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D'Jan v Customs and Excise [2005] UKVAT V19045 (25 April 2005)

19045

PENALTY – Evasion – S.60 and S.61 of Value Added Tax Act 1994 – Appellant director of clothing manufacturer – Whether invoices from another company amounting to half of Appellant's company's output genuine – Appeal dismissed

LONDON TRIBUNAL CENTRE

HATICE D'JAN Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MISS J C GORT (Chairman)

MISS SHEILA WONG CHONG FRICS

MR ALEX McLOUGHLIN

Sitting in public in London on 21, 22 & 23 February 2005

Mr Richard Barlow of counsel, for the Appellant

Mr Robert Kellar of counsel, instructed by the Solicitors Office of the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

This is an appeal against a decision of the Commissioners that the Appellant is liable to a penalty pursuant to sections 60 and 61 of the Value Added Tax Act 1994 which was notified to the Appellant in a letter dated 19 July 2002, and by a letter dated 18 September 2002 the original sum was amended to £109,548. The decision was subsequently upheld on review and notified to the Appellant by a letter dated 11 February 2002, however this appeal is against the substantive decision and not the review.

The Appellant at the relevant time was a director and company secretary of Kelan Clothing Manufacturers Ltd ("Kelan"). Kelan was registered for VAT from 1 September 1995 as a manufacturer of women's and girls' tailored outerwear.

The Appellant appeals on the grounds "that VVR Distribution Ltd did work as a sub-contracting unit for Kelan Clothing Manufacturers Ltd : VVR Distribution Ltd did operate in the CMT fieldwork and the claims for the VAT paid to VVR Distribution Ltd by Kelan Clothing Manufacturers Ltd should be allowed. There is documentary evidence to support my case."

The Commissioners' case is that they were entitled to raise an assessment to a penalty on the basis that false invoices were dishonestly introduced into the records of Kelan for the purpose of reclaiming the VAT on those invoices. It was the Commissioners' case that the introduction of those invoices was in whole or in part attributable to the dishonesty of the Appellant who was at all material times the director and managing officer of Kelan.

The evidence

An agreed bundle of documents was provided. A further bundle was produced containing the witness statements of the Commissioners' witnesses and various other matters including an offence report on Kelan compiled by Mr Jonathan Heath of the Commissioners. Various other documents were produced in the course of the hearing. Mr Barlow on behalf of the Appellant objected to the Tribunal seeing the witness statements. He further objected to the Respondents' witnesses being asked any supplementary questions on the basis of the evidence contained in those witness statements. In particular he objected to any evidence being given as to the content of the offence report. With the exception of one page in the offence report, the Appellant's objections were not upheld. However it was accepted that where the Respondents' witnesses had expressed opinions, those opinions would be disregarded by the Tribunal. In the course of the proceedings Mr Barlow also objected to the inclusion of letters from Mr R G Boulton of Andrew & Co, accountants acting on behalf of the Appellant, although he later withdrew his objection to one of the letters. We consider all the correspondence between Mr Boulton and the Commissioners to be relevant and admissible.

The following witnesses gave evidence on behalf of the Respondents:

Mr Shulem Aksler, Property Manager;

Mr Edward Clark, former Quality Controller of Burberrys;

Mr Alexander Moor, Director of the Clothing Advisory Service Ltd;

Lawrence Zussman, HM Customs and Excise senior officer;

Celia Mainland, Senior Executive Officer of HM Customs and Excise;

James Nicholas, officer of HM Customs and Excise;

Jonathan Heath, Senior Policy Adviser of HM Customs and Excise.

The witness statements of Gladys Annunziata and Richard Barrett were admitted in evidence and Mr Andrew Panayiotou, former Production Manager for Silverts, and the Appellant herself gave evidence on the Appellant's behalf. .

The facts

Since 1994-95 Kelan had operated from the same address as a clothing manufacturer in the cut-make-and-trim business. It made garments for the top end of the market for customers such as Burberrys and Aquascutum, as well as for other companies such as Whistles and Next. It occupied premises of approximately 20,000 square feet which it rented at a cost of £10,000 quarterly and a further £2,000 quarterly was paid in insurance..

Until 1999 various sub-contractors had occupied different parts of the premises. The Appellant did not at that time have her own staff but sub-contracted all the work to others in the building. In about October 1999 the major sub-contractor in the unit disappeared, leaving behind its staff and some uncompleted orders. At this time only a receptionist, a warehouse delivery man, the Appellant and her husband worked for Kelan. When the sub-contracting company disappeared, the Appellant decided that she herself would take over its staff.

The various clients of the Appellant would, prior to placing an order, assure themselves through their quality controllers inter alia that the Appellant had sufficient staff of sufficient expertise to fulfil a particular order. An order might be broken down into smaller quantities. Throughout the period of an order, particularly in the case of Burberrys, the quality controller would regularly visit the Appellant's premises to inspect the work and to ensure there were no problems. In the period in question, namely from November 1999 to September 2000, a large proportion of the Appellant's work was for Burberrys. It was the evidence of Mr Clark, Burberrys quality controller, that he was able to tell which particular machinist had worked on a particular garment. The cloth used in the manufacture of Burberrys' clothes was expensive and difficult to work on. In addition a large proportion of their fabric was checked and it was important that the checks should match properly along all the seams. It was part of the contract between Burberrys and any company manufacturing its garments that no sub-contractors should be used. It was Mr Clark's opinion that it would take about three hours to manufacture one raincoat, and he accepted a statement contained in a letter from Pat Hanlon of Aquascutum that garments with sleeves would take 185 minutes per garment with an additional 43 minutes added where the company was also required to cut the garments, as was the case with the work done for them by Kelan.

When Kelan received an order a docket was issued setting out the type of garment, the quantities required, the sizes and the delivery date. The order could be broken down into different amounts to be delivered by different dates. It was Mr Clark's practice to visit Kelan at least once a week, to ensure that the quality of the work was maintained and that the orders were met on time. In his opinion it took two to three years to get a machinist up to Burberrys' standards, and he considered it would be extremely difficult for anybody to achieve that standard in a short space of time. He did not believe that any work could have been sub-contracted by the Appellant over a long period of time, given that the longest length of time that he would not visit would be two to three weeks, at such a time his assistant would visit the factory. In the period in question some 30,000 garments had been made for Burberrys and in Mr Clark's view there was no possibility that the garments were made by sub-contractors.

The Appellant's evidence was that she had, prior to 1999, been using the sub-contractor who occupied part of her premises to manufacture garments for Burberrys and her other clients; that the company was in fact sub-contracting was never known to any of her clients. There was only one occasion on which Burberrys had been aware that she was sub-contracting and that was when they placed an order with her for dresses some time in 1996. Kelan were not able to make the dresses and so she had taken Mr Clark to a unit in another part of London who could make them. Mr Clark had approved the use of sub-contractors for that particular order.

On the matter of which particular machinist had made a garment, we preferred the evidence of Mr Moor, who said that it would not be possible to tell if the garments had been part manufactured and then passed on to a finishing company provided that all the trimmings and details were the same.

In a factory such as the Appellant's which produced jackets and/or coats, approximately 60% of the staff would be flat machinists who made the outer shells of the garments, the rest of the staff would be made up of cutters, pressers, finishers and a floor manager. Only the linings would be made outside, mainly by the use of home workers, who would not make complete garments. Mr Moor supported Mr Clark in that he was of the opinion that if a factory sub-contracted to another factory, the quality controller would easily be able to identify variations in the method of production both from the lack of in-house activity/production, and by checking the quality of production and the number of garments available there for inspection. Whilst machinists would normally work on piece-rate, cutters and pressers were often self-employed and not on piece-rate. A machinist making jackets should be able to produce four shells per hour, depending on the fabric and the specification. A machinist making coat shells should be able to produce 2-3 per hour, depending on the fabric and specification.

Mr Moor accepted Mr Clark's estimate of the time it would take to make a quality garment. We prefer Mr Moor's and Mr Clark's evidence as to time, and we do not accept the Appellant's evidence that it could sometimes take 6 hours to produce a garment. The only evidence as to the length of time it would take to make skirts and trousers is contained in a letter from Aquascutum from Richard Barrett, a CMT factories manager with Aquascutum, that it would take an average manufacturing time of 30 minutes per unit. In his witness statement he states that even a basic garment would require at least 45 minutes to make from start to finish. Mr Barrett acknowledged that sub-contracting did occur in the industry, but said that after 40 years in the garment industry he had never, to his direct knowledge, been personally involved with a company which he was aware sub-contracted work. He considered he would be unable to tell whether work done or part of that work had been completed by sub-contractors. Again we prefer this evidence to that of Mr Clark on this particular matter.

On 3 October 2000 Mr Zussman had paid a visit to the Appellant's premises to make a routine VAT inspection. He arrived at 10.35am accompanied by Mrs Mainland, who was his line manager and who had accompanied him to see how he performed. Both Mrs Mainland and Mr Zussman took notes during the visit. Those notes were not written up in consultation with each other. The visit lasted all day. In the course of that visit Mr Zussman learned that there was a workforce of some 120 people. He actually observed 45 machinists and a further 25 staff in total. He was informed by Mrs D'Jan that prior to November 1999 sub-contractors who were on the premises had been used, but since then the workforce had been made up from those sub-contractors. It was not until Mr Zussman came across a large number of invoices from a company called VVR Distribution Limited ("VVR") that he learned that work was being sub-contracted out to VVR. He was informed by Mrs D'Jan that the customers did not know that this was the case, other than one customer. Mr Zussman had the impression that that customer was Burberrys and that the quality controller from Burberrys visited VVR's premises with Mrs D'Jan and he had agreed to say nothing about it. Mrs D'Jan subsequently disputed saying this, and her evidence was that it was the quality controller from Silverts who had accompanied her. The only reference to Silverts in Mr Zussman's notes is that he was told that Alexon, Burberrys and Silverts were the main customers. Mrs Mainland had a similar note re the main customers, but had no note as to a visit by Burberrys' quality controller. Mr Clark, the controller in question, gave evidence that he had never visited VVR's premises. Mr Zussman's note is ambiguous and we are unable to make a finding on this point. .

Mr Zussman was informed that Kelan's prices for making garments were as follows: Burberry rainwear £25-£42, Alexon £10-£15, Silverts £11-£15, Whistles £8-£12 – skirts and trousers £15-£20. Sub-contractors were paid £2 less than this per garment. The cutting of the garments was done on the premises, although Aquascutum also did some of their own cutting. Mrs D'Jan told Mr Zussman that VVR made garments for Kelan, and did so off the premises. In evidence Mrs D'Jan told the Tribunal that a quantity of garments in the orders given to VVR would be made by Kelan itself, so that the quality controllers would not suspect that sub-contractors were being used, given that they would see some of their garments being produced in-house. The last invoice from VVR had come on 29 September 2000. Mrs D'Jan told Mr Zussman that she had last been to VVR in August, and that there had recently been quality problems with VVR, which was why they were no longer being used.

Following this visit Mr Zussman went with a colleague to the address on VVR's invoices. That was at Unit B1 of the Arena Business Centre Ashfield Road, London. On that date he found that the Unit was locked up and there was no sign of any activity. There was a sign saying `Checksave Ltd Import and Export'. A man selling kebabs on the corner of the estate informed Mr Zussman that the Unit had been closed for the previous two weeks. Mr Zussman also visited Unit B1 in May 2002. He described the premises at that date as being small and consisting of two floors. He had made two further visits to Kelan's premises on 24 October 2000 and 7 November 2000. He obtained photocopies of VVR's invoices, a copy of a VVR VAT certificate and checked through other paperwork. VVR's address on the VAT certificate was not `Unit B1' but 6 Newling Close, Beckton. On the second occasion Mr Zussman recorded Kelan's sales invoice details and PAYE details. He scrutinised payments to VVR Distribution Ltd and obtained the ledger/account and a printout of the nominal account. He learned that VVR were paid in cash, but were paid less than the amount on the invoices because when Kelan drew out the cash to pay them they were charged bank charges, which they passed on to VVR. All the staff at Kelan were said to work part-time and this was said to be in order to preserve their benefits.

A letter dated 26 November 1999 written by HM Customs and Excise to Checksave Ltd at Unit B Arena Industrial Estate addressed to Mr Phylactou, who was the leaseholder of the premises at Unit B and who throughout the relevant period had paid the rent on the premises, stated inter alia:

"Thank you for your time and assistance during the VAT inspection carried out on your premises on 22 November 1999."

Mr Aksler was responsible for collecting rent from that property, which he described as being on one level only and being 2,000 square feet in size. He had visited the address at least four times a year to collect the rent due and on those occasions dealt with Mr Phylactou. Up until approximately November1999 Mr Aksler had observed the Unit being used to produce garments with a staff of approximately 8-10. The rent for the premises was sometimes received in the name of Checksave Ltd. and sometimes in other names. In or about November 1999 on a visit to the premises he had seen only 3-4 staff there and was told by Mr Phylactou that he was no longer producing garments but was using the premises for the purpose of importing Bulgarian wine. He noticed various wine boxes around and also that the sewing machines were no longer there. At this time the office had been moved to a different position but the cutting table was still in place. According to Mr Aksler the Unit was unoccupied from approximately November 2000. Mr Aksler was not familiar with the name `VVR'.

Mr Nicholas of Customs and Excise had visited the premises at Unit B on or about 22 June 2000. He spoke to a person who identified himself as a director of Checksave Ltd who told him that VVR had rented a corner of the Unit from him for a short period of time, but the company had left three to four weeks previously. Mr Nicholas had no record of the name of that director, but described him as being 5`8"-5`9" tall, in his 50s, balding and almost certainly a Greek Cypriot. This description fits that given by the Appellant of the person she had dealt with at VVR named Michael.

Following his various visits to the Appellant, Mr Zussman informed Mrs D'Jan that he had concerns over the input tax which was being claimed back relating to VVR.

In November 2001, Mr Jonathan Heath, who at the time was part of a unit investigating civil and criminal VAT fraud, was called into the case. He contacted Mr Clark, from Burberrys, and learned that Mr Clark had never been to VVR's premises nor had he heard of them. On investigation he also learned that not only the registered address of VVR was quite different from that on the invoices in Kelan's records, but also that VVR was registered as a company trading in records, tapes, CDs and Videos.

On the basis of his three visits to Kelan Mr Zussman had carried out a "garment count" credibility exercise. He analysed the number of garments shown on the Kelan sales invoices along with those recorded on the VVR invoices addressed to Kelan. He selected the period 1 June 2002 to 2 October 2000 because this was the time that no other sub-contractor was said to be used by Kelan. He took a five-day working week, and, given that Kelan had invoiced 43,966 garments to its customers, of which VVR invoices showed that they in turn invoiced 36,219 garments to Kelan, which equated to 7,747 garments being produced in-house making an average of 485 garments per week, he concluded that only 97 garments were produced by Kelan on average each day, despite the number of employees. He divided 97 by the 45 machinists that he had seen on his visit to Kelan and arrived at a figure of 2.16 garment per machinist per day. If he had discounted the VVR invoices, then each Kelan machinist would have been producing on average 12.21 garments per day. Mr Heath, on behalf of the Commissioners, subsequently accepted that Mr Zussman's calculations in this regard had been on the basis of a single snapshot taken during his first visit, and that, given the average number of employees at Kelan was 71, the correct figure should be 3.69 garments per day per machinist. (`Machinists' includes cutters, button-holers, people operating a jig machine and those operating the pressing units.)

The assessment that was subsequently issued on 25 September 2001 was not in exactly the same sum as value added tax shown on all the VVR invoices to Kelan, because Kelan on its returns had in some periods shown input tax claims lower than the VVR invoices dated in those periods. The disallowed input tax only related to the amount actually claimed by Kelan which was in the sum of £121,724.

On 19 January 2002 a letter was sent to Mrs D'Jan by Mr Heath informing her that there was an investigation with a view to the imposition of a civil penalty for fraudulent conduct under section 60 of the VAT Act 1994, and suggesting a date for a meeting. No meeting ever took place. There was, however, correspondence between a Mr R G Boulton of Andrew & Co, insolvency accountants acting on behalf of the Appellant. By a letter dated 14 January 2002 Mr Boulton had written stating inter alia that Mrs D'Jan had obtained a copy of VVR's VAT registration certificate and had checked by telephone with the local VAT office who had confirmed that the number was valid. She had also tried to trace the directors of VVR but had failed. Reference was made to two companies which Mrs D'Jan was aware had also used VVR, namely Regent Fashions Ltd and Bugsy Ltd. Mr Boulton produced two statements, one from Andrew Panayiotou and the other from Mr Clark. In his letter of 14 January 2002 Mr Bolton made reference to the fact that Kelan had been put into liquidation. We have no evidence of the precise circumstances of that liquidation, however Mr Boulton refers to the fact that the Commissioners' contact with Mr Clark had resulted in Kelan losing Burberrys' work, and that was the main reason for Kelan's liquidation. A printout shows that as at 12 April 2002 Kelan owed to the Commissioners £301,238.64, £121,724 of that amount related to the assessment in respect of the VVR invoices.

In a subsequent letter dated 10 May 2002 addressed to Mr Heath, Mr Boulton stated that VVR had been the company's only sub-contractor "for around the prior 12 months, and with which it had dealt for approximately 18 months. That working relationship had in fact ceased, because of VVR's poor quality work, around two weeks prior to this time." (The time in question was 3 October 2000, the date of Mr Zussman's visit).

The Commissioners subsequently imposed a penalty which was based on the assessment. This sum was notified to Mr Boulton on 19 July 2002. By a letter dated 24 July 2002 an offer was made on Mrs D'Jan's behalf to pay £30,000. This offer was refused. As a consequence of this offer, however, the penalty was reduced by 5% to £109,548. The Appellant was notified of this by a letter dated 18 September 2002.

Part of a witness statement from Timothy James Bramston, a licensed insolvency practitioner, was produced. The statement was dated 22 May 2003 and Mr Bramston was the liquidator in the proceedings against the Appellant which also concerned her husband, Husuyin Altunatmaz and a company called Sel (London) Ltd. Sel (London) Ltd, is the company which had acquired the business of Kelan, and was the third respondent in the liquidation. Mr Bramston had constructed tables to show the number of garments per week that were being produced by Kelan's employees if VVR were genuinely responsible for a large proportion of the company's output. All the sales invoices during the VVR period, commencing on 3 December 1999, were set out on a week by week basis. The total value of the company's sales during the week, the number of garments as shown on the sales invoices, the sums paid to the company's staff as wages and the number of employees on the official payroll were set out. Two other columns set out the value of the VVR invoices to the Appellant in respect of garments purportedly supplied to the company during that week, a further column details the number of garments shown on the VVR invoice, an eighth column details any sums paid to outworkers during the relevant week. The next two columns show the net sales figure which relate to the company's own employees (calculated by deducting the VVR invoice from the company sales invoice) and the net total of garments. The eleventh column shows the net sales figure attributable to each employee per week and the final column shows the net garments produced by each employee per week. (See Schedule attached at Appendix 1).

We concur with Mr Bramston's conclusion that the garments referred to on the VVR invoices did exist. This is because of the high correlation of those garments with the company sales invoices throughout that period.

Mr Bramston arrived at various conclusions about the number of garments that could be produced per employee per week. The evidence we have heard gives extremely varying times for the production of differing garments and we do not rely on the conclusions drawn by him in respect of this. However, we accept the figure of an average number of garments being produced by Kelan's employees during VVR period as being 26.75 per week and as the employees were working a five day week, this therefore amounts to a little over five garments per employee per day. We were not given any evidence as to the breakdown between the number of hours worked by the Appellant's staff on the garments detailed on the VVR invoices and work on garments which were not sub-contracted to VVR. There was conflicting evidence as to whether the garments said to be produced by VVR were finished by them or by Kelan.

Mr Bramston sets out that that from May 2000 to the end of the VVR period the total sales of the company amounted to £1,481,332.44, of which £771,129.55 was supplied by VVR, making a total of 52%.

Mrs D'Jan's evidence was that it was regular practice within the industry to sub-contract work. Not only was it regular practice, but it was known to the quality controllers that this was done but they frequently chose to ignore it. She told the Tribunal that she did not use outworkers because of the necessity of visiting them in their house. She gave no explanation for the large amount of outworking (homeworking) done by Kelan after 27 October 2000, as shown on Schedule A. After the sub-contractors had left her factory area she had found out that a lot of them were only working part-time and she needed further sub-contractors. She therefore contacted VVR whom she had heard about from someone in her factory. She did this by simply turning up at the address she had been given. She had made no appointment and she did not known the names of any of the directors. The only name she could give us was `Michael'. She described VVR's unit as being about 4,000 square feet and containing ten flat machines, a jig machine (for doing the pocket flaps and collars), a button-holing machine, two buttoning machines and a cutting table. There were also five pressing units. When she first visited she said that there were 20-25 people working there.

Shortly after the first visit she provided some sample work to VVR and this was completed satisfactorily. VVR were then given regular work by Kelan. Kelan would cut the material which would then be made up by VVR and finished off, including labelling (kimbling) by Kelan. The payment arrangements were that VVR would only accept cash. An invoice would arrive earlier in the week and the accountant would draw up the money deducting the relevant bank charges. A remittance advice showing that a sum had been deducted for cash was produced. There was no reference to VAT on that invoice.

Mrs D'Jan claimed to have visited the premises of VVR on 6-7 times. On one occasion there were only some 4-5 people there and on her last visit there were some 6-8 people. She believed that VVR itself was sub-contracting the work and using outworkers. Her last visit to the premises was in about August 2000 when she took Mr Panayiotou because she was not happy with the quality of the work being done by VVR for Next. This evidence conflicts with the statement made by Mr Panayiotou and sent to the Commissioners by Mr Boulton on Mrs D'Jan's behalf, when he said that he was told that the work had been passed over to an outside unit for `processing' (i.e. the rectifying of a particular fault) as Mrs D'Jan had been unhappy with "a certain aspect of her own staff's work." Mrs D'Jan's evidence also conflicted with Mr Panayiotou's in that in the same statement he said that after his first visit he returned to the factory a few days later and "picked up the finished garments and took them to Next." Mrs D'Jan herself said that Kelan finished off the garments, and did the kimbling after they were returned by Mr Panayiotou. Mrs D'Jan's evidence also differed from Mr Panayiotou's in that she said that Kelan had had to kimble and bag the 2,000 or so garments made for Next after Mr Panayiotou had collected some from VVR, whereas Mr Panayiotou in his evidence stated that the garments were complete when he went to Unit B. Mr Panayiotou also understood that the whole process was done at VVR. He believed he picked up nearly 1,000 pieces, not the 2,000 that Mrs D'Jan said he had collected. His estimate for the time of producing a garment was between one and three quarter hours and two and three quarter hours. Mr Panayiotou was not certain as to when he had visited the unit, he described there being 6-8 sewing machines, with 15-18 employees. He was familiar with other units at that address which did cut-make-and trim work. We did not find Mr Panayiotou to be a reliable witness. He claimed the total order at that time with Kelan's was for 2,000 coats, whereas the invoices show that between 30 June 2000 and 29 September 2000 VVR invoiced 14,575 garments in respect of Silverts. It was also Mr Panayiotou's opinion that he was under no obligation to tell his employers that Kelan's were sub-contracting the work although he was perfectly well aware that his employers would not have sanctioned such sub-contracting, and he did not consider such behaviour to be dishonest.

Mrs D'Jan said that the reason she had stopped using VVR was because the quality of their work was not good enough. She also was concerned about regularly paying them in cash, and the fact that if they disappeared, as regularly happened in the trade, it would cost her a lot of money. Mrs D'Jan claimed not to know that VVR had left Unit B1 until she heard of it from Mr Zussman on his later visit to Kelan. Her explanation for the confusion between the witnesses over the size of the building was that the furniture business situated next door (Checksave) had taken over three quarters of VVR's building and she had been shown the partition used when she went there subsequently.

Mrs D'Jan's explanation for the fact that the company was able to manage after the loss of VVR was that it was a change of season and the work had dropped off. This is not borne out by the schedule drawn up by Mr Bramston. We do not find that there are any variations which could be specifically attributable to season shown on the schedules because they are inconsistent. It was also said by Mrs D'Jan that Silverts' work ended in September, and so she had less need of VVR, and yet the total quantity of work sold by Kelan does not show a substantial drop after the end of September 2000.

Mrs D'Jan told the Tribunal that Mr Panayiotou was `not entirely honest' in giving his evidence. She disputed that Mr Zussman had taken any notes during his first visit. She further claimed that Mr Aksler had lied on oath about whether VVR was in the premises after November. We prefer the evidence of Mr Zussman and Mr Aksler to that of Mrs D'Jan. She made very few checks on VVR. Given the close monitoring by at least Burberrys' quality controller, if not by those belonging to the other companies, it would be expected that she would have been concerned to see that they could meet the order she was giving them and were not a "phoenix" company. It is not credible that she would not check the premises after August 2000 given that she was concerned about the quality of the work and intended not employing them any longer.

The Commissioners' case

The matters relied on by the Commissioners, as set out in the statement of case are as follows:

1(i) That VVR only produced garments up to November 1999.

(ii) There was no clothing manufacturing equipment on the premises in August 2000.

(iii) Mr Clark from Burberrys never visited VVR.

(iv) The premises of VVR were visited by James Nicholas of East London Business Centre on 22 June 2000. He was told that VVR had retained a corner of the Unit but had left 3-4 weeks earlier.

Whilst the first invoices from VVR to Kelan are in November 1999, the Commissioners rely on evidence that shows:

(i) No garments were being produced by VVR after November 1999.

(ii) VVR did not use sub-contractors to produce clothes for Burberrys.

(iii) The amount of garments apparently produced by VVR according to invoices is not credible in view of evidence in the Commissioners' possession as to, inter alia, the number of people working at VVR in the period of the invoices and manufacturing equipment available.

At the conclusion of the Appellant's submission Mr Kellar invited the Tribunal to uphold part of the assessment to a penalty if we were satisfied that not all the invoices were genuine. We were invited to find dishonesty in respect of part only of the assessment in the alternative.

The Appellant's case

Mr Barlow, relying on the Value Added Tax Tribunal Rules submitted that it was not open to the Commissioners to go beyond the matters specifically pleaded in the statement of case.

Rule 7(1)(aa) of the Value Added Tax Tribunal Rules 1986 provide as follows:

7(1) Unless the Tribunal shall otherwise direct, in an evasion penalty appeal –

(a) …

(aa) the statement of case served by the Commissioners in accordance with (a) above shall include full particulars of the alleged dishonesty and shall state the statutory provision under which the penalty or tax is assessed or the position is made.

Mr Barlow further objected to the manner of pleading in that at paragraph 11 of the statement of case the Commissioners had said:

"In support of this contention the Commissioners rely, inter alia, on the following … ."

The words "inter alia" were also used, as set out above in paragraph 3 of the statement of case. He contended that the Tribunal could only have regard to matters which had been pleaded.

It was the Appellant's case that there was an abundance in evidence to show that after November 1999 VVR did exist and was registered for value added tax. It was the evidence of the Commissioners' own witness, Mr Nicholas, that VVR left in about May 2000. Mr Panayiotou and the Appellant both confirmed that VVR was operating in the cut-make and trim business in August 2000.

It was not open to the Commissioners to criticise the Appellant for not being able to trace the directors of VVR since the Commissioners themselves had not been able to trace them.

It was not possible to say that VVR could not have produced any of the garments. It would have been perfectly possible for VVR to have used home workers or themselves to have sub-contracted part of the work.

The Tribunal were invited to rely on Mr Panayiotou's evidence as to the number of workers at VVR when he visited the premises in the summer of 2000. Further Mrs D'Jan had had an opportunity to lie when she herself had said that in August there were only some 6-8 people there knowing that Mr Panayiotou had said there were some 15-18 people. We were invited to rely on the Appellant's evidence.

Mr Barlow disputed all the matters relied on by the Commissioners in the statement of case as set out above, and further submitted that without proof that VVR were not themselves sub-contracting, it was not possible for the Commissioners to rely on the liquidators' figures to show the output of VVR.

Reasons for decision

In this appeal the burden of proof is on the Respondents. Whilst the standard of proof is the normal civil standard of the balance of probabilities, nonetheless the evidence relied on should be of good quality.

Whilst we accept that the Commissioners are obliged to include full particulars of the alleged dishonesty in the statement of case, we do not accept that they are not entitled to rely on evidence adduced in the course of the hearing, whether it be given by their own witnesses, or the Appellant's witnesses, which supports that allegation of dishonesty. The Commissioners are not obliged to cite each and everyone of the factual matters on which they rely. Thus we do not uphold Mr Barlow's objection to the words "inter alia" in paragraph 11 of the statement of case.

The Commissioners set out the dishonesty alleged in paragraph 11 as follows:

"The Commissioners contend that they were entitled to raise an assessment to a penalty under section 60 and 61 of the VAT Act 1994 on the basis that the false invoices were dishonestly introduced into the records of Kelan for the purpose of reclaiming the VAT on the said invoices. It is the Commissioners' case that the introduction of these invoices was in whole or in part attributable to the dishonesty of Appellant who was at all material times the director and managing officer of Kelan. In support of this contention the Commissioners rely, inter alia, on the following …"

It is quite clear from this what the alleged dishonesty is and what the case is that the Appellant has to meet.

The Commissioners say that the evidence they have produced shows that VVR was not operating from Unit B between November 1999 and September 2000 as claimed by the Appellant. There were neither the machines nor the personnel on site to produce the quantity of garments which are said by the Appellant to have been produced by VVR in that period. This is specifically pleaded at paragraph 11(c). To counter this allegation the Appellant relied on both her own evidence and that of Mr Panayiotou. We accept the burden of proof remains on the Commissioners throughout, and it is for them to show that the evidence given by the Appellant and Mr Panayiotou as to the presence of VVR at Unit B in August and the number of garments they were producing was false. With regard to Mr Panayiotou, as stated above we did not find him to be a reliable witness. His evidence was inconsistent with the statement he had made earlier, and in particular he admitted being prepared to breach his contract with Next and said he thought there was "nothing dishonest in not telling the boss" when he was fully aware that sub-contracting was not allowed.

Whilst there is an apparent inconsistency between the evidence of Mr Aksler, and that of Mr Nicholas in that in November 1999 Mr Aksler was told that garments were no longer being produced on the site, whereas Mr Nicholas was told that VVR had left some three to four weeks earlier than his visit in June, nonetheless Mr Aksler saw for himself that the machinery, other than the cutting table, was no longer there, whereas Mr Nicholas was told by someone else of VVR's departure, but he had no direct knowledge of whether there was machinery or not three to four weeks prior to his visit. Mr Nicholas' evidence depends on the reliability of the person to whom he spoke, the reliable aspect of his evidence is that he saw that the unit was closed. We find there is no actual inconsistency here.

Mr Aksler is an independent witness who has no vested interest in the outcome of this appeal. It was never the Commissioners' case that VVR had never existed. Mr Aksler's evidence shows that there was a company there producing garments. What happened to that company after November 1999 is unclear.

With regard to Mrs D'Jan's evidence, whilst she quite clearly was very familiar with her own business, like Mr Panayiotou she was prepared to deceive those people who gave her work. She regarded it as something to be proud of that she had for several years been producing garments for Burberrys by use of sub-contractors without Mr Clark being aware of this fact. However, in those years the sub-contractors used were operating from her own premises and therefore she was able to give the appearance of having a large enough workforce to cope with Burberrys' orders, and Mr Clark was able to inspect the individual machinist's work on his weekly visits, without his knowing that they were in fact employed by a separate company.

We find it strains credulity that Mrs D'Jan, who appears to have prided herself on her reputation as someone who produced high quality work, would only have visited VVR at the most on six occasions in the period when she claimed she sub-contracted such a large volume of work to them at Unit B1. In particular we do not accept the suggestion that VVR themselves were sub-contracting and using outworkers without this being a matter specifically within Mrs D'Jan's knowledge. We accept Mr Clark's evidence to the extent that he was very particular about the quality of work for Burberrys, and, given that almost half the work produced by VVR was on behalf of Burberrys, we do not accept that this work would not have been closely monitored by Mrs D'Jan. Mrs D'Jan claimed that she stopped giving VVR work after the end of September because of quality control problems with the work. If that is the case, why had she not visited them after the August visit? Whilst there is no burden of proof on her, nonetheless it would be expected that she would be able to show complaints or other evidence to substantiate her account.

The fact that the Appellant continued to be given work by the quality controllers from Burberrys, Aquascutum and so on during the period she claims that VVR were doing the work at Unit B, means they must have been satisfied that she had the staff on the premises to produce that quantity of work, whereas she claims that more than half the work sent out to her customers was in large part done by VVR elsewhere. We do not find it credible that such a large quantity of work could have been done elsewhere. It was Mrs D'Jan's own evidence that she did not use outworkers because she found it time-consuming to visit them on their premises. However, the liquidator's chart shows that after the date of the last invoice from VVR, namely 26 September 2000, after a slight gap there were regular payments made to outworkers by Kelan. No explanation was given for these payments, but whatever the explanation, at the very least they show that Mrs D'Jan's evidence that she did not use outworkers cannot be relied on.

With regard to the discrepancy in the size of Unit B1, which varied from 900sq ft (Mr Nicholas' estimate) to 4,000 sq ft (Mrs D'Jan's estimate), on the balance of probabilities we find it more likely that Mr Aksler's estimate of it being 2,000sq ft is more reliable. He regularly visited the premises and was in charge of collecting rent. Even if it were 4,000sq ft, which we do not consider likely, it was still only a small proportion of the area available to Mrs D'Jan of 20,000sq ft, and yet VVR were said to be producing over half of the number of garments produced at Mrs D'Jan's workshop, that is without taking account of the work that VVR were doing for other companies, evidence for which is contained in a letter from Mr Kumar, the Appellant's accountant, to Mr Nicholas dated 16 August 2001. Even if that letter is disregarded, it must be assumed that VVR were doing other work at the time they were first contacted by Mrs D'Jan since she claimed to have seen all the machines in place at that time and a considerable number of workers there. We are also doubtful about the timing of Mrs D'Jan's involvement with VVR, given the letter from Andrew & Co to Mr Heath dated 10 May 2002 in which he refers to VVR being the company's only sub-contractor for around the prior twelve months, but with which it had dealt for approximately 18 months.

Apart from the seasonal slack which Mrs D'Jan referred to as occurring in September, another reason given by her for her being able to cope without VVR from September 2000 was because she had lost Burberrys' work. In fact Burberrys' work did not cease until after the end of November 2001, when Mr Heath contacted Mr Clark. Until that time Mr Clark had been completely unaware of Kelan's use of VVR. We have no doubt that, whatever Mrs D'Jan's capacity to fool Mr Clark when the in-house sub-contractors were making Burberrys' garments, we do not accept that such large quantities of Burberrys' garments could have been made off-site, even if the cutting and kimbling were in fact done at Kelan's premises. It was of course Mr Panayiotou's evidence that VVR were making the complete garments.

Whilst we accept the liquidator's conclusion that the garments on the VVR invoices did exist, we accept the Respondents' case that VVR did not operate from Unit B1 as claimed by Mrs D'Jan between November 1999 and September 2000. We find on the balance of probabilities that VVR operated from Kelan's premises and that the reality of the situation is that whilst there may have been some use of outworkers during this period, their output was subsumed in the work of VVR, which accounts for the fact that after November 2000 there appear regular payments to outworkers made by Kelan. Mr Barlow asked the Tribunal not to take account of the general background of the case as being non-probative, however we do not consider it right to ignore matters such as the fact that an offer was made on behalf of Mrs D'Jan to settle the case for £30,000, and the evidence supplied by the accountants writing to the Commissioners on her behalf.

It was not the Respondents' case that VVR did not exist, it was, as put by Mrs Bishop in her review letter, that VVR did not exist in the form its invoices purported to show. It was further part of the Respondents' case that VVR did not employ enough staff to produce the number of garments claimed, particularly in view of the fact that they were said by Mr Boulton on behalf of Mrs D'Jan in his letter dated 20 January 2002 (in fact written in 2003) that VVR worked for other companies. It was also part of the Respondents' case that the trading accounts showed that Kelan achieved a higher gross profit during the period it claimed to have used VVR than previously. The analysis of Kelan's trading and profit and loss account from the period 30 November 1999 to 29 September 2000 show a gross profit percentage to sales of 29.75%, whereas the earlier period of 1 January 1999 to 31 December 1999 show a gross profit percentage to sales of 18.22%. There was no explanation given as to this increase by Mrs D'Jan.

In all the circumstances we did not find Mrs D'Jan to be a credible witness. We find on the balance of probabilities that the work done by VVR was not done from Unit B but was done in large part from Mrs D'Jan's own premises. The invoices purportedly in respect of work done by VVR related mainly to work done by Mrs D'Jan's own employees and whilst the work was done, the invoices were not genuine. This appeal is dismissed.

MISS J C GORT

CHAIRMAN

RELEASED: 25 April 2005

LON/03/669