First-tier Tribunal (Tax)

[2010] UKFTT 616 (TC)

TC00858

Appeal number: TC/2009/14695

VAT- company failed to make tax returns – liquidated owing £223,503.84 - appellant sole director held responsible for failure under section 61 Value Added Tax Act 1994 – penalty of £92,852.25 against director – penalty properly imposed-   appeal dismissed.

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FIRST-TIER TRIBUNAL

TAX

                                                  ROD LITTLEY                                 Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

                        TRIBUNAL:  DAVID S PORTER (TRIBUNAL JUDGE)                                                             SUSAN C STOTT (MEMBER)                              

Sitting in public at 11Albion Street, Leeds, on 12 October 2010

Mr Chapman, of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

No one appearing for the Appellant

© CROWN COPYRIGHT 2010

DECISION

1.       The Appellant (Mr Littley), the Managing Director of Followit Ltd (the Company) appeals against a penalty of £92,852.25 arising for the Company’s failure to file VAT returns for the period 04/05 to 07/08 on the due date. Mr Littley says that he did not act dishonestly and that he relied on his bookkeepers to provide the returns.  The Respondents (HMRC) say that Mr Littley was the sole director and was fully aware of the fact that the Company had failed to make appropriate returns. He had allowed the company to pay on centrally raised assessments when he knew full well that those amounts bore no relationship to the actual business carried on by the Company.

2.       Mr Chapman, of counsel, appeared for HMRC and produced a bundle of documents for the Tribunal. Alison Parker, Barry Rush and Chris Elliot attended as witnesses. Mr Bush gave evidence under oath. No one appeared for the Appellant.

3.            This appeal was called on for hearing at 10.30am on 12 October 2010. There was no one to represent Mr Littley. The Tribunal started the appeal at 12.00 pm. Mr Littley was aware of the date and time of the hearing and had failed to arrive at the appropriate time. The tribunal was advised that he had been made bankrupt. No other information was provided indicating what Mr Littley’s intentions were. We decided to continue and hear the appeal in the absence of Mr Littley. Rule 33 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 enables us to do this. 

The facts.

4.       In the absence of Mr Littley, we could only rely on the evidence set out in the bundle supplied by Mr Chapman, and the confirmation, under oath, by Mr Bush that the contents of his witness statement were true. None of the witness statements had been challenged by Mr Littley and we have treated them as evidence in chief. The Company applied to register for VAT as an intending trader with an expected turnover of £150,000 on 11 January 2005 and was registered for VAT from 19 January 2005. Mr Littley had previously been involved with another company Followit (UK) Limited which became insolvent on 11 August 2005. That company was a distribution agent for a Swedish Company Followit AB. Followit Limited, the company involved in this appeal, imported tracing devices for use in the UK by Scottish Power and the Police. The devices sold at around £400 to £500 each. Mr Littley was the sole director and worked from home. He contacted HMRC in 2005 to advise that the returns for 04/05 and 07/05 would be late. Mr Littley had employed a Mr Mahmood as his bookkeeper but he had dismissed him and he understood that Mr Mahmood had now been sent to gaol for fraud. He had not immediately appointed another bookkeeper, but indicated that he had attempted to bring the books up to date himself. HMRC had attempted unsuccessfully to contact Mr Littley between September and December 2005. Correspondence addressed to Mr Littley in December 2006 was returned to HMRC undelivered. It was not until March 2007 that Mr Littley advised HMRC of his new address. HMRC then wrote to the Company advising that all the VAT returns up to 01/07 remained outstanding. By this time the Company was employing Nicola Richardson as its bookkeeper.  She contacted HMRC on 21 June 2007 and asked for duplicate returns for the periods 04/05 onwards. A visit was arranged for 5 June 2008 to discuss VAT matters and HMRC were advised by Mr Littley at that meeting that he had left the completion of the returns to his previous bookkeeper, who had ultimately left, taking some records with him. Those records had been retrieved and his new bookkeeper, Nicola Richardson, had been engaged in late 2007. Until the visit he was unaware of the company’s VAT liability. The returns uplifted by HMRC revealed a total net liability of £170,959.25. Centrally issued assessments, which had been paid for all the periods, ranged between £300 and £700 and totalled £6,656. As a result the Company’s VAT affairs were referred to the Cross Tax Evasion team. On 6 October 2008 HMRC wrote to the Company advising that they intended to undertake an enquiry under PN 160 and a meeting was proposed for 12 November 2008. (A verbatim report, both handwritten and typed, of that meeting appears in the bundle). Mr Littley confirmed at the start of that meeting that there were no health problems of which HMRC should be made aware. In his notice of appeal he alleges that there was no mention in the interview to his extremely difficult marital breakdown and family circumstances, which had been ongoing since August 2005. Unfortunately he has not elaborated on those matters in his notice. We are sure that he did not mention these problems at the interview, particularly in light of the fact that he confirmed that there were no health matters of which he needed to advise HMRC. At the meeting Mr Littley conceded that the returns were ultimately his responsibility although he relied on his bookkeeper. He told HMRC that Mr Mahmood had a heavy work load for the first 16 months and that he had advised Mr Littley to pay the assessments rather than paying nothing. He confirmed, again, that he had made no attempt to complete the returns himself as he was relying on his bookkeepers. Mr Littley said that he had purchased stock, paid consultants and taken drawings of £3000 to £4000 each month. The Company had also lost money as a result of the Euro exchange rate between the United Kingdom and Sweden. He confirmed that he had charged, and been paid, VAT on all the Company’s invoices. He indicted, however, that the company was not in a position to pay any of the outstanding VAT. Over the 3 year period he had raised about 200 invoices and Mr Mahmood had raised 1 – 2 per week at the beginning of his employment with the Company. The invoices had averaged £2000 but there had been some issued for £50-60,000. It appears that Mr Littley knew that the returns were outstanding as he had been pressing his bookkeeper to complete the returns and file them with HMRC. On 1 July 2009 Mr Littley was advised of the penalty of £92,852.25.

5.       Mr Littley, in his Notice of Appeal, considered that the points that he had made at the interview had not been taken into consideration and that he was still unsure why it was considered that he had been dishonest. At no time was his conduct deliberately or knowingly dishonest or misleading. He had co-operated fully with the Officers. We note that the penalty had been reduced to 50% because of that co-operation. He thought that HMRC had accepted that the low payments had been made because his bookkeeper had advised him to make the payments. He had been advised that there would be a ‘routine inspection’ as the Company had been trading for 3 years and had not yet had an inspection. The information for the returns was available before the visit. He had not appreciated that holding on to the records would mean that HMRC had ‘uplifted them’ thereby suggesting that he had attempted to conceal the information. His bookkeeper, Nicola Richardson had spent some 4 hours with one of the Officers and at no time, even when Mr Littley was present, had there been any suggestion that a penalty would be raised. He feels that he has been persecuted and harassed by HMRC as he had been incorrectly notified of the reasons for the penalty and a different one had been issued. That had been at 60% but had subsequently been reduced to 50%

The Law

6.       As the alleged dishonest evasion occurred before I April 2009 the provisions of sections 60 and 61 of Value Added Tax Act 1994 apply. The new penalty rules brought in by the Finance Act 2008 only take effect for returns after 1 April 2009.

       Section 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 section (6) below, to a penalty equal to the amount    of VAT evaded or, as the case maybe, sort to be evaded, by his conduct.

 ….(6) where, by reason of conduct falling within subsection (1) above, a person is convicted of an offence (whether under this Act or otherwise), that conduct shall not also give rise to liability to a penalty under this section.

 Section 61 (1) Where it appears to the Commissioners-

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

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

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

61 (2) A notice under this section shall state-

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

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

Section 61 (3) Where a notice is served under this section, the portion of the basic penalty specified in the notice shall be recoverable from the named officer as if he were personally liable under section 60 to a penalty which corresponds to that portion; and the amount of the penalty may be assessed and notified to him accordingly under section 76. (Power for the Commissioners to assess)

Section 61(4)…..

Section 61 (5) No appeal shall lie against a notice under this section as such but-

     (a)………..

(b)  where the assessment is made on a named officer by virtue of subsection (3)  above, the named officer may appeal against the Commissioners’ decision  that the conduct of the body corporate referred to in subsection (1) (b) above is, in whole or part, attributable to his dishonesty and against the decision as to the portion of the penalty which the Commissioners propose to recover from him.

Section 70 (1) provides that the Commissioners or the Tribunal may reduce the penalty to such amount (including nil) as they think proper, save that subsection (4) lists those matters that cannot be taken into account when considering a reduction and they are:-

(a)   an insufficiency of funds.

(b)  The fact there has been no or no significant loss of VAT

(c)   The fact that the person liable to the penalty acted in good faith

Section 73 provides that the Commissioners must make the assessment to the best of their judgment

Section 76 provided that the Commissioners must assess an appropriate penalty

The submission by Mr Chapman

7. Mr Chapman submitted that Mr Littley could not abrogate his responsibility by blaming his bookkeepers up to 2006. He ran the business and was responsible for seeing that correct returns were made. He failed to contact HMRC to advise them of his difficulties. He has accepted that he paid the centrally issued assessments when he must have known that the figures were far too low. He has conceded that the average invoice was £2000 and in the company’s application for registration indicated that the turnover would be of the order of £150,000. He accepted at the meeting on 12 November 2008 that he had been using the VAT received from his customers to finance the business and to provide his drawings. In the circumstances the penalty was properly raised and the appeal should be dismissed.

 The Decision

7.       We have considered the law and the facts and dismiss the appeal. We have been told the Mr Littley had been involved with Followit (UK) Limited which became insolvent on 11 August 2005. Significantly, he started Followit Limited on 11 January 2005 before the earlier company became insolvent. He must have had some experience in running a company before he took on the Company. He had indicted when he registered for VAT that he thought the Company would turnover £150,000. Nicola Richardson, his subsequent bookkeeper, has provided VAT returns for the entire period. In the quarters for 04/05 to 01/06 the total turnover of the company appears to have been £263,722 and the VAT liability of £49,986. Mr Littley has confirmed to HMRC that out of his receipts he was paying for his supplies and drawings for himself of £3000 to £4000 each month. In those circumstances he must have known that central assessment of the order of £300 to £700 each quarter bore no relationship to the Company’s actual receipts. In spite of contacting HMRC in May and September 2005, Mr Littley failed to advise HMRC that he had changed address until March 2007. Correspondence from HMRC had therefore never been received by him. As he had contacted HMRC in May 2005, we would have expected him to notify them, as to how he was progressing, and more particularly what he was proposing and that the Company had, in fact, moved premises. Mr Littley could not have reasonably believed that his VAT payments were in order. In the circumstances we are satisfied that his conduct was dishonest as he was fully aware that the central assessments could not possibly be sufficient, but chose to accept them as correct. Mr Littley appears only to have been interested in his own drawings and paying his suppliers. This in spite of the fact that he confirmed that he had received the appropriate VAT from his customers on each invoice.  He must therefore have had some indication of the amount of VAT he would have to find each quarter. It was open to him to make a larger payment on account to HMRC and explain his difficulties, which he chose not to do. Furthermore, the fact that the Company had insufficient funds to pay the VAT because of his drawings and the payments to suppliers is not a reason for reducing the penalty (see section 70 (1) (a)). Nor is the fact that he considers that he acted in good faith such a reason (see section 70 (1) (c)).  The onus of proof is on HMRC to prove the dishonesty and the evidence before us clearly demonstrates that Mr Littley acted dishonestly. We therefore dismiss his appeal and confirm the penalty.

8.       This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

TRIBUNAL JUDGE

RELEASE DATE: 30 November 2010