Christopher Lunn trial

KEY POINTS

• Found not guilty on two charges and faces a retrial on four more.
• Claims that possible overstated accountancy fees were covered by underclaimed use of home.
• Did not know that ESC C16 clearance was needed for capital gains tax treatment.
• Dispute over alleged backdating of trade in limited companies.

Taxation has reported previously on HMRC removing agent status from accountants Christopher Lunn & Co (CLAC).

In October 2013, the criminal trial of Denis Christopher Lunn, the owner of the practice, started in Southwark Crown Court.

It continued until the end of January, but was subject to reporting restrictions, which have only just been lifted.

Lunn was charged with six counts of cheating the public revenue. These are explored in detail below, but in summary they related to:

1. overstated accountancy fees;

2 & 3. misuse of losses brought forward in companies acquired by Lunn (Snow White and Rain White);

4. misuse of a company by Mrs Lunn (Carte Blanche);

5. Capital gains tax treatment of companies without ESC C16 clearance, and “phoenixing”; and

6. backdating use of limited companies by clients.

After several days of deliberation, the jury found Lunn not guilty on counts 5 and 6, but failed to reach a verdict on the other four. At a subsequent hearing on 17 March (when reporting restrictions were lifted) the prosecution said it would retry Lunn on counts 1-4, but difficulties over scheduling and the pressure of cases in the Crown Court meant that the new trial has been scheduled for September 2015.

Working with Jake Kanter, a senior reporter at Broadcast magazine, we were able to cover the final speeches by the prosecution and defence, and the judge’s summing up in the first trial.

This article is a report of those proceedings. Rather than setting out what each of them said separately and chronologically, a report drawn from all three is given for each of several separate issues arising in the trial.

Preliminary issues

In her speech to the jury summing up the prosecution case, Carey Johnston QC said that they had to decide whether Lunn was dishonest, telling them that they knew what was and was not dishonest; they did not need to be accountants to understand that. Geoffrey Cox QC, for the defence, said that Lunn could not be a cheat because he believed what he was doing was right.

The jury would have to be convinced otherwise if they were to convict. In his summing up, Judge Goymer dealt with the same point by telling the jury that they needed to decide whether an ordinary, decent, law-abiding person would regard his conduct as dishonest, and whether Lunn knew that at the time.

The judge said that Lunn had qualified in 1969 [Lunn used to be a member of the ICAEW but left some years ago] and then set up CLAC. He had left it for a while and then returned, but from 2006 he only handled the top-level “gold” clients personally.

He said he was in the office about 60 days a year. Johnston said that Lunn, as head of the company, led from the front even when the company had grown and he had to delegate.

Although often away on extended holidays or seeing clients, his correspondence by email and text showed that he was in control. The staff looked up to him, and could not be expected to contradict him. Cox, by contrast, said that from 2006 Lunn was on the road a lot visiting clients. He therefore did not know about some practices that had taken root in the firm.

Commenting on the culture that had grown up, which she said had come from the top, Johnston reminded the jury about evidence of “window tacking”. This was an alleged practice of using Blu-Tack to stick to a window 64-8 forms or tax returns that the client had signed, and then tracing the signature to use on other documents.

Overstated accountancy invoices

On count 1, the judge said that the jury had heard about a practice of including a standard amount for accountancy in the clients’ accounts each year of £1,280. This was said to have grown up as a response to the pressure of meeting the January tax return deadline, but the provisions should have been revisited in the following year to adjust for the actual fees paid, and were not.

The provision was meant to include the fees of a bookkeeper, but not all clients used one. The prosecution’s case was that most clients did their own bookkeeping, and the fees were routinely overstated to reduce clients’ profits, and hence tax. Where clients had queried the amount compared with the fees paid, they were told it was an accounting provision.

Many of CLAC’s staff were initially self-employed and latterly operated through limited companies. Their accounts were prepared by Lunn, who accepted that he had included the standard fee in their accounts as well, even though they did not have to pay anything.

Cox said that, by the time Lunn looked at the issue in 2010, he concluded that any overclaim for accountancy fees would be more than balanced by an underclaim for use of home. CLAC routinely put a figure of £520 into clients’ accounts, having experienced reluctance from HMRC to agree any higher figure.

Cox said this had been supported by inspectors of taxes giving evidence in the case. Lunn had not known that the Business Income Manual was available online until 2010, and had not therefore seen the guidance that explained how to calculate a claim, including mortgage interest.

Having seen this, Lunn calculated that his clients could claim a minimum of £750, and possibly up to £1,750, a month (sic). Lunn said he had a fair idea of the amounts his clients could claim because he often visited their homes. He also encouraged his staff to work at home, and believed the allowable costs would exceed the accountancy fee provision.

Johnston, however, said CLAC had no firm idea about who was working at home, and no detailed information about the costs. If the reason for overstating the accountancy fees was that the full cost of use of home would not be accepted by HMRC, why had Lunn not explained that to the clients?

The concealment was a sign of dishonesty, and this was simply a cheat, she alleged. Lunn had seen incorrect practice for a number of years, and had not put it right.

In some enquiries, HMRC had asked for copies of the invoices. Cox accepted that a routine had grown up of staff asking the accounts department for a false invoice matching the amount shown in the client’s accounts.

However, he said this had happened after 2006, when Lunn was not dealing with enquiries, and disputed the accuracy of the staff who had testified that Lunn had been involved.

The judge instructed the jury that the case for the prosecution was that a system was in place, and that they therefore had to find at least three cases where they all agreed that there was dishonesty, and that Lunn had either participated in the practice, encouraged it, or not stopped it when he knew about it.

He must have intended to cause loss to the public revenue, and an actual loss of tax had to have occurred, although the prosecution did not have to show exactly how much it was.

He also instructed them that the evidence of the two staff witnesses who appeared for the prosecution had to be treated with caution because of the circumstances surrounding the termination of the employment of one of them, and around the way the second was interviewed. The jury were unable to reach a verdict on this count at the end of the trial.

Snow White and Rain White

Counts 2 and 3 related to a tax planning scheme using companies previously run unsuccessfully by clients and taken over by Lunn or his son. The idea was that the companies had brought forward losses and large balances owing to the director/shareholders.

The shares and the debts owing were bought for small sums, as they were essentially valueless. It was argued that the trades both before and after the change of ownership were sufficiently similar for the losses to be used to cover the profits, and that they could be paid out to the new owners as repayment of the debts that had been purchased. The profits would therefore not suffer any tax, either corporate or personal.

Count 2 concerned Snow White, a company that had been used for the creation of video modelling software. This company was, according to the defence, ultimately acquired by Mr Lunn’s son, and used to pay him for a great deal of work on the company’s website, which the son had so far carried out unpaid.

While cashflow considerations prevented him being paid for it, if this tax planning arrangement was successful Lunn believed he could treat some of his own drawings as payment for the work his son had performed, invoiced through Snow White. CLAC would then receive a tax deduction for the expense, but there would be no tax liability.

The prosecution raised some issues over the acquisition of Snow White, but mostly concentrated on allegations that the services were not provided or were not worth the amount that was paid for them; the son delivered nothing in the two years that he worked on the website. The prosecution added that one invoice for more than £50,000 had been claimed twice as an expense.

The defence said that real services had been provided and that the two trades of creating video modelling software and creating a website were sufficiently similar to allow the losses to be used (it seems that no evidence had been given from tax experts about this).

The judge pointed out that no written contract or invoice was provided, and there was no actual payment out to the son; he was “paid in kind” by Lunn. The work that he said he had done had not come to fruition because it was overtaken by the investigation.

There was no requirement for a written contract, although one might have thought that it would have helped to back up the claim for an expense in CLAC’s accounts.

However, in order to convict the jury needed to decide that Lunn did not actually believe there was a continuity of trade for the losses, or that the services were not actually supplied, and that he was guilty of dishonesty.

Rain White concerned a company that had been used for consultancy in the clothing trade. Lunn had provided management consultancy services to his clients as well as accountancy services, and wanted to use a company to charge for it. He acquired Rain White and its debts, and billed £100,000 to CLAC through it.

Several staff had also received invoices to their companies from Rain White for accountancy or training services that they had not paid for. Lunn had given evidence that these were intended as a gift; the services had been provided but the payment of the invoice would be waived, so the staff member’s company would get the benefit of the tax deduction for the expense.

These had not been discovered at the time HMRC raided CLAC’s offices in 2010, and were only produced in 2012. Lunn claimed that they had been in a secret drawer, to conceal them from staff who were not receiving the invoices.

In response to the forensic evidence from the prosecution that an invoice for one year had been followed by one for the following year from the same ream of paper, Lunn said he had written them all while away in India in March 2010 and was prevented from returning to the UK by the volcanic ash cloud.

The judge told the jury that, as well as asking the same questions as for count 2, the jury should be careful not to jump to conclusions about documents written in succession, because this was only one of the factors to be considered.

The jury were unable to reach a conclusion on either count 2 or count 3.

Carte Blanche

Count 4 concerned Carte Blanche, a company owned by Mrs Lunn, offering her services in graphic and interior design, an area in which she was experienced. The issues over losses in counts 2 and 3 did not arise here, said the judge, simply whether services were actually supplied and whether Mr Lunn acted dishonestly.

Prosecution, defence and the judge dealt with this count in less detail than the others. The defence case was that Mrs Lunn had provided services in both graphic design for the company (including their website) and in interior design for its offices.

The prosecution alleged that the trade of the company was backdated, raising issues similar to those dealt with in count 5 below. The only client of Carte Blanche in one of the years concerned was CLAC, and the prosecution also claimed that insufficient work was done by Mrs Lunn to justify the £200,000 that she was supposedly paid.

In fact it seemed that Carte Blanche received only enough to pay the VAT due. No invoices were raised for the work done in two of the three years.

The defence concentrated on the evidence given by an accountant called by the prosecution who had looked at the accounts. He had, Cox said, changed his opinion during his evidence, saying that he could not rule out the possibility that real sales had been made by the company.

The judge told the jury that, if they thought that the £200,000 may have been a legitimate expense, the prosecution had not proved its case.

The jury failed to reach a verdict on this count

Backdating of company trading

The judge introduced this count in his summing up by saying that it concerned the intention to trade through a company and backdating the trade to the date of incorporation.

There was a difference of opinion between defence and prosecution as to what was allowable: the prosecution said a person could trade through a company only when they had acquired it; the defence said the intention to trade through a company was enough as long as any existing invoice was reissued in the name of the company and the agreement of the customer to do so was obtained.

The jury were instructed that, if Lunn thought that what he was doing was allowable they could not find him dishonest, and that the same issues over participation arose as in count 1 (he had to have participated in it, encouraged it, or not stopped it when he knew about it).

Johnston said this was part of the wrongful allocation from sole trader to limited company, where typically a client would continue to have a sole trade running alongside the limited company and billing it for work done by the client in order to create a sole trader turnover covering expenses that could be claimed personally and the personal allowance.

She said that CLAC formed companies that it sold to clients. Many of these were incorporated in March, and the trade in the company was routinely backdated to that point.

Since Lunn’s claim was that the intention to trade was the key factor, why did the client papers never record an “intention to trade” date, and why had all the clients formed an intention to trade in March, even though none of them gave evidence that they had done so?

For the defence, Cox claimed the prosecution case had changed. In her opening statement, he said, Johnston had claimed the manipulation of profits through running sole traders alongside limited companies was illegal.

However, her own accountant witness had said it was not, and when she cross-examined Lunn she only suggested that backdating the company trade was illegal.

Lunn believed that, if the customer agreed, you could backdate the use of the company to the point at which the client had decided to operate through one. Cox accepted that “this might or might not be agreed by HMRC or by a tribunal”, but said it was “not ruled out as a proposition” by any legal principle.

Several staff had given evidence that Lunn limited himself to giving this advice, and that when he discovered one of his teams had been backdating the use of companies to before the client joined the firm, he was “shocked” and said it must be stopped. He disputed that the prosecution had successfully shown Lunn not abiding by this in two cases that he dealt with personally.

The jury found Lunn not guilty on this count.

ESC C16

The final count concerned the striking off of companies and distributing their assets to shareholders, reporting them as a capital gain. Sometimes this was followed by the formation of a new company carrying on what was allegedly the same trade. No clearances under ESC C16 were obtained because Lunn said that he did not know about it.

The prosecution case was that staff were asked for a list of companies that had high-retained earnings. Staff said that the figure for the bank account of a company was treated as a balancing figure, and that high overdrawn directors’ loan accounts were hidden by this.

As a result, the bank figure bore no relation to reality. By shutting these down and paying only 10% tax after claiming entrepreneurs’ relief, these past problems could be resolved. A new company could be formed and everything put back on track.

The defence, accepting that Lunn had mistaken the rules over ESC C16, said the prosecution had to convince the jury that Lunn knew what he was doing was outside the tax rules. He said many experts missed these rules on closing down companies, citing an article from the BBC’s Working Lunch programme.

“The simple truth is that tax is very complicated. Mr Lunn did not get it wrong deliberately,” Cox said.

In one particular case, AD Events, CLAC arranged for the company to be closed down, and then a new company, AD Events International, to be formed. Cox said it was implausible that Lunn would have done this knowing it to be wrong, because by that time the tax inspectors who were already monitoring CLAC would only have had to “press a few keys [on their computers]” to see the evidence.

The judge told the jury that the central issue was whether Lunn thought this was a legitimate scheme. He was not on trial for not knowing, or not understanding, or being incompetent, he was on trial for dishonesty.

His claim was that he had never heard of ESC C16, but it was introduced in the year that he qualified, 1969. If the jury believed that he knew about ESC C16, that was a pointer towards dishonesty.

Lunn’s evidence was that when he first heard about ESC C16 in 2010 he had a staff member check it out. However, by then it was not appropriate to correct what he had done, because the company had already gone from the register.

Lunn’s evidence on closing companies down and forming new ones was that there had to be a sound commercial reason for doing so, but that this happened all the time.

The judge said that Lunn claimed to have spoken to the senior partner of another firm, who allegedly had said that this was quite normal, and that over a three-year period for a client they would cease and retrade once a year.

The jury found Lunn not guilty on this count.

Other issues

Part of the prosecution’s case was that Lunn had refused to answer questions in interview, and had then constructed his defence evidence on seeing the prosecution’s case.

For the defence, Cox said that he had refused to answer questions quite properly, on the advice of his solicitor. The judge pointed out to the jury that in June 2010, at the time of the first interview, Lunn was handed two ring binders of information on which he was to be interviewed.

He could not be blamed if he took advice on whether to answer, which turned out to be wrong advice. In any case, it was only in relation to counts 1 and 5 that the jury were entitled to consider whether Lunn should have said something at interview.

Particularly in relation to count 1, Cox also raised the issue of the loss of tax to HMRC. He said that the prosecution had to prove, in the cases that the jury wanted to rely on, that there was no bookkeeper or no use of home that could justify any overstated accountancy fees, since otherwise they could not prove there was a loss.

The prosecution had failed to ask those questions or provide a detailed examination by an expert witness.

The defence was not saying that the figures in all the accounts were necessarily correct, but the prosecution had failed to show that any particular client’s figures were incorrect. The judge told the jury that there was a need to show a loss, though not necessarily to quantify it.

The prosecution case was that Lunn’s actions were shot through with dishonesty, that he was not just an incompetent accountant, and he was party to each count. The defence case was that, on a careful examination of the evidence, there was no evidence of intention to cause a loss, and Lunn did not cause any loss.

Issue: 4444 / Categories: Comment & Analysis , Investigations