United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2005] UKVAT V19225

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Jackson v Revenue and Customs [2005] UKVAT V19225 (25 August 2005)

VAT – civil evasion penalty – clothing trade – use of false invoices – whether bookkeeper implicated – whether conduct wholly attributable to dishonesty of sole director – yes – appeal dismissed

Human rights – right to a fair trial – whether undue delay – no – whether prejudiced by lack of appeal by company against assessment – no

LONDON TRIBUNAL CENTRE

TERRY FREDERICK JACKSON Appellant

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: JOHN CLARK (Chairman)

SUNIL K DAS

JOHN ROBINSON

Sitting in public in London on 27, 28 and 29 June 2005

Bernard Rice of BJ Rice and Associates for the Appellant

Nicola Shaw of Counsel, instructed by the Solicitor for Her Majesty's Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

Mr Jackson's appeal is against an assessment to a civil penalty under section 60(1) of the Value Added Tax Act 1994 ("VATA 1994") which has been apportioned to him by the Respondents (referred to in this decision as "Customs") under section 61 of the VATA 1994.

The law

Section 60(1) of the VATA 1994 provides:

"(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."

Section 60(7) of the VATA 1994 provides:

"(7) On an appeal against an assessment to a penalty under this section, the burden of proof as to the matters specified in subsection (1)(a) and (b) above shall lie upon the Commissioners."

Section 61 of the VATA 1994 provides:

"(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.

(2) A notice under this section shall state—

(a) the amount of the penalty referred to in subsection (1)(a) above ("the basic penalty"), and

(b) that the Commissioners propose, in accordance with this section, to recover from the named officer such portion (which may be the whole) of the basic penalty as is specified in the notice.

(3) Where a notice is served under this section, the portion of the basic penalty specified in the notice shall be recoverable from the named officer as if he were personally liable under section 60 to a penalty which corresponds to that portion; and the amount of that penalty may be assessed and notified to him accordingly under section 76.

(4) . . .

(5) No appeal shall lie against a notice under this section as such but—

where a body corporate is assessed as mentioned in subsection (4)(a) above, the body corporate may appeal against the Commissioners' decision as to its liability to a penalty and against the amount of the basic penalty as if it were specified in the assessment; and

(b) where an assessment is made on a named officer by virtue of subsection (3) above, the named officer may appeal against the Commissioners' decision that the conduct of the body corporate referred to in subsection (1)(b) above is, in whole or part, attributable to his dishonesty and against their decision as to the portion of the penalty which the Commissioners propose to recover from him."

The facts

The evidence consisted of Customs' bundle of documents, including a number of witness statements made by witnesses for Customs. No objection to these had been raised on Mr Jackson's behalf. One witness statement to which objection had been raised had to be withdrawn, as although that individual had been summoned to give oral evidence, he failed to appear. Mr Jackson was the sole witness in support of his appeal.

We should record that Mr Jackson has impaired hearing. Once we were aware of this, we investigated the possibility of bringing in specialist equipment. However, this would not have been available at short notice, and in any event would only have assisted if Mr Jackson had had a hearing aid capable of being linked to the loop system. We understand that he did not have such an aid. His evidence therefore had to be given without mechanical assistance. This may have been the reason for Mr Rice's style of questioning, which tended to lead the witness. In assessing Mr Jackson's evidence, we have attempted to make appropriate allowances for his hearing impairment, as well as taking account of the way in which the questions were put to him. We do not consider that Mr Jackson was disadvantaged in any way by his restricted ability to hear; he did participate fully in the proceedings, and only on some occasions mentioned that he had not heard the point being put.

On the basis of the evidence, we find the following facts. Mr Jackson was the sole director of a company called ABC Uniforms and Workwear Ltd ("the Company"). He was the legal owner of 99 of the 100 £1 shares in the Company; the beneficial ownership of the other share is not clear from the evidence. The Company was registered for VAT as a manufacturer of workwear and uniforms. Mr Jackson had taken the business over as a going concern for a Mr Green, the previous proprietor, for whom Mr Jackson had worked as a cutter. (The Company subsequently went into liquidation, the creditors' meeting being held in July 2000.) On 27 April 1999 Officer Howlett, a member of Customs' "Rag Team", visited the Company's business premises at Northumberland Park to carry out a prearranged VAT inspection. She had undertaken some pre-visit work and ascertained that high input tax amounts had been reclaimed.

Mr Jackson explained to her that the Company traded in a specialised area within "Cut, Make and Trim" ("CMT"). He obtained work by reputation. The work was mainly for six or seven customers; his employee Mr Walsh dealt with the customers. An order would be faxed or sent by post advising Mr Walsh of the number and style of garment required. Mr Walsh would agree a price, and the docket and cloth would be supplied by the customer.

Officer Howlett asked Mr Jackson where the CMT work was carried out. He confirmed that 95 per cent of the work was cut on the premises, and all of the finishing was done there. Officer Howlett's report records that the Company's premises were a commercial property spread over two floors, each of approximately 2,000 square feet, with ten "flat machines" on the ground floor (which was used mainly for storage) and a cutting table and between 10 and 15 machines on the first floor. (Both Mr Jackson and Mr Rice sought to challenge these details, but as the witness statement had been accepted without challenge, it was not open to them to do so.)

Officer Howlett was told that the number of staff normally employed was seven. No information could be given about the quantity of garments produced each week; it was so varied that it was impossible to say. It was also impossible to tell the average price for each garment, due to the variation.

For work carried out off the premises, Mr Jackson confirmed that he had one or two homeworkers doing flat machining. He also used other VAT registered units to carry out work. He used the same few traders; they had known about the Company by word of mouth. They picked up the work from the Company's premises, and returned it completed to those premises. Mr Jackson checked the garments, and the trader then supplied the Company with an invoice, following which the trader was paid in cash. Mr Jackson confirmed that he had not visited any of these traders and had no way of contacting them; they visited the Company a couple of times a week. The pricing of the work varied greatly. The arrangements for supply of goods to the Company's customers were that they came to the Company's premises to pick up the garments and paid by cheque on delivery.

Officer Howlett then examined the Company's books and records. Customs' record of the VAT return information submitted could not be reconciled with any of the input or output figures in the Company's purchase and sales book listings. She noticed that these listings had all been printed in April 1999. This appeared odd, as listings would normally be printed off at the end of each VAT quarter and used to calculate the VAT liability; the business had been registered since 1 October 1996. She found various discrepancies. In particular, not all of the purchase invoices appeared on the purchase listing; there were large value sub-contractors' invoices apparently from the same invoice books and in the same handwriting, even though these sub-contractors were from different parts of the UK. At this point Officer Howlett decided that the records should be removed for further examination.

Officer Howlett and her colleague Officer Zussmann, a senior officer working in Customs' Clothing Industry Team, carried out various checks at the Finchley VAT Office on the Company's business records. The first check was a cash reconciliation. On the basis that the Company was paid by cheque but paid the wages and sub-contractors in cash, the bank records ought to show a sufficient amount of cash withdrawn from the bank to cover the value of the purchase invoices issued by sub-contractors. For the period from 7 November 1996 to 13 November 1998 £421,701.00 was withdrawn from the bank. The sub-contractor invoices for the [slightly different] period from 29 September 1996 to 29 September 1998 totalled £505,026.80. This gave a cash shortfall of £83,325.80, and did not take into account any other cash expenses, in particular wages given to staff or homeworker wages for the period.

The officers also examined the Company's annual accounts for the period from 1 October 1996 to 31 October 1997. These showed (in the trading and profit and loss account at page 8 of the accounts) the cost of subcontractors' services for the period as £164,680. (In addition the accounts showed wages as £50,856 and directors' remuneration as £10,400.) However, the value of the invoices in the Company's records for the same period was £215,516.00.

Officer Zussman carried out another cash reconciliation for the period from 7 November 1996 to October 1997. This showed cash withdrawn £250,841 less sub-contractors' invoices gross £253,231.39 less £50,586 wages and directors' remuneration £10,400, giving a total shortfall of £63,646.39.

The final check carried out by both officers was on the sub-contractors' invoices.

The first were in the name of a company called Rorybrook Ltd, VAT registration number 504 6194 61. Some of these showed the incorrect VAT number 504 6194 81. Officer Zussman established that one VAT registration number used was invalid. Some invoices showed the sub-contractor's name as Rubybrook rather than Rorybrook. One showed a VAT number belonging to another trader, Elgana Design Ltd, namely 697 7983 44. One invoice did not show any VAT number. Officer Howlett ascertained from the returns submitted by Rorybrook that it claimed high amounts of input tax, which suggested that it would itself have used other units to carry out CMT work.

Next they considered invoices in the name of Texworld Ltd, VAT registration number 713 8320 55. Officer Howlett established from Customs' records that the date of Texworld's registration was 2 February 1998, yet Texworld invoices appeared in the Company's records from the VAT period 2/97. Officer Howlett ascertained from the returns submitted by Texworld that it claimed high amounts of input tax, which suggested that it would itself have used other units to carry out CMT work.

The next sub-contractor considered was Eleana Design Ltd. This was a company that had been registered as Elgana Design Ltd, but traded as Eleana Design Ltd. Officer Howlett found from Customs' registration records that Elgana was liquidated on 24 September 1997, yet invoices still appeared in the Company's records one year after the sub-contractor's liquidation date. Two other suspect false invoice cases being dealt with by Customs showed Elgana as the supplier, but the invoices previously seen in those cases were size A4 pre-printed, whereas the invoices in the present case were Challenge type A6 size.

When Officer Howlett reviewed the registration records relating to the next sub-contractor, Today's Garments Ltd (VAT registration number 478 6577 77), she found that it had de-registered for VAT on 1 November 1998. [The invoices were dated before that date.] Returns submitted to Customs by Today's Garments showed that the output tax that it had declared was smaller than the amount of input tax claimed by the Company.

The next sub-contractor, JC Textiles, had the VAT registration numbers 614 4035 76 and 670 4139 76. From the VAT return information supplied in respect of both these registrations, Officer Howlett found that both had high input tax declarations, which she thought might indicate that they themselves used other CMT units to carry out work.

The officers then examined the invoices for each of the sub-contractor companies and compared them with each other to look for any inconsistencies. The invoices used for Rorybrook, Elgana, Texworld and Today's Garments were all Challenge Type A6. It appeared that these invoices might have been from the same two books, as there was no duplication of numbers. There was a print fault on one of these invoice books, the blue lines not being properly aligned; these invoices had been used for three of the sub-contractors, even though they were situated in different parts of the UK. The handwriting appeared to have been penned by three authors. There appeared to have been no consistency between handwriting styles and sub-contractors. The invoice dates were not consistent with the invoice numbers. Some invoices had indentation markings, showing invoices to other sub-contractors. At least 95 per cent of the purchase invoices did not specify number, style or price of garments. It was not possible to trace garments allegedly made through to sales.

Other faults found in the Company's records were that the purchase and sales day book listings did not agree with the VAT return figures, and although the officers saw debit notes from customers to the Company, there were none from the Company to its sub-contractors, as might have been expected.

It appears from the bundle that further work was subsequently carried out on sub-contractors' invoices, with more being shown than those exhibited to Officer Howlett's statement. The final details are set out below, with other information relating to each sub-contractor.

The Company had four invoices from JC Textiles Ltd for the period 29 October 1996 to 29 January 1997 totalling £12,680 plus VAT of £2,250.50. In an unchallenged witness statement (dated 7 July 1999) Harry Iannou, the director of JC Textiles Ltd, confirmed that the invoices in the records of the Company were not issued by JC Textiles Ltd, that JC Textiles Ltd had never done business with the Company and that JC Textiles Ltd had never traded from the address shown on the invoices appearing in the Company's records. The sample invoice appearing in Customs' bundle uses a font completely different from that on the invoices in the Company's records.

The Company had four invoices in its records from JC Textiles (Birmingham) Ltd for the period from 2 February 1997 to 27 March 1997. These totalled £16,689.50 plus VAT of £2,920.66. In an unchallenged witness statement (dated 7 July 1999) Marouella Iannou, the director of JC Textiles (Birmingham) Ltd, confirmed that that company had never done any work for the Company and did not issue the invoices shown in the Company's records.

The Company had 22 invoices in its records from Eleana Design Ltd for the period 25 February 1997 to 29 September 1998 totalling £151,035.00 plus VAT of £26,431.01. Eleana was a company which manufactured dresses and sold ladies wear. It had printed invoices bearing its company logo. However, the invoices in the records of the Company were all from a blank invoice book. The style of invoice book used was exactly the same as that used for Rorybrook, Texworld and Today's Garments. Nine of the Eleana invoices post-dated its liquidation date.

The Company had 17 invoices in its records from Texworld Ltd for the period from 5 February 1997 to 26 January 1998 totalling £96,105.87 plus VAT of £16,817.48. Texworld was a company which imported fabric and manufactures clothing. It started trading in January 1998 and made its first sale in March 1998. Talat Arican, the Company Secretary of Texworld Ltd, confirmed in an unchallenged witness statement (dated 29 June 1999) that Texworld Ltd did not issue the invoices appearing in the Company's records and that he had never heard of the Company. Mr Arican did not recognise the handwriting on the invoices. The goods described on the invoices were jackets, blouses and dresses. Texworld had never supplied such types of garment, only suits. Texworld had no business premises in Birmingham, which appeared after the name "Texworld Ltd" on the invoices in the Company's records. Texworld's only connection with Birmingham was that it had one customer based there. All the invoices in the Company's records pre-date Texworld's commencement of trading and its registration date; however, all the invoices refer to Texworld's VAT registration number.

The Company had ten invoices in its records from Rorybrook Ltd (or a similar name). These totalled £69,789.25 plus VAT of £12,193.05. Rorybrook was a CMT business, but became dormant, issuing its last invoice on 4 November 1998, the previous one being issued on 30 October 1997 and no trade having been carried on since October 1997. In his unchallenged witness statement (dated 29 June 1999), Mr Aristidou confirmed that he had never heard of the Company nor seen the invoices appearing in the Company's records. The invoices were not issued by Rorybrook and were not in Mr Aristidou's or his brother's handwriting. The invoices referred to jackets being supplied; Rorybrook did not make jackets, it did not have the machinery to make them and it had never bought them in or had them make elsewhere by outworkers. Of the ten invoices in the Company's records, eight are dated after October 1997. Seven out of the ten bear the name "Ruby Brook" but refer to the VAT registration number of Rorybrook.

The Company had 11 invoices in its records from Today's Garments for the period from 19 August 1997 to 25 October 1998 totalling £108,320.75 plus VAT of £18,956.06. Today's Garments was a CMT business which had commenced trading in 1987 and ceased trading in September 1998. In his unchallenged witness statement (dated 15 February 2000) Jarnail Singh, who had been a partner in the business, confirmed that for the last two and a half years of its operation the business had had only one customer, Sam Philips based in Stroud Green Road, London N4. Mr Singh also confirmed that none of the invoices shown in the Company's records was issued by Today's Garments and that the business never did any work for the Company. Further, Mr Singh had never heard of Mr Jackson. Two of the 11 invoices shown in the Company's records post-date the cessation of trading by Today's Garments. The dates of all the invoices fall within the period during which the only customer of Today's Garments was Sam Philips.

The Company had 12 invoices in its records from a business called Panache for the period from 28 February 1999 to 17 June 1999 totalling £62,665.27 plus VAT of £10,966.42. Panache was a retail shop in Manchester, selling school uniforms and babywear. It had been registered for VAT since 1 August 1997. In her unchallenged witness statement (dated 23 July 1999) Susan Howard, the proprietor of the business, confirmed that none of the invoices shown in the Company's records was issued by Panache and that she had never done business with the Company. The invoices in question were for manufacturing work said to have been carried out by Panache for the Company. The types of garments listed on the invoices included men's jackets, female waistcoats, bakers' shirts, boilersuits and ladies' jackets; there was no mention of items of school uniform. The headed notepaper and business card for Panache had a logo depicting a figure ascending a stack of books; the invoices in the Company's records had a completely different logo of a female figure dressed in a suit.

On 29 June 1999 Renford Coleman, Peter Gilbert and Brendan Spranklen, all officers of Customs, attended the Company's premises to carry out an interview with Mr Jackson. After putting a number of questions to him, they stated that they had information to suggest that some of the Company's declarations were false, and handed him a copy of Notice 730.

In the course of the interview, Mr Jackson provided the following information:

(1) The Company's customers would place orders and deliver the cloth. The Company would cut the cloth and then it would be manufactured by sub-contractors. The sub-contractors would collect the cloth from the Company. The sub-contractors would be paid in cash withdrawn from the bank. The Company used three sub-contractors, but Mr Jackson could not remember the names of the sub-contractors, even though he dealt with them and had done so for years.

(2) The sub-contractors would render an invoice when the garments were returned and would be paid in cash. They provided the Company with an invoice, which would then be given to the bookkeeper.

(3) The bookkeeper would tell Mr Jackson what figures to put into the Company's VAT returns, and Mr Jackson would complete them. All the Company's records were given to the bookkeeper.

(4) Mr Jackson was in charge of the day-to-day running of the business, and had some help from his employee Mr Walsh.

(5) The Company's customers paid by cheque, so any cash paid out as wages or for other purposes had to be taken out of the Company's bank account; there was no cash from anywhere else.

(6) Mr Jackson was able to recall the number of homeworkers used by the Company, as well as the names of three of them. He was currently using a sub-contractor called "Panack" (or something like that) in Manchester. He thought that the name of one used previously was "Hexman". He could not remember any others.

(7) If he needed to contact the sub-contractors, he would have used the phone numbers shown on their invoices. However, he had never needed to do so, as they brought the work to the Company.

(8) Mr Jackson confirmed that he had dealt with Elgana Designs Ltd, and identified invoice number 54 as one prepared by Elgana. He could not remember whom he had dealt with at Elgana. He referred to a particular English individual who came regularly to the Company to bring work and take it back. Although the invoices from Elgana did not show Elgana's address or telephone number, Mr Jackson said that if he needed to contact the sub-contractor he would get in touch with Customs, using Elgana's VAT registration number.

(9) Mr Jackson indicated that the Bookkeeper, Tony Lawrence, had never dealt with any of the sub-contractors; he simply received the invoices provided to him by Mr Jackson.

(10) Mr Jackson never checked the work when it was returned by the sub-contractors; he had never had any problems with the work done, and would pay the sub-contractors straight away. The invoices did not particularise the work done, and Mr Jackson did not keep any records of the work going out.

(11) He confirmed that the invoices were in the Company's records because he was given them for work that was done and that as far as he was concerned, the sub-contractors had carried out the work.

(12) Mr Jackson confirmed that he knew and used Texworld, and that he had been given invoices for work done by Today's Garments.

A second interview took place on 17 November 1999. At this interview Mr Jackson was accompanied by Mr Rice. The following information was provided:

(1) Mr Rice indicated that Mr Lawrence, the bookkeeper, had substituted the invoices in the Company's records after the originals had gone astray.

(2) Mr Lawrence was the bookkeeper for the Company until a week or two before the first interview.

(3) Mr Rice suggested that Mr Lawrence had produced the false invoices because he had mislaid, lost or destroyed the original invoices.

(4) After the first interview, when Panache returned the work which had been outstanding as at 29 June 1999, Mr Jackson had found out that the representative of Panache who returned the work was called Mr Patel.

There was an unchallenged witness statement (dated 11 October 1999) from Fuat Sadik, a production manager in the CMT industry, indicating that he worked for Robert Michaels Holdings Ltd, a customer of the Company, at the Company's business premises. This customer would deliver the cloth to be made in using the orders. The cloth would then be cut and the garments made up on the premises, as it was specialist work. All the staff making up the garments were payroll employees of the Company. Robert Michaels Holdings Ltd would then be invoiced for the work and would pay by cheque. The Company would then make a weekly payment in cash to Mr Sadik of the net invoice amount, less tax, rent, electricity etc. He would then pay the net wages to the Company's employees from his share. (Mr Jackson indicated in his interview that this arrangement had changed shortly before the first interview, with Mr Sadik starting to run a separate company.)

The witness statement of Mr Makwana (dated 10 August 1999) was also unchallenged. In May 1998 Mr Makwana was engaged as the Company's accountant, having been recommended by Mr Lawrence. Mr Makwana prepared the Company's accounts for the period from 1 October 1996 to 31 October 1997. For this purpose in October 1998 he asked Mr Lawrence for the Company's records in order to complete the accounts. At the beginning of February 1999 he received the quarterly VAT summaries, VAT returns, sales print-outs and purchase print-outs for the periods 01/97 and 04/97 and sales and purchase invoices and bank statements for the periods 01/97 to 10/97.Three to four weeks later he received the remaining records in respect of 07/97 and 10/97.

Mr Makwana carried out a cash reconciliation exercise. This showed that there was a cash deficit, the Company's cash expenses exceeding its cash withdrawals. Mr Makwana queried this with Mr Lawrence, who agreed to contact the Company. Subsequently, Mr Lawrence telephoned Mr Makwana to tell him that the Company had not accounted for a number of credit notes in favour of sub-contractors. Mr Makwana was then provided with details of the credit notes by Mr Lawrence on the telephone, and Mr Makwana recorded these in his accounts working papers. The net value of sub-contractors' fees shown in the accounts was £164,680. The only person at the Company with whom Mr Makwana dealt was the individual he subsequently learned was Mr Walsh.

On 17 March 2000, having considered all the information available to Customs, Mr Gilbert raised an assessment on the Company covering the period 1 October 1996 to 30 April 1999 in the amount of £79,558, plus interest. (This assessment was addressed to the Company at its trading premises. It was claimed on behalf of the Company that this was not received; Customs were informed after 17 March 2000 that the business had vacated the premises. On 8 May 2000 Mr Gilbert handed the Notice of Assessment to Mr Jackson.) Mr Gilbert believed that Mr Jackson's conduct giving rise to the assessment involved dishonest conduct and recommended that a penalty be imposed. On 20 July 2000 a Creditors' Meeting of the Company was held and a Liquidator was appointed. On 17 August 2000, notification was given to the Liquidator of the Company that it was considered to have rendered itself liable to a penalty for evasion, through dishonesty, of VAT in the sum of £79,558 for the relevant period. The penalty, of an amount equal to the tax believed to have been evaded, was to be reduced to £71,598 to take account of Mr Jackson's assistance on 29 June 2000.The conduct giving rise to the penalty was considered to be wholly attributable to the dishonesty of Mr Jackson, and it was proposed to recover the whole of the penalty from Mr Jackson. On 17 August 2000 notice was therefore given to Mr Jackson under section 61 VATA 1994 of the amount of the penalty attributable to him, taking into account the 10 per cent reduction for his co-operation. A late appeal against this notice was made on 21 November 2002, and Customs agreed on 19 December 2002 not to oppose Mr Jackson's application for an extension of time in which to lodge the Notice of Appeal. Further proceedings, including directions hearings and an appeal to the High Court against a direction, took place in advance of the present hearing.

Mr Jackson's evidence

Mr Jackson had worked as a cutter for another trader, Harry Green, and later took over the business from him. Mr Lawrence had done some bookkeeping for Mr Green. As Mr Jackson had no bookkeeping experience, he decided to use Mr Lawrence. Mr Green employed some sub-contractors; Mr Jackson had seen them taking cut work away and returning it partly completed. Not a substantial amount of work had been done on the premises, as there was not room to do it. The work done there was buttonholing and pressing. Mr Jackson had formed ABC in about October 1996 because Mr Green was shutting and Mr Jackson had said that he would take the business over. The business continued with the same customers.

The amount of equipment was limited. The amount for equipment shown in the accounts was £583. Mr Jackson indicated that he would not buy a lot of equipment; he did not know how the figure in the accounts was made up. A lot of the equipment had belonged to Mr Green. Mr Jackson had eventually purchased equipment from Mr Green; this could have been a year or so afterwards. Mr Green had not taken any equipment. Mr Jackson felt that the Company could not have manufactured the quantity of goods with the machines that were on the premises.

Mr Jackson could remember the names of his outdoor machinists because he had seen them while they were working for Mr Green and had known their families. Their numbers varied between six and eight. Mr Rice suggested to him that his difficulty with the names of sub-contractors might have been partly because of their ethnic origins and the difficulty in pronouncing their names; he agreed with this suggestion. He had known the sub-contractors for a long time and they might take away material to the value of £10,000. If they had attempted to take it for themselves, the theft would have been notified on television. Mr Jackson had had no losses through theft.

All the work was always checked for quality and amount. If there was a defect the subcontractor would have the work back. If the work was not up to standard, the sub-contractor would not be paid. In relation to an invoice from Robert Michaels to the Company for shortages, Mr Jackson refused to answer a question because criminal matters were involved. There was no claim against the sub-contractors; it was not their fault. The figure in the invoice of £156 was the price per item [which was then multiplied by 4.2]. There was no claim for material lost. There was no VAT on that bill; the Company did charge VAT to Robert Michaels. The method in relation to them was to deliver finished goods. Payment was made without proper invoices. Invoices were obtained from sub-contractors. Proper invoices were then prepared.

All the invoices from sub-contractors and suppliers were given to Mr Lawrence on a weekly basis, together with PAYE slips to do the wages. All the paperwork had been sent to Mr Lawrence, and he had not returned the invoices. He did all the books and VAT returns. Mr Jackson had trusted him to do the VAT returns. He had every bit of paperwork. The returns were completed at Mr Lawrence's house. It had been Mr Jackson, not Mr Lawrence, who had completed the form; Mr Lawrence told Mr Jackson what number to put on the form. Mr Jackson signed the cheque at the same time. Then the return was posted to Southend. They were Mr Jackson's returns and in Mr Jackson's writing.

As far as Mr Jackson had known, everything had been included in the Company's accounts. There had been only one occasion of a problem, when Companies House had said that there were certain deficiencies in the monies, that amounts did not match. He had no idea how Mr Lawrence came to mention credit notes; as checked, when the work come back from the sub-contractors, it was correct. The Company had never had money repaid by sub-contractors. Mr Makwana had said that he had only dealt with Mr Walsh. Originally Mr Lawrence had agreed a figure of £500 for the Company's accounts. Then the accountant had asked for £750. Mr Lawrence fell out with him; the Company had not been using him for long.

Mr Rice suggested to Mr Jackson that the first time that Mr Jackson had seen the invoices was when Mr Gilbert visited the Company; Mr Jackson agreed. In the weekly meetings dealing with the wages and paperwork, Mr Lawrence had never questioned Mr Jackson about the missing invoices. As far as Mr Jackson was aware, everything was in order. Mr Jackson had no contact with the accountant; Mr Lawrence had appointed him. Mr Lawrence received the accounts. Mr Jackson paid the accountant. It was Mr Lawrence who had dealings with the accountant. The schedule in the accountant's working papers showing information relating to sub-contractors meant nothing to Mr Jackson.

In cross-examination Mr Jackson said that he knew the sub-contractors; they "walked in" from the street, but they were not complete strangers. He knew them through Mr Green or Mr Lawrence. He could not remember which had been introduced by Mr Lawrence, nor those introduced by Mr Green. He had worked for twelve months on and off part-time for Mr Green. The reason why Mr Jackson did not know that names of sub-contractors was that he did not need to know; he had a piece of paper with the details, namely the delivery notes. These were sent to Mr Lawrence. Mr Jackson did not need records, as the sub-contractors would tell him what they had sent in. Although there was evidence of these documents, there was no record of dockets or receipts. Mr Jackson could not remember one single name. If he had not used sub-contractors, the work would never have got made.

There were usually about 14 on the Company's staff. Contrary to what Officer Howlett had recorded, there were more than seven on the payroll. Over some periods there were more. Mr Jackson could not say how many machines were in the £583 total referred to in the accounts. All the papers had been passed to Mr Lawrence. There might be six flat machines in the total. Perhaps four machines had been rented from Mr Green. There were between twelve and fourteen machines on the first floor.

The proportion of work sent out to sub-contractors was nearly 100 per cent; it was most, one way and another. Some came back completed, some required further work. The reason for not making any on site was that sub-contracting was a way to get a price. With work on site, the cost per garment could vary up or down. If work was sent to a sub-contractor, the variations were the sub-contractor's problem, as the price for the work was set.

Mr Jackson had never checked sub-contractors' premises. He had no records of addresses and phone numbers for them, as Mr Lawrence had these. [He did not explain why he had said in his interview that he would obtain details from Customs.] He had no witnesses to vouch for him as Mr Walsh had moved away; the others were Turkish Cypriots, and he did not know where they all were. If a sub-contractor had run off with the fabric, Mr Jackson would have had to pay for the material and get it made up again. He could not explain the £55,000 figure in the accountant's working papers for credit notes from customers. The cost of a credit note from Robert Michaels, referring to shortages, had not been passed on to sub-contractors. Something had been taken while the goods were in transit, but the driver had not been responsible.

Mr Jackson could not explain why "Panack" or Panache had never heard of the Company. The invoices had been handed to him, and he had then handed them to Mr Lawrence.

He considered that Mr Lawrence could have been responsible for producing the false invoices, although this was not certain. Who else could it have been? Mr Lawrence might have been in a bad mood because Mr Jackson was not satisfied with his work. Mr Jackson had telephoned Mr Lawrence when he knew of the proposed VAT visit, but by that stage Mr Lawrence had really finished working for Mr Jackson.

When cash was withdrawn from the bank, it was recorded on the cheque what amount was for sub-contractors. Mr Lawrence had said that it would be easier to split out. Mr Jackson never marked anything on the cheque stub. Mr Lawrence did; he would know the amounts from invoices. Mr Jackson went to Mr Lawrence's house each Friday morning; Mr Lawrence would tell Mr Jackson how much he could draw. The information was taken from the books that Mr Lawrence had. It was not always Mr Jackson who checked work from sub-contractors; it could be one of the girls who did so. The sub-contractor would not be paid without a check of the work, and would not necessarily be paid instantly. Payment was usually on Friday or the following week; the sub-contractors came up and down quite often. The invoice could be produced later. Work was not always faultless, but Mr Jackson could not think of any bad examples. Sub-contractors were usually paid by the end of the week of delivery of the work. Mr Lawrence had said that an invoice should not be collected; the amounts should be allowed to build up and give a figure for VAT.

Mr Jackson could not explain why although the Company's purchases broadly corresponded to the value of invoices in the Company's records, the invoices fell so far short of the bank withdrawals. He indicated that he was not going to try to explain the cash discrepancy; he had left everything to Mr Lawrence to fill in the figures.

Under re-examination, Mr Jackson said that he had engaged Mr Lawrence as bookkeeper, and that he had trusted him. Mr Jackson had signed the returns on trust. He said that Robert Michaels had never demanded security; this was the way that business worked. He commented that he had not had a representative at the first interview; he had been given no advice on this. He explained that he paid round sum amounts to sub-contractors, then paid odd amounts later. Payments were made in stages. He explained that a large quantity of garments, for example 10,000, would take up a substantial space.

In answer to questions from the Tribunal, he was not able to explain the £55,000 credit notes; he never issued any. In the weekly visits to Mr Lawrence, Mr Jackson took the cheque book that he had been using that week, and in exchange Mr Lawrence gave back the other one to him. Mr Lawrence would know the amount of the cheque for a sub-contractor because Mr Jackson would take the invoices to him. Mr Jackson's system was to have a paper note of the sub-contractor amounts, then settle up the invoices when produced.

The preliminary application

At the beginning of the hearing, Mr Rice made an application on human rights grounds, referring to various alleged violations in relation to the appeal against the dishonesty penalty. He applied to have the penalty assessment struck out, having regard to the delay in bringing these proceedings. He raised the following matters:

(1) The assessment on the Company was delivered to the Company's former trading address even though the Company had moved premises, and that assessment was then served on Mr Jackson after the time for appealing had passed, and when the Company's liquidation was under discussion.

(2) Mr Jackson was not aware in August 2000 of the civil evasion penalty notice and was not supplied with a copy, but once he was made aware of it, he was still not provided with a copy until complaints were made to Customs' Complaints Unit.

(3) The civil evasion penalty was geared to the amount of the tax assessed on the Company, and this assessment was not and could not be appealed.

(4) Customs had been guilty of delay and time wasting.

In response Ms Shaw made the following points:

(1) If the Company's appeal had been made at a time when it was in liquidation, this would have been a matter for the liquidator, who clearly did not want to appeal. The present appeal was concerned only with the civil evasion penalty raised against Mr Jackson, and so he did not have any standing to bring any complaint as to any infringement of the Company's rights. No notification of a change of address was given to Customs before the assessment was issued; when it was, the Company and Mr Jackson were aware of the existence and details of the assessment. The assessment had been validly made; the notification was a separate process (Grunwick Processing Laboratories Ltd v CCE [1986] STC 441). Mr Jackson had successfully applied for an appeal out of time against the civil evasion penalty; had the Company done so against its assessment, the likelihood was that it would have been successful. No prejudice to the Company had been shown, nor was this relevant to Mr Jackson's appeal.

(2) The civil evasion penalty notice was sent to Mr Jackson on or around 17 August 2000 at the home address notified by Mr Rice in April 2000. Customs did not therefore accept that Mr Jackson was unaware of the existence of the penalty. Mr Jackson was aware of the potential for the penalty in April 2000 and Customs' letter dated 10 August 2000 indicated that a penalty in the amount of 90 per cent of the assessment was to be issued against Mr Jackson. Further, by 15 September 2000 the liquidator had forwarded to Mr Rice a copy of the penalty notice served on the Company.

(3) The penalty was geared to the amount of tax assessed on the Company. This was a feature of the statutory code governing the raising of civil evasion penalties (section 60(1) of the VATA 1994). The fact that the Company did not appeal against the assessment did not preclude Customs from pursuing the penalty against Mr Jackson (William Taylor v CCE (2003) VAT Decision 18298 at paragraph 47). The burden of proving dishonest conduct on the part of the Company to have been attributable in whole or in part to Mr Jackson's conduct was on Customs. The question whether Customs also had to establish the quantum of the penalty had been left open by Hart J in Mohammed Siddiq Khan v CCE (at [70]); Ms Shaw argued that Customs could demonstrate the quantum in the present case.

(4) Any delay in bringing the appeal to hearing had been largely attributable to Mr Jackson's conduct. From the detailed chronology, over two years was attributable to Mr Jackson's delay in lodging his Notice of Appeal; a further six months was attributable to his appeal to the High Court against the extension of time granted for the lodging of the Statement of Case. Without those periods, the appeal would have been listed much earlier. It would be tantamount to an abuse of process to allow Mr Jackson to appeal out of time and then to have the appeal allowed because his failure to appeal within the prescribed time limits had denied him the opportunity for a fair hearing within a reasonable time. There was no comparison with the delays in King v UK (No 3) [2005] STC 438; the first interview under the Notice 730 process had been on 29 June 1999 and the appeal was heard in June 2005. Not only was the period considerably shorter; there was no "delay" attributable to either Customs or the Tribunal.

Our decision on the preliminary application

We notified our decision at the hearing, and indicated that we would record the details in our decision on the substantive appeal. We accepted the points put by Ms Shaw resisting the application made on Mr Jackson's behalf.

On the first ground, we do not consider that the service of the assessment is relevant to the outcome of the appeal against the civil evasion penalty.

On the second ground, we are satisfied that Mr Jackson had been made aware of the existence of the civil evasion penalty.

On the third ground, we follow the principle in Taylor (in which two of the three members of the present Tribunal sat). This decision reflected a preliminary decision made by the President, summarised at paragraph 47 of Taylor. Customs are not precluded by the absence of any appeal by the Company from pursuing a penalty against Mr Jackson.

On the fourth ground, there have been some unfortunate delays in this case, which to a considerable extent are attributable to Mr Jackson's own conduct. However, we do not consider that they are such as to result in Mr Jackson being denied a fair hearing.

Contentions for Customs on the main appeal

As the burden of proof was on Customs, their contentions were put first. The following points were made:

(1) The meaning of the term "dishonesty" had been established in Ghandi Tandoori Restaurant v C&E Commrs [1989] VATTR 39; the standard of proof was the balance of probabilities, albeit a high degree of probability. In Mohammed Siddiq Khan v CCE [2005] EWHC 653 (Ch) at [73] Hart J had referred to Lord Nicholls' observations in In Re H [1996] AC 563 at 586-587 rejecting the notion that the standard of proof is higher where a serious allegation is in issue but accepting the proposition that "the more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established".

(2) It was beyond dispute that the invoices in the Company's records were not genuine invoices in respect of genuine supplies. None of the sub-contractors had ever heard of the Company or done business with it. Many of the invoices in the Company's records were not the same as the genuine invoices issued by the sub-contractors. Some of the sub-contractors were not trading at the date of some of the invoices. Some of the sub-contractors did not produce garments of the type listed on the Company's invoices. There was no evidence to support the contention that the Company used any sub-contractors for the purposes of its business or (if it had done so) that it incurred input tax in sub-contracting out the work. Customs submitted that given the size of the Company's premises, the number of machines on the premises, and Mr Sadik's evidence relating to the work for Robert Michaels being done on site, there was ample evidence to suggest that in fact the Company did not sub-contract out as much work as its records indicated. The cash reconciliation carried out by Customs showed that insufficient cash had been withdrawn to meet the value of the invoices. Customs had been perfectly entitled to disallow the input tax claimed by the Company in respect of the invoices.

(3) On the civil evasion penalty, the principal area of dispute between the parties was on the question of who had introduced the false invoices into the Company's records. Mr Jackson contended that he had handed Mr Lawrence genuine invoices for sub-contracted work and that Mr Lawrence had mislaid, lost or destroyed those invoices and created the false invoices to cover his tracks. In contrast, Customs contended that Mr Jackson had been responsible for the production of the false invoices; in support, they raised a number of matters that we consider later in this decision.

(4) On the question of quantum, the assessment had been calculated by reference to (a) the Company's input tax for each quarter in the relevant period (except for periods 07/98 and 10/98 for which no print-outs were available), (b) the value of the disputed sub-contractors' invoices for each quarter, and (c) the input tax claimed by the Company on its VAT returns. The allowable input tax for each quarter (namely the part not disputed by Customs) was calculated by deducting (b) from (a). The resulting amount had then been deducted from the amount claimed in (c) to give an amount in respect of which the Company was assessed for each quarter. There was a slight discrepancy between the amounts for (a) and (c) because the Company did not keep printouts for each quarter (instead printing them all out in late April 1999). The print-outs only showed the dates of the invoices and not the date of inputting the invoice into the computer. As a result, any invoices inputted after the end of the VAT quarter to which they referred would have been included on the VAT return for the following quarter but in the VAT summary printed out in April 1999 would appear in chronological order. For the quarters 07/98 and 10/98, Customs had calculated the arrears by reference to the net amount of input tax claimed on the Company's VAT returns and the amount of allowable input tax for those periods. Ms Shaw pointed out that the VAT amount showed on the relevant invoices for sub-contractors falling within the period of assessment totalled £86,338.12; the actual figure used by Customs had been £79,561.93.

(5) The penalty had been based on 90 per cent of the assessment. This reflected the minimal degree of assistance provided by Mr Jackson. Ms Shaw submitted that this level of mitigation was entirely reasonable.

Contentions for Mr Jackson

Mr Rice made the following points:

(1) He referred to the absence from the bundle of a matter referred to at the first interview and of information relating to the security deposit. Customs had failed to provide Mr Jackson with notes of the first interview. At the first interview Mr Jackson had been requested to supply a sub-contractor's invoice by fax. He had done so. He would have expected Customs to satisfy themselves that the invoice was valid. The invoice had met with the requirements, and Customs had been satisfied. The invoice would surely have been within the records of the Company, but it was not; the question was why.

(2) The Company had been subject to a substantial demand for a security deposit; Mr Lawrence had negotiated this down to less than half the amount originally demanded. The demand had been made because of Customs' over-zealousness.

(3) Mr Jackson had engaged Mr Lawrence, who was a professional bookkeeper, using Sage software; if used properly, this would produce proper accounts and a trial balance. It also provided scope to print out information as at a particular time, for example for the purposes of correcting an error. Mr Jackson was entitled to rely on Mr Lawrence. The returns had been completed in Mr Lawrence's presence. This was not an act of dishonesty. The returns had been based on the invoices and the stubs. The Company had never issued credit notes; it checked all garments when they were returned to its premises. The cash was not dishonest. The invoices, albeit late, were passed to Mr Lawrence.

(4) The Appendix to Officer Howlett's witness statement did not add up to the totals. The amounts should be accurate; this called into question the evidence. Similar mistakes were present in Officer Zussmann's evidence. Mr Rice criticised the over-zealous approach of Customs' Finchley office.

(5) The VAT returns showed the value of outputs. If the value of taxable outputs for four quarters were added up, the total was within about £20,000 of the sales figure in the Company's accounts. The difference was the amount of the debtors, which was not taken into account in cash accounting. The assessments had been based on invoices.

(6) In Customs' summaries, there were entries for "Input tax claimed as per print-out". These were based on Mr Lawrence's figures; no enquiry had been made into these. Mr Rice's understanding was that Mr Lawrence had wiped all the computer records, with the result that the only material available to rely on was the summary.

(7) The accountant had approached Mr Lawrence to query the cash deficit. Mr Jackson had heard nothing about this; he entrusted Mr Lawrence with all the bookkeeping records. In relation to accounting for sub-contractors it was unlikely that a credit note would be issued. The cash shortfall was substantial. The amount shown in the Company's accounts for sub-contractors was £164,680. It appeared that Mr Jackson had nothing to do with the accountant. The credit notes listed totalled £55,000.

(8) In relation to invoices issued by Texworld, Mr Rice questioned how invoices dated before 1998 could have had the correct name and VAT number. It was more likely that the invoices had been produced in 1998. He argued that on the same date as an invoice, a credit note had been given for the full amount; this appeared incredible. Mr Lawrence, a professional bookkeeper, should have known what was required for a VAT invoice; such an invoice could not even have existed on the date entered on these invoices. This called into question how the returns could have been prepared.

(9) Mr Rice also questioned what Mr Lawrence's motivation might have been in relation to the Company's affairs. The accountant had informed Mr Lawrence about the substantial error discovered in preparing the Company's accounts. Any reasonable person would have written to the Company advising it of the error. Mr Lawrence may have been trying to avoid a possible negligence claim.

(10) There was no evidence that Mr Jackson acted dishonestly when he signed the Company's VAT returns. The only foolish thing that he had done had been to employ the bookkeeper. There was no evidence of any credit note anywhere in the papers before the Tribunal.

(11) Mr Rice stressed the need for a high degree of probability, as referred to by Lord Bridge in Khawaja v Secretary of State for the Home Department [1983] 1 All ER 765 as cited in Ghandi at p 46.

Customs' reply

Ms Shaw responded on the following matters;

(1) It was not clear what the reference was to the failure to produce notes. This was supposition, without evidence. This was not relevant to the appeal.

(2) The question of the security deposit was no part of the present appeal, and should be disregarded.

(3) Reliance on the bookkeeper was the nub of the dispute; if Mr Jackson had given false invoices to Mr Lawrence, the fault and blame were with Mr Jackson and not Mr Lawrence.

(4) There was no record of the Company being subject to cash accounting.

(5) The figures in the Appendix to Officer Howlett's statement had to be added to those in Officer Zussmann's statement; this total was the correct figure.

(6) Ms Shaw was dismayed by the reference to the absence of records; Mr Jackson had signed a receipt dated 11 October 1999 acknowledging receipt of two computer disks which were copies of disks provided by Mr Lawrence relating to the accounts of the Company.

(7) It was contended that Mr Jackson was not involved in the accounts, but he had signed them at page 4, so this contention should be viewed with suspicion.

(8) The reference to a credit note in relation to Texworld conflicted with Mr Jackson's own evidence that the Company had not issued any credit notes.

(9) Nothing should be inferred from the non-appearance of Mr Lawrence as a witness. Mr Jackson's evidence did not support inferences of wrongdoing by Mr Lawrence. Mr Jackson's evidence in chief had not been strong, Mr Rice having led him and suggested points; in cross-examination, the answers had been far fetched and lacked credibility. He had failed to address key elements, the significant cash discrepancy and the failure to identify any single sub-contractor. (He had acknowledged that the latter failure was problematic.) His evidence had contradicted answers that he had given in his interviews. At best, his evidence was not convincing and at worst it was utterly false. Customs' case remained unchanged.