Company Confirmed Guilty - The case of McNicholas Construction Co Ltd v Commissioners of Customs and Excise is considered.

Company Confirmed Guilty

The case of McNicholas Construction Co Ltd v Commissioners of Customs and Excise is considered.

Following raids by Customs and Excise and the Inland Revenue, allegations were made against various individuals in connection with the fraudulent misuse of the construction industry tax deduction scheme by the Inland Revenue and major frauds directed at Customs and Excise. No allegation of criminal offences was made against the company itself and the twenty-four assessments raised were in connection with fraudulent evasion of VAT under the civil régime. The VAT tribunal confirmed all the assessments made, and in the High Court this was also the decision except for the input tax claimed on the invoices of Mr Prendergast for the accounting periods June 1992 to December 1993 inclusive.

The facts and points at issue
This appeal began in June 1998 before the VAT tribunal and readers will recollect that in a summary in Taxation, 22 April 1999 at pages 102 to 103 the writer commented that the tribunal report (No 15885) contained 101 pages of narrative.
To some extent this procedure was mirrored in the High Court, with the published judgment of 35 pages and reference to numerous decided cases.
Basically the appeal concerned assessments totalling £1.25 million plus interest.
In the voluminous facts and evidence included in the VAT tribunal report it emerged that, as far as VAT was concerned, there were three major frauds directed at Customs and Excise. However, no allegation of criminal offences was made against McNicholas the company itself, and the twenty-four assessments raised were in connection with fraudulent evasion of VAT under the civil régime.
The matter was complicated by the collusion of three senior managers of McNicholas Construction Co Ltd and other employees of the company, and this affected the evidence.
The company itself operates as civil and public works contractors and one of its main activities is that of digging trenches to contain cable ducts. Part of its workforce comes from its own employed staff. Self-employed labourers, who usually work in gangs, form a much greater part of the workforce.
In essence, the appeals centred on alleged payments to non-existent subcontractors, thus producing dishonest and fraudulent claims for input VAT. In the view of Customs and Excise, the absence of any real services by the subcontractors should have disqualified those payments from ranking as input tax. The supplies for services were not genuine and the department alleged that subcontractors, of whom there were twelve, were 'bogus'.
Before the VAT tribunal, the in time assessments were confirmed, as well as the extended time limit assessments as, in the view of the tribunal, Customs and Excise had proved conduct involving dishonesty on the part of the company falling within section 60(1), VAT Act 1994, apart from various invoices relating to the periods from June 1990 to March 1992.
Accordingly the tribunal was satisfied that the assessments met the requirements of section 73(1), VAT Act 1994. In addition, it determined that the department did not have sufficient facts to justify the making of the assessments until 26 March 1996 (the day before the raids took place) at the earliest. None of the assessments was therefore time-barred by section 73(6), VAT Act 1994.
In the High Court, counsel for the company submitted that the decision of the tribunal should be set aside on the following grounds:
There was unfairness in that the way in which Customs and Excise were allowed to advance their case before the tribunal was materially different from that which had been foreshadowed in their statement of case, and the tribunal made findings on allegations on which the company witnesses had no opportunity to comment.
The tribunal's conclusion that the subcontractors did not make genuine supplies to the company was flawed.
The tribunal's decision on the attribution issue was wrong in law.
The tribunal erred in law in finding that there was conduct falling within the meaning of section 60(1), VAT Act 1994.
The tribunal was wrong to conclude that VAT was lost and that section 77(4), VAT Act 1994 was therefore engaged.
The tribunal's decision on the best judgment issue was erroneous.
The tribunal decision in relation to the 'Prendergast' invoices in respect of the extended time limit was wrong in law.
The decision on the issue of section 73(6)(b), VAT Act 1994 was also wrong.
(Charles Purle QC, Michael Sherry and Eamon McNicholas for the company; Kenneth Parker QC and Aidan Robertson for Customs and Excise.)
The Queen's Bench division judgment
The matter came before Mr Justice Dyson who rehearsed the facts and the relevant statutory provisions applicable to the case.
Interested readers are encouraged to read the full judgment, but the following were the conclusions of the judge:
Mr Justice Dyson rejected the argument of unfairness.
In the opinion of the judge, the tribunal was right to decide that the knowledge, intentions and acts of the company managers mentioned in the judgment in relation to the fraud must be attributed to the company.
As regards the genuineness of the supplies, there was no evidence that various persons were agents of the alleged subcontractors.
The tribunal was correct in deciding that the mere fact that the alleged subcontractors handed over 714 tickets for use in the furtherance of the fraud was insufficient to make the alleged principals responsible for the arrangements made by the various agents.
As regards attribution, Mr Justice Dyson held that the tribunal was entitled to draw the inference that it was a purpose of the site agents to evade VAT, and in any event, that in making returns which claimed to deduct input tax on non-existent supplies, the company's purpose was to evade VAT.
The judge was satisfied that the tribunal was right to hold that the requirement that VAT was lost as a result of the dishonest conduct under section 60(1), VAT Act 1994 was proved. Accordingly VAT was 'lost' under section 77(4), VAT Act 1994.
On the 'best judgment' issue, the judge held that the assessments raised could not be faulted as offending the principles set out in Rahman v Commissioners of Customs and Excise [1998] STC 628.
As regards the best judgment issue, Mr Justice Dyson held that Customs and Excise did exercise best judgment in raising the various assessments.
However, the judge held that the department had made an error in raising extended time limit assessments on a Mr Prendergast for the periods June 1992 to December 1993 and in that small respect the appeal was allowed.
On the question of sufficient facts, in the judgment of Mr Justice Dyson the decision of the VAT tribunal on the issue of section 73(6), VAT Act 1994 could not be impeached.
As was made clear by the Court of Appeal in Pegasus Birds Ltd v Commissioners of Customs and Excise [2000] STC 91 at paragraph 18 of page 98: 'The question for the tribunal on appeal was whether the Commissioners' failure to make an earlier assessment was perverse or wholly unreasonable'. In the view of Mr Justice Dyson, the tribunal was entitled to find that it was the opinion of the Commissioners that the evidence available to them before the raid was insufficient to make the assessments before March 1996. It would be remarkable if Customs and Excise themselves had thought that they were justified in raising the assessment before the relevant raids took place, particularly when none of their witnesses gave evidence to that effect. The burden was on the company to show that Customs and Excise had evidence of facts before March 1996 sufficient in their opinion to justify the making of the assessments. In the judgment of Mr Justice Dyson, the tribunal was right to hold that the company had not discharged this burden.

Appeal dismissed
Except to the very limited extent relating to the Prendergast invoices, the appeal was dismissed.
(Reported at [2000] STC 553.)

Commentary by John T Newth FCA, FTII, FIIT, ATT
Once again one assumes that the company took the case to the High Court in order to clear its name, rather than dispute the assessments raised and interest imposed – substantial as they are.
Nevertheless both at tribunal and High Court level it was established that two site managers, a contract manager and other employees of the company had been involved in long-running construction industry frauds.
As mentioned in the writer's previous report of the tribunal, the evidence against individuals was never properly tested in criminal proceedings. The judge at Harrow Crown Court determined that the evidence disclosed in public at the VAT tribunal and later published was an abuse of process and the various defendants could not receive a fair trial. Accordingly the criminal charges against the managers and employees were thrown out. Once again this appears to indicate a lack of communication between the various prosecuting authorities.
 

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