CIVIL EVASION — penalty — dishonest conduct —Appellant paid centrally-issued assessments which under-estimated his true liability — whether evasion — yes — whether dishonest — yes — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	JOHN BLACKWELL	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Lady Mitting (Chairman)
						Mrs M Kostick FCA ATII
						Mr R Grice

Sitting in public in Birmingham on 9 February 2004

The Appellant appeared in person 
Mr T. Sadiq of counsel instructed by the Solicitor for the Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2004

DECISION

1.	Mr Blackwell was appealing against a civil evasion penalty in the sum of £15,321 notified to him on 29 January 2001.  The penalty was raised pursuant to s. 60(1) VAT Act 1994 (the Act) and apportioned to Mr Blackwell under s. 61.  The penalty had been mitigated by 75% and covered tax periods 02/98 to 12/99.
2.	Mr Blackwell appeared in person and gave oral evidence.  On behalf of the Commissioners we heard oral evidence from Mr Stuart Fletcher who had interviewed Mr Blackwell and on whose recommendation the penalty was raised and mitigated.
3.	The essence of the Commissioners’ case was that Mr Blackwell had paid centrally issued assessments over a number of tax periods knowing that such assessments under-estimated his true liability.  Mr Blackwell maintained that in so doing he had not acted dishonestly.  He did not challenge the Commissioners’ decision to apportion the penalty to him personally.
4.	Mr Blackwell was at all material times the director of Electrical Contracting (Midlands) Ltd.  The company had registered for VAT with effect from 4 July 1997 and de-registered on 21 December 2000 after having been wound up on 23 October 2000.
5.	On 21 February 2000, Ms Sarah Bates had carried out a VAT assurance inspection at the company.  This had been prompted because the company had submitted no VAT returns since registration but had, however, paid all the centrally issued assessments.  By the time of Ms Bates’ visit, the company’s books had been made up and in the course of the visit she was able to complete the returns for all quarters.  In so doing, she identified that the true liability was considerably in excess of the centrally issued assessments.  The respective amounts can be seen from the following table.
Period	Central  Assessment	Amount due	Shortfall	
02/98	518	6002.53	5,484	
05/98	566	265.25	—	
08/98	574	7008.10	6,434	
11/98	592	6056.02	5,464	
02/99	556	17692.57	17,136	
05/99	731	9220.67	8,489	
08/99	857	7,612	6,755	
11/99	1,016	12,304.24	11,288	
12/99	409	652.38	243	
				
6.	Because of the amount of the discrepancy, Ms Bates referred the matter to Mr Fletcher.  Mr Fletcher wrote to Mr Blackwell on 8 June 2000 inviting Mr Blackwell’s co-operation in his investigation and sending him a copy of the VAT Notice 730 “Civil Evasion Penalty Investigation – Statement of Practice”.  Mr Fletcher also contacted the company’s accountant, Mr Rice.  On receipt of Mr Fletcher’s letter, Mr Blackwell telephoned Mr Fletcher and a meeting took place on 11 July 2000.  At the meeting, Mr Blackwell confirmed that he had understood Notice 730 and that he was willing to co-operate with the investigation.  Mr Blackwell and Mr Fletcher discussed the reasons behind the non-rendering of the VAT returns, which Mr Blackwell attributed to a mixture of bad debts, lack of time and illness.  Mr Blackwell confirmed he was aware that VAT returns should have been rendered but that for cashflow reasons the money collected in was used up for other purposes within the company.  Mr Blackwell was somewhat vague on dates during the meeting and Mr Fletcher agreed to write to him setting out what further information he needed.
7.	Mr Fletcher wrote to Mr Blackwell by letter dated 13 July 2000 asking, inter alia, when Mr Blackwell had first become aware that the central assessments were less than the true liability and how he became so aware.  Additionally he asked for details of any significant unpaid debts during the period.  Mr Fletcher had to write a number of reminders until he eventually received a response from Mr Blackwell by letter dated 30 October 2000.  Mr Blackwell wrote that he had become aware that the assessments were less than the true liability in approximately September 1999, this having been brought to his attention by Mr Rice, and he set out details of a significant unpaid debt in the sum of approximately £30,000.  On receipt of this letter, Mr Fletcher arranged a formal taped interview with Mr Blackwell, again with Mr Blackwell’s full co-operation.  Mr Blackwell was again issued with a Notice 730, which he confirmed he understood and he indicated that he wished to proceed.
8.	In the course of the interview, Mr Blackwell accepted that the keeping of the books and records for the company was his responsibility and that he had been involved in an earlier company in which he held the same responsibilities but which had also gone into liquidation.  Mr Blackwell showed a clear understanding of the way in which the VAT system worked.  The picture that emerged from the interview was of a company getting into an ever-worsening financial position; the books were not being kept up-to-date; Mr Blackwell was certainly becoming aware that a VAT problem was building up but it was always his intention that when he had got things straight he would get the books made up and the VAT returns seen to.  Mr Blackwell accepted that he had become aware that he owed rather more than was being centrally assessed and that it was going to be a big deficit.  He accepted using the money which he had collected in as VAT for other purposes within the business, particularly the purchasing of materials, which he thought would lead to further business thus enabling him to pay back the VAT.  Mr Blackwell accepted that he knew that this was not the right way to deal with his VAT affairs and he also accepted that, although he certainly had not at the time intended to act dishonestly, he could see that in fact his conduct had not been wholly honest.
9.	In his oral evidence, Mr Blackwell denied that he had acted dishonestly.  He accepted he had been foolish and his conduct had been improper but not dishonest, even though he could see now that what he had done was wrong.  In cross-examination, he accepted that he could understand the Commissioners inferring dishonesty from his conduct; he accepted using his VAT monies to fund other activities within the business and that the result of this was to delay payment of the company’s true liability.
10.	Throughout his evidence Mr Blackwell maintained that he phoned the Commissioners on numerous occasions telling them that his affairs were “in a mess” and that he needed to get his books made up-to-date before he could submit returns.  If correct, this would, in our view, have been highly relevant to the issue of mitigation and, in order to test the veracity of the assertion, we therefore sought, and were given, very speedily and helpfully, copy extracts from the Commissioners’ main file.  This revealed that the initial contact was from the Commissioners to Mr Blackwell by way of a phone call on 17 June 1999 and not vice versa.  Over the next few months there were notes of repeated telephone calls backwards and forwards but there was no indication at any time did Mr Blackwell reveal that the centrally issued assessments understated the company’s liability and indeed at no time did he appear to seek the help of the Commissioners.  It wasn’t until a phone call from Mr Rice on 10 November 1999 that the Commissioners were advised that the company owed VAT estimated by Mr Rice at at least £35,000.  Mr Rice also said in that call that he was bringing his client’s books up-to-date although he was having a problem getting the records from Mr Blackwell
Submissions
11.	Mr Blackwell’s submission was that he had acted foolishly but not dishonestly.  The financial state of the business had left him no alternative but to defer payment of his VAT.  The company had been so badly let down by one of its major customers that Mr Blackwell could see no other way of proceeding.  His intention at all times was to keep the company going until he could collect payment of the monies owed to the company and at that stage he hoped he would be able to repay the VAT owed.  Further it was only as a result of him having his books made up-to-date that Ms Bates had been able to calculate his VAT and complete his returns.
12.	Mr Sadiq submitted that, in failing to submit returns and instead accepting and paying centrally issued assessments which understated its liability to VAT, the company had dishonestly evaded payment of VAT thus rendering it liable to a penalty.  Further, given the involvement of Mr Blackwell in the business, it was right that the penalty should be attributed to him.
Conclusions
13.	The onus of proof is on the Commissioners and the relevant standard of proof is the balance of probabilities.  However, because dishonesty is alleged, the Commissioners have to prove their case to a higher degree of probability.  
14.	For the Commissioners to succeed, they need to establish first that the company evaded its VAT liability and secondly that its conduct involved dishonesty.  The first question is therefore whether the company did, in fact, evade payment.  The answer to this, in our view, is clearly yes.  Evasion is the deliberate non-payment of tax when payment is due.  It does not require an intention to avoid payment indefinitely but also includes an intention to defer payment (R v Dealy 1995 STC 217).  The company, through Mr Blackwell, deliberately adopted a course of action, which resulted, quarter by quarter, in a vast underpayment of tax.  The company’s acceptance of the centrally issued assessments allowed it, over a period of some two years, to avoid meeting its true liability.  This can only be an evasion of payment.
15.	We then have to be satisfied that Mr Blackwell’s conduct involved dishonesty, the test to be applied being whether he 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] 2 All ER 689 at 696).  Mr Blackwell made a conscious and deliberate decision to accept the centrally issued assessments.  His contention that, in many quarters, he did not realise these assessments undershot the true liability does not hold water because of the huge proportionate discrepancy between the two.  As can be seen from the table in paragraph 5, the true liability was many, many times the amount actually assessed.  It is not credible that Mr Blackwell thought that the company only owed a few hundred pounds VAT each quarter.  He must have known that these central assessments grossly underestimated the true liability.  This was not just the odd quarter but quarter after quarter throughout the entire period of the company’s registration.  
16.	The notifications of central assessments contain, in bold print, the following warning:
“If this tax assessment understates your liability and you do not draw this to the Commissioners’ attention within 30 days you may become liable to a Serious Misdeclaration Penalty and Default Interest.  You are advised to render your return without delay.”
17.	Despite this warning, Mr Blackwell never notified the Commissioners of the underassessment and indeed never sought the Commissioners’ help.  Mr Blackwell utilised monies which had been paid to his company as VAT to fund other activities within the company.  We fully accept that Mr Blackwell did not intend to make any personal gain out of this, and indeed that he did not, but in effect he took advantage of the system to free monies which were due to the Commissioners to fund the business.  We accept that the business was in dire financial straights and it was this that led Mr Blackwell to take the course of action which he did, but this, although an explanation of his motive, does not serve to exculpate him.
18.	Having concluded that we believe Mr Blackwell’s conduct to have been dishonest, we have to be satisfied that the ordinary person would so regard his conduct.  We are satisfied that this would be the case and further that Mr Blackwell would have realised this.  We believe that a reasonable and honest businessman in Mr Blackwell’s position would have contacted the Commissioners and put the position to them.  Such a man would have completed his returns, thus alerting the Commissioners to his true liability, but would have sought a payment agreement with them.  To conceal from the Commissioners the company’s true liability over such an extensive period was in our view dishonest and would be so regarded by the ordinary standards of reasonable and honest people.
19.	Mr Sadiq reminded us of our power to remove the mitigation allowed if we thought fit but we do not think this would be appropriate.  The penalty was mitigated to 25% to reflect the disclosure and co-operation provided by Mr Blackwell and we believe this to have been a proper reduction properly given.  
20.	In summary, we are satisfied that the conduct of the company, through its director Mr Blackwell, did amount to the dishonest evasion of tax.  The 75% mitigation allowed by the Commissioners is perfectly reasonable and we have no reason to vary it.  The appeal is dismissed.  Mr Sadiq made no application for costs.
LADY MITTING
CHAIRMAN
Release date:
MAN/02/0759