MRS GILLIAN ANNE Seggerappellant

010358 MRS GILLIAN ANNE SEGGER Mr M S Johnson Mr R Presho FCMA Newcastle upon Tyne 15 April The Appellant attended in person throughout and was represented by Mr P Cook, of PM Cook & Co, chartered accountants, at the adjourned hearing in April 2004 Mr N Poole, of counsel, instructed by the Solicitor's Office of HM Customs and Excise, for the Respondents M S JOHNSON

VAT PENALTIES — conduct involving dishonesty for purpose of evading VAT — lack of evidence implicating appellant — presumption of innocence accorded by article 6(2) of Human Rights Convention — danger of miscarriage of justice if appellant presumed to be partner in absence of evidence — appeal against penalty assessment allowed to the extent of reduction of penalty to nil

MANCHESTER TRIBUNAL CENTRE

MRS GILLIAN ANNE SEGGERAppellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISERespondents

Tribunal: Mr M S Johnson (Chairman)

Mr R Presho FCMA (Member)

Sitting in public in Newcastle upon Tyne on 15 April 2003, 14 October 2003 and 6 and 7 April 2004

The Appellant attended in person throughout and was represented by Mr P Cook, of PM Cook & Co, chartered accountants, at the adjourned hearing in April 2004

Mr N Poole, of counsel, instructed by the Solicitor's Office of HM Customs and Excise, for the Respondents

DECISION

Background to the appeal

1. The appellant in this case is Mrs Gillian Anne Segger (“Mrs Segger”). The following issues have arisen in her appeal:

a. whether assessments to value added tax under section 73 of the Value Added Tax Act 1994 (“the Act”) issued by the Commissioners of Customs and Excise (“Customs”) and made in respect of supplies allegedly treated as improperly zero-rated for the purposes of that tax, were justified;

b. whether there was dishonest conduct for the purpose of evading VAT such as to render Mrs Segger liable as provided in section 60(1) of the Act.

2. The background is that the business carried on under the style “N Segger Plant Hire” (“the business”) was registered for VAT by Mr Neil Segger (“Mr Segger”) as from 1 September 1987 [1]. The business was described in Form VAT 1 as a partnership. It provided earth-moving equipment for use on building sites. In the nature of that kind of work [2], some of the supplies made by the business fell to be zero-rated and some standard-rated. This appeal relates to supplies of the business which were treated as zero-rated when tax at the standard rate should have been accounted for in respect of them. The supplies in dispute were made during the three years of VAT accounting periods of the business beginning on 1 January 1997 and ending on 31 December 1999. The impact of the business having over-stated its zero-rated supplies during those periods was artificially to inflate the input tax due according to the VAT returns made by the business.

3. The appeal was lodged in the name of “Neil Segger Plant Hire” by Mr Segger personally. At the time that the appeal was lodged, on or about 30 April 2001, he was on the verge of being made bankrupt. His bankruptcy ensued on or about 18 May 2001. Mr Segger’s Trustee in Bankruptcy has not adopted the appeal and has played no part in it. This appeal has therefore been treated by the tribunal as having been maintained by Mrs Segger. Mr Segger has nevertheless accompanied his wife to tribunal and they have both been present throughout the hearing.

4. Mr Cook did not represent Mrs Segger before the tribunal when the appeal came on for hearing in April and October 2003 – his representation was at the April 2004 hearing only. Mr Poole of counsel has represented Customs before the tribunal at every stage.

5. Tax assessments in respect of the business were issued by Customs and notified to the business under section 73 of the Act. These totalled £133,051 plus interest. That total was subsequently reduced by £1,300. Customs also issued and notified to Mr and Mrs Segger a penalty assessment under section 76 of the Act in the amount of £119,745, that is to say £133,051 less mitigation of 10%. That assessment was subsequently reduced to £118,575. Those are the assessments before the tribunal, so far as they may relate to Mrs Segger.

The section 85 Agreement

6. The task of the tribunal has been facilitated by an agreement under section 85 of the Act reached on the penultimate day of the hearing, that is to say, on 6 April 2004. Under that agreement (“the Agreement”), the parties have agreed that the making of assessments by Customs under section 73 of the Act was justified but that the assessed total should be varied downwards to a total of £105,640. It has further been agreed that payment of the tax so due is to be made by offsetting the same against input tax totalling £106,178.15 properly claimed but not yet allowed. The parties have not agreed the question of liability under section 60 of the Act, and that important matter remains for determination by the tribunal. The effect of the Agreement is accordingly that, subject to the outcome of her appeal as to the penalty assessment, Mrs Segger will not actually have to pay Customs any of the tax assessed under section 73 of the Act. That being so, she has not as we see it accepted that anything is due from her, so we do not construe the Agreement as an admission of liability on her part.

7. Provision was made in the Agreement for its signature and acceptance by the Trustee in Bankruptcy of Mr Segger, and on 13 May 2004, Customs lodged at the Tribunal Centre a further copy of the Agreement dated 27 April 2004 signed by him as well as by Mrs Segger.

The outstanding issue for the determination of the tribunal

8. As to the basis of the appeal, so far as remaining to be decided, Section 60(1) of the Act provides that, 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. The only person who is alleged to have been dishonest is Mr Segger. When asked by the tribunal, Mr Poole made it clear that he was not alleging dishonesty against Mrs Segger.

9. Section 60(7) of the Act provides that, on an appeal against an assessment to a penalty under that section, the burden of proof as to (a) and (b) above shall lie upon Customs. In view of this, Customs presented their case first.

Evidence before the tribunal

10. Mr Poole called the following witnesses to give oral evidence on behalf of Customs:

Mr Michael Sean O’Flaherty, the assessing officer of Customs in respect of the section 73 assessments;
Mr Paul Vidler, an officer of Customs who investigated supplies made by the business at the request of Mr O’Flaherty; and
Mrs Victoria Robertson, a visiting officer of Customs who initially identified discrepancies and shortcomings in the accounts for the business.

11. The tribunal had the benefit of two large lever-arch files of documentation prepared by Customs, plus a smaller supplementary file, a separate clip of invoices, and loose copies of correspondence and schedules referred to during the course of the hearing. The supplementary file contained transcripts of interviews attended by Mr Segger, the contents of which were expressly accepted as accurate by Mr Cook [3]. Indeed he told us that the contents of all the bundles were accepted at face value. That therefore means that Mrs Segger accepted as correct the witness statement dated 15 January 2004 of Dawn Hargreaves, VAT Manager of Carillion Construction Ltd, and that dated 6 January 2004 of Rodney Stanley Ashford, Group Taxation Manager of George Wimpey plc, copies of both of which were included in the second large lever-arch file.

12. The acceptance by Mr Cook of the contents of the bundles moreover means that Mrs Segger has recognized that Mr Segger described himself to Customs, in the interview he had with Customs in October 1999, as being in partnership with her [4]. In that interview, he described her as a partner who had never done anything in the business – a “sleeping” partner. However the fact that Mr Segger described Mrs Segger as his partner does not, of course, mean that she has acknowledged that that is what she was.

13. The supplementary file contained a witness statement from Mr Vidler dated 6 August 2003 which he proved in oral evidence. Mr Vidler was not cross-examined. Mr Cook had the opportunity to cross-examine Mr O’Flaherty and Mrs Robertson, which he took.

14. When it was Mr Cook’s turn to call witnesses and present evidence, he elected to call no evidence. Accordingly the tribunal has not had the benefit of hearing from either Mr or Mrs Segger, although, as mentioned above, they were present throughout the hearing.

The facts

15. We find the following facts.

16. The penalty assessment was dated 20 June 2001. It accordingly post-dated the notice of appeal, which related only to the section 73 assessments. No attempt was made to appeal against the penalty assessment until the first hearing of the appeal on 15 April 2003. On that occasion the tribunal directed that it would entertain an appeal out of time against the penalty assessment, on terms that a pro forma notice of appeal dated that day be signed and left with the clerk to the tribunal for conveying to the Manchester Tribunal Centre. That was done, and the hearing of the appeal against the penalty assessment was thereupon commenced.

17. We find that in 1986 and again in 1988 Mr Segger was visited by Mrs E Foster of Customs [5] about his VAT affairs. She wrote letters to him in which she stressed the need for him to keep records. In her letter to him dated 27 September 1988, she wrote:

“On my visit of 7 September 1988 it was discovered that you have continued to omit zero-rated sales from your VAT returns and do not keep a proper record of these… In the event of further failure to keep proper records, it may be necessary to report the matter.”

18. On 21 October 1997, Mrs Robertson visited the business in order to verify the correctness of its VAT returns. She discovered that there existed unsubstantiated zero-rated supplies which were contended to have been made. She discussed that matter with Mr Segger, and telephoned his accountant Mr Cook, who explained to her that the records of the business were incomplete. Subsequently she met Mr Cook. He failed to produce invoices on the basis of which complete records could be constructed.

19. One reason given for the lack of records was that zero-rated supplies in the building industry are commonly covered by Inland Revenue “715 certificates” [6] and are hence not made the subject of separate invoices. However we find that there was a failure to issue invoices to main contractors who should have received invoices.

20. We moreover find that it is not correct [7] that the business consisted solely of undertaking ground works, so that all the income of the business was properly zero-rated. A glance at the VAT returns of the business suffices to show how stark the position of the business was alleged to be. Between period 03/97 and period 03/99, the only output tax accounted for was the amount of the quarterly fuel scale charge for vehicles (i.e. £35, subsequently £56). Each quarterly return therefore included a substantial repayment claim. Customs were therefore being asked to accept that there were no standard-rated supplies made by the business at all during two years.

21. Such was the situation handed over by Mrs Robertson to Mr O’Flaherty for investigation. He interviewed Mr Segger in October 1999 and obtained copies of invoices and purchase ledgers. He noted that some invoices were hand-written and some type-written, and commenced the process of constructing schedules of items declared and undeclared. This was protracted and time-consuming work. During the course of Mr O’Flaherty’s efforts, Customs were in contact by correspondence with Mr Fleming of Armstrong, Watson & Co, Chartered Accountants, representing the business. We find that Mr Fleming was co-operative. In particular, by a letter to Mr Simmons [8] of Customs dated 12 February 2001, Mr Fleming wanted to try to resolve matters and offered inspection of invoices at the accountants’ Northallerton office. We find that for some reason that offer was not taken up.

22. Customs’ investigations demonstrated conclusively that both zero-rated and standard-rated supplies were made by the business. Comparisons were made between the annual accounts of the business and its VAT returns. Mrs Robertson had occasion to raise VAT assessments on the business for periods in 1995 and 1996. She did that in 1998 [9]. An inhibition was placed by Customs on meeting the repayment claims included in the VAT returns being rendered by the business. The industry of Mr O’Flaherty and Mr Vidler produced clear, unequivocal evidence that supplies were made by the business to contractors who were liable for VAT on those supplies at the standard rate. Those contractors included Wimpey Homes North East, McLean Homes North East, Carillion Construction Ltd (formerly Tarmac), and a number of others.

23. The tribunal has the disadvantage of not having heard from either Mr or Mrs Segger in evidence. It appears however to be the position that Mr Segger entrusted the preparation of some (but, as appears below, far from all) invoices for the business to an employed bookkeeper by the name of Christine Carbert (“Christine”). We have not, of course, heard from Christine. On the strength of the oral evidence we have heard, we would not be in a position to make findings of fact as to the extent to which Mr Segger might in practice have been responsible for the generation and preparation of invoices, and to what extent those things might have been delegated to Christine.

24. However, we do have the contents of the bundles, which are agreed at face value. From such contents, we are able to make findings as follows:

a) Mr Segger’s case was presented by his accountant to Customs [10] as being that, prior to 1999, the business made nothing but zero-rated supplies – we have found this to be manifestly incorrect;

b) Allegedly, so it was initially said, he turned to making standard-rated supplies with effect only from early 1999, which explains why his VAT returns from then onwards accounted for output tax [11] in a way they had not done previously – but we note that the loose schedule referred to in paragraph 27 of this Decision comprehensively demonstrates the spuriousness of this suggestion;

c) Mr Segger told Customs when interviewed in October 1999 [12] that the VAT returns of the business, including the output tax figures, were completed by Christine from information passed to her by him;

d) In a subsequent interview with Customs held in December 1999, Mr Segger maintained that he began making standard-rated supplies in 1996/97 [13] – that was clearly a change of story from what, via his accountant, he had previously put forward;

e) Mr Segger further accepted that he made out hand-written invoices himself, so that Christine was not in sole charge of that side of the business [14], also (at a subsequent interview held with Customs in March 2000) he accepted that hand-written invoices constituted 75% of the total [15] ;

f) It was also accepted that Christine would have no knowledge of which invoices bore VAT and which did not, and that Mr Segger made such decisions on behalf of the business [16] ; and

g) It was also accepted that Christine had entered contra-charges (i.e. inputs) into the VAT account when the account was silent as to outputs in respect of the same supplies [17] .

25. Given that Mr Cook informed the tribunal that there was no dispute as to the correctness of the transcripts of the interviews, the above matters do in our view suffice to present an adequate impression for present purposes of the degree of involvement of Mr Segger and Christine respectively in the VAT side of the business.

26. Although lacking complete information as to the affairs of the business, Mr O’Flaherty did what he could to reconstruct the full picture by employing methods of his own devising to calculate the proportions of zero-rated and standard-rated supplies respectively surmised to have been made by the business in the years 1997, 1998 and 1999. He based the section 73 assessments on those calculations.

27. Mr O’Flaherty first gave evidence to the tribunal on 15 April 2003. He was still giving evidence on the last day of the hearing, 7 April 2004. By that date, he had had an opportunity to revisit his calculations. He produced to the tribunal a Schedule of Arrears (“the loose schedule”) representing Customs’ final position as to the tax due. The loose schedule had been available on 6 April 2004 for discussion between the parties. It led to the Agreement.

28. The loose schedule shows how the under-declaration of £105,640 mentioned in the Agreement has been totalled. Given that the loose schedule is an agreed document [18], it is of academic interest only for us to note the derivation of its contents. We nevertheless record that we were taken through the loose schedule by Mr O’Flaherty in evidence, and we are of the opinion that it incorporates the best evidence that it has been possible to procure as to the value added tax position of the business in each of the years 1997 to 1999, and contains a reasonable and defensible analysis of how the bottom-line figure of £105,640 due has been arrived at.