Patrick Dowds v The Commissioners for HMRC

the amount of income tax and capital gains tax payable for the relevant years of assessment by the said person (including any amount of income tax deducted at source and not repayable); and

the amount which would have been the amount so payable if the relevant return as made or submitted by him had been correct.

whether the inaccuracy was “careless”, “deliberate but not concealed” or “deliberate and concealed”; and

in the case of inaccuracies in returns relating to tax periods commencing after 5 April 2011, whether the inaccuracy falls within “category 1”, “category 2” or “category 3”.

whether the disclosure was “prompted” or unprompted”; and

the quality of the disclosure – that is to say, the timing, nature and extent of the disclosure.

a lower percentage, not below 30%, of that additional amount of tax, in the case of an unprompted disclosure; and

a lower percentage, not below 50%, of that additional amount of tax, in the case of a prompted disclosure,

the Respondents’ practice in relation to penalties under Section 95(1) of the TMA 1970 is set out in their guidance entitled “Information about compliance checks for Self Assessment and the old penalty rules - CC/FS15”. In that guidance, the Respondents explain that the amount by which they will reduce a penalty under Section 95 of the TMA 1970 depends on “disclosure” – whether the taxpayer tells them everything they need to know about the taxpayer’s tax affairs – “co-operation” – how well the taxpayer co-operates with the Respondents throughout the compliance check – and “seriousness” – the overall seriousness of the errors in the taxpayer’s tax return or failure to notify them about the taxpayer’s liability to tax. The general practice is to reduce the penalty by up to 20% of the difference between the maximum and minimum penalties for disclosure, up to 40% of the difference between the maximum and minimum penalties for co-operation and up to 40% of the difference between the maximum and minimum penalties for seriousness; and

the Respondents’ practice in relation to penalties under Section 60(1) of the VATA is set out in paragraph CEP4150 of the Respondents’ manual entitled “Civil evasion penalties for Customs, Excise and VAT”. In that guidance, the Respondents explain that:

the Respondents submit that those have been made to the best of their judgment based on the figures set out in the Disclosure Report and that the twenty-year time limit for making the assessments set out in Section 77(4) of the VATA applies because the relevant errors were made deliberately by the Appellant; and

the Appellant does not dispute that the assessments have been made to the Respondents’ best judgment and does not allege that the figures are incorrect. However, he says that:

the Respondents submit that, notwithstanding the grounds of appeal advanced by the Appellant:

the Appellant submits that, for the reasons set out in his grounds of appeal:

the Respondents submit that, notwithstanding the grounds of appeal advanced by the Appellant:

the Appellant submits that, for the reasons set out in his grounds of appeal:

the Respondents submit that, notwithstanding the grounds of appeal advanced by the Appellant:

the Appellant submits that, for the reasons set out in his grounds of appeal:

the Respondents submit that, notwithstanding the grounds of appeal advanced by the Appellant:

the Appellant submits that, for the reasons set out in his grounds of appeal:

the Respondents were entitled to issue the assessments under Section 73 of the VATA in relation to prescribed accounting periods ending more than four years prior to the date of the assessments because the errors in question were made deliberately by the Appellant and that therefore, to the extent that the appeal relates to those VAT assessments, it should be dismissed;

the Respondents were entitled to issue each of the penalties which they have issued, that the amounts of the penalties are perfectly reasonable in the light of the Appellant’s conduct and that therefore, to the extent that the appeal relates to those penalties, it should be dismissed; and

although we have the discretion to increase the amounts of the penalties which have been imposed by the Respondents under Section 95(1) of the TMA 1970, Schedule 24 of the FA 2007 and Section 60(1) of the VATA – as to which, see Section 100B of the TMA 1970, paragraphs 15 and 17 of Schedule 24 of the FA 2007 and Section 70 of the VATA, respectively – we do not think that it is appropriate for us to exercise our discretion to do so.

from October 2003 until April 2012, the Appellant omitted to include in his VAT returns VAT output tax in respect of certain supplies which he made to one of his customers, Cargo Forwarding Limited (“CFL”) (see paragraphs 3.9 and 3.10 of the Disclosure Report). The output tax so omitted amounted in aggregate to £213,751.00;

from and including the financial year ending 30 November 2001 to and including the financial year ending 30 November 2010, the Appellant omitted to include in his VAT returns VAT output tax in respect of certain supplies made to customers other than CFL (see paragraphs 3.14 to 3.17 of the Disclosure Report). The VAT output tax so omitted amounted in aggregate to £15,109.00;

from and including the financial year ending 30 November 2006 to and including the fourteen-month period ending 31 January 2013, the Appellant claimed to deduct as VAT input tax certain amounts in respect of Irish VAT which he had incurred on purchases of fuel in Ireland and then recovered from the Irish tax authorities (see paragraphs 3.4 and 3.5 and Appendix 4 of the Disclosure Report). The amounts in respect of Irish VAT so claimed as VAT input tax amounted in aggregate to £365,982.00;

a review of the Appellant’s purchase ledger for the fourteen-month period ending 31 January 2013 revealed that the Appellant over-claimed VAT input tax on other purchases of £47,082.00 (see paragraph 3.6 of the Disclosure Report);

from and including the financial year ending 30 November 2000 to and including the financial year ending 30 November 2008, the Appellant recovered certain amounts in respect of Irish VAT charged on his purchases of fuel and placed them in an undeclared bank account (see paragraphs 3.7 and 3.8 of the Disclosure Report). The amounts so recovered and not declared amounted in aggregate to £294,380.00;

from and including February 2003 to and including 30 November 2008, certain amounts received by the Appellant from CFL were lodged in an undeclared bank account (see paragraphs 3.11 to 3.13 of the Disclosure Report). The amounts so lodged amounted in aggregate to £764,094.00;

from and including the financial year ending 30 November 2001 to and including the financial year ending 30 November 2010, the Appellant omitted to include in his sales ledger for income tax purposes certain amounts he received from customers other than CFL (see paragraphs 3.14 to 3.17 of the Disclosure Report). The amounts so omitted amounted in aggregate to £86,863.00; and

from and including the financial year ending 30 November 2001 to and including the financial year ending 30 November 2013, the Appellant made certain cash payments to his employees to top up their wages and failed to account for PAYE or national insurance contributions in respect of those payments (see paragraphs 3.19 to 3.22 of the Disclosure Report). The cash payments so made are estimated to amount in aggregate to £195,000.00, which equates to a gross equivalent of £287,452.00.

so far as concerns Section 77 of the VATA, “deliberate”;

so far as concerns Section 95(1) of the TMA 1970, “fraudulent”;

so far as concerns Schedule 24 of the FA 2007, “deliberate and concealed”; and

so far as concerns Section 60(1) of the VATA, “dishonest conduct for the purpose of evasion”.

we do not see how the Appellant’s relationship with Mr Sloan can possibly have the effect of making the inaccuracies inadvertent or careless.

We should start by observing that we find it odd that the first time that the Appellant mentioned his relationship with Mr Sloan as being a cause of the various inaccuracies was at the meeting held in private between the Appellant and the Officers of the Respondents on 2 February 2015. This was long after the investigation into the Appellant commenced and the Appellant was offered the opportunity to make a full disclosure of the irregularities in his tax affairs (3 May 2012) and indeed several months after the finalisation of the Disclosure Report (3 September 2014). We think that it is curious, to say the least, that the Appellant had not seen fit to mention Mr Sloan as a causative factor before that meeting.

There is also no corroboration of the Appellant’s evidence as regards the impact of Mr Sloan on the Appellant’s tax affairs.

Then there is the fact that Mr Sloan was dismissed from the Respondents’ employment in 2003, at a very early stage in the period with which we are concerned.

Leaving the above anomalies aside, the Appellant has put his defence based on the activities of Mr Sloan in two distinct and, we think, inconsistent ways.

The first is that, in his notice of appeal dated 11 December 2015, the Appellant said that his association with Mr Sloan “affected my ability to focus on my accounting systems”. No reason was given as to exactly how the relationship with Mr Sloan had had that effect and we do not see how, even if it did, that lapse in focus could have lasted beyond the period in which Mr Sloan was employed by the Respondents or explain the systematic long-term evasion which has occurred in this case. We do not accept that the errors in question were a result of the Appellant’s inability to focus on his accounting systems. Instead, the inaccuracies in question were systematic and perfectly deliberate.

This leads on to the second way in which the Appellant seeks to rely on Mr Sloan as a causative factor, which is that, in his meeting with the Officers of the Respondents on 2 February 2015, the Appellant said that:

We should observe that this explanation for the impact of the Appellant’s relationship with Mr Sloan on his various failures to comply with the tax legislation is not consistent with the first explanation in that, whereas the first explanation sought to emphasise that the errors were caused by an insufficient focus on accounting systems, this suggests that the errors were perfectly deliberate but excusable.

In relation to this second explanation, we have some difficulties in accepting that the inaccuracies can be explained solely by reference to financial compulsion.

For instance, we note from the Disclosure Report that:

These various payments are not consistent with the proposition that the Appellant could meet his protection payment obligations only by ignoring his responsibilities under the tax legislation.

However, even if we were to accept that the Appellant felt compelled to evade his tax liabilities in order to fund the protection payments in question, that does not alter the fact that the Appellant chose to evade the taxes and that the inaccuracies in question were deliberate and not inadvertent or careless. Whilst we might sympathise with the Appellant’s predicament, that does not alter the fact that he deliberately, fraudulently and dishonestly chose not to comply with his tax obligations;

as for the Appellant’s bookkeeper, leaving aside the fact that the Appellant was responsible for the bookkeeper’s actions, she could only have worked with the records which were made available to her. She could hardly have been aware of sales which the Appellant chose not to record, bank accounts which the Appellant chose to hide and secret cash payments which the Appellant chose to make. The frequency with which the relevant inaccuracies arose, the length of time over which they arose and the quantum of the amounts involved make it inconceivable in our view that the inaccuracies were attributable to the inexperience of the Appellant’s bookkeeper;

we also have some difficulty in seeing how the Respondents’ inability to identify these inaccuracies when they inspected the Appellant’s records at various points in the past is relevant in this context. The fact that the Respondents did not identify the inaccuracies says nothing about whether the inaccuracies were inadvertent or careless or were deliberate. Moreover, it was not down to the Respondents to identify inaccuracies of which the Appellant was himself very well aware; and

finally, we do not see how the Appellant’s current medical condition can possibly explain a course of behaviour which commenced in 1998 and continued over a prolonged period until 2013. The medical reports which were presented to us date from 24 April 2018 and thereafter. They detail the strain which the Appellant has been under as a result of the Respondents’ investigation and the current appeals. However, they do not testify to the Appellant’s state of mind in 1998, when the inaccuracies started. On the contrary, they suggest that, at that time, and up to around at least 2007 (which was eight years before the first report of Dr Minay) the Appellant was functioning perfectly well. The first report from Dr Minay noted that it was the Respondents’ investigation which had led to the changes in the Appellant’s personality, and that the Appellant had reported that he had previously been “very decisive”, “well organised” and “high functioning”. We therefore discount the medical evidence as a reason to conclude that the errors in this case were anything other than deliberate, fraudulent and dishonest.

the Respondents were entitled to issue the assessments under Section 73 of the VATA in relation to prescribed accounting periods ending more than four years prior to the date of the assessments and that therefore the appeal should be dismissed to the extent that it relates to those VAT assessments; and

the Respondents were entitled to issue each of the penalties which they have issued and all that remains to be considered is whether the quantum of those assessments is appropriate.

disclosure - the Appellant did not take up the Respondents’ offer to make full disclosure under the CDF and initially denied the fact that he had failed to include in his returns a substantial number of sales over many years. It was only after persistent challenge by the Respondents that the Appellant admitted to the inaccuracies in question;

co-operation – the Appellant initially denied any wrongdoing and blamed his bookkeeper for the inaccuracies. However, he did ultimately co-operate with his representative in the production of the Disclosure Report and provided a statement of his assets and liabilities. He also made a number of substantial tax payments on account and sold his holiday home in order to do so; and

seriousness – the amount of under-declared sales of £764,094.00 was significant and occurred over many years. In addition, the Appellant made efforts to conceal the sales by making unrecorded cash payments.

for the reasons which we have already rehearsed, we do not consider any of the grounds to be credible explanations for the inaccuracies which were made. Consequently, in our view, they do not affect the seriousness of the inaccuracies. In our view, the Appellant is fortunate to have been given a 5% abatement for seriousness. We would not ourselves have been inclined to award that discount although, given the significant quantum of the aggregate tax liabilities to which these proceedings relate and the relatively small difference between our view on this point and the Respondents’ view on this point, we do not propose to increase the penalty under Section 95(1) of the TMA 1970 by 5% to reflect our view;

of the four grounds of appeal, only one of them – ill-health- has any potential relevance to disclosure and co-operation;

the Respondents concede that they have made no abatement which is specifically attributable to ill-health but they have pointed out that:

we sympathise with the Appellant for the ill-health he has suffered, but we note that he has already been given a significant abatement for disclosure and co-operation and we are not persuaded that the level of his disclosure and co-operation would have been significantly greater even if he had been well. When one looks at the medical reports, they are largely focused on his levels of anxiety, decisiveness, mood, temper and ability to interact socially. Whilst those matters may be highly pertinent to the Appellant’s ability to attend the hearing of the appeal, it is less clear that they affected his ability to disclose the inaccuracies or to co-operate in the Respondents’ investigation into his affairs; and

in the circumstances, we are not persuaded that the Appellant’s ill-health justifies an additional abatement.

the disclosure made by the Appellant was “prompted”, so that the penalty range is between 50% and 100%;

the penalty should be reduced to 76% of the additional amount of tax falling due as a result of correcting the inaccuracy on the basis that the Appellant is entitled to a reduction of 8% (out of a maximum of 30%) for telling, 25% (out of a maximum of 40%) for helping and 15% (out of a maximum of 30%) for giving. They have explained their approach as follows:

there are no “special circumstances”.

disclosure - the Appellant did not take up the offer of the CDF and initially denied the fact that he had failed to include in his returns a substantial number of sales over many years. It was only after persistent challenge by the Respondents that the Appellant admitted to the inaccuracies in question; and

co-operation – the Appellant initially denied any wrongdoing and blamed his bookkeeper for the inaccuracies. However, he did ultimately co-operate with his representative in the production of the Disclosure Report and provided a statement of his assets and liabilities. He also made a number of substantial tax payments on account and sold his holiday home in order to do so.

the reasons set out in his grounds of appeal;

the fact that he made a voluntary disclosure of his prior VAT errors (see paragraph 9 above);

the fact that he engaged his representative to produce the Disclosure Report; and

the fact that has made instalment payments of the tax that is due and has sold his holiday home in order to do so.

the Appellant does not deserve any additional abatement for the fact that he wrote to the Respondents on 1 October 2012 and alerted them to certain prior VAT errors. This is because, at that point, the Respondents had already commenced their investigation into the Appellant. The disclosure was therefore hardly unprompted (see the VAT Tribunal decision in James Ashworth Waterfoot (Successors) Limited [MAN/95/782]); and

the Respondents have already taken into account (and made a reasonable abatement for) the facts outlined in paragraphs 71(3) and 71(4) above in reaching their view that a penalty based on 65% of the VAT evaded or sought to be evaded was appropriate.