United Kingdom VAT & Duties Tribunals Decisions

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Malik v Customs and Excise [2003] UKVAT V18091 (15 April 2003)

CIVIL EVASION PENALTY – company did not register or make returns – whether director dishonest – yes –whether company acquired business on a transfer as a going concern – no – assessment reduced

LONDON TRIBUNAL CENTRE

SYED ABDUL MALIK Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

MICHAEL SILBERT FRICS

PRAFUL DAVDA FCA

Sitting in public in London on 26 to 28 March 2003

Richard Vallat instructed by Lincolns for the Appellant

Jolyon Maugham instructed by the Solicitor for the Customs and Excise for the Respondents

© CROWN COPYRIGHT 2003

DECISION

This is an appeal by Mr Syed Abdul Malik against a civil evasion penalty of £17,101 against Tristar Catering Limited (Tristar) apportioned to him by section 61 of the VAT Act 1994. The Appellant was represented by Mr Richard Vallat, and the Commissioners by Mr Jolyon Maugham.

The Appellant's application for the appeal to be allowed

At the start of the hearing Mr Vallat, for the Appellant, made an application that the appeal be allowed on account of the Commissioners' failure to comply with the Tribunal's Directions.

In order to understand this issue it is necessary to state that Tristar went into insolvent liquidation on 1 September 1999. The Appellant handed over all the accounting records of Tristar to the Official Receiver. Without these records the Appellant is unable to dispute the quantum of the assessment. The relevant Directions made by the Tribunal are:

(1) 28 March 2002. Mr Huggins directed that unless the Commissioners within 14 days provided copies of inter alia the insolvency documents provided by the Official Receiver to the Commissioners between November 1999 and January 20000 the appeal would be allowed.

(2) 30 May 2002. Mr Huggins dismissed the Appellant's request for the appeal to be allowed stating that the Commissioners had complied with the directions so far as is practical.

(3) 26 September 2002. His Honour Stephen Oliver directed the Commissioners to write that day to the Official Receiver requesting certain documents. The Commissioners did so.

(4) 18 February 2003. Mr Oliver directed the Official Receiver to send listed documents to the Appellant's solicitors.

The Official Receiver replied sending four of the documents requested and stating that another four related to accounting records that had been destroyed in December 2001. One final document could not be found but might be in a file sent for storage that could take months to retrieve. Our decision on this Application was made in the light of this reply. We were under the impression that the Commissioners had no accounting documents in their possession and the Official Receiver had destroyed all the accounting records.

Mr Vallat relied on the requirement that for Human Rights purposes this was a criminal charge and the Appellant had a right under article 6 of the Human Rights Convention to a fair trial within a reasonable time:

"In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law…."

It is common ground that the penalty in this case is a criminal charge for the purposes of the Convention. The appeal was made in January 2000 and there have been considerable delays by the Commissioners in dealing with the documents. Since the appeal was lodged the Official Receiver has destroyed the accounting records of Tristar. Secondly, during the period the Appellant's health has deteriorated, having suffered a heart attack last year. This has made preparation of the case more difficult in circumstances where the Appellant did not have access to Tristar's accounting records. Mr Vallat pointed to the acceptance of a five year delay in King v Walden [2000] STC 822 for which the taxpayer was not responsible but pointed out that there the taxpayer's conduct was criticised whereas the Appellant's has not been, and that there is prejudice to the Appellant here, unlike the position in that case.

Mr Maugham contended that the delay was reasonable having regard to the nature of the charge. In particular, the Appellant has not been deprived of his liberty and the charge concerns a civil financial penalty to which limited public stigma attaches and the Appellant retained the use of the money. There was no causal relationship between the delay and the Appellant's health. He pointed out that a directions hearing that had been fixed for 2 July 2001 was postponed by the Tribunal to be refixed when Customs and Excise Comrs v Han and Yao [2001] STC 1188 had been finally determined, which was on 3 July 2001. The Tribunal gave reasons for that direction that whether the appeal was affected by article 6 of the Human Rights Convention needed to be determined before the appeal could go ahead. Accordingly part of the delay was while it was being determined whether the Human Rights point existed.

After considering this application we announced that we dismissed the application and agreed to put our reasons in writing. Our reasons were first, that just over three years (or one year and 9 months since Han and Yao was decided), while a long time for the penalty to be hanging over the Appellant, is not so long as to fail to be a reasonable time. There were complications such as the involvement of the Official Receiver to be taken into account. Secondly, the main issue in the appeal was whether the Appellant had been dishonest which could be dealt with without any accounting records. In the event of our finding that the Appellant was dishonest and the quantum of tax became material we could make allowances for the Appellant's difficulty in disputing the quantum of the assessment as part of the high burden of proof on the Commissioners.

Documents that were disclosed during the hearing

Our understanding about the documents turned out to be wrong. We record that the following documents were disclosed by the Commissioners during the hearing:

(1) Monthly listing of turnover January 1998 to 26 April 1999 prepared by the Appellant (disclosed at the start of the hearing).

(2) Daily gross takings for February 1998 to 26 April 1999 when Tristar ceased trading prepared by the Appellant (disclosed on the morning of the second day).

(3) Table of turnover listing from 19 January 1998 to 26 April 1999 prepared for Tristar by an accountant in connection with the liquidation of Tristar; Miss Best's notes containing figures from the paying-in books of Tristar; wages records of Tristar (disclosed after lunch on the second day following Miss Best's evidence).

It appears that all these documents have been available to the Commissioners all the time and were not disclosed. Miss Best (one of the officers concerned with the case) gave evidence saying that the documents at (3) were in her file but she had not been asked for them; the same may apply to the documents at (1) and (2) but we are not sure about this. This raises a suspicion that wrong information given by the Commissioners' representative (not Mr Maugham) caused Mr Huggins to accept that his "unless order" released on 28 March 2002 had been complied with because as far as was practical the documents had been supplied, whereas if he had known the position as it now appears to us the appeal might well have been allowed in accordance with his unless order. Since the order was no longer applicable we did not feel able to allow the appeal ourselves on this ground. But we consider that there should be an investigation of whether the Solicitor's Office of the Commissioners made a proper investigation of documents in the possession of the Commissioners following the Tribunal's Directions.

We also place on record a further problem that the Appellant has had to deal with in relation to the documents. The Commissioners were directed by Dr Brice on 17 August 2001 to prepare a draft of a single agreed paginated and indexed bundle of documents and send it to the Appellant for his approval; the final version of the bundle to be lodged at the Tribunal not later than 21 days before the hearing of the appeal. Mr Huggins in his directions released on 28 March 2002 and 30 May 2002 noted that this direction remained to be complied with. On Friday 21 March 2003 (with the hearing scheduled to start on Wednesday 26 March) the Appellant's solicitors (and the Tribunal) received the Commissioners' bundle of documents prepared without reference to the Appellant stating in a covering letter that the workload and illness of a member of the Commissioners' Solicitor's Office was the reason for the lateness. As the bundle did not contain many of the documents that the Appellant wanted to be included the Appellant was forced to prepare a further bundle comprising 137 pages. Mr Maugham apologised on behalf of the Commissioners for this failure.

There are two further matters relating to the documents in this case that we consider should be investigated. The first is whether the Commissioners' should keep documents relating to assessments for companies that have been liquidated when there is an appeal pending by a director or officer under section 61. Our understanding is that the Commissioners' practice is that documents are not retained after the liquidation of a company. The only evidence of the assessments made by the Commissioners on Tristar for the periods 1/99 and 4/99 was a computer record (paragraph REF _Ref36963373 \r \h REF _Ref36963334 \r \h below). This is not the first time the Chairman has been faced with this difficulty in relation to a penalty on a director of a liquidated company, see C.W. Edwards v Customs and Excise Comrs (1999) VAT Decision No.16,245.

The second is whether the Official Receiver should have retained the accounting records for six years. It should be noted that the Official Receiver was aware that the Appellant was appealing from a letter of 11 November 1999 from Miss Best to the Official Receiver. Understandably Mr Maugham would not be drawn on this as he was not instructed by the Official Receiver but on the face of it the law requires a liquidator to retain documents. If this is the case we hope that the Commissioners will so inform the Official Receiver and prevent the repetition of accounting records being destroyed while an appeal is pending.

The Tribunal has no power to investigate any of these points but they all made the Appellant's and the Tribunal's task more difficult in circumstances where the Human Rights Convention requires public authorities to ensure that the Appellant receives a fair trial for what in the terms of that Convention is a criminal charge. We shall direct that a copy of this decision be sent to the Chairman of the Board of Customs and Excise and express the hope that he will cause an investigation to be made of these matters.

Facts

We heard evidence from the Appellant and from two officers, Mr McInnes and Miss Best. As we have mentioned each party produced a bundle of documents. We find the following facts.

(1) From 1980 to 1988 the Appellant was registered for VAT as sole proprietor of another restaurant. He was (incorrectly) registered again as sole proprietor of the Ashiana Tandoori Restaurant in Denham Bucks in 1984 but sold it in 1991 due to financial problems leading to his being made bankrupt by the Inland Revenue in 1991.

(2) The Appellant then became the head waiter and manager (but with limited responsibilities, so that, for example, he could not hire and fire staff) and nominated liquor licence holder of the Ashiana Tandoori Restaurant then operated by Saffron Associates Limited (Saffron) which company was owned by a Mr Ahmed.

(3) Ms Ramdin, the owner of the property from which the restaurant traded evicted Saffron for non-payment of rent in January 1998.

(4) The restaurant was closed for two or three days while the Appellant was arranging to start it again through Tristar which was incorporated on 22 January 1998.

(5) By a written "management agreement" dated 19 January 1998 Ms Ramdin licensed the restaurant to Tristar. Since Tristar was not incorporated until 22 January this agreement must either have been backdated or initially the Appellant entered into it as agent for a company in course of formation. The agreement contains the following provisions:

"Whereas [Ms Ramdin] and [Tristar] desire to enter into an agreement for the management and operation of the Restaurant known as ASHIANA TANDOORI RESTAURANT trading at 1 and 2 and 1a Broadway East North Orbital Road Denham Bucks upon the terms and conditions hereinafter set forth:

NOW THEREFORE THE PARTIES HERETO COVENANT AND AGREE AS FOLLOWS:-

In consideration of [Tristar] paying [Ms Ramdin] a fee of £1,416.67 pr month [Ms Ramdin] permits [Tristar] to carry on the business of an Indian Restaurant and to continue to use the name of ASHIANA TANDOORI RESTAURANT together with the right to use [Ms Ramdin's] furniture fixtures fittings and stock now upon the premises until this Agreement is terminated."

(6) On 21 April 1998 the Commissioners wrote to "Mr Malik, Ashiana Tandoori" quoting Saffron's VAT number and proposing a visit on 20 May 1997 [obviously a misprint for 1998]. Mr McInnes and Mrs Roberts visited the restaurant on 20 May 1998. During this visit the Appellant told the officers about Tristar taking over the restaurant following the insolvent winding up of Saffron. Mr McInnes asked if Tristar was registered for VAT and was told it was not. The Appellant asked for a VAT registration form and was given the telephone number of the Newry VAT Registration Unit. The Appellant said that his takings were £2,000 per week. The Appellant had had previous dealings with Mr McInnes on behalf of Saffron. It is clear that the Appellant had difficulty in dealing with Mr McInnes and had arranged for his solicitor to be present at the meeting. It is not necessary for us to consider the reasons for this.

(7) The Appellant telephoned Newry for a registration form and completed this on 20 June 1998 requesting registration of Tristar from 19 January 1998 which he said was because of Mr McInnes' request. The form was incomplete as it did not give the date of the first supply and did not state the Appellant's status (such as director). The registration unit wrote on 8 July 1998 pointing out these two omissions and sent a reminder on 23 July, neither of which the Appellant says he received. The unit then wrote without referring to the earlier correspondence stating that "I am writing in response to your recent application about registration for VAT. For the time being you will not be registered." The letter goes on to say "You are, however, required to notify Customs and Excise again if you exceed the registration limits." The limits are then set out.

(8) Having found out that Tristar was not registered and being unaware of the correspondence with the Registration Unit, Tristar was compulsorily registered on 2 October 1998with effect from 19 January and was required to make a return for the period 19 January 1998 to 31 October 1998. Mr McInnes wrote to the Appellant on 21 December 1998 reminding him that the return was still outstanding and requesting its completion within 7 days. The Appellant regarded this as an unreasonable time limit.

(9) Mr McInnes and Mr Kelly made an unannounced visit to the restaurant on 22 January 1999 from 22.30 to 23.45 hours. The day's takings (a Friday) were noted at £537.

(10) Mr McInnes wrote to Tristar on 9 February 1999 saying that it will shortly receive an assessment. The letter enclosed a schedule showing the method of assessing and stating that if a return is made the assessment would be withdrawn or amended. The schedule showed that the assessment would be based on Saffron's return for the period 10/98 showing sales per day of £271.59 and input tax per day of £6.88 and Saffron's takings for a Friday, 14 June 1996, of £490. Tristar's Friday takings on 22 January 1999 of £537 showed an increase of 8.75% compared to 14 June 1996. This increase was applied to Saffron's average daily takings and input tax for the number of days in the period assessed resulting in output tax of £12,580.83 and input tax of £2,139.85, net £10,440.

(11) The assessment for £10,440 was issued on 18 February 1999.

(12) In the absence of returns further computer-generated assessment were made for periods 01/99 (£3,189) and 04/99 (£3,472). There are no copies of such assessments available but the figures are shown on the Commissioners' computer print-out. We infer that the assessments were made. Our understanding, although the point was not argued, is that notification of these assessments does not have to be proved as the Commissioners are not trying to collect the assessment from the liquidator of Tristar: see Classicmoor Ltd v Customs and Excise Comrs [1995] V&DR 1, 10C: "Until notification the taxpayer is under no liability to pay; nor does the right of appeal arise.".

(13) . Ashiana Tandoori ceased trading on 26 April 1999 and Ms Ramdin sold the premises. Tristar went into insolvent liquidation on the petition of the Commissioners on 1 September 1999.

(14) On 7 July 1999 Miss Best, the officer dealing with civil evasion penalties invited the Appellant to an interview. For various reasons the Appellant did not attend an interview on the proposed date or on two further dates that Miss Best proposed.

(15) The penalty assessment was issued to Tristar on 30 September 1999and sent to Tristar's trading address, not to the Official Receiver. An assessment for the penalty apportioned to the Appellant was also issued on the same day. Both these assessments are for a total penalty of the amount of the three assessments on Tristar amounting totalling £17,101 without any mitigation.

The relevant statutory provisions

Section 60 of the VAT Act 1994 provides:

"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…to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct….

Section 61 provides:

(1) Where it appears to the Commissioners—

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

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

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

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

The amount of tax that should have been paid

We appreciate that in this appeal unless the Commissioners can show that the Appellant was dishonest, the amount of tax evaded is irrelevant because there will be no penalty. On the other hand, it is difficult to determine whether the Appellant was dishonest without knowing what tax was evaded, particularly in circumstances where the date of registration is in dispute because the Appellant contends that Tristar did not acquire the business as a going concern (with the result that Tristar should have been registered in August 1998) while the Commissioners contend that it did acquire the business as a going concern (with the result that Tristar should have been registered in January 1998). Since this issue affects the amount of tax we shall deal with it first. The quantum of tax in either case is agreed in the light of documents that were produced at the hearing which show that the assessment is virtually the same as the Appellant's figures.

Section 49(1) of the VAT Act 1994 provides:

"(1) Where a business carried on by a taxable person is transferred to another person as a going concern, then—

(a) for the purpose of determining whether the transferee is liable to be registered under this Act he shall be treated as having carried on the business before as well as after the transfer and supplies by the transferor shall be treated accordingly; and

(b) any records relating to the business which, under paragraph 6 of Schedule 11, are required to be preserved for any period after the transfer shall be preserved by the transferee instead of by the transferor, unless the Commissioners, at the request of the transferor, otherwise direct."

The relevant facts are that we have found that there was no transaction between Saffron and the Appellant, but there were transactions between Saffron and Ms Ramdin and between Ms Ramdin and Tristar (or perhaps the Appellant as a agent for Tristar in course of formation). These transactions, except for the last, are not documented but we find that Ms Ramdin repossessed the restaurant property and fittings and the trading name thereby becoming entitled to the goodwill on account of the failure of Saffron to pay the rent. The restaurant was closed for two or three days during which Ms Ramdin did not operate the restaurant, after which Tristar (or strictly the Appellant as agent for Tristar in course of formation until its formation on 22 January 1998, assuming that the agreement really was entered into on 19 January 1998) started to run it under the same name using the same menus in accordance with the management agreement. In spite of its being closed for two or three days we infer from these facts that the business of the restaurant did not cease to exist and that it did not cease to be a going concern.

Mr Vallat contends that section 49 could only apply where there was a transaction between Saffron and Tristar, which there was not. He points to the requirements in paragraphs (a) and (b) of section 49(1) which assume a direct relationship.

Mr Maugham contends that there is no explicit or implicit requirement that the transfer should be made directly from the taxable person to the other person. He points to the approach taken by the Advocate General in Spijkers v Gebroeders Benedik Abattoir CV (Case 24/85) [1986] ECR 1119 at 1121:

"The essential question is whether the transferee has obtained a business or an undertaking (or part thereof) which he can continue to operate….A realistic and robust view must be taken and all the facts must be considered…."

This approach was applied in a VAT case, Customs and Excise Comrs v Padglade Ltd [1995] STC 602.