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Wootton & Anor v Customs and Excise [2004] UKVAT V18731 (17 August 2004)

VAT PENALTIES — whether the appellants partners in restaurant business — whether liable for penalty assessment — dishonest conduct for purpose of evading VAT found proved — appellants held to be responsible — assessment upheld and appeal dismissed

MANCHESTER TRIBUNAL CENTRE

(1) Mr PETER JOHN WOOTTON Appellant

(2) Mrs SADIE JUNE WOOTTON

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Mr M S Johnson (Chairman)

Mr P J Seward (Member)

Sitting in public in Birmingham on the 25th to 27th June 2003 and the 26th May 2004

Mr R Barlow, counsel instructed by HKM, accountants, Leicester for the Appellants

Mr J Puzey, counsel instructed by the Solicitor for the Customs and Excise, for the Respondents

DECISION

Issues in the appeal

There are two issues arising in this appeal, namely:

1) Whether the appellants were in partnership with their daughter Ms Jan Lorraine Gill-Wootton ("Ms Gill-Wootton") in the restaurant business carried on at Cossington Mill, Syston Road, Cossington, Leicestershire ("the business") between 24 October 1997 and 26 October 1998;

2) Whether the appellants are liable for a penalty assessment ("the assessment") dated 30 October 2000 issued to them and to Ms Gill-Wootton by the Commissioners of Customs and Excise ("Customs") under section 76 of the Value Added Tax Act 1994 ("the Act"). The assessment, which is for £18,348, is grounded upon alleged dishonest conduct in relation to acts or omissions said to have been for the purpose of evading VAT payable to Customs in respect of the business, as mentioned in section 60(1) of the Act.

The Appellants deny that they were partners as Customs allege, and they deny liability for the assessment, both on the basis of their non-involvement in the business and on the basis that they put Customs to proof, pursuant to section 60(7) of the Act, of the matters mentioned in 60(1), for which they say they are in any event not responsible.

For convenience, we shall call the two issues "the partnership issue" and "the responsibility issue" respectively.

Evidence

The hearing of this appeal was spread over four days, during which time the tribunal heard oral evidence from three witnesses ^[1] called by Mr Puzey, representing Customs. Mr Barlow, representing the Appellants, was afforded the opportunity to cross-examine, but elected to call no witnesses.

The tribunal considered the contents of a lever-arch file of copies of documents, produced at the outset, and a number of other copy documents, produced as the hearing proceeded. The genuineness of all of these documents was agreed, but their reliability and effect was disputed, so far as allegedly germane to the partnership issue or the responsibility issue.

At the back of the lever-arch file are contained a number of witness statements, taken from individuals who were, or might have been, called by Customs to support their case. We record that, of these statements, that from David Edward Parkinson was not objected to by Mr Barlow; Mr Puzey did not rely upon those from Christopher John Green, Oliver Scanlon and Elizabeth Gibson; and those from Robert Edward Hallam and Deborah Jane Stuart were objected to by Mr Barlow ^[2]. Irrespective of objections, this decision is not based upon the contents of any of the witness statements mentioned, because we accept the dangers inherent in allowing into consideration material in relation to which deponents might have given relevant oral evidence, as to which they have not been subjected to cross-examination where appropriate.

At the end of the tribunal bundle are contained copies of a small number of bank statements in the names of Mrs Jan Lorraine King; Cossington Mill; Ms J L Gill-Wootton; and Mr P J Wootton, dated November 1997 and October- November 1998. These documents were not properly proved, and again we consider it to be dangerous to draw conclusions from their contents and apparent effect. Accordingly we have decided to disregard these documents.

An allegation of witness intimidation was made on the second day of the hearing, which was taken up by the tribunal with Lincolnshire Police during the long adjournment from 2003 to 2004, and led to an investigation which was pursued and satisfactorily concluded prior to the final day of the hearing. For the avoidance of doubt, we indicate that we do not believe that this allegation had any effect on the accuracy or completeness of any of the evidence received by the tribunal.

Findings of fact

The findings of fact recorded in this decision are those that we consider to be necessary to reach our decision. We have not encumbered this decision with superfluous findings. This decision is not to be regarded as determinative of issues between the parties, or between the appellants and other agencies, other than those which are for our decision in these proceedings.

We find the following facts.

Facts found as to the partnership issue

The appellants have been represented to be partners in the business in a number of different contexts, viz:

a) In signed Notification of Self-Employment forms telling the Contributions Agency about their involvement with the business. We have had sight of two such forms, one for each appellant, in which they describe themselves as partners in the business as from 24 October 1997. At the top of each form the following is printed:

"The Contributions Agency will send a copy of the completed form to the Inland Revenue, and Customs and Excise.

"Use this form to tell the Contributions Agency, the Inland Revenue, and Customs and Excise that you have started self-employment".

Immediately above the signatures of the appellant on each form respectively there appears the following:

"I understand and agree that the information on this form will be made available to the Contributions Agency, Inland Revenue and Customs and Excise".

The forms stated that the appellants had an agent to advise them on their tax affairs, whose name was given as Mitchell Ramsden, of 132 Highfield Road, Blackpool, Lancashire. Mitchell Ramsden was a firm of chartered accountants practising at that address.

b) In an Agreement dated 22 October 1998 for the sale inter alia of the business to The New Cossington Mill Limited ("the company"). In that Agreement, the appellants and Ms Gill-Wootton are together described as "the Sellers", both of the business and of the restaurant premises at which the business is carried on. The Agreement relates to the sale of both the business and the property. It provides, in clause 1.1, that the Sellers shall sell and the Buyers (i.e. the company) shall purchase inter alia –

"the goodwill of the business of a Restaurant now carried on by the Sellers at Cossington Mill, Syston Road, Cossington, Leicestershire including the right to use the name of 'Cossington Mill Restaurant' in connection therewith … ".

In clause 4.2, the Agreement provides that completion of the purchase is to take place on 26 October 1998. By clause 5.1 –

"Up to the date fixed for completion of the purchase possession of everything hereby agreed to be sold shall be retained and the said business shall be carried on by the Sellers as heretofore and the gross returns or profits thereof shall be received and retained for the Sellers' benefit and all outgoings and liabilities in respect of the said property and business … shall be carried on at the Sellers' risk".

Clause 14 is a manuscript addition to the Agreement. It provides that the Buyers will indemnify the Sellers in respect of two agreements with Everards Brewery Limited dated 12 December 1995 and 10 October 1996 and upon completion will become responsible for the two agreements up to a stated maximum sum.

c) In a set of accounts for the business prepared by Mitchell Ramsden and expressed to cover the trading period 1 April 1997 to 22 October 1998. On page 2 of those accounts, it is stated by Mitchell Ramsden:

"In accordance with instructions given to us we have prepared without carrying out an audit the annexed financial statements from the accounting records of [Ms Gill-Wootton and the appellants] and from information and explanations supplied to us".

On the same page, Ms Gill-Wootton and the appellants are described as "Trading as Cossington Mill Restaurant".

Page 4 of the accounts shows the net profit of the business as being divisible between Ms Gill-Wootton and the two appellants; for the previous period, 1 August 1996 to 31 March 1997, the net profit is shown as payable exclusively to Ms Gill-Wootton.

Page 6 of the accounts shows Ms Gill-Wootton and the appellants as having each made drawings from "Partners' Capital Account". The appellants are shown as having introduced capital in the period, but Ms Gill-Wootton is not so shown, although she is shown as having done so in the previous period.

Page 8 of the accounts shows freehold property as a fixed asset of the business as at 1 April 1997 but as having been disposed of as at 22 October 1998.

The accounts are dated 27 January 1999 by the accountants. A second set of accounts covering the same period was prepared and dated 1 December 1999 by the accountants. In contrast to the first set, these accounts show the business as that of Ms Gill-Wootton as sole trader. We note that in this second set, in contrast to the first set, the accountants have signed the accounts in manuscript on page 2. However neither set of accounts in the tribunal bundle has been signed by those to whom they were addressed.

In the second set of accounts, the freehold property is again shown as a fixed asset at the beginning of the period but not at the end, and at the same value as in the first set of accounts.

d) In a letter written by KPMG Tax Advisers dated 28 April 1999 to Mr Smith of Customs. This was in response to a letter written by Mr Smith dated 21 April 1999, in which he sought information from KPMG as to what he described as "the legal entity of the business". The letter from KPMG was signed by Mr Malcolm McFarlin, Manager, Indirect Tax Investigations. Mr McFarlin's letter stated that, with effect from 1 August 1996, the partners in the business were Ms Gill-Wootton and the appellants, until 22 October 1998 when the restaurant was sold.

Mr McFarlin wrote to Mr Smith again on 12 May 1999. That letter is expressed to be written further to Mr McFarlin's letter dated 28 April 1999, and is a three-page letter, dealing with a number of matters including the evidence of Mr Tutin (see paragraphs 40 to 42 below). The letter does not add to or subtract from what was said in Mr McFarlin's letter of 28 April 1999 about the existence of the partnership.

It appears that the existence of the partnership was not denied in correspondence until a letter dated 2 September 1999, written by HKM to Mr Parsons of Customs, in which it was asserted that the appellants had " … no association with the business at all from a legal partnership point of view".

The position of the appellants in this appeal is that the above matters do not, on analysis of the background, show that they were partners in the business, whatever superficial indications to the contrary there may have been. The tribunal is disadvantaged in that the appellants have not come to the hearing to assist with the determination of this or any other aspect of the appeal; rather they have relied upon the very considerable ability of their counsel to win the day for them.

The appellants' case on the facts relating to the partnership issue is that the accountants and lawyers who acted for the business jumped to the conclusion that they were in partnership, when such was never intended. When Mitchell Ramsden was acquainted with the true position, the appellants say, that firm redid the accounts to reflect this. The forms sent to the Contributions Agency were an aberration. As for the sale of the business and the property, the solicitors who acted were Horwood Patterson, of Charles Street, Leicester. When requested, that firm wrote to Mitchell Ramsden explaining the background to that transaction.

In Horwood Patterson's letter to Mitchell Ramsden dated 7 July 1999, Horwood Patterson explained that Ms Gill-Wootton needed to find £70,000 to pay to her ex-husband, Mr King, to conclude their divorce settlement ^[3]. In return, she received Cossington Mill, subject to existing charges. She was unable to borrow the £70,000, so her parents, the appellants, provided it. In consideration of that payment, Horwood Patterson explained, the appellants acquired a one-half share in the property at Cossington Mill, which was recorded in a deed dated 24 October 1997. We have unfortunately not been provided with a copy of that deed. By inference it was, so Horwood Patterson indicate, the interest of the appellants in the property and not in the business that led to the appellants being parties to the sale as described.

The appellants' position is therefore that they were at all material times interested solely in the property, but never in the business carried on at the property. Whether the deed dated 24 October 1997 contained reference to the business as well as the property, we have no means of knowing. In the absence of evidence, we assume that it did not.

On 16 March 1999, Ms Gill-Wootton was interviewed by Mr Smith of Customs, with the appellants present, and Mr Bruce Johnson of the Inland Revenue also present. According to the transcript of the interview contained in the tribunal bundle, the appellants played quite a full part in the interview. It is instructive to observe how the interview developed.

At an early stage, Ms Gill-Wootton stated that she had been in partnership with the appellants in the business, from the time at which they had provided her with money, namely October 1997. She was then questioned in detail about the methods used by the business for recording and accounting for takings. She described how, from August 1998, she ceased to be involved in the business. The appellant Mrs Wootton confirmed how she (the mother) was thereafter in charge. Cashing-up became her overall responsibility rather than that of her daughter.

From that point onwards in the transcript, the extent of the appellants' involvement in the business became apparent, albeit in a supervisory capacity (the appellant Mr Wootton is recorded as asserting that his wife "never worked in the restaurant"). The interview concluded with no denial on the part of the appellants that they were partners, to contradict the assertion by the daughter at the start that they were.

On 3 December 1999, the appellants were interviewed by Mr Parsons and Mr Smith of Customs. Mr Khandhia of HKM was present as well, representing the appellants. The transcript of that interview states that its primary purpose was to establish the "legal entity" of Cossington Mill Restaurant.

The interview first explored the termination of Ms Gill-Wootton's marriage and of the restaurant partnership between her and her ex-husband. The interview then turned to the requirement for Ms Gill-Wootton's ex-husband to be paid £70,000 in October 1997. Mr Wootton confirmed that his daughter had asked to borrow that sum from him.

The transcript contains a discussion between the appellants as to whether the money was intended to be a loan or a gift. Mrs Wootton said that she wanted "a guarantee that I'm going to get my money back". We find that effect was given to that by the deed mentioned in the letter written by Horwood Patterson dated 7 July 1999 referred to above. The result was that the appellants became owners of an interest in the property. The money could have been provided as a gift, or by way of secured or unsecured loan; in practice, however, the requirement of the appellants to see their money again was reflected in their becoming joint owners of the property along with their daughter.

Mr Parsons then began to explore the tax treatment of the appellants' interest. The appellant Mrs Wootton described how she was told by her accountants that she would have to take responsibility for her daughter's tax. She was asked by Mr Parsons about the forms to be provided to the Contributions Agency. She said that she signed her form because she wanted to pay any tax she owed, and because of her "regimental" attitude. Mr Wootton said that he signed because his wife told him to do so. Later, he said that the forms were signed because his daughter could not afford to pay the income tax due, "and she knew very well that we'd got to pay the income tax".

The discussion proceeded. Mr Smith and Mr Parsons wanted to know how the accountants had got the idea that there was a partnership, if there wasn't one. Mrs Wootton replied, "He might have got the idea when I took the box [of records] in [because] I says we are going to expect money from this business back because we've put the money in". She said that she and her husband had taken the records to Blackpool to hand over to the accountant. The appellants said that they had never had a share of the profits of the business. But they made it clear that they intended to benefit, sooner rather than later, from the proceeds of sale of the business in due course.

Mr Wootton confirmed that he had subsequently asked the accountant to redo the accounts because there was not a partnership and their daughter was sole proprietor. They did not know if the accountant had ever spoken to Ms Gill-Wootton about that.

Then Mr Parsons concentrated on how the £70,000 was reflected by the appellants' interest in the property. That figure does not appear in either set of accounts. What does appear is the freehold property as an asset of the business. That is in both sets of accounts.

Mr Khandhia made the point that, as a chartered accountant, one would not be in a position professionally to adjust a set of accounts from that of a partnership to that of a sole trader without what he described as "clearance" within the guidelines of the Institute.

Mr Parsons then asked about the statement of Mr McFarlin of KPMG that a partnership existed. The appellants agreed that he was acting for Ms Gill-Wootton, but stated that he had been to see them all. As a result, he came to believe that they were partners.

Then the appellants were asked about payment of income tax. It appeared that they might have self-assessed to income tax in respect of the business, despite denying any interest in the profits of the business. The appellants were unclear.

The appellants were also asked about the sale in October 1998, but were unable to answer, because they had not spoken to their solicitor at Horwood Patterson, who was said to be in Canada. And so the interview terminated, with Mr Khandhia stressing the need to make further enquiries.

Analysis of facts found as to the partnership issue

More than one professional on more than one occasion has been sufficiently convinced that a partnership in the business existed between the appellants and Ms Gill-Wootton for documentation to have been prepared reflecting that state of affairs. As it must be assumed that a professional does not act without instructions, that belief must have been induced by the appellants.

Any naïveté professed by the appellants as to how they would get back their financial contribution towards the needs of their daughter is solved by their preparedness to trust their accountants and solicitor to ensure that their interest took the appropriate form. The professionals involved do not appear to have been in doubt what that form should be.

The appellants lent their support and encouragement by signing and adopting the forms completed for the Contributions Agency and the documents prepared for the sale of the business and property. When they did this, it either was or should have been clear to them that they were undertaking obligations on the footing of their co-ownership of the business.

It appears from the interviews that the appellants did what they did because they believed that they should do so, and not by reason of any mistake or misapprehension. They believed either that they were liable for payment of income tax in respect of the business, or at least that they should undertake responsibility for payment of income tax in respect of the business. In so doing, they acknowledged involvement with the business, as distinct from the property in which the business was carried on.

It also appears from the interviews that 24 October 1997 was appreciated by the appellants to be a key date, namely the time for payment of £70,000 due to Mr King. It is no coincidence that that was the date on which they became interested in the property, according to the date of the deed referred to by Horwood Patterson, which unfortunately we have not seen.

The appellants were more than mere financiers of their daughter. To the extent that their daughter could not, or would not, supervise the business, the appellants played their part. This extended to cashing-up, when their daughter left her mother in charge. The appellants had a practical interest in ensuring the successful continuance of the business, which would preserve the value of their legal interest in the property.

Ms Gill-Wootton informed Customs in interview that her parents were her partners in the business, and this was not contradicted by the parents at the time. It also appears that Ms Gill-Wootton told her adviser Mr McFarlin that they were partners, at a time when – according to the appellants – he had met and discussed the position with them all. It is a feature of this case that we have not heard from Ms Gill-Wootton, who, it appears, continued under the impression that a partnership existed.

We have not had a satisfactory explanation of the change in the accounts. It is not clear that the change met with the approval of Ms Gill-Wootton. Nor does it appear how, unless there was a partnership, the freehold property could properly be treated as an asset of the business apparently in its entirety, having regard to what we know from Horwood Patterson of the ownership of the property. Accordingly, whereas the first set of accounts makes sense, the second does not.

Facts found as to the responsibility issue

We mention above the letter written to Mr Smith by Mr McFarlin of KPMG dated 12 May 1999. The bulk of that letter refers to the evidence of Mr Tutin.

In giving oral evidence to the tribunal, Mr Tutin came across as a confident and courageous witness. We have no hesitation in accepting his evidence.

Mr Tutin told the tribunal that he had had occasion to visit the restaurant premises in a professional capacity in August 1997. Mr Tutin is a partner in Streets & Co, chartered accountants of Bath Street, Grantham. He is experienced in evaluating businesses. He had been commissioned to prepare a report about the restaurant on behalf of a client, Mr Robert Hallam. Mr Hallam was thinking of purchasing the restaurant, if he could, and sought advice about the wisdom of doing so. Mr Hallam wished to be thorough in the assembly of information on which he could base his decision, so much so, indeed, that Mr Tutin was instructed to incorporate in his report the contents of another report obtained from a Mr Nesbitt, of Premier Management, a management consultancy.

Mr Tutin recommended against his client's proposed purchase. In part this resulted from information provided by Ms Gill-Wootton (Mrs King, as he knew her). He was shown what he described as "neat" takings sheets for the restaurant business, but as he looked at these, became aware of other, "scruffy" takings sheets, with jottings and amendments, said by Mrs King to have been prepared by the restaurant manageress. He was told by Mrs King that these sheets showed the true takings. A "little book" was produced showing the true takings. Between them, Mr Hallam and Mr Tutin obtained copies of the "neat" and "scruffy" takings sheets, which in due course they were able to provide to Customs.

Mr Tutin was taken in evidence to samples of "neat" and "scruffy" takings sheets respectively. He was able to draw a distinction between them, "clear as day", as he put it. He had no doubt of the difference. He told the tribunal that he could tell that the restaurateur had by a systematic process falsified the takings. He was left under no illusion; he became sceptical of the business, and concluded that he wasn't going to let his client "walk into being sold a pup".

In his letter of 12 May 1999 to Mr Smith, Mr McFarlin wrote as follows:

"It is my clients ^[4] contention that the takings figures of the business were falsely increased purely to assist Mr Hallam, the prospective purchaser, in obtaining finance from the bank, and that this was done with Mr Hallam's full agreement at the time".

The above sentence could in our view be construed as notifying Customs of a conspiracy to defraud the bank. We have not heard from Mr Hallam, so we must not, and we do not, make any assumptions against him on the strength of the allegation. So far as Ms Gill-Wootton is concerned, however, we observe that Mr McFarlin appears to have been writing on the basis of instructions received from his client; that her attitude is admitted to have been a dishonest one; that she was actively engaged in the falsification of documents on which she knew that financial reliance would be placed; and that she was admitting that one set of the takings sheets was false. All this is evident without the need for us to have heard personally from Ms Gill-Wootton as to these matters.

At that time, that is to say in Summer 1997, it is not contended by Customs that the alleged partnership with the appellants had commenced. By the time Customs became concerned with the business, it is said that Ms Gill-Wootton was in partnership with her parents. Mr Smith and Mr Parsons told the tribunal how they lunched at the restaurant premises on Sunday, 13 September 1998. This was at the start of an extensive so-called "test eating" programme, conducted covertly by various officers of Customs between that date and Saturday, 10 October 1998. Subsequently, Mr Smith compiled a table showing which officers had eaten which meals on which dates, how much they had spent and what they had observed.

Customs suspended the "test eating" programme when the business was sold. However the investigation deepened when Customs became aware of the possibility of falsified takings. Customs' schedules of takings allegedly underdeclared have been prepared from records obtained from Ms Gill-Wootton after the sale, and on the strength of the evidence from Mr Tutin and his client Mr Hallam, with Mr Hallam's approval.

Mr Smith visited Ms Gill-Wootton on 23 February 1999. We find that, on that occasion, she told Mr Smith that all her takings were correctly accounted for. She said that she had done most of the bookkeeping for the business apart from the last few months, when her mother had done it. She referred Mr Smith to her parents in case of queries.

We are satisfied that Ms Gill-Wootton lied to Mr Smith about her takings. Based on his appreciation of the difference between the represented takings and the true takings, derived from comparing and contrasting the "scruffy" and "neat" takings sheets, Mr Smith was able to prepare schedules detailing the differences between the declared takings and the actual takings. He was able to demonstrate that, for the VAT periods of the business from 09/97 to 09/98, and from then until the sale, the output tax declared by the business was £36,905.84, whereas the true output tax, applying the suppression rate calculated from the information he possessed, was of the order of £62,790.10. For periods 09/97 to 06/98, he used the discrepancies in the takings sheets as his source of information as to the rate of suppression; after that, he used the observations resulting from the "test eating" programme.

These calculations appear to us to be thorough and comprehensive. Certain details required correction, as Mr Smith and Mr Parsons frankly admitted in evidence, but we are satisfied that the key figures are accurate. The conclusions of Customs as to the amounts of tax suppressed were not seriously challenged by Mr Barlow. The information before the tribunal in this case as to suppression is a good deal more extensive than is often available, and we readily conclude that an assessment for unpaid tax was justified. We have no hesitation in accepting the evidence of Mr Smith and Mr Parsons.

We are informed by Mr Puzey that Customs issued an assessment covering the period 24 October 1996 to 26 October 1998, which is not the period for which they now contend that the partnership including the appellants lasted. Customs incorrectly registered the alleged partnership as commencing on 24 October 1996, not 1997, and withdrew the assessment when this mistake was appreciated.

However Customs have raised the penalty assessment with which we are concerned. Mr Parsons explained the calculation of the assessment to the tribunal. For periods 03/98, 06/98 and 09/98 of the trading of the business, he employed the figures contained in the calculations mentioned in paragraph 48 above. For the period 24 October 1997 to 31 December 1997, he took the relevant proportion of the figure so calculated for the quarter 12/97. For the final period, from 1 October 1998 until the sale of the business, he took the figure so calculated. The total of these came to £19,314.23, which he reduced by 5%, in recognition of the co-operation of the persons assessed, to the assessed figure of £18,348.

Analysis of facts found as to the responsibility issue

When questioned by Mr Smith in February 1999, Ms Gill-Wootton implicated her mother in the running of the business, at least in the run-up to the sale. On her own admission, she was dishonest about the takings of the business, so the parents became involved with an individual who was, on the evidence of Mr McFarlin's letter, prepared to lie in order to secure a financial advantage and clinch a sale.

There is good reason to assume, from the observations of Customs in 1998, that the takings had been underdeclared continuously, from the time when Mr Tutin sighted the "neat" and "scruffy" takings sheets in 1997 right up until the sale. Customs' calculations, derived from the considerable volume of evidence accumulated and scrutinized, bear out continuing high levels of suppression.

The appellants are highly unlikely to have been ignorant of the dishonest underdeclarations of takings, given their involvement with the business at a time when the underdeclarations were continuing. This was a business that was being dishonestly conducted before the appellants became involved, and there is no reason to assume that matters changed afterwards.

We infer that the appellants were concerned to preserve the value of the business, having regard to their payment to their daughter in return for their investment in the property. Irrespective, therefore, of the partnership issue, their co-ownership of the property implicated them in the use made of it. Without a high level of return from that use, their investment might be jeopardised.

Having regard to the way in which they were willing to become associated with their daughter's financial affairs, the appellants cannot avoid responsibility for what happened at the premises by professing that it was the daughter's concern alone. The appellants have not succeeded in distancing themselves from their daughter's interests.

The submissions of Mr Puzey

Mr Puzey submitted that the question whether a partnership exists in any given case is to be judged objectively. Consequently, he said, such matters as the forms completed for the Contributions Agency (paragraph 11(a) above) and the appellants' protestations that they were not partners are irrelevant. He cited Weiner v Harris [1910] 1 KB 285 (Court of Appeal) per Cozens-Hardy MR at 290, viz:

"It is quite plain that by the mere use of a well-known legal phrase you cannot constitute a transaction that which you attempt to describe by that phrase. Perhaps the commonest instance of all, which has become before the courts in many phases, is this: Two parties enter into a transaction and say 'It is hereby declared there is no partnership between us'. The court pays no regard to that. The court looks at the transaction and says, 'Is this, in point of law, really a partnership?' … ".

IRC v Williamson [1928] 14 TC 335 is to the same effect.

The limited involvement of the appellants in the running of the business was not an impediment, Mr Puzey said, to their being regarded as partners, bearing in mind that a sleeping partner is just as much a partner as is a person with day-to-day management of a business (Pooley v Driver (1876) 5 Ch D 458).

Mr Puzey drew attention to the late stage at which the denial of partnership arose. That stage was contemporaneous with the re-drawing of accounts by Mitchell Ramsden to show the business as belonging exclusively to Ms Gill-Wootton. Mr Puzey invited our attention to the factors listed in section 2 of the Partnership Act 1890 and to the evidence indicating the existence of a partnership in this case. He submitted that the weight of evidence taken together clearly indicated the existence of a partnership as alleged by Customs. The appellants had not shown that such was not the case. They had called no evidence, even from their accountants, but had relied upon cross-examination of Customs' witnesses, which had been to no effect.

Mr Puzey also invited our attention to the dishonesty of Ms Gill-Wootton with regard to the takings of the business. He reminded us that, having regard to the effect of sections 10 and 12 of the Partnership Act, the dishonesty of one partner was deemed to be that of all the partners, citing Akbar (trading as Mumtaz Paan House) v C & E Comrs (1998) VAT Decision No 15386. It was accordingly unnecessary, he said, for Customs to prove that the appellants themselves had been dishonest, so long as one partner had been dishonest. The other partners would then be jointly and severally responsible for the penalty assessed.

Mr Puzey invited us to accept the quantum of the assessment, and he submitted that the level of mitigation at 5% was fair in all the circumstances.

The submissions of Mr Barlow

Mr Barlow referred us to sections 1 and 2 of the Partnership Act with regard to the question, what evidence is habitually taken as sufficient to establish the existence of a partnership. In particular he drew our attention to section 2(3). He pointed out that receipt of a share of profits is only prima facie evidence of a partnership. He referred us to Badeley v Consolidated Bank (1880) 38 Ch D 238 (Court of Appeal) per Lindley LJ at 258-9, viz:

"It is no longer right to infer either partnership or agency from the mere fact that one person shares the profits of another. It may be, and probably it is true, that if all that is known is that one person carries on business and shares the profits of that business with another, prima facie those two are partners, or prima facie the person carrying on the business is carrying it on as the agent of the person with whom he shares his profits. That may be true, and I think is true even now; but when you have a great deal more to consider it appears to me to be a fallacy to say that you are to proceed upon the idea that sharing profits prima facie creates a partnership or an agency, and that prima facie presumption has to be rebutted by something else ^[5] ".

So, Mr Barlow submitted, the fact that the accounts first drawn up by Mitchell Ramsden showed that profits were shared between the appellants and Ms Gill-Wootton did not gainsay the fact that the profits were not actually shared nor agreed to be shared. He relied upon section 2(3)(a) of the Partnership Act, which states that the receipt of a debt by instalments out of accruing profits of a business does not of itself make a person a partner in the business or liable as such.

Mr Barlow then analysed the evidence and the reliance placed on it by Customs. In the case of the Contributions Agency forms, he emphasized the confusion of the appellants as to what they were signing. The appellants had been frank about filling in the forms and had not attempted to pretend that they had not meant to enter into the forms to settle their daughter's tax. As to the sale Agreement, the appellants were undoubtedly joint owners of the property and had simply joined into the Agreement to sell what they had to sell ^[6] . The evidence of Mr Tutin was that Ms Gill-Wootton alone appeared to own the business.

As to the first set of accounts, those were not prepared to cover the period, from 24 October 1997, during which the partnership was alleged to have existed. The accounts were prepared to cover a period commencing on 1 April 1997. They appeared to have been drawn up at the time of the Contributions Agency forms.

The letter from Mr McFarlin dated 28 April 1999 was, Mr Barlow submitted, misconceived. Mr Barlow took us in detail to the contents of the interviews. The detail of the interviews showed that Ms Gill-Wootton treated herself, and was treated by her parents, as sole proprietor. Mr Barlow addressed the matters relied upon by Customs as proving dishonesty and dismissed these as equivocal or as supporting the case of the appellants. In particular, he submitted that Ms Gill-Wootton's assertion that she was in partnership with her parents from October 1997 was a passing remark made against all the evidence, which was far outweighed by assertions to the contrary elsewhere and by the independent evidence.

Mr Barlow submitted that Ms Gill-Wootton's admissions about false documents did not implicate her parents. That did not make them dishonest. They had co-operated with Customs, yet not only had they been assessed together with their daughter, they had not been accorded a proper level of mitigation.

Mr Barlow submitted that the appellants had bought only into the property, not the business. They had not been involved in the business to the extent required to demonstrate that they must have been partners.

Decision of the tribunal with reasons

In Memec v IRC [1998] STC 754 (Court of Appeal) at 764 e-f , Peter Gibson LJ described the characteristics of an ordinary English partnership as follows:

"(1) the partnership is not a legal entity; (2) the partners carry on the business of the partnership in common with a view to profit … ; (3) each does so both as principal and … as agent for each other, binding the firm and his partners in all matters within his authority; (4) every partner is liable jointly with the other partners for all the debts and other obligations of the firm … ; and (5) the partners own the business, having a beneficial interest in the form of an undivided share in the partnership assets … including any profits of the business".

The above incidents are not prerequisites to the existence of a partnership; rather they are indicators of the relationship of partners. In that regard, section 1(1) of the Partnership Act 1890 states merely that –

"Partnership is the relation which subsists between persons carrying on a business in common with a view of profit".

Section 2 of that Act lists rules to which regard shall be had in determining whether a partnership does or does not exist, but it does not follow that any of those rules is decisive in itself. In particular, it does not follow that, because a share of profits in a business has not been received, or has not been agreed to be received, that that business is not being carried on by more than one individual in common with a view of profit. It is simply that that incident of the suggested partnership is then lacking.

As we see it, the question to be asked is this: was it intended that a profit should be realised for the common benefit of daughter and parents? We are in no doubt that the answer to that question is "yes". As we analyse the facts, the parents had become interested in the property in October 1997 with a view to receiving in due course, indeed sooner rather than later, a share of the proceeds of sale on the assumption that the business would continue to be carried on profitably. In other words, they would profit from the business at the time of sale.

A key fact is the treatment of the property in both sets of accounts prepared by Mitchell Ramsden. In both sets, the property is shown as an asset of the business. Yet the appellants were interested in the property irrespectively. The accounts of the business only make sense if it be assumed that the property has been brought into the business. If there was a partnership, then the property might or might not be joint estate simply by being present in the accounts ^[7]. But if, as the appellants contend, there was no partnership, then what is the property doing in the second set of accounts as if it belonged exclusively to Ms Gill-Wootton? Its inclusion must indicate something – the question is, what.

In our view, the inclusion of the property in the business accounts indicates the fifth incident of partnership identified by Peter Gibson LJ in the Memec case supra. We have found that the parents intended neither a gift to their daughter nor a loan; nor was the one-half interest they apparently received in the property commensurate with the £70,000 paid to their daughter so that she could settle with her ex-husband. The only explanation that fits the facts was that the parents and the daughter proceeded on the basis that the parents' agreed share in the property should remain in the business as a business asset.

We do not accept Mr Barlow's submission that Ms Gill-Wootton's early indication in interview that she was in partnership with her parents should be disregarded as inconsistent with the independent evidence. In the first place, the independent evidence sheds no light on the existence or otherwise of the partnership. One is left to infer the existence of the partnership, or not to infer it, from the apparent acts and omissions of Ms Gill-Wootton and her parents. Secondly, we have not heard from Ms Gill-Wootton and so have no reason to believe that she would change her position. Indeed, why she would apparently permit her accountant Mr McFarlin to write asserting the existence of the partnership, when allegedly there was no partnership, is not adequately explained.

We are unimpressed by the lack of evidence from Horwood Patterson, who prepared the deed dated 24 October 1997, and from Mitchell Ramsden, who prepared the two sets of accounts. We are also unimpressed by the failure of the appellants to give evidence themselves, in a case where a large number of unanswered questions has arisen. In the absence of such assistance, we must do the best we can with what we have got.

The Contributions Agency forms, the sale Agreement, the accounts and the correspondence all tend to the conclusion that the appellants were interested in the business as partners. We moreover think that that is the proper conclusion to be drawn from what the appellants themselves are recorded as having said in interview. As we say above, the appellants left it to those advising them to ensure that they got their investment back, and the documentation reflects a partnership because the intention of partnership was the clear impression that was given to those advising. We accept Mr Puzey's submission that, looking at the facts objectively, a partnership must have been intended to arise. We regard it as very clear that the period of the partnership was from the date of the deed which vested the appellants' interest in them through to the completion of the sale of the business just over a year later. Those dates, being the dates relied upon by Customs in the assessment, are both matters of record. Mitchell Ramsden's date of 1 April 1997 for the commencement of the partnership was simply a mistake.

We therefore decide the partnership issue in favour of Customs.

Turning to the responsibility issue, we have found Ms Gill-Wootton to have acted dishonestly at the time of the proposed transaction with Mr Hallam, and Customs have proved to the requisite high standard ^[8] that dishonesty for the purpose of evasion of VAT was subsequently present throughout the duration of the business. We have found that the appellant Mrs Wootton took over the bookkeeping from her daughter. Both the appellants and Ms Gill-Wootton herself were partners in the business, whatever the level of their active involvement, or lack of it, in the running of the business.

We accept Mr Puzey's submission that the Mumtaz Paan House case is authority that, in the case of a partnership, the effect of sections 10 and 12 of the Partnership Act taints all the partners with the dishonesty of any one or more of them, for the purpose of liability to a penalty assessment reliant upon section 60(1). On the facts, we do not see how either of the appellants can have been ignorant of the dishonesty being perpetrated, even if the dishonesty were that of their daughter. Having regard to the effect of the Partnership Act, we therefore decide the responsibility issue also in favour of Customs.

Had the appellants attended tribunal and made a case for further mitigation of the penalty, we would have listened to them and might have adjusted the penalty if appropriate. As it is, we are unsympathetic. We see no reason to depart from the level of mitigation determined by Customs, namely 5%.

For the above reasons, this appeal is dismissed.

Costs

We heard submissions from counsel as to costs at the conclusion of the hearing. The appellants have lost on both issues for our determination. We accordingly think that the only fair result is for costs to follow the event. We accordingly order that the appellants are to pay Customs' costs of the appeal, to be the subject of detailed assessment if not agreed.

MR M S JOHNSON

CHAIRMAN

Release Date: 17 August 2004

MAN/01/0125

Note 1    These were: Mr Andrew Edward Smith, officer of Customs; Mr Paul Frederick Tutin, chartered accountant; and Mr Michael Anthony Parsons, officer of Customs.     [Back]

Note 2    (although by the time of final submissions, Mr Barlow appeared to have relented from this).    [Back]

Note 3    As provided in a Consent Order made by District Judge Merriman in the Leicester County Court dated 29 August 1997, in which the partnership in the Cossington Mill Restaurant between the former Mr & Mrs King was acknowledged to have been dissolved on 31 July 1996. A copy of the Order is contained in the tribunal bundle.     [Back]

Note 4    The word “clients” does not contain an apostrophe as typed in the letter. However, it appears, and we find, that Mr McFarlin had for the purposes of writing that letter one client, namely Ms Gill-Wootton.     [Back]

Note 5    Mr Barlow emphasized the passage that we have highlighted in italics.     [Back]

Note 6    It is within the experience of the Chairman that multi-vendor sale agreements are often drawn without specificity as to which interest(s) precisely, within the entire subject-matter of the sale, particular vendors may be agreeing to sell.     [Back]

Note 7    See Barton v Morris [1985] 1 WLR 1257, a decision of Nicholls J (as he then was).     [Back]

Note 8    See Gandhi Tandoori Restaurant v C & E Comrs [1983] VATTR 39.     [Back]