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Cite as: [2004] UKVAT V18743

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Wood & Anor v Customs and Excise [2004] UKVAT V18743 (26 August 2004)

VALUE ADDED TAX — dishonesty — company accepting centrally issued assessments and failing to send in returns, or to correct the assessments — assessments significantly understating true liability— responsibility of directors — VAT Act 1994 s 61 — whether dishonesty of directors established — appeal withdrawn by one director — dishonesty of other director not established.

MANCHESTER TRIBUNAL CENTRE

JAMES WOOD & PAUL RILEY Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Colin Bishopp

Arthur Brown

Peter Whitehead

Sitting in public in Manchester on 29 March & 29 July 2004

Nigel Gibbon, solicitor, for the appellants

Lisa Linklater, of counsel, instructed by the Solicitor's Office of HM Customs and Excise, for the Respondents

DECISION

In this appeal James Wood and Paul Riley, the former directors of Gamebell Limited, challenge the imposition on them, in accordance with section 61 of the Value Added Tax Act 1994, of a penalty for the dishonest evasion of tax by Gamebell Limited which, the Commissioners say, was attributable to their dishonesty. The essence of the respondents' contention is that Gamebell Limited failed to send in its VAT returns for the successive periods from 07/96 to 10/97, and its final return to the cessation of trading, but instead paid centrally issued assessments when the appellants knew, or ought to have known, that those assessments significantly understated its true liability.

Gamebell Limited eventually sent in the outstanding returns and in due course an assessment was raised. Gamebell appealed against the assessment but later went into insolvent liquidation and the appeal was withdrawn. The amount of tax said to be evaded is £117,931. The respondents decided to mitigate the potential 100% penalty by 60% to an aggregate, after some rounding, of £47,169. On 20 March 2000 the respondents wrote to each of the appellants indicating that one half of the penalty - that is £23,584 - was to be assessed on him. By the time the hearing before us began on 29 March 2004, the only remaining issue was whether the respondents could demonstrate that Gamebell's failings were "in whole or in part, attributable to the dishonesty" of the appellants, the relevant test imposed by section 61 of the Act.

We heard no oral evidence from the Commissioners since the appellants' representatives had not objected to the statements which had been served in advance. We heard argument from Lisa Linklater, counsel for the respondents. In essence, the respondents rely upon the fact that centrally issued assessments were paid while returns were not rendered; on the fact that the difference between the amounts centrally assessed and the amounts ultimately found to be due was considerable; upon the inference that the directors of Gamebell knew, or had they made proper enquiry would have known, that the centrally issued assessments substantially understated the company's true liability; upon what the two appellants said at separate interviews with Customs officers on 13 May 1999; and upon what they describe as an admission of dishonesty which both appellants signed after the interviews. There was some dispute whether the document had been signed immediately following the interviews, or (as its date suggests) about a month later but we have concluded that this dispute is not material to the matters we need to decide.

The appeal first came on for hearing on 29 March 2004 when we heard oral evidence from Mr Wood; he is Mr Riley's wife's uncle, and the elder of the two by about twelve years. Mr Wood and Mr Riley have been in business together for ten or twelve years, principally in property development. Gamebell Limited, however, of which they were the only directors and shareholders, was at first the owner of a public house. When it secured a different kind of justices' licence, it was converted it to a nightclub and it traded as a nightclub until it ceased business in the spring of 1998.

Mr Wood told us that Gamebell had embarked on a programme of refurbishment of the premises from which it traded, in Accrington, Lancashire, on the strength of an oral promise of a loan from a brewery. Rather unwisely, the company had started to carry out the refurbishment before it had properly secured the loan. When the brewery changed its mind and decided after all not to make the loan, Gamebell was left with considerable debts to tradesmen but insufficient funds to pay them.

Mr Wood accepted that he was responsible for the company's finance and administration, while Mr Riley dealt with organising the building works and, to a limited extent, with running the business itself. In fact neither of them had any real expertise or experience in running licensed premises and the day to day management was undertaken by an employed manageress. Mr Wood was very positive in his evidence that Mr Riley had no involvement in the financial affairs of the company and in particular had no involvement in the preparation or furnishing of VAT returns.

In fact, Gamebell's financial problems were serious. Although it continued to trade for some time, and it appears made some trading profit, it had no realistic prospect of paying off its creditors within a reasonable time scale. Mr Wood told us that he spent as little time as possible at the premises, meeting the manageress each morning in order to collect the takings from the previous day which he thereafter banked but otherwise absenting himself. It was apparent that he was paying off ordinary the trade creditors who made supplies which were necessary for the running of the business, but, he said, he was actively avoiding all other creditors and, because the scale of the company's debts was so great, largely closing his eyes to the problem. He would, for example, simply place bills and other items of that kind, including the centrally issued assessments, in a drawer, out of sight. His policy had become, he said, to pay the creditors who "shouted the loudest" - in particular those who sent bailiffs - but he was otherwise not attending to paperwork. It was quite clear that Mr Wood was well aware of the need to send in VAT returns (in fact he had sent in Gamebell's first two returns, both of which claimed repayments) but he conceded that he had made no attempt to do so thereafter.

It became obvious to us as Mr Wood gave his evidence that if he did not know Gamebell's true VAT liability was significantly in excess of the amounts centrally assessed his ignorance was due entirely to his wilful closing of his eyes to his responsibilities as, in effect, the company's finance director. We concluded Mr Wood's evidence on the first day of the hearing but were not able to continue with the case on that day, and it had to be adjourned to be resumed on 29 July 2004. In the meantime, Mr Wood - wisely in our view - decided to abandon his appeal. The respondents agreed that our allowing Mr Riley's appeal, should we do so, would not have any adverse impact on Mr Wood by, in particular, increasing the penalty imposed on him; they would not seek to recover more than 50% of the penalty from Mr Wood, and would not argue that we should adjust the mitigation which they had allowed.

On 29 July we heard Mr Riley's evidence. Having done so, and having heard the parties' closing submissions - by Nigel Gibbon for the appellant and by Lisa Linklater for the respondents - we came to the conclusion that the appeal should be allowed, and indicated as much to the parties. We now give our reasons for doing so.

First, we were impressed by the consistency of Mr Riley's evidence with Mr Wood's, not merely in the central feature that Mr Wood was responsible for the company's finances to the exclusion of Mr Riley, but in the detail, despite the lapse of four months between their respectively giving evidence. We were satisfied that Mr Riley was a truthful witness. He told us that he was aware that the brewery had withdrawn its offer of the loan and that its doing so had placed the company in considerable financial difficulty. However, he said, while he realised that it was staving off its creditors he had no idea that it was not merely not paying the Commissioners, but concealing the extent of its true liability. He had assumed that, despite Gamebell's financial difficulties, Mr Wood was dealing with its record keeping and similar duties properly. Mr Wood had said nothing to suggest the contrary, nor did Mr Riley have any other reason to suspect that there was anything amiss. He did not deal with any financial documents; if any came into his hands he passed them on to Mr Wood. We accept that evidence.

We were particularly impressed by what Mr Riley told us of a winding up petition issued by the respondents in about 1996, when Gamebell was already receiving centrally issued assessments. It appears that a winding up order was made on the strength of the Commissioners' petition but it was revoked when the amount due to the Commissioners was paid. Miss Linklater suggested that this episode should have put Mr Riley on enquiry and that he should have asked himself at that time whether the company was dealing correctly with its VAT liabilities. With hindsight, one can see that that is exactly what Mr Riley should have done but we accept his evidence that, at the time, he thought that the company had resolved its position in relation to the respondents and that its VAT affairs were in order. Though Mr Riley's conduct might have been misguided, it was not, in our view, dishonest within the ordinary meaning of that word.

Mr Riley's replies to the questions put to him by the Customs officers who interviewed him in May 1999 were consistent with what he and Mr Wood told us about the responsibility for Gamebell's financial affairs. We find nothing in the interview to support an allegation of dishonesty.

The document which Mr Wood and Mr Riley signed thereafter is, however, rather different. It reads as follows:

"We, Mr Paul Riley and Mr James Wood, directors of Gamebell Limited, hereby state that returns were not rendered on time for period 07/96, 10/96, 01/97, 04/97, 07/97, 10/97 and the final return. We accepted the centrally issued assessments knowing the VAT liability was higher than the assessments. We accept full responsibility and are aware that our actions cannot be considered fully honest."

The document has been signed by both Mr Wood and Mr Riley, and also by their then accountant, Michael Brookes, as a witness. Mr Brookes had accompanied both Mr Wood and Mr Riley to their separate interviews. On the face of it, this is a damning document.

Mr Riley's explanation was that he had signed it because Mr Brookes advised him that he had no alternative. He told us that Mr Brookes was instructed by Mr Wood and, although he was Gamebell's accountant, it was with Mr Wood that he dealt and Mr Riley had only slight acquaintance with him. He has since lost all confidence in Mr Brookes and now his affairs are dealt with by a different accountant. He was, he said, unhappy at the time that he appeared to be making an admission of dishonesty but felt he had no choice but to follow the advice he was given. He certainly recognised that it was wrong to fail to pay Customs and Excise the correct amount of tax, and worse to misrepresent the correct amount; but, he repeated, he had not known until after the event that this is what had happened.

We accept that account; we are satisfied that, here as elsewhere, Mr Riley was telling us the truth. While it is clear that he knew, or must have realised, that Customs and Excise, like other creditors, were not being paid promptly (which is wrong but not dishonest), we are satisfied that he did not know that the true extent of Gamebell's liability was being concealed. Accordingly, the respondents have not discharged the burden which is on them of establishing dishonesty on his part.

Mr Wood's appeal, having been withdrawn, is formally dismissed. We direct that he pay the Commissioners' costs of his appeal. Mr Riley's appeal is allowed and we direct that the Commissioners pay his costs. If the parties are unable to agree between themselves on the manner in which the issue of costs should be resolved, either may apply for further directions.

COLIN BISHOPP

CHAIRMAN

Release Date: 26 August 2004

MAN/04/0557