United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2004] UKVAT V18811

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Watson (t/a Watson Cleaning Contractors) v Customs and Excise [2004] UKVAT V18811 (21 October 2004)

18811

PENALTY – No appearance by or on behalf of Appellant – Appeal heard under rule 26(2) of VAT Tribunal Rules 1986 – Appellant deregistered for VAT when trading above registration limit – Appellant's main client VAT exempt not valid reason for appellant not to charge VAT – Appeal dismissed

LONDON TRIBUNAL CENTRE

GRAHAM WATSON Appellant

T/A WATSON CLEANING CONTRACTORS

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MISS J C GORT (Chairman)

MR P D DAVDA FCA

MR J G ROBINSON

Sitting in public in London on 7 September 2004

No appearance by or on behalf of the Appellant

Dr I Horton, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

This is an appeal against liability to a penalty under section 60 of the Value Added Tax Act 1994 ("VATA") for an evasion through dishonesty of VAT in the sum of £264,539 for the period 1 May 1996 to 31 May 2002, that amount being reduced to £66,124 following the Appellant's co-operation. The decision was contained in a letter dated 20 November 2002.

The appeal was heard under the provisions of rule 26(2) of the Value Added Tax Tribunals Rules 1986, there being no appearance by or on behalf of the Appellant. Both the Appellant and his accountant, who was his nominated representative, were contacted prior to the hearing, both informed the Tribunal they did not intend to attend.

The Respondents produced a bundle of documents and we heard evidence from Mr I B Kempster, a VAT investigation officer.

The Appellant commenced trading as a contract cleaning in 1976/77 as Watro Cleaning Services, the name later being changed to G Watson & Company which was registered for VAT on 1 July 1989. He deregistered from 1 March 1992 after being made bankrupt following a debt to the Respondents of £15,000.

On 1 March 1992 the Appellant's wife, trading as Watson & Co, registered a contract cleaning business for VAT. This business was deregistered on 31 March 1995 having ceased to trade. During the period when the Appellant's wife was trading as Watson & Co she carried out work for Ladbrokes racing, the cash betting division of Hilton Group Plc. She charged Ladbrokes value added tax for the work done, and was paid by them.

Having been discharged from bankruptcy, the Appellant, trading as Watson's Cleaning Contractors, registered for VAT with effect from 4 October 1995. Seven months later he deregistered claiming that he had ceased trading. We find that he had not in fact ceased trading, and, according to his self-assessment tax returns to the Inland Revenue he was trading at a level above the registration limit. The Appellant had at some stage secured a contract with Ladbrokes racing and this contract eventually amounted to approximately 99% of the Appellants business.

On 16 November 2001 the Appellant was appointed the sole director, and his wife the secretary, of Watson's Cleaning and Maintenance Contractors Ltd. That company remained dormant until 24 April 2002 when the Appellant signed an application to be registered for VAT with effect from 1 June 2002.

In the course of an interview conducted by Mr Kempster with the Appellant at the Appellant's accountants' offices on 1 August 2002 the Appellant learned that the Commissioners had been investigating his value added tax position.

Prior to the interview Mr Kempster had produced a schedule of arrears using information contained in the Inland Revenue self-assessment returns, together with a Hilton Group printout of invoices rendered and payments made up to 31 May 2002.

In the course of the interview the Appellant stated inter alia that in addition to the work with Ladbrokes he had a contract with a nightclub in Staines and a couple of other small jobs totalling about £400 per month. He also did work for a business called Interforum. He received £530 per week from the nightclub and £128 per month from Interforum.

The Appellant accepted that invoices had been rendered to the Hilton Group in the names of Watson's Cleaning and Maintenance Contractors, Watson's Cleaning Contractors and Grampian Cleaning. He had set up Grampian Cleaning in order to be under the VAT threshold and believing that he did not have to charge VAT. He stated that he had been led to believe that the racing industry was zero-rated for VAT purposes, and knowing that the Ladbrokes contract would exceed the VAT registration threshold, he set up the separate company. He admitted that all the cheques received from the Hilton Group were made payable to Graham Watson, although invoices were rendered in the name of Grampian Cleaning. He believed that by rendering invoices using three different trading names he was keeping his business below the VAT registration threshold. He admitted that the Grampian Cleaning payments went into his private bank account, and that his accountant, Mr L J Ford, was unaware of this.

In the course of the interview the Appellant stated that he was fully aware that the VAT threshold related to turnover and not to profit. He stated that he had registered for VAT from 4 October 1995 after his discharge from bankruptcy because the business had already secured the Ladbrokes contract and he knew that he was over the VAT threshold. However he had deregistered, having been led to believe after discussions with Ladbrokes that he did not have to be registered for VAT. He was unable to say with whom he had discussed the matter and when this conversation had taken place. He also claimed to have contacted the local VAT office who were unable to tell him if he should be registered or not. He claimed to have no intention to defraud Customs and Excise, and that he had not charged or collected VAT. He did however admit that he had told the local office that he had ceased trading when he applied to deregister. He also admitted that his accountant had told him on a number of occasions that he should be registered for VAT and he also stated that he had registered Watson's Cleaning and Maintenance Contractors Ltd for VAT after he had been successful in winning a new contract with Ladbrokes on which they had stated the price plus VAT.

In the course of the interview Mr Kempster, in the presence of the Appellant, agreed that a person's liability to be registered for VAT had nothing to do with the type of supplies that customers were making, but was dependent on the turnover exceeding a specified limit. Mr Ford admitted that he had discussed this with the Appellant every time he had prepared his accounts. He also agreed that his client should not have deregistered for VAT purposes in 1996.

At the conclusion of the interview the Appellant said he had not given VAT a low priority and had not deliberately tried to evade VAT. He claimed it would have been more beneficial for him to be VAT registered so he could have claimed the tax back on all his purchase invoices. He believed he did not have to register for VAT because Ladbrokes were making zero-rated supplies, and that if he were VAT registered, he would lose 17½% of his profits, and there was a possibility that he would lose the Ladbrokes work altogether. He did not think that he had acted dishonestly.

Following the interview on 22 October 2002 the Appellant telephoned Mr Kempster and informed him that the total moneys received from the Hilton Group for invoices rendered in the name of Grampian Cleaning was £228,890.68. These receipts covered the period 1 January 1999 to 31 May 2002 and had been used to pay the wages.

When assessing the amount of VAT for which the Appellant was liable, Mr Kempster had taken account of the fact that the Appellant's wages bill constituted his biggest overhead, there was no VAT liability in respect of them and he had therefore given the Appellant a benefit in respect of this. He had allowed input tax of £21,851 over the whole period in question. He had also considered that the Appellant was very co-operative, in particular he had produced the invoices and was able to substantiate the money that had gone into his own account. Because of this co-operation he had been allowed the maximum mitigation in the circumstances of 75% despite the fact that the Appellant had not made any specific admissions in the course of the interview.

In a letter dated 16 April 2003 written by Mr Ford on behalf of the Appellant and sent to the Respondents Mr Ford stated:

"He still believes that Ladbrokes Ltd instructed him not to charge VAT as per the letter enclosed of 12 September 2002 and if he had to charge VAT to Ladbrokes Ltd then this money would have been collected and paid over to you as a matter of course. There was no intention on my client's part to defraud Customs and Excise out of any output tax that was due to them. I would understand if they had had to be charged VAT on the invoices and collected on behalf of Customs and Excise and not paid it over to them but this is not the case as you are aware."

On 17 September 2002 Mr Ford had sent to the Respondents a letter from Peter Marvin, the Financial Services Controller of Ladbrokes addressed to the Appellant. That letter stated as follows:

"The principal business activity of Ladbrokes Ltd is retail bookmaking. This activity falls within the scope of Schedule 9, Group 4 of the Value Added Tax 1994. Schedule 9 Group 4 specifically exempts activities covering "the provision of any facilities for the placing of bets or playing of any games of chance."

The effect of our betting activities being classified as exempt prevents the recovery of any input VAT that is directly attributable to the provision of exempt supplies."

At the conclusion of the hearing we dismissed the appeal for the following reasons.

The Appellant had considerable experience of value added tax, having been a registered trader at various times since 1989. We do not accept that he was ever told by Ladbrokes that he did not have to register for VAT. In the first place his wife had been carrying out a contract with Ladbrokes and had been charging VAT thereon, and Ladbrokes had paid VAT. Whilst it may be that Ladbrokes were thinking of taking away the contract and awarding it to a company that was not registered for VAT, this seems improbable given the high value of the contract which almost inevitably would have taken any supplier over VAT threshold. We find that the Appellant had been told frequently by his accountant that he should be registered for value added tax and that he had also been told by his accountant that VAT was relevant to turnover and not profit. Ladbroke's VAT position was not relevant to the Appellant's liability to register. More particularly we find that the Appellant had deliberately told the Respondents that he had ceased trading and hence was deregistering, this can only have been a deliberate lie. There would be no need for the Appellant to have told such a lie if he had genuinely believed that he did not need to register for VAT.

We have considered all the matters put forward by the Appellant on his own behalf in the course of the interview, as well as the matters put forward on his behalf by Mr Ford in correspondence, we have taken account of the fact that the burden of proof in this case is upon the Respondents, and that dishonesty requires a deliberate intent to evade VAT. We have also taken account that the standard of honesty is that of ordinary reasonable people, and that we have to consider whether reasonable people would regard the Appellant's activities as dishonest, and, if so, whether the Appellant himself knew that what he was doing was dishonest. In all the circumstances, applying this test particularly given that the Appellant consistently ignored his accountant's advice, we found that the Appellant did act dishonestly.

As stated above, this appeal was dismissed at the hearing. The Respondents did not make any application for costs.

MISS J C GORT

CHAIRMAN

RELEASED: 21 October 2004

LON/03/319