18279

CIVIL EVASION PENALTY – whether sufficient proof that appellant was dishonest – no

LONDON TRIBUNAL CENTRE

CHRISTOPHER KILLICK ELLISAppellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISERespondents

Tribunal:DR JOHN F AVERY JONES CBE (Chairman)

JOHN N BROWN CBE FCA ATII SHAHWAR S SADEQUE MBCS

Sitting in public in London on 17-19 June 2003

Christopher Prince, Prince-Martin & Co Ltd for the Appellant

Jeremy Hyam, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

1

DECISION

  1. This is an appeal by Christopher Killick Ellis against a civil evasion penalty for failing to register for VAT at the correct time, originally of £25,232 and subsequently reduced to £15,122, both of which figures include 50% mitigation. The Appellant was represented by Mr Christopher Prince and the Commissioners by Mr Jeremy Hyam.
  2. We heard evidence from the Appellant, his accountant Mr R White, and from three officers of the Commissioners, Mrs M. O’Brien, Mrs K. Wyatt and Mr M Webb.
  3. Mr Prince submitted as a preliminary issue that transcripts of two interviews should be excluded on the grounds that a civil evasion penalty was a criminal charge for Human Rights purposes and the Appellant had not been told of his right of silence. Mr Hyam contended that the interviews were on 18 March 1999 and 20 October 1999 before the Human Rights Act 1998 and the only grounds for exclusion were that its prejudicial effect exceeded its probative value (R v Sang [1980] AC 402). After hearing evidence from the Appellant and Mrs Wyatt we decided to admit the transcripts of the two interviews into evidence. We did not state our reasons at the time but our principal reason was that Mr Prince had criticised some aspects of the conduct of the interviews and we considered from what we then knew that it might be in the Appellant’s interests that we saw the whole picture in spite of the fact of the interviews containing admissions by the Appellant. Having heard the whole case, we would probably have decided to exclude the transcripts. As it is, reading the transcripts gave us a useful understanding of the case and for reasons that we shall explain later we shall place no reliance on them.
  4. The following facts are not in dispute.

(1)The Appellant carries on an equestrian business as a sole trader under the name Hangleton Farm Equestrian Centre providing livery, riding lessons and riding holidays.

(2)The Appellant had been registered earlier but had been de-registered following a visit by the Commissioners. The letter dated 29 March 1983 de-registering him states: “You are no longer liable or entitled to be registered for the purpose of Value Added Tax, and your registration is cancelled with effect from 1 April 1983.”

(3) On about 16 March 1998 the Appellant applied to be registered for VAT stating that he intended to start making taxable supplies on 1 March 1998 and that estimated taxable supplies in the following 12 months was £100,000. He was registered from 1 March 1998.

(4)An assessment for £127,310 was made on 13 October 2000 covering the period from 1 November 1990 and later withdrawn on Mr Prince agreeing a VAT liability of £33,262. The 1990 registration date was not changed, although both sides now agree that it was wrong.

  1. Section 60 of the VAT Act 1994 provides:

“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…to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct….

  1. It is not disputed that the meaning of dishonesty is that the Appellant “knew that according to the ordinary standards of reasonable and honest people what he was doing would be regarded as dishonest.” (R v Ghosh [1982] QB 1053, applied in this context in Stuttard v Customs and Excise Comrs [2000] STC 342). The burden of proof is on the Commissioners to show dishonesty on the balance of probabilities to a high standard.
  2. The Commissioners started an investigation of unregistered businesses in the animal husbandry industry, such as equestrian establishments and kennels. Mrs O’Brien and Mr Webb claim to have visited the Appellant on 20 January 1998 which the Appellant denies that the visit took place. Mr Prince had great difficulty in obtaining the Commissioners’ evidence of this visit. He requested it by letter on 12 September 2002, and at a hearing on 1 October 2002 the Tribunal directed it to be provided by 29 October. A further request was made by Mr Prince on 21 January 2003 and again on 7 February 2003, with a further request for Mr Webb’s notebook on 11 March 2003. Mrs O’Brien’s diary for the day in question was produced without notice at the hearing, which the Tribunal considers unfortunate in the light of all Mr Prince’s efforts to obtain information in advance. The Tribunal will accordingly ignore the diary as evidence of the visit. Both Mrs O’Brien and Mr Webb said that they remembered the unusual feature that the Appellant was on a horse throughout their conversation. Mrs O’Brien remembers the Appellant‘s use of the phrase “exemption papers” meaning papers relating to his previous de-registration. The Appellant said that this was unlikely, particularly as it would have been cold outside on 20 January. What is unsatisfactory is that the Commissioners have no documentary record of the visit other than a sheet headed “Ellis Casework Details” which is a summary of the Commissioners’ investigations without any background supporting papers. This document was kept in manuscript and typed in January 2000 with the manuscript then being destroyed. The officers state that there were notes taken at the meeting on a piece of paper attached to a clipboard, which was subsequently thrown away. Had they kept the original records, the dispute about the visit would have been avoided. As recorded below the next step taken by the officers was a telephone call to the Appellant’s accountant, Mr White, whose details we presume were given by the Appellant. We find that on balance such a visit did take place.
  3. The next steps taken recorded on the Ellis Casework Details were that on 10 February 1998 Mrs O’Brien spoke the Appellant’s accountant, Mr White. The Ellis Casework Details records: “White agreed that Ellis should be VAT registered. He did not know of any exemption papers. White was happy to establish the different types of income but said that he would need some considerable time as the books were in a mess, allowed six months.” On 19 August 1998 the Ellis Casework Details record: “White called me back. I pointed out that Ellis was now registered for VAT and asked what had prompted this. White said it was the visit we made but also said that he had told Ellis to register some time ago, he could not explain the long delay between him offering this advice and the actual registration. White said that he had scheduled out the riding school income. He said that the school started in 1992 and for the y/e 1993 the income for the riding school was £7,590 and for y/e 1994 it was £62,000 and that it rose rapidly after that to £154,000 for y/e 1997.” Mr White has no recollection of these telephone conversations but he is now aged 70 and semi-retired.
  4. Again the only record is the Ellis Casework Details. In the light of there being no supporting contemporary records we find these notes surprising. The fact of the telephone call helps to show that the intitial meeting with the Appellant took place and at the meeting Mr White’s particulars were given. However, for Mr White to agree in the course of an initial telephone conversation that his client should be VAT registered when he was aware of the previous deregistration is odd. It is even more odd that in the second telephone call he should volunteer that he had advised his client to register some time ago, which is completely contrary to his duty to his client. If such a statement had been made it was crucial to the Commissioners case on dishonesty and evidence in the form of the Ellis Casework Details is not good enough. In the circumstances, we place no reliance on these records of telephone conversations.
  5. Also on 19 August 1998 the Ellis Casework Details records: “Visited I/R [Inland Revenue] Worthing with K Wyatt. Picked up copies of annual accounts showing T/O in excess of reg limits as far back as 1992. KW went on to the planning department at Arun DC but no extra info was gained.” We find this information strange. Since the officers were engaged in an exercise relating to the animal husbandry industry they would have known that the livery income, at least for DIY livery, was exempt and so the relevance of the turnover in the accounts for 1992 is not clear. We fear that it meant that the Commissioners were not later willing to consider whether exemption applied in an open-minded manner. It is also not clear what information led them to make enquiries of Arun District Council. The Appellant did mention in the first interview on 18 March 1999 that he did not in 1997 have planning permission to run a riding school. In the second interview on 20 October 1999 Mrs O’Brien told him that she had “spoken to Arun District Council, the Environmental Health People, this was way back. I’m afraid that not only did they have no record of the Safety Inspection at your premises, they also have no record at all that you are even holding holidays there.” The enquiry of the District Council in August 1998 was “way back,” but how did Mrs O’Brien then know to ask questions about riding holidays? This suggests that she had information not included in the Ellis Casework Details, or that another approach was made to the District Council. This is another unsatisfactory feature of the lack of underlying documents, as a result of which we place little reliance on the Ellis Casework Details document.
  6. On 11 September 1998 Mrs Wyatt carried out a registration visit to the Appellant. The visit report records the reason for registration that he had decided to change the livery and now charged VAT on all livery services. It also records that additional business income is received from horse-riding holidays for children which had started that summer.
  7. On 1 October 1998 Mrs Wyatt and Mrs O’Brien visited Mr White. The visit report states: “Mr White informed myself and Mrs O’Brien that he had advised Mr Ellis on a number of occasions that he needed to be registered for VAT, but Mr Ellis claimed that he didn’t have to.” The original Statement of Case referred to a “statement by the accountant” which Mr Prince had taken to mean a witness statement which he asked for. The Statement of Case was later amended to refer to this visit report. Mrs O’Brien’s contemporary note of the meeting records: “RW [Mr White] showed correspondence file and said he had been approached by CE [the Appellant] after CE had received a visit from two officers asking him if he was VAT registered, RW said that CE had ‘panicked’ and told RW that he should be VAT registered. MO [Mrs O’Brien] asked RW if him (sic) and CE had ever discussed VAT, RW said that he had raised the subject of VAT registration with CE every year when he did the accounts but CE had always claimed he had ‘clearance’.” Again the statements are odd for an accountant to make, particularly so as at the time Mr White has sold his practice and was working as a consultant to the new firm. One would expect that what Mr White said was rather important evidence for the Commissioners but they made no attempt so far as we are aware to obtain his agreement to the visit report, probably because they hoped to obtain admissions from the Appellant. We heard evidence from Mr White who does not recollect the statement. His evidence, which we accept, is that he helped the Appellant fill in the registration form on the Appellant’s instructions. In the circumstances we cannot place any significant reliance on it in determining whether the Appellant was dishonest.
  8. On 22 October 1998 the Ellis Casework Details record: “KW and MO visit Chichester library to examine back copies of West Sussex gazette horse news. Substantial evidence to show late reg’n, and existence of taxable supplies long before EDR, Ellis had asserted at visit that business had completely changed, i.e. that before EDR it was all exempt DIY livery.” We regard this as further evidence that the officers were convinced about the Appellant’s guilt before they had taken the trouble to sort out the extent to which exemption applied to his supplies
  9. The events leading up to the first interview were that the Appellant was in correspondence with Mrs Wyatt about the difference between cheques banked and recorded takings, which she had asked for at the registration visit on 11 September 1998. He had also written claiming that riding lessons were exempt, giving the name of another establishment, the South Humberside Equestrian Centre, where this had been accepted by the Commissioners. She replied on 1 December 1998 asking a further question about the cash difference, and asking for the address of the South Humberside Equestrian Centre. She gave some information about exemptions first as a non-profit making organisation, and secondly as private tuition. As to the latter she correctly said that “you as a private teacher must work in a private capacity” and that the exemption did not apply if the lessons were provided either by an employee or a partner (in fact, although immaterial to this case, this is wrong about partners, but that was the Commissioners’ then policy). She continues “Therefore under these circumstances you do not qualify for exemption, and your supply is standard rated.” Mrs Wyatt commented at the hearing that the Appellant never told her that he gave lessons himself. It seems to us that the situation is the other way round: it was more likely than not that the Appellant, who is apparently well-known in equestrian circles, as a sole trader, would have given some lessons personally. We consider that the correct reply would have been that the Appellant might be exempt under this item and that he should provide full details. Before the Commissioners give such firm advice that exemption does not apply and start investigating penalties for dishonestly failing to register, we think that they should take the trouble to find out the facts. It was agreed during the hearing that lessons given by the Appellant personally were exempt but we were in the difficulty that we had no agreed figures about how much was done by the Appellant personally. The situation is more serious than a matter of figures because this difference meant that the Appellant was contending for a registration date of 1 April 1996 and the Commissioners for 1 April 1994 and the task facing the Tribunal is to find whether the Appellant had been dishonest in not registering until 1 March 1998.
  10. The Appellant wrote an undated letter that Mrs Wyatt received on 26 January 1999. He said that he was in correspondence with the South Humberside Equestrian Centre and said that he would forward this. He said “The one point of which I am confident is that to be ‘a non-profit making organisation’ is no longer a pre-requisite for exemption.” Mrs Wyatt wrote again on 28 January 1999 again asking for details of the South Humberside Equestrian Centre, dealing with the non-profit making organisations point by enclosing a notice on Sports and Physical Education. She comments on the educational exemption by saying “As I have previously stated your supplies are not that of private tuition and therefore are standard rated.”
  11. Pausing there, a normal correspondence about VAT liability is being carried on. We place particular reliance on the correspondence as it is contemporary and was written by the Appellant before he realised that he was under investigation by the Commissioners. We consider that his belief in riding lessons being exempt was genuine, having put it forward on two occasions in correspondence, although he was only partly correct and was given wrong advice by Mrs Wyatt twice. So far as liability on livery activities is concerned the Commissioners had previously de-registered the Appellant and he considered that nothing had changed since that time.
  12. In the last, the sixth, paragraph (ignoring an introductory paragraph) of Mrs Wyatt’s letter, after dealing with invoices, capital introduced, and exemption for riding lessons she states: “In order to further our enquiries I would be grateful if you could contact myself of Mrs O’Brien to arrange a mutually convenient date for you to attend this office for a formal interview.” Such a paragraph would have rung alarm bells for a professional adviser, but the Appellant told us, and we accept, that he thought that it was a meeting to sort out the remaining differences. As a way of inviting the Appellant to an interview to investigate dishonesty we consider that this letter is open to criticism. The Commissioners rightly mitigate penalties for a taxpayer who attends an interview.