United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2005] UKVAT V19117

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19117

EVASION PENALTY — penalty apportioned to company director and managing officer — failure to submit returns in four periods — payment of centrally issued assessments for first three of those periods — Appellants' belief that their financial consultant was dealing with VAT affairs — appeal allowed in respect of two periods and dismissed in respect of two periods

MANCHESTER TRIBUNAL CENTRE

MR IAN QUINTON & MRS LESLEY QUINTON Appellants

- and -

HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: Lady Mitting (Chairman)

John M Lapthorne

J T Brian Strangward

Sitting in public in Birmingham on 28 February 2005, 1 March 2005 and 16 May 2005

The Appellants appeared in person

Miss Sarah Williams, of counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

DECISION

By letter dated 13 May 2002, the Respondents notified Roofing and Cladding Supplies Limited ("the Company") of an assessment to a penalty for dishonest evasion of VAT in the sum of £145,472 for the period 1 November 1999 to 31 October 2000. The penalty was mitigated by 55 per cent to £65,461 and was apportioned by the Respondents equally between Lesley Quinton, the sole director of the Company and her husband Ian, the Sales and Marketing Manager. The conduct of Mr & Mrs Quinton which gave rise to the penalty was their acceptance of centrally issued assessments when, it is alleged by the Respondents, they knew the true liability was considerably higher. That the assessments were accepted and that the true liability was much higher is not disputed but Mr & Mrs Quinton deny acting dishonestly.

Mr & Mrs Quinton both gave oral evidence and, on behalf of the Respondents, we heard oral evidence from Mr Neil McGivern, who at all material times had been operations director of Bibby Factors North West Limited ("Bibby") and Andrew Dixon, financial consultant and Officer Sally Fletcher. The Respondents also put in evidence an unchallenged witness statement from Officer Leonard Stevenson. Mr McGivern and Mr Dixon gave their evidence on the first day of the hearing and were both released. Unfortunately matters arose during Mr Quinton's evidence on day two that should have been put to them but were not. They were therefore recalled on day three. For clarity, we have amalgamated both sessions of their evidence.

Evidence

The trading history of the Company was short, unfortunate and undisputed. The company began trading and was registered for VAT with effect from 1 November 1999. It was successor to a company called Garian Roofing and Cladding Supplies Limited ("Garian") of which Mr Quinton and a Mr Gareth Pugh had been directors. Garian had gone into liquidation in January 2000, owing nothing to the Respondents. The Company's business was in the supply and distribution of roofing materials. 95 per cent of the business arose out of its holding the sole UK distributorship for a Spanish company called Uralita, based in Madrid. Uralita supplied the company with roofing sheets which the company then supplied to the industrial and agricultural sectors. Before taking on the distributorship, the company had carried out all the necessary quality control inspections and had confirmed the sheeting met all British health and safety standards. The product also came with similar certification from Spain. Business was good until July 2000 when, unknown to the Company, Uralita delivered a batch in which there had been a flaw in the manufacturing process. The Company, in all innocence, sold this on but it turned out to have been inadequately reinforced and there were a series of accidents when people fell through it, some resulting in serious injury. Naturally, the Health & Safety Executive ("HSE") intervened and issued an Improvement Notice, with which the company complied but Uralita did not and the product could therefore no longer be imported and distributed within the UK. Additionally, the HSE advertised the defect in all relevant trade journals and the Company had to write to all customers who had purchased from that batch advising them of the defect. The knock on effect of this was that, in addition to the problems there would be with future sales, a number of customers who had already been supplied refused to pay. The Company could not survive this catastrophic blow to the major part of its business and trade diminished very quickly to the extent that by late autumn, the Company had basically ceased trading and has been dormant ever since.

The Company came to the attention of Mr Stevenson due to its having rendered no returns. Centrally issued assessments had been raised for periods 01/00; 04/00; 07/00 and 10/00. The first three had all been paid but not the fourth. Duplicate returns had been issued to the Company in December 2000 but had not been returned. Mr Stevenson visited on 7 February 2001 and spoke to Mrs Quinton and the book-keeper, Mrs Margaret Grocutt. He established that the Company ran a computerised Sage accounting programme and he was able, on this visit, to access the Sage VAT summaries from which he quickly established that each of the central assessments had underestimated the true liability. The following table shows the centrally issued assessments as against the true liability and the deficit.

VAT Period	Value of centrally issued assessments	Paid Yes or No	True amount of tax due	Value of additional assessment
01/00	792.00	Yes	21,116.00	20,369.00
04/00	778.00	Yes	17,943.00	17,165.00
07/00	800.00	Yes	45,823.00	45,023.00
10/00	986.00	No	63,901.00	62,915.00

				145,472.00

During the course of the visit, Mr Stephenson was told about the difficulties which the Company had experienced over the defective goods. He obtained information about the structure of the Company and its accounting procedures. Mr Stephenson raised an assessment in the sum of £145,472 which has not been appealed. He then passed the file for further investigation to the local fraud unit where it was taken up by Mrs Fletcher.

Mrs Fletcher took the matter forward under the Notice 730 procedure and Mr & Mrs Quinton accepted an invitation to interview which took place in the presence of their advisor, Mr Whittle of VAT Ease on 14 May 2001. Mrs Grocutt also attended.

During the course of the interview, Mr Quinton described the factoring arrangement with Bibby. Mr McGivern had felt that with Mr Quinton running the sales, Mrs Quinton, the administration and Mrs Grocutt, the book-keeping, the Quintons lacked the necessary financial ability to run the company. He therefore introduced them to Mr Dixon who, in Mr Quinton's words "Came in to run the financial side". Mr Dixon looked after the factoring deal, the day to day running of the company, the accounts, the PAYE, the VAT, letters of credit and the overall financial structure. In addition, he attended all meetings with the bank.

The Quintons also told the interviewing officers that Mr Dixon remained self employed, subcontracting his services out to the Company and rendering monthly invoices which the Company paid. He visited for a few days each month. There was no written agreement between the Company and Mr Dixon or between Bibby and Mr Dixon. Mr Dixon had advised the Quintons they needed to register for VAT. They were both fully aware of the Company's liability to account for VAT and understood how the system operated. All inputting was dealt with by Mrs Quinton and Mrs Grocutt. Mr Dixon would issue cheques for signature by Mrs Quinton, the sole signatory. The officers were told that Mr Dixon remained with the Company until July or August 2000 when he left because of "grave mistakes", "incompetence" and "ripping off". Mr Quinton explained that the Company had paid Mr Dixon £45,000 over eight months and for at least part of that time, he had also been paid out of the Company's trading account with Bibby. In September 2000, Mr Quinton brought in a Mr Gary New who looked after the books for another of Mr Quinton's companies, Parklands. Mr New looked at the books and advised the Quintons that only centrally issued assessments had been paid and that it was necessary to establish the true VAT liability of the Company.

The Quintons accepted in the interview that despite Mr New's advice, they took no action in respect of the returns, other than to write a letter of complaint to Mr Dixon, a letter which was in general terms but made no specific reference to the VAT. The Company had no money to pay the returns in any event. Mrs Grocutt remembered the duplicate returns coming in in December but it was accepted that they had not been completed. It was thought that the original returns would have been put in Mr Dixon's in tray or sent on to him. In June, Bibby had demanded Mr Dixon was reinstated but Mr Quinton had explained to Mr McGivern that they could not afford him and at that stage the factoring deal began to break down. It was accepted by Mrs Grocutt during the interview that the first return was not rendered or paid because there were insufficient funds to meet it and that Mr Dixon had therefore made the decision to pay the centrally issued assessment instead. Mrs Quinton denied she was a party to the discussion in which that decision was made and said that the decision would have been made by Mr Dixon and Mr McGivern. The position over this return was summarised in the course of the interview by Mrs Fletcher and responded to by Mr Quinton as follows:

"S Fletcher: Okay. So if we just summarise. The first VAT return runs from 1^st of November 1990 (sic) to the end of January 2000. Mrs Grocutt can remember at the time when the estimate came through from the computer in Southend, the central assessment, when that came through prints were run off and a true amount of tax was calculated as over £21,000. But a decision was made that the company could not afford to pay the £21,000 and the decision was made to pay the central issued assessment for £792. Is that correct.

I Quinton: I can't argue with that. That's correct."

Once this interview had taken place, Mrs Fletcher arranged for witness statements to be taken from Mr McGivern and Mr Dixon.

In his witness statement, Mr McGivern explained that his responsibilities within Bibby included overseeing the service and security of all clients with special emphasis on those with which there was a large exposure and those which presented administrative difficulties. The Appellant Company fell into both categories. The Company had become a client of Bibby's in December 1999 but before that, Garian had been a client in May 1998. As most of the supplies to the Company were pre-sold, Bibby would provide a combination of letters of credit which funded the import and invoice finance which provided the working capital for the Company. Bibby had believed that Garian had failed due to a combination of poor systems and paperwork and low quality debtors and to assist Garian in developing their systems and Bibby in collecting their debts, they had introduced Andrew Dixon to the Quintons in the summer of 1999. His remit from Bibby had been to develop the systems and produce meaningful management and financial information. Bibby had covered his costs. Following the demise of Garian, Mr Dixon had produced the projections and business plan for the new company and Bibby continued to engage Mr Dixon during the early part of 2000 to set up a workable credit control system for the new company. Bibby remained responsible for his remuneration at this point but thereafter he was engaged by the company directly.

During the course of Bibby's relationship with the Company, Bibby purchased £1.378 million worth of debts. However, once the Company started experiencing problems with the quality of the product sold, the viability of the business became questionable and Bibby collected its debt back from the outstanding ledger and terminated the relationship.

Mr Dixon in his witness statement, explained that he had worked with Mr McGivern since the early 1990s and over the years, Mr McGivern referred work to him. During late 1999, Mr McGivern instructed Mr Dixon to review the business of Garian and thereafter the current Company. The agreement was that Mr Dixon would advise the Company on managing working capital and setting up systems to support the trading of the business. This would involve looking at the factoring, letters of credit, stocks and sales systems. He would have operated within Bibby's financial services guidelines and would have looked at the position of the facilities and trading to maximise funding for the company.

He provided consultancy services for the Company between December 1999 to July 2000. During that time, he was never given authority to sign or issue cheques. He was never in possession of a company cheque book. He was never instructed to handle the VAT affairs of the business and it was not his responsibility to complete or render the returns. He received payment for his services from the Company but most of the time, his fees would come via Bibby.

Mr Dixon had produced to the interviewing officers a report dated 2 March 2000 which details the issues within the business at that time. The report referred to certain specific issues regarding goods and stock but drew attention to the poor cash position as everything had been drawn down but collections on the first debts were only just commencing. There was one single reference to VAT, reading "the VAT liability of £21K is now overdue". The one page report then concluded with a list of recommendations, no reference to VAT being made. Mr Dixon said in his interview that the purpose of this report had been to advise Mr Quinton about his findings on that visit because he had not been around. He again stressed he was not responsible for the VAT affairs of the Company and had merely pointed out the outstanding VAT liability "as a matter of courtesy to Mr Quinton". He went on to say that there had been mounting problems with disapprovals on the factoring account caused by aged and disputed debts. This has resulted in him having to spend a lot of time with the Company during April and May but after a visit in the week commencing 15 May 2000, he was not contacted at all by the Company during June. He was, however, asked to attend a meeting in July to discuss the Uralita situation. He then carried out a further visit to the site office to ascertain the position of the Company but carried out no further work for the Company after that. He obtained a judgment against the Company for outstanding fees of £9,428.89.

Once in possession of the statements from Mr Dixon and Mr McGivern, Mrs Fletcher formed the view that the Company had acted dishonestly and as she believed the Company was likely to become insolvent, she recommended the penalty, which she had mitigated by 55 per cent should be apportioned between Mr & Mrs Quinton. Mrs Quinton was a director and she viewed Mr Quinton, in view of his intimate involvement in the Company, as a shadow or defacto director. When Mrs Fletcher raised the penalty, she recommended the 55 per cent mitigation. For co-operating in substantiating the true amount of the arrears, she allowed the full 25 per cent mitigation. For attending interviews and producing records, she also allowed the full 10 per cent mitigation. However, for the provision of an early and truthful explanation, as against the maximum limit of 40 per cent, she recommended 20 per cent. The reasons, she told us, was that during the investigation she had received full explanations of what was occurring and the difficulties suffered by the company but all the parties interviewed had denied responsibility for VAT and had denied that they had acted dishonestly. Equally, they accepted that after December 2000 they were aware of the problem but did nothing to rectify it.

Mr McGivern, in his oral evidence, confirmed the truthfulness of his witness statement. He told us that Bibby had introduced Mr Dixon to the company because it recognised a weakness in the company's financial management and a general lack of financial control. The presence of Mr Dixon gave Bibby a measure of "comfort" which would not otherwise have been there. This comfort enabled Bibby to authorise occasional overpayments at the behest of Mr Dixon to cover short term financial needs that arose. This facility would not necessarily have been offered if the request had been made by the company's bookkeeper. He explained to us that each invoice was considered on an exposure basis. There were occasions when Bibby was not happy with either the invoice or the customer and that invoice would not be taken on but the majority of invoices were and Bibby would make immediate down payment of 75 per cent to the company and the balance on collection. It was put to Mr McGivern by Mr Quinton in cross-examination, that insufficient steps were taken to secure payment. Mr McGivern said that any decision on taking legal action to enforce payment would be dictated by the reason for the non-payment. If Bibby was satisfied that the customer had been supplied with a quality product and was solvent then legal action would be taken but if not, it would probably be considered inappropriate.

He repeated that until February or March, Bibby was responsible for remunerating Mr Dixon as he was a consultant put into the Company at the behest of Bibby. Mr Dixon would have invoiced Bibby as he was acting to Bibby's terms of reference; Bibby would make payment and then recoup the amount paid from the Company through their trading account. The agreement between Bibby and Mr Dixon ceased when the Company indicated it wanted to retain Mr Dixon itself to carry out its own strategic planning although, even after this, Mr Dixon continued to supply Bibby with the information and reports which they needed to pursue the factoring.

Mr Quinton questioned Mr McGivern at length on the extent of the financial control exerted by Mr Dixon. Mr McGivern denied that the engagement of Mr Dixon was a pre-condition of Bibby entering into the factoring agreement and denied that Mr Dixon had the power to bar drawdowns. He initially said that Mr Dixon did have "full financial control" to produce management accounts, forecasts, cash flows and to assist in the management of the factoring facility and the letters of credit. He later, however, qualified his answer by saying he had meant "full financial control of the facility" and not of the Company, i.e. looking at invoices, stock control and short term cash flow. Mr McGivern had no recollection of any mention being made at the set up meeting of the company's statutory liabilities being within Mr Dixon's remit. He stressed that the remit was to support the company and to assist in managing the factoring agreement. He was not put in by Bibby to take full financial control of the company although Mr McGivern pointed out that the company had later taken on Mr Dixon in its own right. What he did for the company in this capacity would be over and beyond the remit given to him by Bibby.

Mr Dixon in his oral evidence again confirmed the truthfulness of his witness statement. He said he had not been aware of the centrally issued assessments. He told us that Mr Quinton had dismissed him in May 2000 but he had been asked to go back in June to attend a meeting with representatives of Uralita and Bibby. For that meeting, he would have carried out his usual inspection of levels of credit, sales orders, stock review, etc. He also had produced a set of accounts which would have shown the outstanding VAT as at the end of June. He could not remember whether they had been given to Mr Quinton or merely left them at the premises. He had done no further work for the Company after July 2000.

In cross-examination, Mr Dixon denied he had been paid by Bibby at the same time as being paid by the Company. He said that Mr McGivern had been mistaken over that and he had only carried out one assignment for Bibby and had thereafter been paid solely by the Company. He maintained that Mr Quinton had been given copies of all the accounts and management reports which he had prepared throughout his time with the Company. Unfortunately copies of these were no longer available as he had ceased in self-employment (now working directly for Bibby) and had destroyed all his files and records.

Mr Dixon denied exercising financial control over the Company and maintained he had no control over the payments made by the factors although, in case of dispute between Bibby and the Company, he would have been approached to broker an agreement between them. He maintained he was in no position to give permission for a draw down and equally he had no control over payments made by the Company out of its bank account and he did not control the cash. He was at no time concerned with the payment of VAT. Mr Dixon was asked about the set up meeting at Bibby's premises at Liverpool at which Mr Quinton was to maintain there had been discussion of the company's statutory liabilities being within the remit of Mr Dixon. Mr Dixon maintained he had no recollection of the meeting at all.

He confirmed that he was not working on written terms of reference. He accepted that he would have produced regular management reports and cash flow forecasts which would have incorporated the VAT liabilities but it was not within his remit to, and he did not, make any written recommendations to the Company in terms of managing the cash. His regular reports would all have been along the lines of the March report.

Mr Quinton in his oral evidence told us that Mr Dixon had been in full financial control of the Company from day one and the Quintons had relied on him completely to manage all the company's financial systems and operations. The Company had been set up in such a way as to enable Mr Quinton to carry out the sales and marketing role and the day to day finances to be managed by Bibby, Mr Dixon and Mrs Grocutt. There had been an initial meeting in December 1999 between Mr Dixon, Mr McGivern and Mr Quinton when they had run through the cycle of what Mr Dixon was expected to do. Mr McGivern had made it clear to Mr Dixon he wanted him to prepare management accounts and cash flow reports; oversee the banking; look at the procedures for sales orders and to ensure there were sufficient monies available to meet the Company's "statutory liabilities". Mr Quinton told us that at this point, Mr Dixon had referred to the PAYE and he, Mr Quinton had asked if it meant the VAT as well. Mr McGivern's response had been to repeat "statutory liabilities". Following on from this meeting, there was a further meeting at the Company premises when the day to day arrangements were discussed. Mr Quinton explained to Mr Dixon that Mrs Grocutt would prepare the VAT returns from the Sage system and Mr Dixon had said that he was happy with this and that he would look after the financial side.

Mr Quinton put in evidence a set of monthly invoices from December 1999 to July 2000 which Mr Dixon had rendered to the Company. He worked on a daily rate of £700 plus his travel from Edinburgh and his expenses. The invoices revealed an ever increasing number of days worked from two days in December and three days in January to ten days in May. The total amount billed, including travel, expenses and VAT from December to July was £43,627.47.

Mr Quinton went on to say that in July, the Company had its first problems with the quality of the Uralita supplies and thereafter his entire time had been spent "fire fighting". He was dealing with the Health & Safety Executive, with the threat of criminal proceedings hanging over him. He was trying to deal with Uralita who were being uncooperative. The Company had existing Uralita supplies in stock, which had been supplied to the Company on irrevocable letters of credit but no longer had a market for them. Mr Dixon had stopped coming and Bibby had decided not to pursue its outstanding invoices, even on unflawed materials. The Company were left raising invoices without Bibby paying out on them.

Up until September, Mr Quinton told us that he had been unaware of the extent of the Company's outstanding VAT liabilities. He was not aware that centrally issued assessments had been paid. He had had regular meetings with Mr Dixon at which, although there was never specific mention of VAT, he always asked if everything was alright financially and had been assured that it was. After the disappearance of Mr Dixon, Mr Quinton had instructed Mr New in September to look at the finances and he told us this was the first time he had been made aware of the true VAT position and that only centrally issued assessments had been paid. He volunteered, in his evidence in chief, that he knows now that he should at that stage have contacted the Respondents but such were the pressures on him from all quarters that VAT was the farthest thing on his mind and he took no action.

He stressed the financial control exerted by Mr Dixon by, for example Mr Dixon had prevented the Company from paying its rent and he had stopped Mr & Mrs Quinton from drawing their salaries. In effect, nothing went through and no money was released from the Company without Mr Dixon's express permission. In closing submissions, Mr Quinton was to refer to Mr Dixon blocking access to the financial computer system by introducing a password so that only Mr Dixon would or could have access to all financial information. Unfortunately, this assertion had never been put to Mr Dixon who by this time had been released by the Tribunal for the second time and so we do treat the assertion with some caution. Mr Quinton himself did have regular access on his own screen to sales and purchase information, payment processing and debtor lists. He could at all times establish the payment record of a customer before making any further supplies to him. He was also able to have a good idea of the level of the company's VAT liability and he was also able to establish, to his own satisfaction, that sufficient monies were coming in to enable the VAT payment to be made. Beyond this, in Mr Quinton's mind, VAT was the responsibility of Mr Dixon and he left it to him. He told us he believed that it was not a shortage of funds in the true sense that led to the VAT not being paid but there were probably insufficient funds coming in to pay all liabilities and Mr Dixon must have applied the funds in other areas at the expense of the VAT.

In cross-examination, he denied ever having seen the report of 2 March and denied knowing whether or not there had been sufficient money available to pay the first return. He said that he was, throughout the first six months of the year, unaware of the Company's cash flow problems, which only Mr Dixon would have known.

Mrs Quinton, in her evidence in chief, described to us her purely administrative role within the Company. She checked incoming purchase invoices and input them on to the system. She also dealt with any queries arising out of unpaid invoices. She was the sole cheque signatory but only signed cheques given to her by Mrs Grocutt or Mr Dixon. As they had recently adopted a 12 month old boy, she only worked two thirds time.

In cross-examination, she said that she did not know whether any paperwork had accompanied the VAT cheques which she had signed; she would merely have signed the cheque which Mrs Grocutt would have filled out. It had never occurred to her that the VAT cheques she was signing were too low for the volume of sales the Company was generating. She could not remember whether she had been at the September meeting with Mr New but accepted that at that time she was made aware of the VAT problem.

In answer to questions from Mr Lapthorne, Mrs Quinton said that she signed cheques a couple of times a week. They varied in value but she herself took no steps to ensure there were monies to meet the cheques, assuming that Mrs Grocutt would have done that. Mrs Quinton did not look at the day to day cash balance.

In answer to questions from the Chairman, Mrs Quinton said that she at no time gave any thought to VAT. As far as she was concerned, Mr Dixon was there to deal with anything of a financial nature. She never discussed the VAT with anybody and was not aware that there was an outstanding liability or that only centrally issued assessments were being paid. When Mr Dixon came in, he would talk to Mrs Grocutt and sort things out with her but would rarely have any communication with Mrs Quinton. Mrs Quinton never saw any reports generated by Mr Dixon although she assumed that he must have prepared some.

Submissions

It was Miss Williams' submission that, as director, or in Mr Quinton's case as a de facto director, it was the responsibility of Mr and Mrs Quinton to ensure the VAT returns were submitted and paid. To knowingly fail to render returns and to pay centrally issued assessments was to act dishonestly, even if there was an intention to make good any shortfall as and when it could be afforded. In the alternative, Mr and Mrs Quinton acted with such recklessness in failing to see that proper and accurate returns were being submitted and paid that their recklessness would amount to dishonesty. They either knew the assessments were being paid and arrears building or they deliberately closed their eyes to the whole issue.

It was Mr and Mrs Quinton's case that until September 2000, when Mr New was brought in, they had believed that all financial matters, including VAT, were being properly and fully looked after and controlled by Mr Dixon. They neither knew nor had any reason to suspect that only centrally issued assessments were being paid and that arrears were building up. They did, however, accept in evidence and in closing submissions that by September they were aware of the problem and should have addressed it but did not.

Legislation

VAT Act 1994:

"'60 VAT evasion: conduct involving dishonesty

(1) In any case where —

(a) for the purpose of evading VAT, a person does any act or omits to take any action, and

(b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability),

he shall be liable, subject to subsection (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded by his conduct ….

61 VAT evasion: liability of directors etc

(1) Where it appears to the Commissioners —

(a) that a body corporate is liable to a penalty under section 60, and

(b) that the conduct giving rise to that penalty is, in whole or in part, attributable to the dishonesty of a person who is, or at the material time was, a director or managing officer of the body corporate (a "named officer"),

the Commissioners may serve a notice under this section on the body corporate and on the named officer …

(6) In this section a "managing officer", in relation to a body corporate, means any manager, secretary or other similar officer of the body corporate or any person purporting to act in any such capacity or as a director; …"

Conclusions

The Respondents, on whom the burden of proof lies, have to establish, to a higher degree of probability, that Mrs Quinton as a director and Mr Quinton as a managing officer or de facto director, have done some act or omitted to take some action, their purpose in so doing being to evade the payment of VAT and that that act or omission involved dishonesty. The test of dishonesty is that laid down in R v Ghosh 1982 2 ALLER 689, namely whether Mr and Mrs Quinton knew that according to the ordinary standards of reasonable and honest people what they were doing would be regarded as dishonest.

There are four tax periods in issue, namely 01/00; 04/00; 07/00 and 10/00. In none of the periods were returns submitted; centrally issued assessments were raised for all periods and were paid in all but 10/00; as can be seen in the table in paragraph 4, the amounts assessed were vastly below the amounts due and at no time were the Respondents alerted to this. Therein, say the Respondents, lies the Quintons' dishonest conduct.

It is well established that to accept and pay, knowingly and intentionally, centrally issued assessments with full knowledge that they understate one's true liability is dishonest conduct within the scope of section 60, even if one's intention is to make good the shortfall if and when funds become available.

The question therefore arises whether it was Mr and Mrs Quinton's decision to pay the centrally issued assessments, if it were not whether they knew of it or were being reckless to the point of dishonesty. We believe different considerations apply to different quarters and we look first at 01/00 and 04/00.

Mr and Mrs Quinton maintain Mr Dixon was in charge of the VAT and they had no reason to believe that he had not been dealing with it. Exactly what Mr Dixon's remit was is quite unclear. All parties appear to have viewed it differently. There were no written terms of reference either between Bibby and Mr Dixon or between the company and Mr Dixon. What therefore did the Quintons' believe Mr Dixon's remit to be? To them, we were told, "he was in full financial control". By this, they understood him to be managing all the company's financial operations including VAT. On the otherhand Mr Dixon denies having any involvement with the VAT. We can well believe that the term "financial control" was bandied around. To Bibby it would mean control of their factoring arrangements; to the Quintons it would mean rather more. Neither Mr nor Mrs Quinton took any part in the financial management of the company and we believe them when they say that they genuinely thought Mr Dixon was in total charge. It is quite clear to us that his role was substantially broader than merely managing the factoring facility. This latter remit would be narrow and defined and for that, as we understand it, he would have been paid by Bibby. However, beyond that he undertook "consultancy services for the company" for which the company paid him a great deal of money and which involved him spending an increasing amount of time on the premises. It is not disputed that as part of his role, he would produce cash flow reports, projections and management accounts. He would therefore undoubtedly have been aware at the very least of the increasing VAT liability. That he was so aware is evidenced from the reference in his March report which he maintains he inserted only as a matter of courtesy.

We think it inconceivable that Mr Dixon, in his role with the company, did not have some involvement with the VAT. We do not believe Mr and Mrs Quinton were involved in the decision to pay the assessments. Mrs Grocutt, the bookkeeper, would not in our view have taken it upon herself to make that decision without reference to Mr Dixon and indeed, in interview, Mrs Grocutt referred to discussing the matter with Mr Dixon and it then being his decision to pay the assessments. We believe it can only have been Mr Dixon who decided to pay the centrally issued assessments.

The question then arises whether Mr and Mrs Quinton were aware, or should have been aware, of the payment of the assessments. Mr and Mrs Quinton deny ever having seen the March report and there was no reliable evidence as to how the report is supposed to have come to their attention. We are not satisfied that the Quintons ever saw it. Equally, Mr Dixon told us he would have written similar reports on a regular basis but again there was no evidence from anyone that these reports ever reached the Quintons and we accept that they did not. We believe Mr Quinton when he told us that he would periodically ask Mr Dixon about the finances and would be assured that they were in order. We also accept Mr Quinton's evidence that he accessed sufficient financial information on his own programmes to manage the sales side and from what he was seeing, he had no reason to suspect there was a problem with the VAT. Mr Dixon accepts he never discussed VAT with the Quintons because, in his view, it was outside his remit. We find this utterly incredible. Even if it had not been within his remit to ensure it was paid, we would have thought that any responsible financial consultant, seeing as he undoubtedly did in his cash flow analysis, the ever increasing liability to VAT, would have mentioned it to the directors and yet, as we fully accept, he did not. Given the amount that the company was paying Mr Dixon for his financial consultancy, we believe the Quintons were entitled to assume that he was in full control of all financial operations and that this would include the VAT. Certainly, Mrs Quinton signed the cheques but we accept that she personally never gave any thought to the amounts that they were for or indeed would have known whether or not they were accurate. She probably did not even take any notice of to whom they were payable.

In short, for periods 01/00 and 04/00, we find the decision to pay the assessments had been Mr Dixon's; that the Quintons were not aware of that decision and were not reckless in their attitude. We find that they did not act dishonestly in respect of these two periods and within the Ghosh test, no-one would believe them to have done so.

For the periods 07/00 and 10/00, the situation is different. We understand the assessment for 07/00 would have come in in approximately mid September and we were told it was paid on 19 October 2000. By this time, Mr Dixon was long gone; Mr New was in post and had, in September, advised the Quintons of the true VAT liability. And yet, the centrally issued assessment was still paid. This decision cannot have been Mr Dixon's. It is most unlikely to have been Mr New's. We do not imagine, and indeed it was never suggested, that Mrs Grocutt would take it upon herself to pay it and the decision can only have been that of Mr and / or Mrs Quinton or, at the very least, if the suggestion had originated elsewhere, they would have known about it. This constitutes dishonesty and we therefore find that for 07/00, they did act dishonestly.

The 10/00 assessment was never paid and the dishonesty alleged for this period cannot therefore lie in the acceptance and payment of the assessment. It can and does however lie in the failure to submit an accurate return. The company was under a statutory liability to render an accurate return, the effect of which would be to advise the Respondents of the company's VAT liability for that quarter. To fail to submit that return is quite clearly an omission within section 60. The Quintons failed to put in a return and in so doing they would have been seen to be, and indeed were, evading the payment of tax. For 10/00 we therefore also find the Quintons were dishonest.

On the question of mitigation, we believe that greater mitigation should have been allowed than the 20 per cent as against the 40 per cent, that Mrs Fletcher allowed. She was concerned that the Quintons and Mrs Grocutt, who were the parties interviewed, had not accepted any liability for payment of the returns. Given, however, our findings, for the first two periods this was accurate. Mr and Mrs Quinton did not make the decision and were not aware of it. They did answer, in interview, truthfully, that in September 2000 Mr New had told them of the true position. We believe that this merits greater mitigation and we would allow a further 10 per cent giving a mitigation level of 65 per cent rather than the 55 per cent allowed.

In summary, therefore, for periods 01/00 and 04/00, the appeal is allowed. For periods 07/00 and 10/00, the appeal is dismissed but the penalty is to be further mitigated by an additional ten per cent. We leave the Respondents to make the calculations.

There were no applications for costs and we make no order.

LADY MITTING

CHAIRMAN
Release Date: 14 June 2005

MAN/03/0101 & MAN/03/0102