18775
VAT – S.60 VATA 1994 penalty apportioned to company director under s. 61 — whether director’s dishonesty responsible for company’s evasion of tax — on evidence held director dishonest — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	MOHAMMED ASLAM 	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal: 	Mr J D Demack	 (Chairman)
						Mrs G Pratt
						Mr J T B Strangward		

Sitting in public in Manchester on 19 and 20 July 2004 
Mr D Mohyuddin of counsel instructed by Messrs Nigel Gibbon & Co, Solicitors, Manchester
Mr Mahmood of counsel instructed by the Solicitor for the Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2004

DECISION
1.	On 9 October 1998, Hanaan Ltd  ("Hanaan”) was assessed to VAT of £129,727, and on 11 March 1999 to a civil evasion penalty of the same amount mitigated by 10 per cent for co-operation in determining its true liability to tax. The mitigated penalty of £116,754.30 was apportioned to Mr Mohammed Aslam, Hanaan’s director, on the basis that the evasion of tax was due to his dishonesty.  Mr Aslam appeals against the penalty assessment.  (Initially, Hanaan appealed against the tax assessment, but, on the company going into liquidation in 2000, its appeal was not pursued).
2.	Subsequently the tax assessed was reduced to £120,314 (see para 19 below), with a corresponding reduction in the penalty and mitigated penalty.
3.	The statutory provisions relating to civil evasion penalties and the apportionment thereof to officers of companies are to be found in sections 60 and 61 respectively of the Value Added Tax Act 1994.  The relevant parts of those sections for the purposes of the present appeal  are the following:
(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. 
	
 (7) On an appeal against an assessment to a penalty under this section, the burden of proof as to the matters specified in subsection (1)(a) and (b) above shall lie upon the Commissioners. 
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 officer 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. 

(3) Where a notice is served under this section, the portion of the basic penalty specified in the notice shall be recoverable from the named officer as if he were personally liable under section 60 to a penalty which corresponds to that portion; and the amount of that penalty may be assessed and notified to him accordingly under section 76. 

 (4) Where a notice is served under this section— 	
		(a)	   the amount which, under section 76, may be assessed as the amount due by way of penalty from the body corporate shall be only so much (if any) of the basic penalty as is not assessed on and notified to a named officer by virtue of subsection (3) above; and 	
		(b)	   the body corporate shall be treated as discharged from liability for so much of the basic penalty as is so assessed and notified. 
	
 (6) In this section a “managing officer”, in relation to a body corporate, means any manager, secretary or other similar officer of the body corporate or any person purporting to act in any such capacity or as a director; and where the affairs of a body corporate are managed by its members, this section shall apply in relation to the conduct of a member in connection with his functions of management as if he were a director of the body corporate.
4.	  Section 70 of the 1994 Act deals with the mitigation of evasion penalties in the following terms:   
 (1) Where a person is liable to a penalty under section 60, 63, 64, 67 or 69A, the Commissioners or, on appeal, a tribunal may reduce the penalty to such amount (including nil) as they think proper. 
 (2) In the case of a penalty reduced by the Commissioners under subsection (1) above, a tribunal, on an appeal relating to the penalty, may cancel the whole or any part of the reduction made by the Commissioners
5.	In his notice of appeal, given on 28 September 1999, Mr Aslam appealed because “the tax assessment on which  the civil penalty was based was not made to best judgment.”  In his Defence:
1)	he denied that his conduct had been dishonest, and contended that in any event the evidence offered by the Commissioners of Customs and Excise to support the allegation did not discharge the burden of proof to the requisite standard;
2)	he claimed that, in any event, the Commissioners’ evidence of Hanaan’s dishonesty did not discharge the burden of proof to the requisite standard; and
3)	further, he contended that the evidence relied on by the Commissioners to support the alleged level of tax evasion by Hanaan did not discharge  the burden of proof to the requisite standard that VAT was evaded by the company to the extent alleged, or at all; and
4)	finally, he maintained that the underlying tax assessments were excessive, and were not made to the Commissioners’ best judgment.
6.	We received parol evidence for the Commissioners from two Customs officers, Keith Fletcher and Peter Shorrock, and from Mr Aslam and his four witnesses.  Those witnesses were: 
Mr S Ali, a taxi driver who had worked at the Hanaan restaurant from about 1994 until March 1996;
Mr Haq Nawaz, a Tandoori chef who had worked at the Hanaan restaurant at some time in 1995;
Mr Mirza Sharkat Baig, a self-employed property management agent, who had been employed as a photographic technician and security officer at certain of Hanaan’s premises from 1994 to 1999; and
Mr Okon Okonokpona, who had been a trainee pharmacist with Mr Aslam for some time between 1995 and 2001. (Mr Aslam is a pharmacist and owns a chain of 8 or 9 chemist shops). 
7.	Mr Mahmood, counsel for the Commissioners, also produced two bundles of copy documents.  Mr Aslam was represented by Mr D Mohyuddin, also of counsel.  
8.	From the evidence presented, we make the following findings of fact.
9.	Hanaan operated an eponymous Indian restaurant in Wilmslow Road, Rusholme, Manchester, registering for VAT on commencing trading in 1993. It accommodated 200 people and was one of the more expensive restaurants in an area where Asian food outlets abounded.  Its declared takings appeared to Mr Fletcher to reflect neither the size of the restaurant nor its “up-market image”.  Consequently, he selected it for a control visit. 
10.	But before the visit was made, Mr Fletcher decided to test the accuracy of Hanaan’s sales recording system by having Customs officers carry out a series of internal observations and test purchases.  Fourteen selected officers, operating in pairs, visited the restaurant at lunchtime on and in the  evening of Thursday, 22 August 1996.  They recorded having observed 144 diners.
11.	Subsequent to the observations and test purchases, Mr Fletcher telephoned Hanaan to arrange an appointment for the control visit.  He spoke to Mr Bashir, whom he understood to be a co-director of Mr Aslam.  Mr Bashir  claimed to have to return to Pakistan to care for someone who had suffered a heart attack, and asked Mr Fletcher to start the visit at the offices of Hanaan’s accountants, Messrs Saddique & Co, of Rusholme.  Mr Fletcher agreed, and on 2 October 1996 visited Saddique & Co when he was able to examine Hanaan’s 1996 records. He was unable to examine its records for 1994 and 1995 because they were with  the Inland Revenue.  Mr Fletcher’s checks of purchase records satisfied him as being correct, but he found a number of discrepancies between the company’s audited annual accounts for the two years ended 31 December 1994 and 31 December 1995 and Hanaan’s VAT returns covering those years.  Initially he made an assessment of £6,633.00 to deal with them, but following an explanation by the accountants that the accounts included  tips which should have been excluded, the assessment was withdrawn.  Before he left, Mr Fletcher uplifted various documents including the meal bills for 22 August 1996.  He found the bills to relate at most to 76 diners and to reveal that 6 of the 7 pairs of Customs officers’ meals had not been declared.  He calculated that over 47 per cent by value of sales on that day had not been declared.
12.	Mr Fletcher then arranged for a further day of observations on Tuesday, 29 October 1996.  The six pairs of officers involved in the exercise on that day observed 115 diners and 3 takeaway sales
13.	As Mr Bashir remained in Pakistan, Mr Fletcher arranged to visit the restaurant on 7 November 1996 to meet Mr Aslam and Mr Saddique, the accountant.  In discussion with them, Mr Fletcher was told that Mr Aslam had been Hanaan’s sole director from March 1996 onward.  He was also told that Mr Aslam carried out no management checks of Hanaan’s financial needs.
14.	Mr Fletcher observed that the till in use in the restaurant was an electronic one but contained no till roll.  He found that Hanaan did not use till rolls nor did it take Z readings.
15.	Not surprisingly, Mr Fletcher considered that improvements to the companies’ records system needed to be made.  To emphasise the matter he wrote to Mr Aslam on 19 November 1996 in the following terms (copying his letter to Mr Saddique):
“REF:RECORDS FOR VAT PURPOSES
I refer to my visit on Thursday 7.11.96 and to my discussion with you.
As explained I am writing to confirm several changes to your system that should be made immediately.
1.	Till rolls should be used in your till, to record each sale as it takes place PN No.727, paragraph 28).  Please ensure a till roll is inserted.
2.	A ‘Z’ reading should be taken at the end of each day’s trading
3.	All till rolls, and ‘Z’ readings are to be retained
4.	When you next re-order your meal bills, ensure that the printer pre-numbers them in a five digit consecutive series, ie 00001, 00002, etc.
With regard to point 4 above, after discussion with your accountant you may consider it appropriate to implement this change at an early point and ‘waste’ unused, un-numbered, meal bills.
A further check will be made to confirm the above changes in the next few months.”
16.	In evidence, Mr Aslam denied ever receiving that letter.  We do not accept that denial for he telephoned  Mr Fletcher on 19 December 1996, and the two of them discussed its contents. Mr Aslam also disclosed that he had carried out some covert checks of the system and maintained that it was not possible for staff to “fiddle”.  He said that he would have pre-numbered bills printed when next he re-ordered them. We find that Mr Aslam totally ignored the letter, and carried out none of the requirements of the Commissioners.
17.	Operating in a similar fashion to the officers who had visited the Hanaan on 22 August 1996 and 29 October 1996, further groups visited on a number of other dates.  The results of all the officers’ observations and their comparison with Hanaan’s records are set out in the following table: 
Day	Date	Diners Observed	Diners declared	Takeaways observed and declared	Pairs of officers involved	Pairs of officers bills suppressed	Average Bill per declaration	Suppression rate	
Thur	22/8/96	144	76	-	7	6	9.82	47.39	
Tues	29/10/96	115	97	3	6	2	10.35	18.31	
Fri	6/12/96	187	100	2	6	2	9.49	49.3	
Sat	18/1/97	295	199	1	5	2	10.43	34.54	
Wed	18/6/97	104	64	-	7 	4	9.39	39.64	
Sat	21/6/97	245	121	-	7	6	10.84	51.07	
Sun	22/6/97	102	76	1	6	4	9.07	32.76	

18.	We are satisfied, and find, that the above table is factually correct.
19.	From the information he had obtained Mr Fletcher was able to calculate an overall suppression rate of 40.40 per cent.  As that figure included all officers’ bills he recalculated it to exclude them.  Applying the recalculated rate of 38.6 per cent  to Hanaan’s declared takings in all accounting periods back to that of 03/94, there being no unusual or exceptional features to indicate any change in Hanaan’s trading pattern or management practices in the  overall period, Mr Fletcher arrived at a rounded down total of £120,314 tax underdeclared.
20.	On 29 April 1998 Mr Aslam was interviewed by Mr Shorrock under the terms of Notice 730.  He objected to the interview being taped, so that a contemporaneous note was instead made of it.  Mr Aslam confirmed having signed the Form VAT 1 for Hanaan which indicated that it started trading on 3 December 1993.  He also confirmed that Mr Bashir ceased to be a director in March 1996. Mr Aslam dealt with questions about his duties as a director by explaining that he was responsible for the overall running of the business but did no work in the restaurant itself.  He claimed to visit the restaurant “very few times” and said that when he did so it was to ensure that it was problem free.  He said he was familiar with the accounting system in the restaurant “a little bit”.  Having explained that he left the running of the restaurant to its manager, he listed the manager’s responsibilities as the “complete running of the business such as hiring and firing staff, buying, cashing up, cleaning etc”.  He added that, when cashing up at the end of each day’s trading, the manager was expected to reconcile the till reading with the contents of the till and the meal bills issued that day.
21.	Mr Aslam went on to explain that the manager gave the daily takings figure to the bookkeeper who then recorded it, and was given the bills and the takings for banking.   Mr Aslam admitted being “very interested” in the restaurant’s daily takings.  He did however claim that because of a lack of manpower it was not always possible to check takings daily, weekly or even monthly, effectively saying it was unnecessary because the staff were “honest, trustworthy and reliable.”
22.	The next part of the interview concerned a Mr Akram who had been bookkeeper to Hanaan for some considerable time, but who had left, according to Mr Aslam, to obtain a better job.  Mr Aslam was asked if he had had any reason to dismiss staff for theft in the previous three years, to which he replied that whilst the running of the business was in the hands of its manager, he would have expected to be told had any employees been dismissed for theft, and to his knowledge none had.  On being asked who engaged the manager, Mr Aslam admitted that he did, going on to say that he had had no reason to dismiss a manager for theft.
23.	Mr Shorrock then asked Mr Aslam, “Mr Saddique mentioned that a till roll is not in operation, is that correct?”, He replied, “It is correct”.  Mr Shorrock continued, “Have you ever kept a till roll and a Z reading?  Mr Aslam replied, “I think there was originally, but had some problems, I can’t remember what.  I explained this to Mr Fletcher last time.”
24.	Later Mr Aslam claimed, “The records presented to Mr Saddique  [to prepare VAT returns] are full and complete and accurate and hence the VAT returns are accurate.”
25.	As  the next following section of the interview is extremely important, we report the exchanges verbatim:
PS: (Peter Shorrock) 	Did you explain to Mr Fletcher either at the meeting or later by telephone that you had done some covert checks of your own on the present accounting system and that in your view, as a 3 part system, it was not possible for the staff to fiddle?  
MA: (Mr Aslam)	I think yes because very often we send in a dummy customer to pose as an actual customer.
PS:	What were the results of those checks?
MA:	That’s why I said I trust the staff.
PS:	There was no evidence of bills unrecorded?
MA:	That’s right
PS:	What prompted you to do that?
MA:	Normal course in  pharmacy business which I used in the restaurant.
PS:	Can I refer back to Mr Fletcher’s letter of 19 November, did you comply with any of the 4 directives/ requests made in the letter?
MA:	I don’t think we did.
PS:	In the phone call that Mr Fletcher records as taking place on 19th December, he says you agreed that pre-numbered bills would be introduced when next re-ordering, I presume stationery re-order has that been done?
MA:	I think at the meeting we gave Mr Fletcher answer, we still have not done.
PS:	I’m asking about the telephone conversation of 19th December.
MA:	I can’t remember but it is still not done.
26.	Mr Fletcher sought a further interview with Mr Aslam. It was arranged for       18 August 1998.  But only Mr Saddique kept the appointment.  He explained that Mr Aslam was too busy to attend.  He then suggested that any VAT problems should be dealt with on the same basis as Hanaan had recently resolved an Inland Revenue investigation.  Mr Fletcher knew nothing about the Inland Revenue investigation, and, correctly in our judgment, declined to proceed as suggested by Mr Saddique. (In any event, it appeared that Mr Saddique failed to disclose the terms on which the Inland Revenue investigation had been concluded.  Those terms were not disclosed to us).
27.	We find from the evidence relating to the Inland Revenue investigation that that authority had evidence of suppression of direct taxes by Hanaan and raised assessments to recover them. We infer that Hanaan discharged the assessments either in their original amounts or in lesser sums agreed with Inland Revenue. We consider Mr Aslam’s failure to attend the second interview and to have Mr Saddique suggest that the Commissioners resolve their investigation on terms similar to those accepted by the Inland Revenue following its own investigation indicative of his personal dishonesty.
28.	We found much of Mr Aslam’s evidence to be wholly inconsistent with his answers to Mr Shorrock’s questions in interview, and the whole of it to lack a ring of truth.  As we have already said, Mr Aslam sought to implicate Mr Bashir in the suppression of takings when all the evidence pointed to Mr Bashir being abroad in the relevant period.  He further claimed, in the absence of any evidence whatsoever,  that if there had been suppression it was due to the restaurant manager, or perhaps to a concerted operation by a group of chefs and/or waiters.  When we are looking at the suppression of a total sum in excess of £1 million, as here, we are forced to consider not only how the suppression was carried out, but also how it could have been carried out, what happened or might have happened to the takings suppressed, and who would have had to be involved (or tacitly concur in it whilst secretly obtaining the benefit of it) over the period of assessment.  When we look at the whole matter in that light we conclude Mr Aslam must have been not merely involved but solely responsible; no other person identified at the hearing could possibly have been.
29.	In evidence, Mr Aslam sought to deflect attention from himself and to implicate Mr Bashir.  It will be recalled that Mr Bashir left the UK for Pakistan in the autumn of 1996 and we were initially left with the impression that he had never returned.  But Mr Aslam indicated that he had done so at some stage and had become a director of at least some of Mr Aslam’s companies on Mr Aslam being disqualified from acting as a company director by the Department of Trade and Industry.  We regard Mr Aslam’s evidence in relation to Mr Bashir’s involvement in events, for which we  can find no foundation or support, as nothing more than a smokescreen designed to obscure rather than clarify matters, and we therefore ignore it. 
30.	Had any member of Hanaan’s staff been stealing from the restaurant, particularly on the scale of suppression concerned, we have no doubt that he would have been  instantly dismissed.   That no member of staff – and we include the manager in that term – was ever dismissed, so that the police were never called in to investigate any cash shortages, indicates to us in the clearest possible terms that whoever was responsible for the suppression of takings was a person of the highest authority within Hanaan.  And since no one other than Mr Aslam was, on the evidence, in a position higher than manager, we can only infer, indeed we do infer, that Mr Aslam himself suppressed the missing takings.
31.	On the basis of the interview of Mr Aslam and his evidence to us, we find that while he may have done no work in the restaurant on a daily basis and may indeed have been an infrequent visitor to it, he was responsible for its operation; he was not merely familiar with its accounting system, but in complete charge of it; he knew that by not using till rolls and taking Z readings it would be impossible for anyone to check the exact amount of its daily takings; and we infer that he was prepared to accept the lack of such checks in order himself to suppress takings on the scale discovered by Customs.
32.	We are quite satisfied, particularly in the light of the evidence of Mr Aslam’s witnesses, that the restaurant staff would not have had the ability or the opportunities to suppress takings at the rate of over £1000 per day as happened on two of the days of observations.  And since Mr Fletcher was satisfied Hanaan was declaring all its purchases, we also find that Mr Aslam, as an intelligent, professional man with the services of accountants available to him, would have known the extent of suppression taking place and, had he himself not been responsible for it, would quickly have taken steps to prevent its continuance;  and those steps would undoubtedly have included implementing all Mr Fletcher’s recommendations of 19 November 1996.  That he took no such steps is, in our judgment, further very strong evidence of his personal involvement  in the suppression of takings.
33.	We hold that Hanaan’s evasion was attributable to the dishonesty of Mr Aslam, placing  particular reliance on his replies to the questions put to him in the latter part  of his interview by Mr Shorrock.  Mr Aslam stated categorically that the records presented to Mr Saddique to enable him to prepare Hanaan’s VAT returns were full, complete and accurate, so that the returns themselves were correct.  He added that he personally had carried out checks to ensure that staff were not “fiddling” the company; that he trusted the staff; and that Hanaan complied with none  of the four requests contained in Mr Fletcher’s letter of 19 November 1996.  
34.	The Commissioners having proved on a balance of probabilities to a high degree of probability that the evasion of tax by Hanaan was due to the dishonesty of Mr Aslam, we dismiss the appeal.  In reaching our decision we have most carefully considered all the submissions of both counsel.  (We find it unnecessary to rehearse them here for most relate to factual matters with which we have dealt and, to a limited extent, inferences we have drawn.  The remainder relate to the law, about which there is no disagreement: evasion means to get out of something, and dishonesty is to be interpreted as  what ordinary, right-thinking people would describe as dishonest (see R v Dealy  [1995] STC 217)).
35.	Had it been necessary for us to consider whether the tax assessments under appeal had been made to best judgment as required by s. 73 of the 1994 Act, on the evidence we should have found that they were.  We should also have found that the quantum of the assessments, as reduced to omit the Customs officers test eats, was correct.
36.	Although we have jurisdiction to increase the mitigated penalty, in the present case we do not propose to exercise it.  We therefore confirm the penalty in the sum of £108,183.
37.	As is usual in cases such as this, Mr Mahmood applied for the Commissioners’ costs in the event of the appeal being unsuccessful.  We accede to his application and direct Mr Aslam to pay their costs of, and incidental to and consequent upon the appeal.

DAVID DEMACK
CHAIRMAN
RELEASE DATE: 30 September 2004