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Casa Frattini Ltd v Revenue & Customs [2008] UKVAT V20645 (11 April 2008)

20645

ASSESSMENTS – Making – Validity – Assessments made on Appellant – Appellant contends that trade was carried on by ex-director – Appellant was registered as taxable person in respect of business – Whether Appellant has established that business was carried on by ex-director and not by Appellant – Appeal dismissed

LONDON TRIBUNAL CENTRE

CASA FRATTINI LIMITED Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: SIR STEPHEN OLIVER QC (Chairman)

MRS RUTH WATTS DAVIES MHCIMA, FCIPD

Sitting in public in London on 6,7 and 10 March 2008

Vladimir Joannou, director, for the Appellant

Pauline Crinnion for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The Appellant, Casa Frattini Ltd ("CFL") appeals against assessments issued on 9 June 2005 and subsequently amended on 5 December 2006. The assessments covered the periods 03/04 to 03/05 inclusive. The amount assessed was £45,405 of tax plus interest of £2,271.61 totalling £47,676.62.

A misdirection penalty assessment has been raised for £8,133 covering the periods 03/04 to 06/05 inclusive. CFL has not lodged an appeal against the misdirection penalty. But if the appeals against the assessments succeed, the misdirection penalty will fall.

CFL has been represented by its current director, Mr Vladimir Joannou. He gave evidence. Evidence for the Respondents was given by Mr Michael Mallia, an officer of Customs who had visited CFL in 2005, and by Mr Umesh Patel, the officer of Customs with conduct of the present appeal.

The issue in essence is this. The assessments were made on the basis that CFL was making restaurant supplies (i.e. sales of food and drink to customers) in the course of its catering business. Mr Joannou contends that CFL never carried on any such business. It held a lease of the premises for part of the period to which the assessments relate; that was the extent of its involvement. The restaurant business, he contends, was carried on throughout by a Ms Lindair Cardoso. Ms Cardoso did not attend and give evidence nor was she represented. Our (and Mr Joannou's) understanding is that she is now living in Brazil.

We will start by summarising the facts relied upon by HMRC for the purpose of making the assessments. We will then summarise the circumstances which Mr Joannou relies upon and, where appropriate, comment upon these.

Facts relied upon by HMRC

HMRC's case is that CFL, a company incorporated on 21 August 2003, carried on business as a restaurant from premises at 104A Chepstow Road, London W2. Mr Joannou accepts that CFL is a company but, as noted, denies that it ever carried on any restaurant business from those premises or at all.

An application for registration of CFL (in Form VAT 1, received on 24 September 2003) shows "Casa Frattini" as a body corporate applying to carry on business as a "restaurant" at 104A Chepstow Road. It shows that the Applicant had a bank account and it is signed by Lindair Cardoso, describing herself as "Director". Registration was granted with effect from 21 August 2003, which happens to have been the date of CFL's incorporation.

On 3 February 2004 a nine-year lease of the Chepstow Road premises was granted to CFL with Lindair Cardoso joined as guarantor.

A VAT return made by CFL for the period 1 May 2003 to 31 December 2003 (submitted on 2 September 2004) showed a turnover of £188,000 and VAT due of £21,389. A cheque for £5,000 dated 1 September 2004 and made out in favour of "Customs and Excise" was signed by Lindair Cardoso. The cheque had been drawn on the "Casa Frattini" account, which was the business account notified in the VAT1 application made by Casa Frattini describing itself as a limited company

In the course of a visit conducted by Mr Mallia on 8 January 2005 to the Chepstow Road premises, Lindair Cardoso (described in the visit report as a "director") was questioned. The "trader's name" is noted in the visit report as CFL. Lindair Cardoso explained that she had been in Brazil for eight months, leaving her brother-in-law (Mr Domenico Frattini) in charge. The visit report notes that Lindair Cardoso had been named as defendant in three court summonses brought by suppliers. Annual accounts had not, according to Mr Mallia's note, been prepared and only a few recent bank statements had been made available.

The next Customs visit on 1 June 2005 showed that only the VAT return for 03/04 had been completed. Mr Mallia observed that the restaurant was in the course of refurbishment. It did not, he said in evidence, appear to have been shut for business. Assessments in the name of CFL were then issued for 03/04 to 03/05: the tax due was £11,011 per quarter. The visit report states:

"The trader does not appear to have enough assets to cover all the debts. She owes £10,000 to the Inland Revenue and another £6,000 to a fish supplier. She will owe over £55,000 in VAT once my assessment has been issued."

(The word "she" in the extract set out above was relied upon by Mr Joannou as indicating that the true owner of the business was Lindair Cardoso. Under cross-examination Mr Mallia denied that he had never intended to convey the impression that Lindair Cardoso had been carrying on the restaurant business. We are satisfied that, from the point of view of Mr Mallia, he had throughout been working under the impression that the actual owner of the business was CFL.)

In the course of giving evidence Mr Mallia said that he had spoken to Lindair Cardoso during the two visits. His understanding of what Lindair Cardoso had told him was that, before CFL took on the business, it had been run by Lindair Cardoso's husband and at one stage by a company, Santa Lucia Ltd, in which her husband had an interest. Mr Mallia had observed from his examination of the incomplete records that suppliers and utilities had, during the period covered by the assessments, invoiced Lindair Cardoso for supplies relating to the restaurant business. One of the purchase invoices (from BT for April 2005) had been issued to Mr D Frattini. Mr Mallia said he had looked at sales invoices to customers. These were headed Casa Frattini; they appeared to have tear-off slips at the foot which included the words "Casa Frattini Ltd trading as Casa Frattini".

On 17 February 2005 a letter was received by CFL's solicitors from solicitors apparently acting for NIFE Ltd. The text is headed Casa Frattini Ltd and it contains the following passage:

"Our clients offer of £150,000 is purely premium payable on the Lease. They are in no way taking over any assets or liabilities of the Company and are not interested in the Company."

On 29 June 2003 CFL (as seller) entered into an agreement with NIFE Ltd (as buyer) for the sale of the business of a licensed restaurateur carried on by the seller at 104A Chepstow Road under the name Casa Frattini. The agreement describes itself as "Business Sale and Purchase Agreement (Assets Only)" relating to Casa Frattini Ltd. The business is described as comprising the goodwill (which includes the exclusive rights to use the name Casa Frattini and to represent the buyer as carrying on business as successor to the seller), the stock, the fixtures and fittings and the lease. The price is £150,000. It is apportioned as to £4,999 for the goodwill, £1 for the stock, £45,000 for the fixtures and fittings and £100,000 for the lease. Annexed to the agreement which was signed by Lindair Cardoso were (i) an inventory specifying 15 items of fixtures and fittings, (ii) a document assigning the goodwill (coupled with an indemnity granted by CFL to NIFE in respect of outstanding debts and liabilities) signed by Lindair Cardoso and (iii) a form of transfer and an assignment of the lease signed by Lindair Cardoso as director of CFL.

On 30 June 2005 solicitors, stating that they were acting for CFL, wrote to Debt Management Unit. The letter said that CFL had sold the lease and that – "as we understand it the company stopped trading in March 2005"; the letter went on to offer payment of the outstanding tax by stages.

A letter of 8 July 2005 from the same solicitors acting for CFL written to "Debt Management Unit" stated that they were instructed to pay £10,000 immediately.

We were shown a number of sales invoices. Some of these had the attachment at the foot stating that CFL was trading as Casa Frattini; most did not have the attachment, but the photocopies of some of these invoices showed that the attachment had been torn off.

Based on the facts appearing to them from the visits and documents that they had seen, HMRC issued an assessment in the sum of £55,055 for the periods 03/04 to 03/05, being calculated (as already noted) as £11,011 for each of the five quarters. The amount was revised down to £52,846 in January 2006. The amount of £11,011 was taken from the amount of tax declared in the 03/04 return.

Comment

The facts set out above, if correct, are we think sufficient to establish that the assessments were on their face good. Mr Joannou contends that Customs have misunderstood the primary facts and had drawn the wrong conclusions from them. In the light of the circumstances that he drew our attention to, he contended that HMRC had failed to recognise that there was in law a difference between CFL as a company and Lindair Cardoso as the individual director of that company. The two should be regarded as separate entities. So regarded, the proper conclusion should have been that Lindair Cardoso and not CFL was carrying on the business. We are satisfied that the decision to make the assessments on CFL was taken with the full recognition that Lindair Cardoso and CFL were separate legal entities. There was no "piercing of the corporate veil".

Events after the end of the periods to which the assessments relate

Vladimir Joannou became director of CFL on 27 July 2005. Lindair Cardoso resigned at or about the same date. CFL had one share in issue; that share had been purchased from Lindair Cardoso for £1 and had, since 27 July 2005, been owned by J N B Company Services Ltd, a company controlled by Mr Joannou.

Letters dated 29 July 2005 record Lindair Cardoso as still a director of CFL informing the business bookkeeper and HMRC that International Corporate Restructuring & Insolvency Ltd (known as ICRI, a company that engaged Mr Joannou) was instructed to act in all matters concerning Lindair Cardoso's personal affairs and the affairs of Casa Frattini and CFL.

Asked about the purchase price of £1 paid for the one share in CFL at a time when £75,000 was still owed by NIFE as the outstanding balance of the purchase price under the Business Sale and Purchase Agreement. Mr Joannou said of the outstanding £75,000 that Lindair Cardoso (who had needed to return to Brazil for health reasons) did not have the resources to chase; Mr Joannou said that NIFE Ltd told him that it never intended to pay. He said that he saw it as an investment opportunity (to turn round the situation). (We have to say that we were not entirely happy about the role that Mr Joannou has been playing in these transactions. How did he know, within a month of the Agreement that half of the total consideration would be irrecoverable? What did Lindair Cardoso know of this? Why was ICRI engaged to look after the affairs of CFL, which included the opportunity to recover the £75,000 from NIFE and to recover the £10,000 already paid to HMRC, as well as looking after the affairs of Lindair Cardoso?)

A company called Let's Go All'Italiana Ltd with its registered office as 104A Chepstow Road applied to be registered for VAT with effect from 30 June 2005. The evidence produced by HMRC showed that this was in pursuance of a "Transfer going concern" (sic). The "Vision" entry of HMRC records that its "trading style" was to be Casa Frattini. The turnover was estimated as £250,000. Its financial statements for the period 25 February 2005 to 28 February 2006 were produced to us by Mr Joannou whose firm, ICRI, compiled them.

Mr Joannou wrote to HMRC on 8 August 2005 pointing out that, because of the apparent incompetence or negligence of a previous bookkeeper, accounts and returns had not been prepared. (Mr Joannou stated in evidence that the bookkeeper's incompetence had become even more apparent when he discovered that £5,000 was the price payable for releasing any documents in the bookkeeper's possession.) Mr Joannou's letter states that "from the documents in our possession it appears that the Company [CFL] has never traded … never had a bank account, never applied for trade credit, all supplies were to Casa Frattini, all bills issued to customers are in the name of Casa Frattini …".

In September 2005 Mr Joannou submitted a voluntary declaration reclaiming £21,390, being the tax paid for the 12./03 period.

A further letter from Mr Joannou to HMRC (addressed to Mr Umesh Patel who also gave evidence) dated 28 December 2005 stated that the bank account detail in the VAT 1 Application Form applying for registration had given Lindair Cardoso's account number; Mr Joannou also pointed out that the bills for Westminster rates, for water services and for gas had been addressed to Lindair Cardoso. Mr Patel responded on 16 January 2006 reducing the earlier assessments to take account of the centrally assessed assessments already on the file.

Mr Patel was unpersuaded by Mr Joannou's contentions. Mr Patel stated as much in a fully reasoned letter to Mr Joannou of 10 April 2006. A misdirection penalty was issued on 12 April 2006. Mr Patel made further enquiries and on 29 September 2006 he received a letter from NIFE with the heading "Casa Frattini Ltd". The letter contains the following statement:

"I … now enclose a copy of the Bills that were given to the Casa Frattini customers when the restaurant was run by Casa Frattini Ltd. I have also spoken to the former director and shareholder Ms Lindair Cardoso who it seems was misled by Mr Joannou into signing a share transfer form in his favour in July 2005. She is adamant that the restaurant was operated by the limited company and not by her trading as Casa Frattini which is why she made payments of VAT to HM Customs and Excise during the course of trading."

Mr Joannou asked us to disregard the contents of that letter. The writer, who described himself as a "counsellor-at-law" was (he said) in fact an ex-solicitor who had been removed from the roll. The counsellor-at-law had, Mr Joannou said, been an ex-associate of his professional practice, ICRI, and had been dismissed for forging Mr Joannou's signature on a reference document in an attempt to raise finance. The consequence, Mr Joannou said, was that the counsellor-at-law had an axe to grind. What is more, Mr Joannou said, NIFE had an interest in damaging CFL. CFL and Mr Joannou had sued NIFE in the London Mercantile Court and in February 2007 Mr Joannou had received summary judgment in the sum of £98,000. This, asserted Mr Joannou, showed that the court had taken an adverse view of the reliability of NIFE. (We cannot accept Mr Joannou's assertion which was made in the absence of any written reasons from the judge.)

Mr Joannou produced bank statements in the name of Lindair Cardoso. These (current account statements) cover the period from 20 April to 3 June 2005. Among the amounts received were payments from Cardnet (aggregating £5,001). The only agreement that Mr Joannou provided that related to Cardnet (a Lloyds Bank outlet) was dated 27 March 2003 and was signed by Lindair Cardoso, describing herself as a sole proprietor of Casa Frattini at 104A Chepstow Road. The agreement is said to cover card sales and gives £400,000 as the expected total card sales during the next 12 months.

Also provided by Mr Joannou was a Westminster Justice's Licence of February 2001 to sell intoxicating liquor. This names the licensee as Domenico Frattini and Guiseppi Frattini (whom we understand to be the brother-in-law and the husband of Lindair Cardoso). Mr Cardoso provided a remittance advice issued by a supplier to Casa Frattini dated 31 March 2003, presumably for supplies of food and invoices issued by NIFE for food dated 4 June 2003 and 12 January 2004. He also produced invoices issued by Othneil Shellfish Farms to Lindair Cardoso dated November 2003.

On 24 April 2006, in response to a letter from Mr Joannou, the counsellor-at-law wrote to ICRI. The letter was produced in evidence. The counsellor-at-law apparently held a power of attorney for Lindair Cardoso. The counsellor-at-law's letter refers to the evident conflict of interest in which Mr Joannou then found himself by acting for CFL, who (Mr Cardoso claims) never carried on the restaurant business and so could not have been taxable, and for Lindair Cardoso who (Mr Joannou contends) carried on the business at all times and so must have been taxable. The letter contains the passage:

"The papers that you have in your possession are – bank statements, copy invoices and related documents in respect of her trading as a licence to restaurateur at 104A Chepstow Road, court papers relating to actions brought against Casa Frattini (but specifically excluding please, any documents addressed to CFL)."

Mr Joannou emphasised the use of the words "her trading as a licence to restaurateur" and the fact that the actions referred to were brought against Casa Frattini. He also pointed to the remittance advices and invoices referred to in the previous paragraph of this decision. (The question for us will be whether those points, and the others relied upon by Mr Joannou, displace the conclusion reached by HMRC on the basis of the information set out at the start of this decision.)

The fact that Lindair Cardoso was invoiced by suppliers for supplies made to the Casa Frattini business and the fact that Lindair Cardoso was sued for non-payment of suppliers' invoices do not prove that Lindair Cardoso was carrying on the business and making the restaurant supplies as principal. While they are features that are consistent with Mr Joannou's claim that Lindair Cardoso had been trading as a principal and as a sole proprietor, the true position could be different. It could equally be the case that there was no proper organisation and control of the financial side of the Casa Frattini business; or, quite simply she was handling some of the business receipts and making some of the business payments, being receipts and payments that belonged to or had been assumed by CFL.

The same goes for the Cardnet receipts. The Retailer Agreement to which Cardnet was a party was with Casa Frattini; it was signed up in March 2003, some five months before CFL started business. Perhaps Lindair Cardoso was trading as the sole proprietor of the Casa Frattini business at that time. But the "hard" evidence shows that she signed the application for CFL to be registered for VAT; she signed the VAT cheque of £5,000 in respect of the CFL return for the period to 31 December 2003 and she agreed to sell the business to NIFE as a going concern.

Our overall conclusion is that Mr Joannou has not satisfied us that Lindair Cardoso should be regarded in law as the person making the taxable supplies from the Casa Frattini restaurant at 104A Chepstow Road. The case for CFL (and Mr Joannou as its principal shareholder) has been largely based on assertion backed up by the few pieces of evidence that have been identified above. The invoices issued to the customers may, in some cases, have lacked the statement at the foot that Casa Frattini was the trade name for CFL; but we cannot be sure from the few invoices we have seen is what actually happened when they were presented to the customer. We do not know what other indications there were within the restaurant, such as notices and menus that displayed (or might have displayed) who was actually making the supplies to the customers. We heard no evidence, other than that of Mr Joannou who had no first hand experience of the Casa Frattini business until July 2005.

In this connection we should mention Mr Joannou's assertion that the Business Sale and Purchase Agreement did not represent the true position. He said that the solicitors acting for the sellers had pulled an inappropriate draft out of the draw and used it, despite the fact that their instructions had been simply to sell the lease. He backed that up by referring to the offer letter of 17 February 2005 in which the solicitors acting for NIFE had offered £150,000 being "primarily the premium payable on the lease". We do not see that supporting Mr Joannou's case. In the first place the letter merely contains an offer and there is no suggestion, and certainly no evidence, that it was accepted. Secondly, the Business Sale and Purchase Agreement specifically divides up the four items that are to be sold to NIFE and apportions the overall consideration among them. That must, we think, represent the position as at June 2005 and it indicates that the original offer (in the letter of 17 February 2005) had not been acceptable to the seller. The way to resolve this would have been for Mr Joannou to have obtained a statement from the solicitor acting for CFL on that transaction. We can only infer that the solicitor was not called because he, in common with the counsellor-at-law, would not support what Mr Joannou was asserting. It is not enough to brand the counsellor-at-law as unreliable.

Mr Joannou drew attention to the fact that the letter of 30 June 2005 from the solicitors for CFL to Debt Management Unit had said that their understanding was that CFL had stopped trading in March 2005. If it had stopped then, argued Mr Joannou, how could there possibly have been a transfer of business as a going concern in June 2005? That does not really help Mr Joannou. The question for us is not whether there was a transfer of business as a going concern but whether Lindair Cardoso to the exclusion of CFL had been carrying on the business throughout all the periods to which these assessments relate.

With all those points in mind we do not accept CFL's case. We have been given no good reasons for varying the amounts of the assessments. We therefore dismiss CFL's appeals against both the tax assessments and the misdeclaration penalty.

Appeal dismissed.

SIR STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 11 April 2008

LON 2006/1402