19830

VAT Evasion – Civil penalty – Conduct involving dishonesty – Liability of director – Company claimed input tax on supplies that did not take place – Company through director misled Respondents as to the true nature of the transaction – Whether company’s conduct involved dishonesty – Yes – Whether conduct giving rise to penalty was attributable to dishonesty of Appellant – Yes – Appeal dismissed – VAT Act 1994 ss 60 and 61

LONDON TRIBUNAL CENTRE

	A P GALLUCCI	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	STEPHEN OLIVER QC (Chairman)

Sitting in public in London on 14 September 2006

No appearance for the Appellant 

Dr Ian Hutton, counsel, instructed by the acting general counsel and solicitor to the Respondents, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This appeal is against a Notice of Liability to a penalty under section 60 of VAT Act 1994 (“VATA”) and the decision to recover that penalty under section 60.  The Notice apportioning the amount to the Appellant, Mr A P Gallucci, was issued on 27 May 2002.  

2.	The underlying decision of the Customs is that On Line Corporate Services Ltd (“On Line”) by its failure to account for the full amount of tax which was due for the period from 1 May 2000 to 31 July 2000, made itself liable under section 60(1) to a penalty of £45,835, that amount being reduced to £41,251 in recognition of cooperation.  The Customs also decided that the penalty was wholly attributable to the dishonesty of Mr Gallucci and as a result the penalty imposed on the company was assessed on Mr Gallucci.  

3.	Mr Gallucci did not attend the hearing of this appeal.  The hearing notice had been sent out on 6 June 2006.  On 5 August 2006 Mr Gallucci wrote to the Tribunal stating that he was going abroad until March “to work” and that the hearing should be listed after March 2007.  There was no other reason put forward for having the appeal relisted.  In particular, no explanation was given, either in that letter or in a subsequent letter of   September 2006, explaining why he was abroad, where he was and what circumstances prevented him coming in person to the hearing.  A letter was received from Mr Gallucci on 11 September 2006.  This referred to the hearing date, saying “I was not informed two months ago.  I work away and therefore only collect post when I am back in UK.”  Bearing in the mind that the events to which this appeal relate took place at the start of the year 2000, that the decision appealed against was issued in May 2002, the statement of case had been issued in May 2003 and the first listing notice had been sent out by the Tribunal in September 2003, it seemed to the Tribunal that the appeal should be brought on for hearing at the first possible opportunity.  There has been considerable delay, occasioned either by Mr Gallucci’s failure to respond to “dates to avoid” letter or by his explanations that he will be “out of the country” or “relocated up north”.  His “reply” that should have been lodged within 30 days of the Statement of Case was in fact not submitted until 3 March 2004.  The Tribunal has already notified Mr Gallucci of the fact that the case was heard in his absence in pursuance of rule 26(2) of the Value Added Tax Tribunals Rules 1986.  Mr Gallucci has also been informed of his rights under rule 26(3) and (4).

4.	Evidence was given by Mary McQuitty, an officer of the Customs and by Stephen Barker FCA, employed at the relevant time by Citroen UK Ltd.  Other evidence referred to the Tribunal included letters between the Customs and On Line/Mr Gallucci and a transcript of a tape recorded interview with Mr Gallucci on 13 November 2001.

Summary of the case for the Customs

5.	On Line, whose conduct was wholly controlled by Mr Gallucci, having claimed relief in its 04/00 return for input tax of £45,835 in respect of 29 Citreon Xantias (the Xantias), failed to repay that amount (or to show it as repayable) in its 02/00 return.  He did this for the purpose of evading VAT and its conduct was attributable to the dishonesty of Mr Gallucci.

6.	The particulars of the Customs’ case, shortly stated, are these.  In January and February 2000 On Line had the opportunity to buy 29 Xantias.  The intention was that On Line would lease or hire the Xantias to an entity called Swinton Vehicle Management Ltd (“Swinton”). On Line received tax invoices from its supplier, Citreon Sales, and claimed relief for the input tax in its 04/00 return. On Line was unable or unwilling to finance the purchase. The deal never took place.  Consequently on or about 14 March 2000 Citreon Sales issued credit notes in respect of the purported supply of the 29 Xantias. On Line, by the actions of Mr Gallucci, claimed £47,835 for input tax arising out of that transaction. On Line did nothing to reverse the input tax claim. Mr Gallucci knew, in or around May 2000, that On Line had never paid for the Xantias and that any possibility of onward supply had come to an end.

7.	When, in June 2000, On Line was questioned about the deal by the visiting officer, Mary McQuitty, Mr Gallucci did not explain the true position.  Specifically, he said nothing of the collapse of the proposed deal.  He said nothing about Citreon Sales’ issue of credit notes to On Line.  And he did not tell Mary McQuitty something that he subsequently asserted in a letter to the Customs of 8 December 2000, namely that the 29 Xantias had been supplied by Citreon Sales direct to a company called Taylored Vehicle Finance (“TVF”).

8.	In the course of a further visit by Mary McQuitty, it is said, On Line/Mr Gallucci did not disclose to her, then or following the assessment issued in December 2000, that On Line/Mr Gallucci had never financed the purchase, that On Line/Mr Gallucci had never made any payment and that On Line/Mr Gallucci had been issued with credit notes by Citreon Sales.  

Mr Gallucci’s account of the circumstances

9.	On 12 April 2003 Mr Gallucci made a formal signed statement which I have taken to be the account of the facts that he is advancing in the present appeal.  It reads as follows:

“1.	I entered into negotiations with Citreon Sale to purchase and then sublease to a customer of theirs based in our area.  At first the proposal looked favourable and the deal looked on.

2.	We then without any authorization received invoices for the purchase of these vehicles; it was decided by my accounts department not to enter the invoices until such time we had explored the deal further.  

3.	We subsequently decided not to finance the vehicle ourselves but to undertake a back-to-back deal with a major finance house.  In the meantime we had also received notification of registration from DVLA in our name. 

4.	Based on this fact and this point alone we decided to enter the invoices so we had records of all vehicles that we were legally now responsible for.

5.	In the meantime we continued with our investigation into the end-user and uncovered a problem which eventually resulted in us not only refusing to do the deal, but have no wish to be involved or associated with the end-user in any way, having just been defrauded of £17,000 by him.

6.	We contacted Citreon Sale and requested a credit and assumed upon receipt of credits that would be the end of the matter.

7.	The credits never received and we brought the matter up with our accountants so the figures did not distort our financial records or affect any tax liability.

8.	Neither myself or the company have done anything inappropriate of something we would not do again under the circumstances in light of no alternative suggestion being offered by those who have accused myself and the company of wrong doing.  I have taken exception to the personal allegation made against myself as if I had personally gained or the fact the company who at the time held considerable funds in its account acted inappropriately.”

10.	In a later signed statement (of 3 March 2004) Mr Gallucci expressed the view that Mary McQuitty had failed to grasp the complexity of the situation.  There was, it asserted, no question of tax being lost through the dishonesty of either On Line or Mr Gallucci.  The statement makes the point that notwithstanding the Swinton deal going off, On Line had “still sought to finance the Xantias, but this time as a broker through a third party” (called “Black Horse”).  

Chronological sequence of events

11.	On 21 November 1994 On Line registered for VAT.  Mr Gallucci was at the material time the managing director and the only other company officer was his wife.  

12.	From 19 January until 14 February 2000 29 Xantias were provided to On Line.  In his statement of 3 March 2004 Mr Gallucci asserts that the invoices had been “undertaken solely Swinton and Citreon Sales without On Line’s knowledge”.  The evidence does not support this and I do not accept it.  Mr Gallucci and On Line had been the parties to the purchases; Mr Gallucci told Mary McQuitty as much at the June 2000 interview (see below) and Stephen Barker’s evidence was that On Line was to take the 29 Xantias.  

13.	On 22 February 2000 Stephen Barker discovered that On Line were not willing to complete the deal and as a result he arranged for credit notes to be issued.  He gave evidence to this effect.  The breakdown of the deal is noted in an entry in Mr Barker’s telephone notes (dated 14 March 2000) recording Mr Gallucci’s explanation that his funders had pulled out because their exposure, i.e. that of Lloyds UDT/Black Horse, to TVF, had been “too high”. Mr Gallucci’s case is that On Line had the means to complete the deal and was seeking an alternative to Swinton to finance the transaction.  I accept Mr Barker’s evidence that notwithstanding regular prompting by Citreon Sales it was apparent that On Line would not go ahead with the purchase.  Mr Barker’s understanding was that On Line/Mr Gallucci had proposed borrowing from Lloyds but Lloyds had withdrawn their offer of finance to On Line: see the telephone note of 14 March 2000.

14.	On or around 14 March 2000 Citreon Sales issued the relevant credit notes (or “reversal invoices” as they were described as on the documents).  Mr Gallucci denies this.  The first occasion when he denied this was, indirectly, in a letter to Customs of 8 December 2000 when he said “we have today written to Citreon Sales requesting credits for invoices”.  In his 3 March 2004 statement Mr Gallucci says “Credit notes have never been issued by Citreon Sales”. But the statements are directly contradicted by the presence of a credit note issued by Citreon Sales to On Line with a “Date/Tax Point of 31 January 2000; and it is contrary to the evidence of Mr Barker (which I accept) who explained that the reversal invoices must have been issued because Citreon Sales’ computer system prevents a sales invoice from being issued when a previous deal for the particular car has been cancelled unless that previous deal has been the subject of a reversal invoice issued by Citreon Sales.  For those reasons I find as a fact that the relevant credit notes were duly issued by Citreon Sales on or about 14 March 2000.

15.	Mr Gallucci claimed to have continued his attempts to find alternative finance and alternative customers.  He accepted on several occasions in the course of an interview held on 13 November 2001 that any possible deal was “dead” by 14 March 2000; that is supported by Mr Barker’s evidence and by the telephone note of 14 March 2000.  I do not accept the accuracy of Mr Gallucci’s claim.  

16.	On 14 June 2000 Mary McQuitty, the officer of the Customs who gave evidence visited On Line to discuss the “purchase” and “supply” of the Xantias.  It was claimed by Mr Gallucci (a) that invoices had been issued to a company called Swinton and (b) that the cars had (following the take-over of Swinton) been leased to former customers of Swinton.  Mary McQuitty was not informed that the deal between On Line and Citreon Sales was “dead”.  Evidence of sales invoices relating to On Line’s supply to Swinton was requested by Mary McQuitty.

17.	By 13 October 2000 those invoices had not been received and as a result a letter increasing the amount of output VAT due from On Line was sent by the Customs.  

18.	On 22 November 2000 Mary McQuitty against visited Mr Gallucci who gave an alternative account as to what had happened to the vehicles.  He suggested that they had been supplied to TVF.  Mr Gallucci maintained the suggestion that he had been supplied with cars and was entitled to claim the VAT on them.  (I do not accept Mr Gallucci’s suggestions which are contradicted by the evidence of Mr Barker and his entry of the telephone conversation on 14 March 2000.)

19.	By a letter of 5 December 2000 from Mary McQuitty to Mr Gallucci  regarding the alleged supply to TVF, she re-asserted the view of the Customs that an amount of output tax was due on the value of that supply.  

20.	On 8 December 2000 Mr Gallucci wrote to the Customs saying that Citreon were going to cancel the original transaction and make a new one with TVF and that credit notes were being issued to On Line. This was followed by a letter of 20 December 2000 from Mary McQuitty to On Line saying that as On Line no longer had the vehicles, they were deemed to have supplied them with a result that VAT to the value of the cost of these Xantias was due.  The original assessment was amended on 28 January 2001 to remove the deemed supply of Xantias and a new assessment was issued for £45,835 for reclamation of input tax on the Xantias.

21.	On 20 September 2001 a letter was sent to Mr Gallucci outlining the need for a meeting and informing him that On Line was to be the subject of a civil evasion investigation and offering Notice 730.

22.	On 13 November 2001 Mr Gallucci attended a meeting with officers of the Customs and a transcript of that meeting was provided as evidence.

23.	The penalty notice and assessment were issued on 27 May 2002.  

Conclusions

24.	The issues in this appeal are whether, as Customs contend, (i) the sum of £45,835 of input tax was claimed by On Line on the purchase of the Xantias, (ii) the sum should not have been claimed or should have been repaid as the sale did not take place, (iii) as a result of its acts or omissions On Line was liable to a penalty under section 60 of VAT Act and (iv) the conduct giving rise to the penalty was wholly attributable to the dishonesty of Mr Gallucci (section 61).  

25.	In addressing these issues I need to state (and in some cases restate) certain features of the evidence.  

26.	On Line’s VAT return for 04/00, as already noted, included a claim for input tax in the sum of £45,835 said to relate to the purchase of the Xantias from Citreon Sales.   The purchase invoices were dated either January or February 2000.

27.	On Line’s aim at the start had been to purchase those vehicles and then hire them to Swinton. That had been the gist of Mr Gallucci’s explanation to Mary McQuitty in June 2000 and that had been Mr Barker’s evidence of his understanding.

28.	During the June 2000 meeting Mr Gallucci informed Mary McQuitty that the cars had been delivered direct to Swinton.  He said that sales invoices had been raised in respect of these leases/hires.  However, these were not included in the VAT return.  Mr Gallucci then attempted to explain this by saying that Swinton had been taken over by another company and that Swinton had agreed not to reclaim the VAT on the invoices.  Mr Gallucci further told Mary McQuitty that he had leased the cars to previous customers of Swinton.  

29.	Mr Gallucci was informed that if sales invoices had been raised and sent to Swinton they had to be declared on the VAT return; this appears from Mary McQuitty’s notes of the June 2000 meeting.  Mr Gallucci agreed to provide the relevant invoices.  These had still not been provided by 13 October 200 and as a result a letter increasing the amount due was sent by the Customs.  

30.	When on 22 November 2000 Mary McQuitty again visited Mr Gallucci, he provided a folder said to contain the invoices which were said to have been raised to Swinton, but not put through On Line’s computer system.  It was clear to Mary McQuitty that these invoices did not relate to the Xantias.  Mr Gallucci attempted to explain this by saying that Swinton had been taken over by TVF.  He further stated that TVF were going to buy the cars outright.  He said that he had received the cheque from the owner of TVF (a Mr Bruce Robertson) and that that cheque had bounced.  He said that he had not raised relevant invoices to TVF and that no VAT had been accounted for on that transaction.  His explanation was that TVF had leased the cars to various other companies.  

31.	On 5 December 2000 Mary McQuitty wrote setting out the VAT position following the supply to TVF.  Subsequently, by letter of 8 December 2000, Mr Gallucci indicated that Citreon Sales might issue On Line with credit notes.  In other words, that the transactions would be cancelled as never having taken place. The vehicles would then be supplied direct from Citreon to TVF. Consequently Mary McQuitty wrote on 20 December 2000 to say that as On Line no longer had the vehicles, they were deemed to have supplied them and that VAT was therefore due. 

32.	It is then that the evidence of Mr Stephen Barker becomes relevant. This shows that Citreon Sales had received no payment from On Line and that he, Mr Barker, had discovered on 22 February 2000 that On Line were no longer willing to finance the relevant deal. See paragraph 13 above. He said that he had arranged for the credit notes to be issued on or around 14 March 2000 (see paragraph 14 above) and after that he had had no further contact with Mr Gallucci.  In this connection Mr Gallucci’s statement says that On Line had in fact sent a cheque for the Xantias to Citreon Sales but that Citreon Sales had not cashed it.  Mr Barker expressed the view that this would have been inconceivable. I accept this. The cheque had been of the order of £300,000 and, if Citreon Sales had had it, it would have been presented.

33.	Section 60(1) of VATA are, so far as is relevant, in the following terms:

“60(1)	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, subject to subsection (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct.”

61(1)	Where it appears to the Commissioners – 

(a)	that a body corporate is liable to a penalty under section 60, and
(b)	that the conduct giving rise to that penalty is, in whole or in part, attributable to the dishonesty of a person who is, or at the material time was, a director or managing director of the body corporate (a “named officer”), 

the Commissioners may serve a notice under this section on the body corporate and on the named officer.”

34.	I am satisfied that the penalty was properly applied under section 60.  The irresistible inference from the evidence summarized above is that On Line had deliberately concealed the fact that the supplies to it by Citreon Sales had been reversed; it had consequently omitted to make any return or otherwise inform the Customs that it had overclaimed £47,835 of input tax.  

35.	I am also satisfied that the penalty was wholly attributable to Mr Gallucci.  In this respect I emphasize that On Line/Mr Gallucci failed to repay the £47,835 for input tax reclaimed on the vehicles notwithstanding the fact that On Line/Mr Gallucci knew that the purchase could not, and would not, be finalized.  I also take into account the fact that Mr Gallucci failed to tell Mary McQuitty during the meeting of 14 June 2000 of the collapse of the deal between On Line and Citreon Sales in relation to the 29 Xantias.  He failed to tell her of the consequential issue of credit notes by Citreon Sales.  He said nothing of the involvement of TVF and, generally, failed to provide any account of the true nature of the transaction.

36.	Turning on to the meeting with Mary McQuitty of November 2000 and to the correspondence before and immediately after that visit, I note that Mr Gallucci never disclosed to Mary McQuitty that On Line/Mr Gallucci had never finalized the purchase of the Xantias.  Nor did Mr Gallucci tell Mary McQuitty that On Line/Mr Gallucci had never made a payment in respect of that deal to Citreon Sales.  I note in this respect that in the course of the interview of 13 November 2001 Mr Gallucci admitted “I didn’t pay them a penny”.  Nor did Mr Gallucci disclose to Mary McQuitty on that occasion that On Line/Mr Gallucci had been issued with the credit notes in March 2000.

37.	Turning now to the transcript of the interview of 13 November 2001, I note that Mr Gallucci accepted that he was responsible for On Line’s activities.  In this capacity Mr Gallucci must have been aware throughout the relevant period that On Line never paid for the vehicles. Moreover it is clear that Mr Gallucci was fully aware that any possibility of onward supply of the vehicles had come to an end within two months of the invoices being placed into On Line’s system. I refer to a passage from the transcript:

“GN:		Within a couple of months of these invoices going into your records, 		the deal was dead and you didn’t buy those cars?
Mr Gallucci:	That’s what I said to you from the beginning.

GN:		Is that so?

Mr Gallucci:	Like I said from the outset.  That’s what I said to you clearly, the 		exact times spent on the invoices coming in and the deal going dead 		…”.

When asked why Mr Gallucci had not informed the Customs that the deal was not to go ahead (“GN: Well why didn’t you tell Mrs McQuitty that, that the deal was dead?  Mr Gallucci: Of course we did”.)  The witness statement produced by Mary McQuitty shows that no such information had been provided.

38.	My general conclusion is that before or at the time of the 07/00 VAT return, On Line/Mr Gallucci knew that the £45,835 reclaimed should not have been paid or credited to On Line and should have been repaid because by that time no purchase was to go ahead.  This I conclude was known, and dishonestly not disclosed, during Mr Gallucci’s meetings with Mary McQuitty in June and November 2000 and throughout the correspondence between the parties. It follows that the initial and continuing failure to disclose the true position was dishonest for the purposes of section 60 and 61 of VATA.

39.	The penalty of £45,835 was, in my view, properly calculated and applied.  I can see no grounds for mitigating it by more than the 10% that the Customs have applied bringing it down to £41,251.  Such mitigation takes into account On Line/Mr Gallucci’s substantial failure to cooperate. The penalty was, I think, wholly attributable to Mr Gallucci’s dishonesty.

40.	For all those reasons I dismiss the appeal.  Customs asked for their costs.  I can see no good reason for refusing this.  They have succeeded in their case that On Line and Mr Gallucci were guilty of fraud.  I therefore award an amount in respect of the reasonable costs of the appeal to the Customs.  If that amount cannot be agreed it should be referred to me for a further direction.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 12 October 2006

LON/03/322