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Ellis v Customs & Excise  UKVAT V18279 (11 August 2003)
CIVIL EVASION PENALTY – whether sufficient proof that appellant was dishonest – no
LONDON TRIBUNAL CENTRE
CHRISTOPHER KILLICK ELLIS Appellant
- and -
THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents
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
- 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.
- 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.
- 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  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.
- 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.
- 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….
- 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  QB 1053, applied in this context in Stuttard v Customs and Excise Comrs  STC 342). The burden of proof is on the Commissioners to show dishonesty on the balance of probabilities to a high standard.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
- 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.
- 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."
- 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.
- 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. Attendance at interview should be a voluntary act of a taxpayer knowing what he was facing, not an ambush. We regard this as an ambush.
- Moreover Mrs Wyatt told us that when the taxpayer telephoned to arrange an interview he would normally be told that he could bring an adviser, and that the interview would be taped, but she was not sure she spoke to the Appellant herself. One of the early questions in the interview was about the accountant not being present to which the Appellant replies that "I didn't know I could bring him" Accordingly we accept the Appellant's evidence that he was not told that he could bring his accountant.
- At the interview Mrs O'Brien's first question said that she had information which suggested that the Appellant had failed to register at the right time. She may have introduced herself as being from the local fraud unit or fraud team. She started by asking some uncontroversial questions (such as, his telephone number, what happened when he de-registered, what type of livery was supplied and whether it was liable to VAT, who dealt with advertising and banking, who completed the VAT registration form, when riding lessons started, and whether horses were sold), saying that it is normal practice to establish the basic facts before issuing Notice 730. After 20 minutes of uncontroversial questions Notice 730 was handed over, because after that Mrs O'Brien intended to put points to the Appellant that contradicted his statements. The interview was suspended for 10 minutes for him to read it, restarting at 11.25. An explanation of the notice was then given, the point is made that it is a civil enquiry but that it could turn criminal if he took any action with deliberate intent to deceive the officers, and it was made clear that the investigation would continue with or without co-operation. He was then offered another break at 11.20 (corrected on the tape from 11.25), both of which times must be wrong, although this is not material, as the break occurs about two pages later in the transcript than the previous re-start at 11.25. This break lasted 17 minutes. The only contemporary evidence of what was said during the break is contained in Mrs Wyatt's notes (which had not been provided to the Appellant in advance, perhaps understandably as they were not thought to be relevant), that "During this time a general discussion was held regarding the current status of the business, as Mr Ellis wishes to pursue the issue of the business becoming exempt as an educational institution. The past activities of the business, prior to registration was not discussed during this interval." The Appellant contended that other things were discussed during the break, including that Mrs O'Brien saying that she was a fraud investigator and mentioning the existence of informers, but we are unable to make any findings about this. Mrs O'Brien accepted that it was unsatisfactory to have breaks in a recorded interview but equally she considered that if the taxpayer wanted to go off record this should be allowed. The transcript restarts with Mrs O'Brien saying "During the break we discussed the future of Mr Ellis' business but no past history. Okay, obviously we've discussed this Notice and what it means. I have to ask you Mr Ellis have you deliberately failed to register for VAT when you were required to do?" The question immediately following the break seems to us a rather sudden run-in following a discussion of the future, but we do not make any findings that Mrs Wyatt's note and Mrs O'Brien's statement when the tape restarted are not true, although we are left with a feeling of uncertainty that something might have been said that influenced the Appellant's conduct at the interview. The fact of the break is unsatisfactory as it has allowed this conflict of evidence to arise, although we do not criticise the Commissioners for allowing a break at the Appellant's request. The Appellant said, and we accept, that his state of mind was that the Commissioners would bankrupt him and he would lose the business that he had built up over the years. This shows the danger of asking the taxpayer to attend an interview without informing him of the purpose of the interview so that he was not in a position to consider whether to attend or who to bring with him. On the other side, we record that very properly Mrs O'Brien offered to allow the Appellant to contact Mr White or to terminate the interview to enable him to consult him, although this was said before Notice 730 was handed over.
- Our task relating to finding whether there was dishonesty in not registering earlier is made more difficult because not only did the Commissioners de-register the Appellant when he was carrying out similar livery activities, but the Commissioners later changed their ruling by the Business Brief of 21 December 2001 by exempting all livery activities instead of, as previously, DIY livery where minimal services were provided, as a result of the Tribunal decision in John Window v Customs and Excise Comrs (2001) VAT Decision No.17,176. This is, of course, not something for which any criticism lies with the Commissioners, but the retrospective change in what was taxable makes our task more difficult in deciding whether the Appellant was dishonest in not registering earlier. Much of the time at the interviews was spent in obtaining details of the type of livery services provided by the Appellant. The result of the changed livery liability, coupled with, at least to Mr Prince's way of thinking, the exemption for lessons carried out by the Appellant personally, resulted in the assessment being reduced from £127,310 to £33,262 and, as already mentioned, the penalty from £25,232 to £15,122.
- There is therefore the dual problem of first, the liability of riding lessons which we have found that the Appellant believed were exempt, which was partly true but Mrs Wyatt had wrongly advised him about; and secondly, the livery where at the time both the Appellant and the Commissioners thought was exempt on one basis (about which there would be room for argument about how much services were required for livery to become taxable), and later the Commissioners changed the basis so that they were all exempt. Thus, as a result of changed liability of livery the date the Commissioners thought the Appellant should have been registered must be later than they were then contending, and they never correctly addressed their minds to exemption of riding lessons, which also points to a later date. Suppose the Appellant, on the basis of his (and the Commissioners') understanding of the liability for livery activities, and his genuine belief that riding lessons were exempt, coupled with the existence of some other taxable supplies, dishonestly did not register that would not assist the Commissioners in proving their case. Mr Hyam concedes, rightly in our view, that a person cannot be dishonest in not registering before he is required to be registered. The requirement to register must take into account the Commissioners' retrospective decision about exemption of livery activities. We have no idea when he was required to be registered, and what is certain is whatever date the Commissioners thought when they interviewed him must be too early. Any admission that he made would have been on the basis of wrong information about the true date for registration.
- In addition to the problem about the degree of exemption of the two main sources of income of the Appellant, the Commissioners conducted an interview in which we criticise on a number of grounds: first, and most importantly, that any such interview was premature because one cannot sensibly investigate dishonesty in not registering without previously settling any liability issues that affect the date of registration (there is, of course, no criticism for not knowing about the later changed liability of livery, but it was vital that the liability of riding lessons should have been settled); secondly, which we also regard as important, that he was invited to the interview in the course of an ordinary correspondence about VAT liability without being told why he was being invited; thirdly, and also importantly, that he was not told that he could bring an adviser; fourthly, that Notice 730 was not handed over for 20 minutes (and we do not read anything in those 20 minutes that could have led the officers to change the way they were conducting the interview); and fifthly (although our criticism of this is much less serious), that they allowed discussion during a 17 minute break just after talking about the possibility of criminal proceedings and that investigations would continue whether or not he cooperated. We consider that the existence of a liability dispute about exemption for riding lessons, coupled with liability changes for livery activities subsequent to the interview contained in a business Brief of 21 December 2001, coupled with the way the interview was conducted was unfair to the Appellant as a means of investigating whether the Appellant was dishonest. Therefore, although we agreed in our decision on the preliminary issue to admit the interview evidence, we have decided to give it no weight, and so we do not record any admissions made by the Appellant in the interview or place any reliance on anything else he said at the interview. Although the same criticisms cannot be made of the second interview we consider that the investigation had started on the wrong foot and we should also exclude this. We must make clear that this is far from saying that we formed a good impression of the Appellant's answers. He was clearly an evasive witness both before us and at the interviews. We did not believe a lot of what he said.
- If we exclude the interview evidence what are we left with? Mr Hyam's case was that the visit of 20 December 1998 (which we have found did take place) prompted the Appellant to panic and register knowing that he should have registered earlier. The statements by Mr White as recorded by both Mrs O'Brien and Mrs Wyatt support this. On the other hand, we have already found that the Appellant genuinely believed that riding lessons were exempt well after the time he registered. The registration document did refer to future taxable supplies and there were some then expected future supplies, which could have related to residential riding holidays for children when coupled with what he and the Commissioners then understood, wrongly, to be the taxability of livery supplies on the basis that more services were going to be supplied. The Appellant said that such residential riding holidays started in 1998 although they were advertised in 1997 to see if the demand was there; we have some difficulty in accepting this, but it could be true. But had he thought he was likely to be investigated for not registering earlier, registering on account of future supplies is an odd thing to do. One might expect him to have registered on the basis past supplies and try to show that late registration was not dishonest. We have already said that we place no significant reliance on the record of statements by Mr White in the Ellis Casework Details, or the record of the meeting with Mr White in the absence of his being asked to confirm their visit report and in the light of his evidence to us. We cannot determine precisely when the Appellant should have been registered as this depends on making finding about who gave what lessons for which we have insufficient evidence. In the circumstances we do not even know when we should be looking for dishonest intent. On the basis of all these points we find that the Commissioners have not made out their case for dishonest evasion to a sufficiently high standard.
- We have already mentioned the problems Mr Prince had in obtaining what evidence the Commissioners held about the 20 January 1998 visit, and he had other problems in obtaining transcripts of the interview and other documents, details of which we need not set out. However, we feel that we should mention one further example. The documents show that on 17 March 1999, the day before the interview, the Commissioners obtained a computer print out about the Appellant's previous VAT registration. They asked questions about this in the interview, about which there is no objection, but professed not to have the information. Much later in a letter of 23 June 2000 the reviewing officer states: "From the limited information we do hold this suggests that you we deregistered because you were classified by what we term as a 'missing trader'. This generally means that a business fails to render it's (sic) returns and as a consequence the registration is cancelled." The print out shows repayment claims authorised for the 12/82 period and for the final period. We do not believe that the officer can have had any possible basis for making his statement. The Appellant was even now still trading from the same address as he had been in 1982.
- We express the hope that the Commissioners will change the way in which they invite taxpayers to interview without informing them why, and that in future all documents created at any time during an investigation should be retained.
- Accordingly we consider that the Commissioners have not shown dishonesty to the required standard and we allow the appeal with costs, to be determined by the Chairman in the absence of agreement between the parties.
J F AVERY JONES
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