had ever had occasion to hold back any information regarding the quantity or level of sales, or had, for any reason, put down a figure for sales that was less than the amount actually sold, Bobby’s answer was, “Well no, I don’t need to, no.”  He said that he had never been asked by anyone to record lower sales figures than the actual sales.

80.	Asked again about the meter readings and the weekly sales sheets, Bobby said that on a Saturday he would take all the pump readings down and write them on the weekly sheet, so that the closing reading for the day before became the opening reading for the new week. By doing that he could also see the movement in volume for any particular pump. Sometimes it might not be possible to read one of the figures, in which case he would have had to calculate the amount of diesel sold from the amount delivered less the amount remaining by taking a dip. In the week ending 25 March 2000 there had been a pump that had to be stopped working. One of the pumps was out of order, and Bobby said that he could not see the reading on one or two of the others. He had had to calculate the amount of gas-oil remaining, because a delivery of gas-oil was expected that day. Bunkering fuel was mixed in with the fuel that the Appellant was going to sell, because there was no separate tank for bunkering.  There had also been an occasion on which a load which should have been 34,000 litres of bunkering fuel had actually only contained 18,000. The suppliers might have recorded that they had supplied 34,000 litres. The interview ended by Bobby saying, in answer to a specific question, that he was not aware that any deliberate mixing of diesel and gas-oil had taken place.

81.	A further interview of both the Appellant and Bobby took place on 2 March 2001.  Both were asked at the beginning whether they had read Notice 730, and said that they had. Each said that he wished to assist the inquiry. The interview effectively began with Mr Inkersole asking the brothers, “...has there been some manipulation regarding the sales of stock at the Aylesford Service Station?”. Both brothers answered in the affirmative. Mr Inkersole then asked what that manipulation had been, and said that he had been told, but it had not been officially confirmed, that “there [had] been sales of a fuel product at the service station that had not been treated properly.”  He asked if that was right, and Bobby answered “Yes,” and said that it related to the sales of gas-oil.  Mr Inkersole said that it appeared that the Appellant had purchased significant quantities of gas-oil which were not reflected as sales of gas-oil in the weekly and monthly sales sheets. Then the following exchange took place:

“Inkersole:	...It was our view initially that gas oil may well have been, er, mixed in some way with other products or delivered through your diesel pumps and that that had not been properly declared.  I’m led to believe that that isn’t the case but you did something else with that gas oil product.

H Johal:	We sold it.

S Johal:	We sold it as gas oil, yes.

Inkersole:	You sold it as gas oil?

S Johal:	Yes.

Inkersole:	And who did you sell this gas oil to?

H Johal:	Er, customers.

S Johal:	Through the pump.

Inkersole:	So you are saying to me that er, somewhere in the region of 160,000 litres of gas oil, which I think is the volume we’d identified, has been sold to customers for a qualifying use....

S Johal:	Yes.

Inkersole:	... as gas oil, 

S Johal:	As gas oil, yes.

Inkersole:	and that therefore er, its been sold as a rebated product and no additional gas oil is, er, sorry no additional duty is due from that sale

S Johal:	That is correct.”

Then Mr Inkersole said that he did not accept that explanation.  He continued: “As far as I can see there is no logical financial benefit for you to have sold that gas oil off record unless it was being used for road fuel oil, which is not a qualifying use as you will be aware.”  He then expressed the view that the Appellant had sold that gas-oil to customers knowing that it was to be used as road fuel and not for a qualifying use.  That was denied.

82.	Mr Inkersole then asked for an explanation of what had happened in respect of the sales of gas-oil and why they had not been accounted for. Bobby agreed that the amount of gas-oil recorded had been purchased, and that the sales records did shew somewhere in the region of 160,000 litres less than had been purchased. Bobby explained the reason for that as being very imperfect book-keeping, though there had been no deliberate understatement. He said that all purchases of gas-oil had been included in the business records, though it was possible that a few might have been mislaid.  It was possible that one or two delivery notes had been lost. The Appellant mentioned also that there had been three burglaries at the site. Mr Inkersole said that although the Appellant might have sought to keep everything in the business records he might still have “been involved in some illegitimate sale of the product”. He went on to say that approximately 160,000 litres of fuel “which we will take to be gas oil” which had passed through the premises which were unaccounted for and the appellant was saying that that was purely because of the ineffective method of accounting. The Appellant agreed, and Mr Inkersole said that he did not accept that.  There followed a lengthy conversation between Mr Inkersole and Mr Spurling, as to what had been done and whether it was dishonest or not.  It was repeated by the Appellant that any erroneous pump readings had been written down in all innocence, and that there had been no intent at any time of defrauding Customs. Any differences between purchases and sales were the result only of inaccurate book-keeping.

83.	The Appellant said that the 21,000 or so litres of mixed fuel must have been delivered by a third party. There had been five or six loads from a haulier referred to as Freight, and he would have had no idea that mixed fuel was going into his tanks, because all that he could have seen was just oil going into the tanks. Mr Inkersole then related at length the inquiries that had been made of the suppliers and hauliers, and mentioned that he still had further inquiries to make, he asked if there was any other reason for the contamination having occurred.  The Appellant said that he had not put any gas-oil into his diesel tanks, nor was he aware of any accidental mix-up in delivery. He agreed that the only other possibility would be a delivery of already contaminated fuel. Mr Inkersole expressed the view that the possibility that the Appellant had mixed the fuel oils in drums of cans was entirely feasible. Most of the rest of the interview was a conversation between Mr Inkersole and Mr Spurling.

The Commissioners’ contentions

84.	Mr Christopher Mellor, for the Commissioners, handed up a helpful skeleton argument.  He began by referring to the test for dishonesty as enunciated in R v Ghosh [1982] QB 1053, as repeated in Ghandi Tandoori Restaurant v Customs and Excise Commissioners [1989] VATTR 39, 47.   He conceded that the burden of proof with regard to the penalties under section 60 lay upon the Commissioners, and that being a matter of dishonesty the degree of proof had to be on the balance of probabilities with a high degree of probability (see Ghandi (supra)).  He accepted that the burden of proof lay upon the Commissioners to prove that the gas-oil was sold as road fuel for the purposes of the appeal, since the act of the Appellant relied upon by the Commissioners was itself an act of dishonesty, namely that of selling gas-oil mixed with DERV as road fuel.  The two crucial acts were the selling of the gas-oil as road fuel and the failure to disclose sales of gas-oil.  The size of the discrepancy itself was such that it could not have been anything but intentional.

85.	The matters on which the Commissioners relied were, first, that contaminated fuel was found in the Appellant’s tanks, in which there was between 5 and 10 per cent of gas-oil. Secondly, the Appellant failed to provide any explanation for the contamination. The contention that the contamination was the result of mixing by haulage subcontractors was not credible. That was clear from the extensive inquiries made by Customs of the main suppliers and the haulage contractors. Nor had the Appellant ever made any complaint about receiving contaminated fuel. Mr Mellor also relied upon Mr Drury’s evidence of having had trouble with a vehicle as a result of contaminated fuel supplied by the Appellant.  The Appellant was unable to provide any explanation for the fact that his purchases of gas-oil were 43 per cent greater than declared sales of gas-oil. The explanation of innocent errors was not credible.  Mr Mellor pointed to four particular reasons why that explanation was incredible: first, that it was standard practice to compare recorded sales with purchases; secondly, that Bobby had a degree in business studies and must be familiar with such a practice;  thirdly, that a comparison of sales with purchases was necessary in order to be able to order stock, and therefore the low sales of gas-oil compared with the amount purchased must have been evident; and fourthly, that the meters were read weekly, and such a significant discrepancy could not have been missed. 

85.	Mr Mellor pointed out that the Appellant’s records shewed that there were excess purchases of DERV as contrasted with the recorded sales of DERV.  Also, the location of the service station was away from main traffic routes and there was therefore considerable doubt as to the amount of gas-oil that would ordinarily be sold for qualifying uses. If gas-oil had been sold for qualifying purposes it remained a query why it had not been declared; the explanation of errors in meter reading and book- keeping was not credible.

86.	As to laundering, Mr Mellor contended that the suppliers would not be supplying laundered products.  It was accepted that the list of suppliers interviewed was incomplete, and that there had been no suppression of purchase invoices. The Commissioners relied upon the suppliers’ statements, and on the fact that the Appellant had made no complaint about receiving contaminated fuel, although he said that it might have been supplied by one of the drivers. The inference was that something had been done by the Appellant to launder the gas-oil after it had been delivered.

87.	In support of the penalties, the Commissioners relied upon the fact that the Appellant was selling gas-oil mixed with DERV as road fuel, and that he purposely omitted to declare the sales of gas-oil to an extent that was too great to be unintentional, and in so doing acted with the dishonest purpose of evading VAT.  It could not be argued, Mr Mellor contended, that in doing those acts the Appellant would not have known that what he was doing was wrong (see Ghosh (supra)). The amount of mitigation, at 15 per cent, that the Commissioners allowed was, in the circumstances, reasonable.

The Appellant’s contentions

88.	Mr Richard Barlow, for the Appellant, said first that the Commissioners were now putting their case on the basis that the Appellant had sold gas-oil as gas-oil and that therefore duty was payable and a penalty due.  Paragraph 42 of the statement of case dealt only with the sale of gas-oil mixed with DERV. The Commissioners had not contended that the penalty was due in respect of the amount of tax of £1,251, which amount had been admitted for a very long time; and the facts which might go to shew dishonesty were very different.  No penalty was due in respect of that sum, nor had the penalty been raised on the basis that gas-oil had been sold as gas-oil.  It was not so pleaded in accordance with the requirements of the Value Added Tax Tribunals Rules 1986 (rule 7(1)). It was obligatory on the Commissioners to prove that the Appellant acted dishonestly. Mr Barlow conceded that it could be dishonesty on the part of the Appellant if someone acted dishonestly on his behalf and with his knowledge, and in the context in which he had allowed the dishonest acts to occur or had adopted them.

89.	This appeal, Mr Barlow said, was about the additional amount of gas-oil purchased which was not recorded in sales.  If it had been sold as gas-oil, then no additional tax was due.  It was for the Commissioners to establish that it had been sold as DERV.  Some gas-oil was found mixed with DERV on 28 April 2000.  That was simply the starting point, but it afforded no proof that the Appellant was or had been knowingly selling the mixed fuel.  In the ordinary course of things the Appellant would not have seen the mixed oil.

90.	There were three possible situations upon which the Commissioners might rely.  First, that the mixed oil had been supplied by known suppliers. It was not suggested that the suppliers were other than honest. For that reason the list of suppliers was incomplete, which was immaterial. But it was accepted that that had not happened, nor that there was any evidence of any additional supply or off-record purchase.  Secondly, that the product had been delivered in a mixed state by someone acting for, but without the knowledge of, one of the suppliers. That was the most likely possibility. It is known to be done by organised criminal gangs, but it was possible that a driver could have been subverted. This possibility had been rejected by Customs; there had been no complaints, and the Appellant had not known of the mixture until 28 April 2000. The third possibility was that the Appellant had “done something” to the oil after delivery. We were told that it was a messy industrial process, which could not realistically have taken place at the Appellant’s premises.  For Customs to say that “the Appellant might have done something” is no proof of anything.  It should also be remembered that Mr Drury had bought fuel on 11 April from another service station. Customs having abandoned all three of those possible scenarios, they were left with very little upon which to base their case.  If the Appellant had mixed the oils, it would have been red gas-oil, not laundered.

91.	Mr Barlow examined that part of Customs’ case relating to the size of the discrepancy, and whether it was credible that such a discrepancy could have been missed or remained unnoticed. The difference between deliveries and sales was 43 per cent of gas-oil. However, Mr Barlow pointed out, gas-oil formed only about 10 per cent of sales, so that the discrepancy in the context of the whole business was, at the most, 4.3 per cent. It should not be forgotten that the price per litre of gas-oil was then about 20 pence, and of DERV about 79 pence. The discrepancy was, therefore, only about one fifth of the value of sales, or 0.86 per cent. The 43 per cent of gas-oil sales as a proportion of the total sales of the business, in money terms, was minute. The evidence also shewed that the business was run on the lines of a corner shop, and the checking of money was not kept constant; there was no need to do so. Bobby’s reconciliations of dips and meter readings sufficed. He did not do a full cash reconciliation.  The turn-over of the business was approximately £1,500,000 a year, so that a discrepancy of the order of £40,000 was only 2.6 per cent of that figure.  The Appellant clearly thought that he was making a profit if he was charging more for sales than he was paying for the product. It was an unsophisticated business which did not take any real notice of overheads. The errors in recording did not amount to dishonesty, nor were they proof of dishonesty; they were the result of the manner in which this family business was run.

92.	There was no evidence, Mr Barlow pointed out, of any previous sales of mixed products. Mr Drury’s evidence did not suggest that there had been. There was no evidence that Mr Drury’s trouble was caused by the Appellant’s fuel; evidently Mr Drury’s other vehicles suffered no such problems. The evidence suggested that fuel bought from Parkfoot was also contaminated.  Nor was there any evidence that the presence of contaminated fuel in the Appellant’s tanks was other than a one-off incident. There is no positive evidence to shew that the Appellant was responsible for the contamination. There had been no complaints other than from Mr Drury, nor from bunkering purchasers. Customs had not interviewed any of the haulage drivers. Mr Bussandri, of Futura, did say that his company did use subcontractor hauliers. It was not for the Appellant to prove how the contaminated oil came into his tanks.  It was necessary for Customs to prove that the Appellant had sold mixed products knowing them to be mixed.  The evidence, taken as a whole, did not support that conclusion.  

93.	In the circumstances, Mr Barlow contended, all that was left was that £1,251.81 was due from the Appellant to Customs.  He suggested that if the Tribunal found that the only discrepancy was in gas-oil sold as gas-oil, the price should be left to be agreed between the parties.

Conclusions

94.	The evidence in this appeal had roamed over quite a wide area, and had dwelt upon the finding of a mixture of laundered gas-oil and diesel in the Appellant’s tanks.  We therefore began by reminding ourselves that the only matters before us were, first, whether the assessment under section 73, for £14,206, was properly raised, depending upon whether it has been established that the Appellant was selling gas-oil as DERV; and secondly, as to the penalty under section 60, whether the Appellant did act dishonestly in failing to account for the full amount of VAT in respect of the sales.  As to both the assessment and the penalty, the principal issue is whether the Appellant was knowingly and dishonestly selling gas-oil as road fuel, whether mixed with DERV or otherwise.  If he was, and was doing so with the intention of evading VAT, then it would be difficult to avoid the inference that both the assessment and the penalty sere correctly imposed.  If, on the other hand, we were to conclude that he was not selling gas-oil as road fuel, mixed with DERV or otherwise, and that the discrepancy between the purchases and sales of gas-oil came about otherwise than as a result of the Appellant selling gas-oil for an illicit purpose, it would not appear that he had been acting dishonestly, unless someone else had carried out these fraudulent acts on his behalf and that he had known of them and adopted them.

95.	Much was made of the evidence of Mr Drury and Mr Hake, and we therefore gave it all due consideration.  We came to the conclusion that it had little bearing on the issues before us, save in so far as it was the incident which attracted the attention of Customs to the Appellant’s service station.  However, it threw up one or two tangential facts.  The first was, that contaminated fuel was found in one of Mr Drury’s vehicles after Mr Hake had emptied its fuel system and refilled from a source not that of the Appellant.  The second was that, contrary to his evidence, in which he said that it was very unlikely that he had filled up at a service station other than that of the Appellant, Mr Drury had indeed refuelled at other service stations on several occasions within the relevant period, and on such a date that he might well have had fuel left from that refuelling in his vehicle when it started misbehaving.  That suggests that yet another, a third, service station may have been selling contaminated fuel.  But neither of those facts alters the undoubted fact that the Appellant was found to have contaminated fuel in his tanks.  That fact naturally raises an immediate suspicion that the Appellant was knowingly selling mixed fuel.  The likelihood is that he had sold some mixed fuel; his case is that he knew nothing about its being mixed, and if he did so, did so unwittingly.   We consider it important to bear in mind that the contaminant was not just red gas-oil, but laundered red gas-oil.

96.	We consider that the main significance of Mr Drury’s and Mr Hake’s evidence is simply that it provided the trigger which caused Customs to take samples from the Appellant’s tanks.  It goes no further than that so far as concerns the Appellant’s acts and intentions.  But the two tangential points referred to in the previous paragraph do suggest that other services stations than that of the Appellant had, at the relevant period, mixed oils in one of more of their tanks.  There appears to have been a certain amount of such fuel about in that area at that time.

97.	Mr McEachen had also said that 49,184 litres of diesel had been sold more than had been delivered.  That, he said, was 0.019 per cent of total sales, and a part of that figure may, he said, have been the opening stock of diesel.  That figure was very much less than the amount of gas-oil said to have been bought in excess of what had been sold, only 37.7 per cent, and would therefore appear not to account for sales of that amount of gas-oil as diesel. It has to be remembered, also, that that amount of 49,184 litres was arrived at by taking into account Mr McEachen’s belief, since shewn to have been erroneous, that one or more pump meters had been rewound (see paragraphs 16, 19 and 54 above).  That apparent discrepancy should therefore be revised, though by what amount it is probably impossible to say. One might perhaps expect that if a significant quantity of gas-oil had been sold as diesel there might have been an equally significant surplus of diesel remaining, unless deliveries had been reduced accordingly.  But if the diesel which the Appellant was selling was stored in the same tanks as the bunkering fuel he would derive far less benefit from such a fraudulent act.  Mr McEachen also said that there was no evidence that the Appellant had sought to conceal the gas-oil purchases, nor that anything underhand had been done.  He had conceded that it was possible that there had been a mixture of gas-oil and DERV in the Appellant’s tanks only in April 2000.  Also of importance, he said that it was not impossible for subcontracting hauliers to deliver contaminated fuel unbeknownst to their employers. That was one possible way of accounting for the diesel contaminated with laundered gas-oil in the Appellant’s tanks, and the apparent presence of contaminated diesel in the service stations visited by Messrs Drury and Hake.

98.	Mr McEachen had also said that mixing fuels was a big operation; it could be done in barrels, but that was clumsy and would probably involve spillage.  Tanker lorries would deliver their loads without spilling a drop.  There was no suggestion that there were pipe connexions between the Appellant’s tanks.  In fact the Appellant said that there was a pipe link between the two gas-oil tanks, but no other such link.  That seemed to us to suggest a greater likelihood that the contaminated oil had been delivered from a tanker than that the Appellant had carried out any mixing operation himself.  We do not doubt that the main suppliers, and in particular those who supply the Appellant, carry out stringent checks in order to prevent the mixing of oils and the misdelivery of the wrong oil. The evidence of the suppliers, in any case, is of little, if any, relevance in view of the fact that the contaminant in the Appellant’s tanks was not just red gas-oil, but laundered red gas-oil. But there were suggestions from both parties that the occasional rogue haulier or driver might deliver a contaminated load. We also bear in mind that Mr McEachen said in evidence that oil from the gas-oil tanks had not been tested.  There was therefore no evidence that any laundered gas-oil had come from the Appellant’s gas-oil tanks and had then been mixed with diesel. 

99.	We considered with care the evidence of Mr Inkersole relating to the telephone conversation that he mentioned with Mr Spurling on 28 February 2001, when Mr Spurling had said that the Appellant was ready to admit “off record” sales of fuel in line with the figures produced by Customs. That admission was never made by the Appellant or his brother at the next following interview on 2 March 2001.  Mr Inkersole produced no note of that conversation, which, in view of the importance of such an admission, we found surprising: it would have been quite an important document. It did not appear that Mr Spurling had referred to the admission again at any time. There was no suggestion that it had been expressly withdrawn and rescinded, simply that no such admission had been made. When it was put to the Appellant and Bobby that gas-oil had been sold as diesel, in the last of the interviews, they both denied categorically that gas-oil had been sold for anything other than a lawful purpose (see the passage quoted from that interview in paragraph 81 above).  There was no suggestion that they had already admitted selling it unlawfully. Considering that evidence, we are not satisfied that any admission of dishonest acts was made. Perhaps Mr Inkersole was mistaken about what was said, or misremembered it at a later stage.

100.	One of the pieces of evidence upon which Customs relied was contained in the weekly record sheets produced by the Appellant. From these, it was said by Mr Inkersole, it appeared that something was going through the diesel pumps, apparently not diesel, which was giving rise to higher readings than were consonant with the purchases, and taking also into account the apparent fact that pump meters had been rewound. From that he inferred that gas-oil had been supplied with diesel as road fuel.  At first, Customs had considered that the Appellant had suppressed purchase invoices, but it was later accepted that all purchase invoices had been produced. However, he expressed the view that nothing had been produced that was evidence of any meter reading problem. It was not entirely clear what kind of evidence he had in mind.  It seemed to have been established by the local authority that the pump meters had not been tampered with. The Appellant’s evidence was that they had thought that the meters were not in good working order, though that was not mentioned in their report.  The Appellant’s evidence was that the meters were not always working properly and did not always shew the true amount of fuel provided.

101.	Customs also seemed to rely upon the amount of the discrepancy, 43 per cent of the amount of gas-oil sold over a 14-month period, as giving rise to the inference that the discrepancy had been brought about intentionally, since it was so large that it must have been detected.  That was coupled with the lack of evidence of the use to which purchases of gas-oil put the oil.  To this, Customs added the suggestion that as the Appellant’s site was off the M20 and had little passing traffic it was unlikely that there would be much lawful sale of gas-oil. We bear in mind that even in such a site in the kind of position described by Mr Inkersole, the Appellant was still turning over £1.5 million in a year. We were impressed by Mr Barlow’s analysis of the discrepancy in the context of the whole of the Appellant’s trade.  While the extent of the discrepancy may be 43 per cent if one examines no more than the gas-oil situation, in the context of the whole business that dwindles down to 2.6 per cent, which is a very small percentage of the total sales.  If the Appellant and Bobby did not, as they said, and which was not challenged, keep an eye on much more than the amount of each category of fuel that it was necessary to order from week to week, and otherwise only take notice of the annual figures, it seems to us that to miss an error of 2.6 per cent over a 14-month period, or approximately 0.185 per cent in any given month, is not unlikely.  The apparent excess sales of diesel, of 49,184 litres, amounted in all to about 0.02 per cent of all sales, and that figure was dependent upon the mistaken belief that one or more pump meters had been rewound. The difference between the declared diesel sales and that metered through the pumps was 2,382 litres, which was slightly over 0.001 per cent of metered sales. It is a little surprising that the Appellant’s accountant did not notice the discrepancy, though it is possible that by the time that Customs began to take an interest in the contents of the Appellant’s tanks the accountant might not have got to that stage of doing the accounts for that period.  There was no evidence as to that.

102.	We therefore come to consider the book-keeping errors which, according to both the Appellant and Bobby, gave rise to the discrepancy.  To say that “book-keeping errors”, unspecified, or an oversight, also unspecified, were the whole cause of the discrepancy, or of the failure to notice the discrepancy, at first sight looks like only half an explanation, or merely the label for the type of explanation without the explanation itself. (We were surprised that Mr Spurling was not called to give evidence, but we bear in mind that he was no longer acting for the Appellant.)  However, in the light of the figures that have been put before us, and which appear to us to be correct, what seems to have happened is that there may have been an accumulation of very small errors over a period of rather more than a year, not one massive error as Customs appear to be suggesting.  When we put to ourselves the question which Customs has sought to answer, Can such an error be an innocent mistake? we come to the conclusion that it is not impossible that it was a series of innocent mistakes.

103.	In our view, the whole of this case turns upon the issue of dishonesty, both as to the assessment and the penalty. If dishonesty be not established, both, in our judgment, fall to the ground.  It is for Customs to prove dishonesty, they having alleged it.  The standard of proof is the civil standard, on the balance of probabilities.  However, dishonesty is a serious allegation, and a high degree of probability is required: see Khawaja v Secretary of State for the Home Department [1983] 1 All E R 765, HL, per Lord Bridge of Harwich, adopted and applied by Judge Medd QC in Ghandi Tandoori Restaurant v Customs and Excise Commissioners [1989] VATTR 39.  It is not disputed in this appeal that that is the correct standard of proof.  It appears to us, therefore, that Customs must prove to that standard that the Appellant was knowingly selling gas-oil as road fuel, mixed with DERV or otherwise, and had knowingly and dishonestly endeavoured to conceal that fact by underdeclaring sales. In the light of the evidence which we have summarised above we look to see whether it has, on the balance of probabilities and to a high degree of probability, established that the Appellant did such dishonest acts over the 14 month period under consideration, or that someone else carried them out and he knew of them and adopted them.

104.	The following aspects of the evidence come to mind.  First, there was no evidence that the Appellant had contaminated fuel in his tanks on any other than the occasion upon which it was found in his tanks. Secondly, the contaminant was laundered gas-oil, and there was no evidence, nor was it suggested, that the Appellant had done the laundering himself, nor was there any evidence as to whence it had come.  A possible inference it seems to us, is that it was delivered as contaminated diesel, which in turn suggests that it was indeed a one-off incident.  Thirdly, there was some evidence that contaminated diesel was being sold by other service stations at that time.  Fourthly, there was no evidence that the Appellant had mixed gas-oil with diesel. Fifthly, although there was evidence of a significant disparity in the amounts of gas-oil purchased and sold, the disparity between the amounts of diesel purchased and sold was far smaller.  Sixthly, the amount of the discrepancies in the context of the Appellant’s whole business was very small, and looked at on a monthly basis minute.  That, in our view, as we have said above, suggests at least the possibility that very small errors were not noticed.

105.	It follows in our judgment that Customs case, as the evidence eventually unfolded at the hearing, falls well short of establishing, on the balance of probabilities, the dishonest sales of gas-oil as diesel and the consequential attempts to conceal such acts. It certainly does not approach the necessary high degree of probability. We continue to bear in mind the want of any real explanation from the Appellant concerning the discrepancy and the fact of the contaminated fuel.  But what was said by him and on his behalf by Bobby was equally consistent with guilty knowledge as with innocent mistake.  It is difficult to see what else he could have said; and if he was innocent, why should he admit guilt?.

106.	For the above reasons we allow this appeal.  The assessment under section 73, in respect of the difference between VAT on diesel and VAT on gas-oil, is therefore discharged. The result of that is that the Appellant remains liable for the admitted underdeclaration in respect of the 127,915 litres of gas-oil, which Mr Spurling had quantified at £1,215.19.  Mr Inkersole said that that figure might have to be revised in the light of the varying price of gas-oil over the relevant period.  We leave that matter to be decided between the parties, with liberty to apply to the Tribunal in the case of any real dispute as to the figures.  The Appellant also remains liable for the admitted amount of £821.63.  The penalty under section 60 is also discharged.

107.	The Appellant applied for costs in the event of his success.  We consider that the costs should, in the normal way, follow the event, and direct that Customs pay the Appellant’s costs of and incidental to this appeal.  Again, in the event of any dispute as to costs, each party has liberty to apply to the Tribunal.

ANGUS NICOL
CHAIRMAN

RELEASED: 13 October 2006

LON/02/8080