United Kingdom VAT & Duties Tribunals Decisions

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Postproof Ltd & Anor v Customs and Excise [2004] UKVAT V18547 (26 March 2004)

ASSESSMENT – some invoices issued after de-registration disallowed for input tax – other invoices accepted as representing valid input tax

CIVIL EVASION PENALTY – insufficient proof to infer dishonesty – appeal allowed

LONDON TRIBUNAL CENTRE

POSTPROOF LIMITED AND

DIMOSTHENIS BITOULADITIS Appellants

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

TONY RING FTII ATT

SANDI O'NEILL

Sitting in public in London on 23 February 2004

Dimosthenis Vitouladitis for Postproof Limited and in person

Nicola Shaw counsel instructed by the Solicitor for the Customs and Excise for the Respondents

© CROWN COPYRIGHT 2004

DECISION

These are appeals by Postproof Limited against an assessment for £59,580 made on 27 October 2001 and by Mr Dimosthenis Vitouladitis against a civil evasion penalty on Postproof Limited of £47,664 (being the amount assessed less 20 per cent mitigation) apportioned to him under section 61(1) of the VAT Act 1994. We shall refer to Postproof Limited and Mr Vitouladitis as the Appellant. Mr Vitouladitis appeared in person assisted by his son; the Commissioners were represented by Miss Nicola Shaw.

Mr Vitouladitis' first language is Greek and Miss Shaw agreed to his son acting as interpreter when necessary.

The issue is whether a number of input tax invoices represent supplies to the Appellant and whether there was evidence of export relating to two supplies. The Commissioners contend that the invoices are false and that no export took place and that the Appellant was dishonest in claiming the input tax and zero-rating respectively.

We heard evidence from the assessing officer Ms J Danson. Mr Vitouladitis offered himself for cross-examination and was duly cross-examined by Miss Shaw.

We find the following facts:

(1) Mr Vitouladitis is the sole director of Postproof Limited and has control of the business which is that of a clothing manufacturer which subcontracts all the work to others.

(2) Mr Vitouladitis attended an interview with the Commissioners which was recorded and a transcript produced. No admissions were made. He made available to the Commissioners some papers relating to a County Court case relating to a claim against the Commercial Union Assurance Company plc for stock lost in a fire of which the input tax invoices in issue in this case were used as existence of the existence of the stock. This included some expert evidence relating to the invoices and a witness statement by Mr Hayward, a loss adjuster, which we have referred to where it contradicts evidence of the Commissioners in order to be fair to the Appellant.

(3) In relation to the alleged export there is no documentary evidence of export. The Commissioners also claimed that the Greek VAT number quoted on the sales invoice while a valid number was one that had never been issued. On Mr Vitouladitis' claiming strongly at the hearing that the number was valid Ms Danson arranged for another officer to check the number again and fax the result to the Tribunal. The result showed that there was a registration in the name of Vitoiladitis Konstantinos Dimosthenis which was explained to be Mr Vitouladitis' father's name which had been taken over by a business run by Mr Vitoladitis's son under the same name. This new information was obtained by searching 046278132 rather than, as previously, this number without the initial 0.

(4) The disputed input tax invoices amounted to 81 per cent of the input tax claimed by the Appellant for the relevant periods.

(5) There are two input tax invoices from Direct Trade Limited (Direct Trade) issued in August and September 1996 for input tax of £2,899. A valid VAT number is given but the trader de-registered on 29 September 1995. The Commissioners were not able to locate a Mr Errol Hassan from details given by Mr Vitouladitis in interview. We note, however, that Mr Hassan gave evidence in the Commercial Union case which the judge accepted and so had not disappeared. A witness statement relating to the Commercial Union case by Mr Hayward, a loss adjuster, states that he visited Direct Trade Limited's premises in December 1997 where another company had been trading for the past 6 months and was told by an unnamed employee that Direct Trade had left 2 years previously. We find from this that Direct Trade cannot have been there after July 1997 but give no weight to the unknown person's statement that it left 2 years before as the information was presumably obtained by the unnamed person from another source.

(6) There are 12 input tax invoices from Starleaf Limited (Starleaf) from August to October 1998 for a total tax of £8,080. The VAT registration number is valid but Starleaf is a missing trader. The Appellant had a copy of the VAT registration with its papers. Mr Vitouladitis gave the Commissioners some details of Euroleaf as a contact for Starleaf but they found that Euroleaf was also a missing trader. The Commissioners produced a witness statement, which was not objected to, by Mr G Yahiya director of a company that occupied 3 and 4 Crossway Parade, London N22 stating that his company took over No.3 (Starleaf's address) in June or July 1998. He described a Greek or Turkish person he knew as Costas and saw a few clothes and hangers in No.3. We find that it is likely that Costas and Starleaf were connected and that Starleaf occupied No.3 until some time up to June or July 1998, which is before the date of the invoices.

(7) There are 6 input tax invoices from Cenastyle Limited T/A A&K Designs (Cenastyle) from May to July 1996 for a total tax of about £10,500. The VAT registration number is valid but Cenastyle de-registered on 2 November 1995. The Commissioners produced a witness statement, which was not objected to, from Mr T J Cody, the manager of the Latton Bush Business Centre, Harlow, Essex, the address given by Centastyle, stating that unit 18 was licensed from 30 January 1995 to 14 May 1995 to a Mr Savva trading as Golden Enterprises and on one occasion a cheque was drawn on Petite Limited. He states that Cenastyle has never rented unit 3, the address on the invoices. However, Cenastyle's address is unit 3 not unit 18 and Mr Hayward's witness statement in the Commercial Union case states that on 2 December 1997 he was informed by the landlord of the premises that Cenastyle had absconded 3 to 4 months earlier owing rent which would be August or September 1997. This suggests that Cenastyle may have been a subtenant of unit 3. We prefer this evidence, although not served as a witness statement in this appeal, and although not mentioned by the Commissioners in their statement of case or by Miss Shaw. We find that Cenastyle was at the address shown on the invoices at the time they were issued. Apparently there was no suggestion in the Commercial Union case that there was anything wrong with the Cenastyle invoices.

(8) There are 7 input tax invoices from Imbex Designs Limited (Imbex) between August and November 1996 for a total input tax in excess of £12,000. Imbex is not registered for VAT. A copy of a VAT registration certificate was given to the Appellant, which is false but this would not have been known to the Appellant. An indication that it is false is that the date of registration is given as 1 December 1995 and the first return is stated to be in respect of the period ending 1 March 1996, although this would not have been obvious to the Appellant. An email from someone in the Commissioners makes various other allegations about the certificate but we consider that this sort of evidence should be contained in a witness statement explaining the knowledge of the person rather than a copy email before we should pay much regard to it. The Commissioners were unable to locate a Mr M Papadopoulos from information given by the Appellant. We note, however, that he gave evidence in the Commercial Union case and so had not disappeared. The expert evidence in the Commercial Union case by Dr Audrey Giles finds that "there is a sufficient degree of similarity between the handwritings on the Imbex Designs Ltd Invoices [1-7] and Mainframe Ltd Invoices [10-23] for me to conclude that there is strong support for the view that the were written by one person". Dr Giles also concludes that "Mainframe Ltd Invoice No.6 [12] was written, at least in part, whilst resting on Imbex Designs Ltd Invoice No.104 [7] and Imbex Designs Ltd Invoice No.104 [7] was written, at least in part, while resting on Mainframe Ltd Invoice No.5 [11]." Since we had the same report as the court we give some weight to this evidence although Dr Giles did not give us the evidence and Mr Vitouladitis, who disputes it, was not able to cross-examine her, although presumably did so in the Commercial Union case. Mr Hayward's evidence in the Commercial Union case was that there was a fire at the premises stated on the invoices on 5 November 1995 which is before the date of the invoices.

(9) There are 14 manuscript invoices by Mainfraime (sic) Limited (Mainframe) (and in one case Mainfraime Designs (sic—the correct name is Design in the singular) Limited) of 20/22 Grove Cresent (sic), Strattford (sic) between April 1996 and April 1997. The VAT number is valid but the trader's real name is Mainframe Design Limited and it was de-registered on 2 May 1996. The Appellant had a copy of the VAT registration with its papers. Papers in the Commercial Union case contain an example of a printed Mainframe invoice with its name and address correctly spelt. As mentioned, the expert evidence in that case shows that the same handwriting was used as on Imbex invoices. Also that 4 non-sequential invoices had been written on top of Imbex invoices. We give this evidence the same weight as in relation to the Imbex invoices. A Mr Ullah is connected with Mainframe. He gave evidence in the Commercial Union case and provided a witness statement to the Commissioners in this appeal, but since it was objected to we have not read it, and we understand that the Commissioners were unable to find him to give evidence in this appeal. However, we take into account that the Commissioners must have been able to trace him. Mr Hayward's evidence in the Commercial Union case was that he was told that Mainframe left the premises a year to a year and a half before his visit in December 1997 ie during the second half of 1996 which means that some of the invoices were issued while they were there.

(10) According to evidence in the Commercial Union case in relation to all the Direct Trade invoices, all but one of the Cenastyle, two of the Imbex, and some of the Mainframe invoices, the invoice for onward sales by the Appellant was issued before the date of the purchase invoice. We agree with Miss Shaw's contention that one would expect this to be the other way round. Mr Vitouladitis explained that payments were made on account to and by the Appellant and the balance was paid at the time of invoice. We do not pay much regard to this fact.

(11) Payment of all these invoices was in cash.

(12) Mr Vitouladites stated at his interview that he had visited all the premises of his sub-contractors.

In relation to the export Mr Vitouladitis claimed that the goods were exported in a container with some other goods being exported by his son's company. He produced what we understood was a statement of claim in the Greek courts in which a claim was made in relation to the theft of (amongst others) the goods covered by the alleged export, which suggests that the goods may have reached Greece. However what is required is normal commercial shipping documents which are missing. Even at the hearing Mr Vitouladitis seemed unaware of what he was expected to produce. We cannot find that there is sufficient proof of export. We would add our concern that the Commissioners - failed to find the Greek VAT number originally and used their failing to allege dishonesty. If the VIES system is sensitive to whether an initial 0 is given in the number we express the hope that this fact will be made known to staff making the searches.

So far as the assessment to VAT on Postproof Limited is concerned on any basis we must disallow the input tax on the Direct Trade and Cenastyle all of which were - issued after de-registration of the issuing company, all but one of the Mainframe invoices which were issued after de-registration, and all the Imbex invoices as it was never registered.

Miss Shaw contended that since the papers relating to the Commercial Union case had been produced by the Appellant we should use the judgment as evidence against the Appellant. The judgment finds that the Imbex and Mainframe invoices were false and there was probably a VAT fraud whereby the subcontractors kept the VAT element shown on the invoices. The judge did not accept as a necessary inference that Postproof Limited benefited from the VAT. He found: "Looking at matters overall, I consider that the Claimants [Postproof Limited] were parties to an artificial scheme rather than one which reflected the true nature of the underlying transactions. I believe that the probability is that [Mr Vitouladitis and Mr Papadopoulos] put their heads together to procure the production of documents which would enable books to be made up by Mr Nutt (who was not called and against whom I draw no inferences) in which a way as to represent that [Postproof Limited] were trading with sub-contractors in an orthodox way." Our view is that we should note the existence of the judgment but not give it much weight. The judge heard witnesses that we have not heard. The issue in the case was the existence of the stock at the time of a fire which is different from the issue in this appeal. The burden of proof was on Postproof Limited to show utmost good faith in making the insurance claim. In this appeal the burden is on the Appellants to disprove the assessment to VAT and on the Commissioners to show dishonesty.

Miss Shaw relied on the following to demonstrate that the supplies did not take place and there was dishonesty on the part of Mr Vitouladitis:

(1) The total payments were allegedly made in cash without any evidence in support.

(2) The fact of the invoices being issued after de-registration or in the case of Imbex without being registered.

(3) The Mainframe invoices were obviously forged, having the wrong spelling of the name and address.

(4) The forensic evidence that Imbex and Mainframe invoices were written by the same person.

(5) The forensic evidence that Mainframe invoices were written on top of Imbex invoices and Imbex invoices were written on top of Direct Trade invoices.

(6) Mainframe and Imbex invoices have improbable numbering and dating.

(7) The Commissioners have been unable to locate Mr Papadopoulos or Mr Hassan from information given by the Appellant.

(8) The evidence that Direct Trade, Starleaf and Imbex were not trading from the premises stated at the time of issue of the invoices.

(9) The evidence that Cenastyle has never traded from the premises stated. As stated above we do not accept this.

(10) Nos (8) and (9) above contradict Mr Vitouladitis's evidence at his interview that he visited the premises of all the sub-contractors.

(11) In relation to Starleaf details of another missing trader were given as contact details.

(12) There is no corroborative evidence of the validity of the invoices and no other supporting documents such as delivery notes or transport documents.

(13) The judgment in the Commercial Union case.

(14) The lack of evidence of export to Greece and (before they found this was incorrect) the false Greek VAT number quoted.

Mr Vitouladitis denies any wrongdoing both in the interview and in evidence before us.

In relation to the assessment to VAT the only remaining items are the Starleaf invoices for which there was a valid VAT registration at the time of their issue but the trader is a missing trader, and one of the Mainframe invoices (dated 7 April 1996) issued while it was registered. The issue is whether we are satisfied that the supplies shown in those invoices were actually made. The numbering on this Mainframe invoice is odd. The instructions to Dr Giles lists 14 Mainframe invoices all, apart fro this one, in numerical and date order from No.3 dated 8 November 1996 to No.34 of which this one, No.32 dated 7 April 1996 comes after No.30 dated 28 March 1997 and before No.34 dated 30 April 1997. This suggests that it should have been dated 1997, in which case it is after de-registration. This invoice was one that Dr Giles found was in the same handwriting as some of the Imbex invoices. It was not one of the invoices written in contact with an Imbex invoice. In view of our doubt about the date we do not consider that this represents the supply shown on the fact of it and disallow this invoice as well.

In relation to Starleaf's invoices of August to October 1998 we have found that it was not at the address given after June or July 1998. The fact that it is a missing trader does not mean that an input tax claim is not valid. The only evidence against the validity of these invoices is that Starleaf left the premises in about June or July 1998 and the invoices contain the address in August to October 1998. We do not consider that this fact is sufficient to conclude that they are not genuine. It is possible that they were using up old stock and the address did not matter if they were paid cash on delivery of the work. We do not pay much attention to the fact that payments were made in cash, which is apparently common in this trade. The Commercial Union case did not concern Starleaf invoices and so we cannot derive any assistance from this. Accordingly we allow the appeal in relation to these invoices.

We turn to the penalty apportioned to Mr Vitouladitis. Section 60 of the VAT Act 1994 provides:

(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…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 burden of proof to show dishonesty is on the Commissioners. The standard of proof is to the balance of probabilities but to a high degree. This was explained by Lord Hoffmann in Secretary of State for the Home Department v Rehman [2002] 1 All ER 122, 141a: "It would need more cogent evidence to satisfy one that the creature seen walking in Regent's Park was more likely than not to have been a lioness than to be satisfied to the same standard of probability that it was an Alsatian." Proving dishonesty on the part of Mr Vitouladitis equally needs more cogent evidence.

Taking into account the factors listed above that the Commissioners say demonstrates dishonesty on the part of Mr Vitouladitis, these amount to clear evidence of dishonesty on the part of his subcontractors but that is not itself evidence against Mr Vitouladitis. The specific claims against him seem to be payment in cash; that following the interview in December 2000 the Commissioners have not been able to trace Mr Papadopoulos or Mr Hassan from information given by the Appellant; that he cannot have visited the subcontractors at the premises at the time of the invoices (which does not apply to Cenastyle which we have found were there or Starleaf which we have found was there part of the time); and that false invoices amounted to 80 per cent of the Appellant's inputs (the figure will change as a result of our decision). Payment in cash seems to be the norm in this industry; we are not wholly surprised that subcontractors in this industry are not found in the same places in 2001 as they were when invoices were issued in 1996 to 1998, particularly as they all gave evidence in the Commercial Union case, and the Commissioners do not appear to have asked Mr Vitouladitis again when the first information did not lead anywhere; the fact that the subcontractors were not trading from the stated premises at the time of issue of the invoices does not mean that Mr Vitouladitis did not visit the premises before that; while the 80 per cent figure is extremely high this is not proof of wrongdoing by Mr Vitouladitis. The case of dishonesty against Mr Vitouladitis is really one of association with dishonest subcontractors. We are not prepared to find guilt by association. We do not consider that the Commissioners have proved their case against him to a sufficient standard and accordingly allow Postproof Limited's and Mr Vitouladitis' appeal against the penalty.

Accordingly we reduce the assessment by £8,080 and alter the period for which Mainframe invoice No.32 was disallowed in accordance with paragraph REF _Ref66089956 \r \h above; and allow the appeal against the penalty.

J F AVERY JONES

CHAIRMAN

LON/02/996