United Kingdom VAT & Duties Tribunals Decisions

 


Suhail & Anor v Revenue and Customs [2006] UKVAT V19448 (02 February 2006)

19448

VAT PENALTIES — evasion — payment of central assessment — payment a mistake — intention to include amount of assessment in sum demanded by solicitors to avoid Winding-up Petition — assessment paid twice through inadvertence — credit balance with Customs thereby created — payment of assessment attributable to solicitors' demand and not to any intention to underpay VAT with knowledge of greater VAT liability — dishonest conduct for the purpose of tax evasion not proved — appeal against penalties allowed

MANCHESTER TRIBUNAL CENTRE

(1) ANJUN SUHAIL

(2) REBA TEXTILES LIMITED Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Michael Johnson (Chairman)

Arthur Brown FCA

Peter Whitehead FIMA

Sitting in public in Manchester on 28 – 30 November 2005

John Price, chartered accountant for the Appellants

Nigel Poole, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1. This is an appeal against penalty assessments for value added tax under section 76 of the Value Added Tax Act 1994 ("the Act"). The assessments are for a total of £56,216. Her Majesty's Revenue and Customs ("Customs") have, in alleging tax evasion as mentioned in section 60(1) of the Act, relied upon the purported dishonesty of the First Appellant Mr Anjun Suhail ("Mr Suhail"), as the managing director of the Second Appellant REBA Textiles Ltd ("REBA"), REBA being the taxpayer said to have evaded the tax. Mr Suhail is sought to be made liable pursuant to a notice under section 61(1) to (3) of the Act. It is his conduct that has allegedly given rise to the penalties appealed against.
2. The penalties relate to three VAT accounting periods of REBA, namely 10/97, 04/98 and 10/98. In opening the case for Customs, Mr Poole explained that, a week or so before the hearing and in the light of his advice, a decision had been taken by Customs not to seek to uphold before the tribunal the penalties for periods 04/98 and 10/98 respectively. The position is accordingly that Customs, who bear the burden of proof as provided by section 60(7) of the Act, have elected to offer no evidence in respect of alleged dishonest conduct for the purpose of evading VAT in relation to those two periods. That leaves 10/97 as the single period in issue.
3. The amount remaining in dispute is £12,386, being a penalty calculated at 40 per cent of the alleged maximum penalty of £30,966 for period 10/97, allowing for mitigation of 60 per cent. The entire £12,386 is sought to be recovered from Mr Suhail personally.
4. The tribunal heard oral evidence from two officers of Customs in support of their case, namely Mr Michael John Lloyd and Mrs Patricia Ann McErlain. Mr Suhail gave oral evidence for the Appellants. We also considered the contents of three ring binders of documents relevant to the appeal produced by the parties, and a chronology, skeleton argument and factual analysis prepared by Mr Price, who represented the Appellants.
5. We find that the origin of the allegation of dishonesty in issue in this appeal was a visit by Mr Lloyd to the premises of REBA on 24 June 1998. Mr Lloyd conversed with Mr Suhail and asked (as was a fact) why REBA had not submitted VAT returns in respect of its accounting quarters 10/97, 01/98 and 04/98. Mr Lloyd's report covering that visit states that Mr Suhail explained that this was because REBA was in course of being restructured and refinanced, and because it was in the process of computerizing its records. We find that, at times of cash-flow difficulty, REBA was accustomed to turn to another company active in the textile industry, namely Didsbury Textiles Ltd ("Didsbury") for finance.
6. Mr Lloyd's report further records that Mr Suhail stated that he had paid central assessments for VAT in the meantime, that Mr Lloyd replied that it was an "offence" to pay such assessments knowing that the VAT liability might be higher than assessed, and that Mr Suhail confirmed that he knew this.
7. Mr Lloyd's visit report for 24 June 1998 also covers two further visits he made to the Appellants on 1 July and 9 July 1998 respectively. We find that, by the time Mr Lloyd signed off that report on 10 July 1998, he had formed the view that Mr Suhail might well have paid central assessments for VAT knowing that REBA owed more VAT than had been assessed. However we also find that Mr Lloyd appreciated that REBA had continually written off bad debts. We find that Mr Lloyd must have known that, if bad debt relief was duly claimed and was allowed, this would have a significant effect on REBA's liability for VAT.
8. Mr Lloyd's report states that he discussed with Mr Suhail and REBA's bookkeeper Mr Khan the new procedures for claiming bad debt relief, and left with them a copy of Customs' Notice 700/18 (December 1997). In the light of cross-examination of Mr Lloyd by Mr Price, we find that, unfortunately, Mr Lloyd probably did not at the time fully appreciate the conditions for such relief, and we find that he did not adequately explain to REBA how its VAT position might be improved by claiming such relief. We are not satisfied that either Mr Suhail, who we find not to have been au fait with VAT matters, or Mr Khan, who was acting for the time being as REBA's bookkeeper but who was in reality not trained as such, understood the intricacies of claiming bad debt relief for VAT.
9. Mr Lloyd did not tell the Appellants that they should take accountancy advice as to their VAT liabilities, such as they might be.
10. Having formed a view that tax evasion appeared to be present, Mr Lloyd referred the case to Mrs McErlain at Customs' local fraud unit. She wrote to Mr Suhail on 14 October 1998 to request his attendance for interview at Customs' offices. She said in her letter that a serious view was taken of the non-rendering of VAT returns, and that, as Mr Lloyd had pointed out when he visited, "your actions may constitute a VAT offence". She said that the interview was in order that the possibility of an offence might be investigated by Customs, and she enclosed a copy of Customs' Notice 730 "Civil Penalty Investigations".
11. Mrs McErlain was a trained interviewer whose objective was to secure co-operation from taxpayers, in the form of admissions that could obviate the need to pursue tax evasion investigations beyond the interviewing stage. Mr Suhail duly attended on the morning of 21 October 1998 for interview by her at Customs' offices in Skerton Road, Manchester. He was unaccompanied. In conducting the interview, Mrs McErlain was joined by another Customs officer, Mr Kevin McAlinden. Both these officers asked questions of Mr Suhail as part of the interview process.
12. The interview was recorded. The tribunal was provided with a transcript of the interview, together with agreed corrections, and we also had portions of the recording of the interview played to us. The interview lasted 2 hours 26 minutes.
13. Despite the contents of the letter to him dated 14 October 1998, we find that the thrust of the interview with Mr Suhail was the assumption by Customs that an "offence" had been committed by him – meaning that dishonest tax evasion was present in his case. Accordingly, what the interview was concerned with was the scope for mitigation of the consequential liability to a penalty, achievable if Mr Suhail "co-operated".
14. The interview was aggressively conducted, in a hectoring, insistent manner. It proceeded at a fast speed. When Mr Suhail attempted to reply to the points made to him by the Customs officers, his answers were frequently cut off by one or other officer interrupting, so that Mr Suhail was not allowed to give a proper explanation of himself. In the latter part of the interview, both Customs officers joined in questioning Mr Suhail alternately. In our view, excessive persuasion was sought to be applied, and the atmosphere in which the interview was conducted was one of undue pressure exerted upon an unrepresented layman not versed in VAT matters.
15. Mr Suhail was not asked if he wished to have an adviser present at the interview. He was not given the opportunity to take accountancy advice before responding. Although, as mentioned above, there was an underlying assumption of dishonesty on his part, Mr Suhail was not informed of his common law right not to incriminate himself.
16. Extraordinary inducements were offered to Mr Suhail to admit dishonesty. For instance he was told that if he admitted dishonesty according to the criteria of Customs, it did not matter that he might not think he would be regarded as dishonest, since the admission would suffice to attract the mitigation of the penalty available under the civil investigation procedure. In other words, Mr Suhail was being invited to state that he was dishonest for the limited purposes of Customs whilst holding a genuine belief that the man in the street would not regard him as dishonest (compare R v Ghosh [1982] QB 1053 at 1064 C – D). Mr Suhail was also told that the admission on his part could remain confidential, ie that the contents of the interview need not see the light of day.
17. Notwithstanding the pressure under which he was placed, Mr Suhail protested that he was an honest businessman. We find that he said nothing at any stage of the interview to indicate dishonesty.
18. We find the manner in which this interview was conducted to be entirely unacceptable. We are very surprised that so little regard was paid to the elementary safeguards that exist in this country to ensure the fairness of such interviews and the reliability of such replies as may be given by the interviewee. We think that, had Mr Suhail admitted to dishonesty, he would have had a clear case for alleging coercion by his interviewers and that the replies obtained were given under duress. As it was, the interview ended without a result for Customs.
19. On 14 December 1998, Mrs McErlain wrote to Mr Suhail enclosing a "Schedule of Arrears" relating to periods 10/97 and 04/98, which she invited him to sign and return. She did this in a further attempt to induce him to "co-operate" and thereby obtain mitigation of the penalty "which will be based on Mr Lloyd's figures, ie what your records showed to be due at the time of his visit and on the dates [when] returns should have been submitted to Customs and Excise".
20. That letter, and a further letter from Mrs McErlain dated 12 January 1999, were clear in asserting that an assessment would be forthcoming based upon "Mr Lloyd's figures". We find that the intention was to get Mr Suhail to agree those figures.
21. Mr Suhail did not agree those figures. In a letter dated 15 January 1999, he accepted liability only for £22,484 of the £49,313 demanded (the £49,313 constituting £30,966 for the quarter 10/97 and £18,347 for the quarter 04/98). He returned the Schedule unsigned, describing the balance of £26,829 as not due, being "VAT on bad debts". In the letter he stated that £22,484 was –

" … the amount payable after the deduction of writing off of bad debts as advised by our auditors and accountants. In case you need any details of the make up of the figures, please contact our Accountants Ehsan Malik and Co."

22. Perhaps understandably after nearly seven years, neither Mrs McErlain nor Mr Lloyd had a clear recollection of this letter in giving evidence to the tribunal. It is, however, apparent to us that the letter was received, because we find that it must have been the letter referred to in the report of a further visit by Mr Lloyd to REBA on 17 February 1999. The report begins by stating –

"Visit at the request of [local fraud unit] to establish true debt before offence action can continue. Letter from trader dated 15/1/99 disagrees with our findings. … "

23. Mrs McErlain and Mr Lloyd could not explain to the tribunal why REBA's accountants had not been contacted to pursue the deduction alleged by Mr Suhail in his letter of 15 January 1999. Yet it must have been obvious that the justification for the deduction was asserted to reside in the hands of the accountants, seeing that they were stated to have advised it. It must further have been obvious that the deduction related to bad debt relief allegedly claimable, about which Mr Lloyd had originally advised – inadequately, as we have found – in June/July 1998.
24. Mr Lloyd, seemingly without having contacted the accountants for their input, identified a figure of £37,442 for bad debts at his visit on 17 February 1999. He did this on the footing that: "Since my last visit and letter issued Mr Suhail has failed to adopt correct procedures with reference to bad debts. Therefore nothing has changed … ".
25. Mr Price rightly points out to the tribunal that there can be no doubt that Customs were aware that bad debt relief ought to have been claimable by REBA. Quite why Customs were not in correspondence with REBA's accountants, from June/July 1998 onwards, with a view to quantifying this relief is a mystery. As we see it, there was no excuse, from the time of receipt of Mr Suhail's letter of 15 January 1999 onwards, for Customs not having investigated with REBA's accountants the impact of its bad debts position on its VAT liability, both in relation to the accounting period 10/97 and later periods.
26. Against this background, we come to examine the precise basis on which the penalty is still maintained by Customs in respect of REBA's VAT accounting period 10/97. That basis is a narrow one.
27. The alleged dishonesty is founded upon the payment by REBA of a central assessment in respect of REBA's VAT accounting period 10/97 at a time when Mr Suhail must allegedly have appreciated that the unassessed VAT owed by REBA to Customs was greater than the amount of the assessment. Such conduct has in the past been characterized as dishonest by other VAT & Duties tribunals, because taxpayers should notify Customs of their correct VAT liability, and not in effect evade their liability by paying only the amount actually assessed. However we do not find that the circumstances of the payment in the present case are indicative of dishonesty.
28. By October 1997, REBA's indebtedness to Customs had reached such a level that Customs instructed solicitors, Dibb Lupton Alsop of Bradford ("DLA"), to issue a Winding-up Petition against REBA in the High Court, Chancery Division, Leeds District Registry, on the ground that REBA was unable to pay its debts. The Petition, No 3077 of 1997, showed a total of £81,515.00 to be owed, including interest and default surcharges.
29. The copy of the Petition that we have seen bears the court seal, but the Petition appears to have been redated from 21 October 1997 to 16 December 1997. This postponement probably reflects the contents of a letter from Mr Suhail to DLA dated 22 October 1997, whereby he undertook that REBA would make twelve weekly payments on account of the debt, each payment to be £6,793.00 (the final payment to be £6,792.00). We conjecture that the Petition was initially held in abeyance pending the satisfactory fulfilment of that undertaking, and that the Petition was in due course withdrawn or allowed to be dismissed.
30. Customs' ledger shows that eight payments of £6,793.00 were made, the first of them credited to REBA's account on 27 October 1997 and the last on 28 January 1998. Taking account of the central assessment for £5,794.00 in respect of period 10/97 and a default surcharge for £869.10 imposed in respect of that period, both issued on 12 December 1997, and four small assessments for interest of £26.52 each, the overall debt due from REBA to Customs was by means of the payments mentioned reduced to £34,793.77 by 16 February 1998.
31. Customs then issued a central assessment in respect of REBA's VAT accounting period 01/98, and a default surcharge in respect of that period, so that the total amount due climbed to £41,424.67. That fact, coupled with the failure of REBA fully to perform the undertaking of 22 October 1997, appears to have prompted Customs to cause DLA to write to REBA on 26 March 1998, demanding payment of £41,424.67 within 3 days, if REBA wished to avoid another Winding-up Petition. That amount was the balance shown in Customs' ledger as due from REBA as at 13 March 1998. On 31 March 1998, as the amount demanded remained unpaid, Customs presented Petition No 1352 of 1998 in the High Court, Chancery Division, Leeds District Registry, to wind up REBA on the ground of its inability to pay its debts.
32. REBA went to its financier Didsbury to borrow the funds to pay the demand. The initial proposal, dated 12 April 1998, appears to have been that Didsbury would provide a loan of £40,000 in consideration of a series of eight weekly repayments by REBA to Didsbury of £5,000 each, to be paid together with reducing sums by way of interest on the amount of the outstanding loan. Then, on 18 May 1998, Didsbury appears to have agreed alternative terms with REBA whereby Didsbury would provide DLA with a cheque for £41,424.67 on REBA's behalf, in consideration of four weekly repayments by REBA to Didsbury of £12,378.01, £10,172.60, £10,115.07 and £10,057.54 respectively, including interest, those repayments to commence on 15 June 1998.
33. Meanwhile, REBA paid to Customs the sum of £6,663.10, consisting of the amount of the central assessment issued in respect of period 10/97 and the default surcharge for that period. That payment was credited to REBA's account with Customs on 15 May 1998. However both the central assessment and the default surcharge in respect of 10/97 formed part of the £41,424.67 in the course of being financed via Didsbury. It is clear that, pursuant to the arrangements dated 18 May 1998, REBA intended to pay the full amount demanded, and not just the net balance after deduction of the amount of the central assessment and the default surcharge in respect of period 10/97. The full amount was to be paid by Didsbury to DLA on REBA's behalf by one single payment.
34. On 18 May 1998, Didsbury drew a cheque no 20047 for £41,424.67 on its account with the Manchester Branch of the ABN-AMRO Bank, crossed "account payee" and made payable to DLA. That same day, Mr Suhail sent the cheque to DLA under cover of a handwritten letter, on REBA's letterhead, in which he stated that the cheque was sent – " … as full and final settlement of our outstanding debt". On 26 May 1998, Customs credited £41,424.67 to REBA's account with Customs. We find that Mr Suhail's intention, and that of REBA, was that the cheque from Didsbury should operate to pay the amount of the demand and every element of the indebtedness which gave rise to that demand.
35. Consequently the court dismissed Petition No 1352 of 1998, by Order of the District Judge dated 28 May 1998.
36. The question may therefore be asked, why did REBA pay the central assessment and default surcharge separately, a few days before the cheque provided to DLA by Didsbury? Unfortunately the only evidence put before this tribunal to answer that question is that REBA did not know what it was doing. Clearly, there was no intention to pay the assessment and the surcharge twice. The result of so doing was to create a credit balance with Customs of £6,610.06 in favour of REBA, immediately following payment of the £41,424.67. Mr Suhail told the tribunal that the overpayment was unintended, and we accept this, seeing that it is obvious that every penny counted so far as REBA was concerned.
37. That being so, we ask ourselves the question, were the Appellants dishonest in making the payment credited on 15 May 1998? We answer that question in the negative. We say this because it is clear to us that the intention was to discharge the indebtedness in full out of the money borrowed from Didsbury. The demand for payment by DLA and the commencement of the negotiations with Didsbury for financing the amount of the demand of course predated the payment credited on 15 May 1998, and the finance for affording the demand remained to be provided at that time.
38. In the event, no dishonesty is alleged by Customs in respect of REBA's further liability for VAT, ie for its accounting period 01/98 and thereafter. So far as concerns the period 10/97 and earlier periods, the intention behind the payment on 18 May 1998 was to discharge the full amount of REBA's historic indebtedness for VAT, which we are satisfied was what lay behind the payment of £41,424.67.
39. We therefore think that the most likely explanation of the payment of the central assessment and surcharge credited on 15 May 1998 is that a mistake was made. We cannot see that the payment was intended. We do not think that REBA could have meant to make that payment, in the absence of a contemporaneous belief on Mr Suhail's part that the £6,663.10 was to be excluded from the £41,424.67 paid a few days later.
40. There is no evidence before us to indicate that Mr Suhail might have had that belief, nor is there evidence to indicate that £41,424.67 might not, in Mr Suhail's contemporaneous opinion, have been the correct outstanding balance due as at 18 May 1998.
41. As it is, we would have expected Mr Suhail to have deducted the sum of £6,663.10 from the £41,424.67 paid had he appreciated that the £6,663.10 had already been paid. The conclusion that we have come to is that the payment of £6,663.10 was not, in the circumstances that we set out above, evidence of dishonesty on the part of the Appellants. On the contrary, the facts in our view show that REBA strove to pay the full amount demanded by DLA on 18 May 1998. When it did so, an unintended overpayment resulted.
42. It follows that, in order for Customs to succeed in this appeal, it must prove that the payment of £41,424.67 was dishonest. That amount was, however, what had been demanded in order to avoid the Winding-up Petition of 1998, and we cannot see how there could be anything colourable about the making of that payment. The payment was enforced, and consisted in effect of the price for obviating the placing of REBA into liquidation. We do not think that Mr Suhail ought at the time to have had in mind the payment of a different sum, on account of the VAT for the period 10/97 that REBA should have paid, because his concern was to pay the sum referred to in DLA's letter to REBA dated 26 March 1998, in order to avoid the consequences of non-payment expressed in that letter. Consequently there was no dishonesty inherent in the payment of that amount.
43. For Customs, Mr Poole drew our attention to previous decisions of these tribunals where the payment of central assessments was said to involve the dishonest evasion of tax, viz:

Robert Keith Johnson v The Commissioners of Customs and Excise VAT Decision 15868;

Frank Thornber v The Commissioners of Customs and Excise VAT Decision 16235;

Graham Storey v The Commissioners of Customs and Excise VAT Decision 17793; and

Mr Ian & Mrs Lesley Quinton v The Commissioners of Customs and Excise VAT Decision 19117.

44. Mr Poole submitted that, on the strength of these authorities, it is clear that payment of a central assessment, in the knowledge that a greater VAT liability ought to be disclosed by the taxpayer, can constitute dishonest conduct evidencing tax evasion. As the expression of a general principle, we agree with this. But the facts of each case must be examined to see whether they amount to a true illustration of this principle. We find that the facts of this case do not amount to such an illustration.
45. Mr Poole made other submissions that we find it unnecessary to consider, in the light of our primary finding as to the absence of dishonesty.
46. For the Appellants, Mr Price submitted that there was no evidence of dishonest intent on the part of Mr Suhail. We agree. We accept Mr Price's submission that, whilst Mr Suhail may have been somewhat naïve in VAT matters, his conduct was above board, and did not display such deviousness as would suggest dishonesty.
47. Mr Price further submitted that the approach of Customs, in particular Mr Lloyd, to the calculation of REBA's liability fell short of what the taxpayer had a right to expect. We agree. We think that had REBA's accountants been contacted by Customs and assisted to put forward a bad debt relief claim, the history of this matter might have been entirely different.
48. Mr Price further submitted that the circumstances of payment of the central assessment relied upon by Customs as evidence of dishonesty in fact disprove dishonesty. We agree. We think that, when the soundness of the penalty assessments under appeal was reconsidered a few days before the hearing of the appeal, the opportunity arose to identify the weakness of Customs' position as much in relation to period 10/97 as in relation to subsequent periods. The assessments in our view should have been withdrawn in their entirety.
49. Mr Price also drew our attention to mistakes made in the interview with Mr Suhail, to the unsatisfactory nature of the interview, and in a comprehensive way to a plethora of other mistakes and inadequacies on which the Appellants rely. Moreover both he and Mr Poole addressed us on the subject of mitigation. In view of our decision, it is unnecessary for us to deal with these matters.
50. For the reasons given above, we decide that Customs have not discharged the burden of proof incumbent upon them pursuant to section 60(7) of the Act. We therefore decide that neither of the Appellants is liable for any of the penalties assessed, in whole or in part. This appeal is allowed in full.
51. Mr Price indicated to us, at the conclusion of his submissions, that the Appellants would if successful be looking for payment of their costs, to be assessed on the indemnity basis. It may assist the parties to know that, in view of the outcome of this appeal, we are provisionally sympathetic towards this submission, because the penalties in respect of two of the three periods assessed were not pursued at the hearing at all, and the remaining penalty should have been seen for what it was, ie fundamentally unjustified.
52. We hope, therefore, that the Appellants' costs can be agreed and paid in early course by Customs to the Appellants' representative. If not, we grant leave for either party to have the appeal restored to the list for the purpose of argument as to costs in the light of our decision. If an order is made, we will also hear submissions as to whether the costs should be summarily assessed or referred for detailed assessment.

MICHAEL JOHNSON

CHAIRMAN
Release Date: 2 February 2006

MAN/2000/0864 & 0865