19991

VALUE ADDED TAX — whether Appellant trading alone in one business and in partnership with his wife in another separate business — no — Appellant correctly assessed as a sole trader — appropriate date of registration — validity of assessments — whether failure to notify exclusively by reference to prescribed periods fatal — VATA 1994 s 73 — whether notification and explanation separately given to be considered together — yes — assessments valid — amount of tax not declared — penalty for dishonest evasion — VATA s 60 — whether dishonesty established — yes — time limits for making assessments not offended — amount of penalty — evaded tax to be recalculated by parties — appeal allowed in part
MANCHESTER TRIBUNAL CENTRE

ANTHONY CORSTON
Appellant
	
- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS
Respondents

		Tribunal:	Colin Bishopp (Chairman)
				Marilyn Crompton
				Arthur Brown FCA CTA

Sitting in public in Manchester on 3 and 4 April and 28 and 29 September 2006 
Richard Barlow, counsel, instructed by Franklin Underwood, accountants, for the Appellant 
Jonathan Cannan, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents 

© CROWN COPYRIGHT 2007

DECISION
Introduction
1.	This appeal raises a number of issues, some of which changed during the course of the appeal, in a few cases only days before the hearing began. It is common ground that at all material times the Appellant, Anthony Corston, traded as a hairdresser from salon premises in Grantham and Newark. The matters we must decide, in summary, are:
•	Whether, at the Newark premises, he traded in partnership with his wife (it is agreed that the Grantham business was at all material times Mr Corston’s alone);
•	The date from which Mr Corston (or, as the case may be, Mr and Mrs Corston) should have registered for VAT in respect of the Newark salon;
•	Whether the assessments of tax which Mr Corston disputes, irrespective of the foregoing issues, satisfy the relevant technical requirements; 
•	Whether, and if so to what extent, Mr, or Mr and Mrs, Corston has or have under-declared his or their liability to VAT;
•	Whether Mr Corston’s conduct has been dishonest in a manner which exposes him to the imposition of a penalty; and 
•	If so, the amount of the penalty which should be imposed.
2.	The assessments relevant to the appeal consist of an assessment (or set of assessments) notified on 13 September 2000 (“the first assessment”), an assessment (or set of assessments) notified on 18 September 2000 (“the second assessment”) and a notification, dated 20 April 2001, of a civil penalty for evasion of tax, imposed in accordance with section 60 of the Value Added Tax Act 1994. Both (or all) of those assessments have been amended, by withdrawal of some of the periods included within them or by arithmetical adjustment, since they were first notified. We deal with those amendments, so far as necessary, below. A further assessment (or set of assessments) notified on 15 September 2000 has been wholly withdrawn. By “notified” we mean the formal notification of what, in some cases, had already been communicated in another form. The arithmetic of the first assessment and of the amendments to a voluntary disclosure Mr Corston made in January 2000 (to which we will come later) is not disputed.
3.	The Commissioners have taken the view, throughout, that Mrs Corston has never been in a business partnership with her husband. She has not been assessed, to tax or to a penalty, nor is she the subject of a disputed decision, and correspondingly she is not an appellant. Much depends on our answer to the first of the questions we have identified since, if Mrs Corston was her husband’s partner in the Newark business, some of the Commissioners’ assessments and decisions may not be able to stand for the technical reason that they have been incorrectly addressed. We intend therefore to begin with the first question and, since they follow naturally in that order, with the remaining questions as we have set them out. Although there is some overlap between them, and most of the witnesses gave evidence directed to more than one issue, it is in our view simpler to deal with each issue, as far as possible, discretely, and we have endeavoured to do so.
4.	Before us, Mr Corston was represented by Richard Barlow and the Commissioners by Jonathan Cannan, both of counsel. In the usual way in cases in which a penalty has been imposed for alleged dishonesty the Commissioners went first and we heard evidence from Susan Butler, the assessing officer; Neil Freebury, the officer on whose recommendation the penalty was imposed; Frances Clements, the officer who reviewed both the assessments and the penalty; and Mr Corston himself. We do not propose to set out the evidence of the witnesses, one after the other, but to deal with their evidence, so far as necessary, as it relates to each issue. We were provided with transcripts of three interviews of Mr Corston, undertaken by Mr Freebury and Mrs Butler and at which Mr Corston was assisted by an accountant. We did not, however, find the interviews of great help and we shall not refer to them below.
The partnership issue
5.	It was agreed that Mr Corston first began trading from the premises in Grantham in 1983, when he entered into partnership with a Mr Michael Green. The trading name of the business at that time was Michael Gerard. After a few years Mr Green emigrated and Mr Corston carried on the business alone. He became registered for VAT as a sole proprietor with effect from 1 February 1988. It was also not in dispute that from that date on he has remained the sole proprietor of the business.
6.	Mr Corston—or, if his case is correct, Mr Corston and his wife—acquired the Newark salon in 1990 by purchase as a going concern from the then owners. Although there was no documentation available to us relating to the acquisition, the copy accounts produced at the hearing showed the first trading period after the purchase to be from 1 July 1990 to 31 May 1991, and we deduce therefore that the takeover occurred on 1 July 1990, a conclusion which Mr Barlow did not challenge. At the time the business was known as “Kudos” and was located in a village on the outskirts of Newark, but it moved to the centre of Newark and its name was changed to Gerard Hair Studio (the name by then used by the Grantham business) in 1993 or 1994. The Newark salon was sold in about February 2000 and, we understand, Mr Corston continued to trade at Grantham alone.
7.	Mr Corston told us that he spent most of his time at the Grantham premises, visiting Newark only once a week, generally on Wednesday. Newark and Grantham are about 16 miles apart. The Newark salon was always rather smaller in scale and on a daily basis it was run by an employed manager who, we deduce, was one of the stylists. Both salons were open every day of the week except Sunday and Mr Corston did not work either on Sunday or, usually, on Monday morning. In addition to running the business he was a working hairdresser and he had clients of his own at both Grantham and Newark. 
8.	Mr Corston’s evidence was that it had been his intention from the outset that the Newark business should be owned by a partnership of himself and his wife. She had, he said, put money into the Newark business at the time of its acquisition and it was in part for that reason he had regarded her as his partner. It later transpired—as Mr Corston conceded—that Mrs Corston had not injected cash, but had participated with her husband in a borrowing from their bank secured by a charge over the matrimonial home. 
9.	At the time the Newark business was acquired Mrs Corston was working in a bank but she was unhappy there, Mr Corston said, and they had agreed that she would leave the bank and instead attend the Newark premises daily, in order to manage them. Because the turnover of the Newark salon had not improved as rapidly as they had hoped, however, and it could not justify a full time manager, that intention had been put off and in fact had never been realised. Indeed, it was the continuing poor results of the Newark salon which led to the decision to sell it. Mrs Corston had eventually left the bank, and, after a period of about 18 months during which she received jobseeker’s allowance, she had begun to work as a receptionist, but only at the Grantham premises. Nevertheless, Mr Corston said, he regarded her as his partner at Newark, but not at Grantham.
10.	Unfortunately for Mr Corston, all of the remaining evidence, with a single exception, is consistent only with his being the sole proprietor of the Newark business. We deal with the single exception first: it is the bank account of the business. We saw two statements, dated July 1996 and June 2000 respectively, both of which identify the account holder as “A & C Corston t/as Gerard Hair Studio Newark”. We accept that the second account holder is Mrs Corston (her first name is Christine), and we are quite willing to believe that the bank was under the impression that Mrs Corston was indeed a partner in the business, not least because there was no evidence available to us to suggest that, when the borrowing to which we have referred was made, the bank—the same bank as that with which the account was held—had advised her to seek independent legal advice which, we are aware, was the universal practice at the time when one spouse wished to borrow against the security of the matrimonial home money for use in that spouse’s own business. Mr Corston did not tell us he had specifically informed the bank that he and his wife were partners, but it must be inferred that the bank assumed as much.
11.	Against that, explicable, item, virtually all of the other documentary evidence points overwhelmingly in the opposite direction. Mr Corston himself represented, in an application he made in 1995 for VAT registration of the Newark business, with which we will deal in more detail later, that he was the sole proprietor of that business, by ticking the box for that option. The “partner” box was left blank, and only his name appeared on the form. During the course of an investigation by the Inland Revenue into his affairs, in 1999, Mr Corston completed and signed a statement of his personal assets in which he declared that he was the owner of the two businesses, eschewing the option open to him of stating that he was in partnership. His income tax returns to what was then the Inland Revenue (in conjunction with which much of the investigation in this case was conducted—the departments were, of course, then separate) indicated, consistently, that he was not in partnership and likewise Mrs Corston’s income tax returns made no reference to her being a partner in the Newark business. It may be the case that she took no drawings but if Mr Corston is right that she was an equal partner with him, she should have declared her share of the profit (although in most years the Newark accounts show a loss those losses could have been offset against profits in other years). We accept that Mr Barlow may be right in contending that Mrs Corston was not disqualified from receiving jobseeker’s allowance if she received no income from the business, and will treat the fact that she received the benefit as neutral. 
12.	We were shown three reports compiled by VAT officers who visited Mr Corston in January 1993, in July 1996 and in January 2000. In the first, Mr Corston is recorded to have said that he was in business at Newark, in partnership with his wife, but (we must infer, since the report is not explicit) that the turnover of the salon was below the prevailing registration threshold. At the second visit (which occurred after his abortive application for registration) he is recorded to have said that he was in partnership with one Dani Louth and—despite his having applied for registration less than a year previously—that the business had not yet reached the registration threshold. In 1997, as we shall explain below, Mr Corston began to include the Newark takings (or, if the Commissioners are right, some of them) in his VAT returns. At the third visit the officers discussed the increase in the declarations with him. The explanation he gave, according to the report, was that he had opened the Newark premises on 1 July 1997. On this occasion, he is not recorded to have claimed that he was in partnership. Mr Corston denied having claimed that he was in partnership with Ms Louth, or that the Newark salon had opened only in 1997. We recognise that we heard no oral evidence from the officers who prepared the reports of the first two visits (the visiting officer on the third occasion was Mrs Butler). 
13.	Perhaps most importantly of all, every one of the sets of annual accounts for the Newark business produced to us shows Mr Corston as the sole proprietor of it. There is no hint anywhere within those accounts that Mrs Corston (or indeed anyone else) had ever been in partnership with him. The accounts were prepared by chartered accountants; although, as we shall later indicate, the accountants can be criticised in some respects, there is no hint in the large volume of correspondence included in the bundle, passing between the accountants and Mr Corston and between the accountants and the Respondents, that it had ever been suggested to the accountants that Mrs Corston was a partner in the Newark business, and it defies belief that, year after year, neither he nor his wife (to whom, he told us, he showed the annual accounts) thought it appropriate to tell, or remind, the accountants that the documents which were produced to them for approval and signature were incorrect. Mr Corston also told us that he had discussed not only the accounts but also various other documents showing him as the sole proprietor of the Newark business with his wife, but that it had not occurred to either of them to query with the accountants or anyone else the manner in which those documents had been prepared. 
14.	We are entirely satisfied from the evidence that Mr Corston’s claim to have been in partnership with his wife is false. In reaching that conclusion we do not overlook Mr Barlow’s argument that partnership does not require great formality, but is merely the relationship of two or more persons carrying on business together with a view to profit. But, despite those limited requirements, we do not accept that Mr Corston, even mistakenly, believed he was in partnership with his wife; we are quite satisfied that he did not intend, at any time, that such a relationship should exist. He had some understanding of the nature of partnership from his earlier relationship with Mr Green. We accept that he did claim in 1993 to have been in partnership with his wife, but we have concluded that the statement was made in order to deflect the officers’ attentions from the Newark salon, and that the comments he is recorded to have made during the 1996 and 2000 visits are in the same vein—that is, they are to be regarded as an attempt to divert the Commissioners’ attention from the Newark business. It is quite impossible to reconcile the various documents produced to us, many prepared by Mr Corston personally, and others on his behalf but with his approval, with his claim that he was in partnership with his wife. The documents were produced for formal purposes, and Mr Corston can have had no doubts about the importance of accuracy in them yet, by his own account, he took no steps to correct the supposed error (an error easily corrected), not once or twice but on many occasions over a prolonged period. 
15.	We are in no doubt that at all material times Mr Corston was a sole trader. The assessments do not fail because they were incorrectly addressed. 
The proper date of registration
16.	This question becomes largely academic by reason of our answer to the first question. Mr Corston became registered for VAT, as a sole trader, on his assumption of the Grantham business when Mr Green emigrated, in February 1988. It is an elementary concept of VAT law that his proper course, once he had acquired the Newark premises, was to aggregate the takings of the Grantham and Newark salons and declare them in the returns he was required to make by reason of his existing registration. Separate registration of the Newark venture was neither required nor possible. Since Mr Corston was registered for VAT throughout the relevant period (and there was in any event no dispute that the aggregate takings of the two salons were at all times above the registration threshold) it follows that the Newark takings should have been declared from the outset, and it is unnecessary to consider when, had there been a separate business at Newark, that business should have become registered. We shall, nevertheless, deal briefly with the parties’ arguments about this issue, because they are of some relevance to the issue of dishonesty.
17.	It was conceded that the previous owners of the Newark business had declared that its turnover in the year prior to the sale to the Appellant amounted to £42,452, a sum then above the registration threshold, and they were liable to register for VAT (it is not now known whether they were in fact registered). It was also conceded that the acquisition amounted to the takeover of a going concern. Had there, in truth, been an acquisition by Mr and Mrs Corston, they should have registered immediately for VAT, by reason of paragraph 1(2) of Schedule 1 to the Value Added Tax Act 1994 (re-enacting in a different form but without significant amendment provisions in force in 1990). That is so whether or not the previous owners were in fact registered. But neither Mr Corston nor Mr Corston and his wife applied for registration, and Mr Corston continued to declare the takings of the Grantham premises alone. 
18.	Even if we were to accept that Mr and Mrs Corston were in partnership, and that they were not affected for some reason by the rules relating to the taking over of a going concern, there is clear evidence from the separate accounts of the Newark salon that registration from as early as 1991 was required. The Newark accounts disclose turnover in the 11 months to 31 May 1991, the first period of trading, of £35,967, well in excess of the registration limit to 19 March 1991 of £25,400 and more modestly in excess of the increased limit, in effect from 20 March 1991, of £35,000. It is impossible to determine from the accounts alone when precisely the liability to register arose, but it was plainly at some time during the course of that 11-month period. No application for registration was submitted, though it is fair to say that Mr Corston’s then accountants do not seem to have drawn his attention to the obligation to register when they sent the draft accounts to him for approval. 
19.	In fact, it was in September 1995 that Mr Corston submitted the application for VAT registration of the Newark business which we have already mentioned. He stated in it that he made his first taxable supply on 1 July 1995, and applied for registration with effect from that date. It was apparent from the correspondence produced to us that he made the application on the prompting of his accountants, who had determined in the course of preparing the (separate) accounts for the two salons that the takings at Newark had exceeded the registration threshold. It is apparent from the Newark accounts, if they are accurate, that between 1991 and 1995 the takings of that salon alone had fallen below the prevailing registration threshold before rising again to a level above it; it was that rise which prompted the accountants’ advice. Because Mr Corston described himself in the application he made (which he completed himself) as a sole proprietor, and he was already registered in that capacity, his application was rejected by a letter of 26 September 1995, to which we shall return later.
20.	It follows from those findings that if, contrary to our earlier conclusion, the Newark venture is properly to be regarded as a separate business, the liability to register for VAT arose on 1 July 1990. Alternatively if, despite Mr Barlow’s concession, one disregards the fact that the acquisition was the takeover of a going concern, the liability to register arose during the 11-month period to 31 May 1991, albeit registration might have been avoided if the Commissioners had been persuaded that the turnover would fall during the ensuing period (see what is now paragraph 1(3) of Schedule 1 to the 1994 Act). In that further alternative situation, the liability to register arose again at 1 July 1995, the date from which Mr Corston applied for registration. If there were any truth in Mr Corston’s assertion that he and his wife were in partnership, the application for registration, whether in 1991 or in 1995, should of course have been made in both their names.
The technical validity of the assessments
21.	There are two discrete issues here: whether the assessments satisfy the requirements of form, and whether they were made in time. The second of those issues depends, in respect of most of the periods assessed, on our being satisfied, or not, that Mr Corston was dishonest. If we are so satisfied in respect of any period, the assessment relating to that period (if it is otherwise valid) is in time because, by virtue of section 77(4) of the 1994 Act, the Commissioners have 20 years in which to make an assessment, a time limit which, Mr Barlow accepted, had not been breached. On the other hand, if we are not satisfied of Mr Corston’s dishonesty, only the assessments for the periods 06/98 and 06/99 survive the time limit of three years imposed by section 77(1) of the Act, as Mr Cannan conceded. It was agreed that no other time limits might apply. We will deal with the issue of time limits when we have dealt with the question of dishonesty; at this stage we deal with the other formal requirements which, Mr Barlow argued, have not been satisfied.
22.	We should first mention that, for reasons which were not explained, the Newark accounts were made up to 31 May 1991, 31 May 1992 and then 30 June in 1993 and subsequent years, while the Grantham accounts were made up to 21 June in each year from 1988 to 1992, and to 30 June from 1993 on. There were separate accounts for the two salons in every year. Mr Corston had at first made quarterly VAT returns, but in 1993 was given permission to make annual returns for periods coincident with those covered by his trading accounts. His last quarterly return was for period 09/93. There then followed a nine-month period, 06/94, and thereafter returns were due for the periods ended on 30 June in each year. It was common ground that the returns Mr Corston made up to and including that for the year ended 30 June 1997 disclosed only the Grantham income (or, if the Respondents are right, some of it) but that from 1 July 1997 Mr Corston began to include the Newark income (or, again, some of it).
23.	Mr Barlow’s first argument depended on the wording of section 73(1) of the 1994 Act:
“(1)	Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him.”
24.	The various assessments were made in accordance with that provision, on the supposition that the returns Mr Corston had made were “incomplete or incorrect”. It followed, Mr Barlow said, that the assessments, like the returns, must be made by reference to prescribed periods. That argument was supported by subsection 73(6):
“(6)	An assessment under subsection (1) … above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following—
(a)	2 years after the end of the prescribed accounting period; or
(b)	one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge,
but (subject to that section) where further such evidence comes to the Commissioners' knowledge after the making of an assessment under subsection (1), (2) or (3) above, another assessment may be made under that subsection, in addition to any earlier assessment.”
25.	The system of assessment, and the imposition of time limits, was therefore dependent on the observance of prescribed periods. Mr Barlow accepted, as the Court of Appeal had indicated in House v Customs and Excise Commissioners [1996] STC 154, that an assessment might be validly made for more than one prescribed period but, he said, that was not what the Commissioners had done. The first of the periods included in the first assessment (that is, the notification dated 13 September 2000 and originally for a total sum of £48,229) included an amount, £19,660, for a period described as “00/00”, without elaboration. A similarly identified period features in the second assessment (or, if the Commissioners are right, notifications of assessments already made), and exactly the same arguments as those we set out below arise in relation to those assessments or their notification; rather than duplicate the arguments we shall deal only with the first assessment, but our conclusions apply equally to the other. “00/00”, Mr Barlow said, was not a prescribed accounting period, and nothing was provided to Mr Corston which would have enabled him to determine the period to which the sum assessed related. Mrs Clements, the review officer, explained when she gave evidence that, because that part of the notification related to a period more than six years before the assessment was made, the Commissioners’ computer could not handle the date correctly, and instead printed “00/00”. The explanation does not, of course, excuse any technical failing, and the notification itself does not contain any material from which Mr Corston might have been able to discover the period to which amount assessed related, nor the reasoning behind the assessment.
26.	The notification was, however, preceded by a letter Mrs Butler, the assessing officer, wrote to Mr Corston on 7 September 2000. That letter was accompanied by a breakdown, or schedule, of the amounts assessed for each of several, identified periods. Mr Corston could not have had any real difficulty in understanding, from the letter and schedule, how much tax the Respondents said was owing to them, and why. Had the formal notification sent on 13 September been in the same form Mr Corston would have seen immediately that the latter merely duplicated the former. In fact, it was necessary to use a little arithmetic to marry the various amounts in the notification with the earlier schedule, though we doubt if anyone reasonably numerate would have needed to spend more than 10 or 15 minutes on the task. It must have been perfectly clear, from the fact that the totals on the two documents were identical, that they related to the same tax even if they arrived at the total by different routes. 
27.	Mr Barlow’s argument was, in effect, that the notification of 13 September should be taken at face value. His contention was that Mr Corston should not be expected to work out for himself, from another document, what “00/00” included. Secondly, “00/00” in the notification included three periods which, in the earlier explanation, were described as “Year end 31 May 1991”, “Year end 31 May 1992” and “Year end 30 June 1993”. As the Commissioners now accepted, none of those was a prescribed period (it was for that reason that those elements, as well as similarly identified periods in the other notices had been withdrawn shortly before the hearing began). The aggregation of those periods with others in the single assessment for period “00/00” had the consequence, Mr Barlow said, that the whole assessment was tainted. Merely removing those periods, as the Commissioners had done, was not enough: the assessment as a whole was invalid and it could not be salvaged by removing periods erroneously included within it. In addition, as Mrs Clements agreed when she gave her evidence, the fourth period included within “00/00” was described in the breakdown sent by Mrs Butler as “Year end 30 June 1994”. That, too, was not a prescribed period, but was the aggregate of the two periods 09/93 and 06/94, adopted in order to allow Mr Corston to use annual accounting. Though it might be legitimate to assess two prescribed periods together it must be made clear that such a course had been adopted (which Mr Barlow did not concede was the case here) and it must be possible to identify the tax for each period. 
28.	For the Commissioners, Mr Cannan referred us extensively to what was said by Sir John Balcombe in the Court of Appeal in House. He gave the only judgment, with which the other members of the court agreed. The court was required to consider a situation similar to that here, namely an assessment for a period described in the computer-generated notification as “00/00”, where the taxpayer had received an explanation in a separate document. There is a small difference between the two cases in that, there, the notification and the explanation were served together whereas here the explanation preceded the notification by a few days, a point to which we shall return. At p 157e Sir John Balcombe said:
“The following issues arise on this appeal. First, is a global assessment permissible in the circumstances of the present case, those circumstances being … that, by dint of a number of small mathematical calculations, it would have been perfectly possible to have had separate assessments for each of the accounting periods concerned? The second question is: if a global assessment was permissible at all in the circumstances of the present case, was it permissible to treat the schedules in the [accompanying] letter … as part of the notice of assessment? Thirdly: is the taxpayer sufficiently informed of the effect of the assessment? The judge answered all these questions in the affirmative. I agree …”
29.	Then, after setting out the legislative requirements (from the 1983 Act; the 1994 Act is in identical terms) and pointing out that there is no explicit requirement that tax be assessed by reference to prescribed accounting periods, and no particular form which assessments or notifications must take, he referred to the earlier decision of the Court of Appeal in S J Grange Ltd v Customs and Excise Commissioners [1979] STC 183, in which Lord Denning MR said (at p 192):
“… there is nothing to prevent the commissioners making an assessment for any period, whether it be three months, 12 months, 21 months or longer.”
30.	In the same case the Court of Appeal explained that there was no difficulty in applying the relevant time limits even when an assessment covered more than one prescribed accounting period. However, as Sir John Balcombe mentioned in House, a belief had grown up, possibly from a slightly unguarded remark made by Lord Denning in Grange, that the Commissioners could make an assessment for a period longer than a prescribed accounting period only when it was impossible to split the assessment into three-monthly periods. But, he went on, that belief was incorrect. It was not consistent with what the other judges in Grange had said, and was not consistent with what he (Balcombe LJ as he then was) had said in Customs and Excise Commissioners v Le Rififi Ltd [1995] STC 103, that no such limitation of necessity was to be found. 
31.	There are, we think, three elements to Mr Barlow’s argument: first, was Mr Corston provided with a sufficiently clear explanation; second, was the assessment for period “00/00” a single assessment or merely the notification, together, of several assessments; and, third, if there was a single assessment, was it rendered incurably invalid by the inclusion within it of periods which were not prescribed periods?
32.	We accept that the explanation given by the letter and its enclosure requires a little study before it becomes clear, but we do not think a taxpayer can expect to be provided, in every case, with an explanation anyone could understand without the least difficulty. In some cases it would be impossible to provide an explanation in such terms. The standard, as Woolf J said in International Language Centres Ltd v Customs and Excise Commissioners [1983] STC 394 at 398, is that “the taxpayer is entitled to be informed in reasonably clear terms of the effect of the assessment”. In our view Mr Corston was informed “in reasonably clear terms” about the reasons for the making of the assessments, the means of calculation and the periods to which each component item related—clear, that is, in that the amounts of tax assessed and the reasons for their assessment could be gleaned from the documents.
33.	There is nothing in the point that the letter preceded the notification; it must have been perfectly plain to Mr Corston that what he received on or about 14 September 2000 was no more than the formal notification of what he had received only a few days earlier. Although the information in the two documents was set out in a different manner, the total was the same and, as we have said, Mr Corston could not have failed to realise, when he received the latter, that the two documents related to the same tax, and that he had not been assessed twice, and for different reasons, for two separate amounts of tax which just happened to be identical. We cannot accept the implicit argument that the adequate explanation provided by the letter and schedule is in some way overridden by the notification which, taken alone, plainly does not contain an adequate—or indeed any—explanation. The argument would be unsustainable if the letter, with its explanation as we have called it, and the notification arrived in the same envelope (as in House); it is in our view equally unsustainable when, as in this case, the one preceded the other by a matter of days. We need therefore to consider whether the letter and schedule amount to an assessment, or must be considered to be something else.
34.	It has been said many times that the processes of assessment and notification are separate—see, for example, Grunwick Processing Laboratories Ltd v Customs and Excise Commissioners [1986] STC 441. The letter of 7 September 2000 includes the sentence “An initial assessment is enclosed in the sum of £48229.00”. We have described the enclosure to the letter as a schedule, a breakdown or an explanation, but the description of assessment is equally appropriate: it is a statement of the tax said to be owed by Mr Corston, broken down into periods and with an indication of the reasons for asserting that each amount of tax was due. The notification of 13 September added nothing to the letter and in our view it was unnecessary to send it at all. The letter and breakdown told Mr Corston all he needed to know, and the breakdown was, moreover, described in the letter as an assessment. That description was correct. 
35.	It will be apparent from what we have said that we also do not accept Mr Barlow’s argument that the 13 September notification contained a single assessment for the period identified in it as “00/00”. In our judgment the various items set out in the breakdown, or schedule, all stand as assessments in their own right, and are not replaced, or overridden, by the later notification. There were therefore discrete assessments for the years ended on 31 May 1991, 31 May 1992 and 30 June 1993 (the last, though said to cover a year, was in fact for the 13 months which ended on 30 June 1993; all three, as we have said, have been withdrawn), and for the year ended 30 June 1994 (as well as other periods not relevant to this particular issue). It follows therefore that the first three of those periods were not removed from a single assessment for a longer period, and that the remaining items making up what was aggregated in the notification and included in “00/00” stand or fall on their own merits.
36.	It is perfectly true, as Mr Barlow said, that the “Year end 30 June 1994” was not a prescribed period, but the aggregate of two consecutive prescribed periods; and it is true that the schedule does not indicate in any way that it is intended to relate to the two prescribed periods—the only identification is to the accounting year.
37.	In House Sir John Balcombe said, at p 158a:
“The reference in [what is now section 73(1)] to tax due for a prescribed accounting period, and, indeed, similar references in other [parts of the Act], at one time gave rise to the belief that it was not possible for the commissioners to make an assessment other than in relation to a prescribed accounting period, which normally would be one of three months. That belief was dispelled by a decision of this court in the case of [Grange] …”
38.	Once one accepts that the Commissioners made an assessment for the year to 30 June 2004 it is apparent that there is in reality no difference between this case and House. It seems to us a proper inference from what Sir John Balcombe said that, provided only that the taxpayer is given an adequate explanation, the Commissioners can assess by reference to any period, whether or not coincident with one or more prescribed periods. (Mr Cannan conceded that an assessment must be coincident; we do not need to determine, for the purposes of this appeal, whether he was right to do so.) As we shall explain, the assessments were (in the main) made by reference to Mr Corston’s annual accounts and for that reason, rightly or wrongly, the assessments were likewise made by reference to accounting years rather than prescribed periods. The Respondents could have made separate assessments for the periods 09/03 and 06/04 by the simple expedient of dividing the tax determined to be due for the year by four and allocating one fourth to 09/03 and three fourths to 06/04 (there was no evidence to support a more sophisticated division). Mr Corston could have done exactly the same himself. What is clear is that he could not have been in any real doubt that those two prescribed periods were included in the assessment for the year.
39.	It has been made clear by the courts and this tribunal on many occasions that the purpose of an assessment is to recover from a taxpayer the amount of tax which is properly due. The assessment process is not a kind of challenge in which, regardless of the merits, the Commissioners have to comply with rigid but inconsequential matters of form, and run the risk that if they make a mistake, however unimportant and however obvious to the taxpayer, he secures an adventitious escape from his liability. There is no merit in, nor any legislative or judicial support for, the proposition that an assessment expressed to be for the year ended 30 June 1994 is incapable of amounting to a valid assessment for that period of time, even if two (or more) prescribed periods together make up that year. In our view the assessment made in this case for that year is valid. For completeness we repeat that the same conclusion applies to the other assessment which include periods identified as “00/00”, from which, too, those periods which were not prescribed periods have been removed.
Whether, and if so to what extent, there has been any under-declaration of VAT
40.	The tax said to be due falls into three groups: that attributable to the Newark takings which were not declared at all; that attributable to the under-declaration of the Grantham takings and, after Mr Corston began to declare them, the Newark takings; and that attributable to various other under-declarations of output tax and over-claims of credit for input tax, and book-keeping errors. There is some overlap between the first and second groups, since the Commissioners first assessed the Newark takings by reference to the annual accounts and later, when they concluded that the annual accounts did not disclose all of the turnover, by reference to what they perceived to be the true turnover. Once arguments about the existence or otherwise of a partnership, the correct date for registration of the Newark salon and the technical validity of the assessments are set aside, the only remaining issue so far as the amount of recoverable tax is concerned is the accuracy of the Commissioners’ belief that the annual accounts understated the turnover. The first assessment, based on the Newark accounts, is for the VAT fraction of the declared turnover (input tax is accounted for elsewhere) and, as we have said, Mr Barlow did not challenge the arithmetic of what remains of that assessment. Likewise the adjustments made to the voluntary declaration Mr Corston submitted in January 2000 were not challenged.
41.	It was, in fact, an earlier voluntary declaration, made by Mr Corston in 1997, which led the Commissioners to the conclusion that the annual accounts were not reliable. They were able to calculate, by marrying the voluntary disclosure with the Grantham accounts for the corresponding period, that the turnover shown in the VAT returns was less than the true turnover. Mrs Butler explained that by taking the VAT return for the year and the voluntary disclosure together, she and Mr Freebury, who was assisting her with the calculations, could reconcile the VAT return to the accounts. There were no primary accounting documents, such as till rolls or stylists’ dockets, from which the daily gross takings could be determined (even though Mr Corston should have retained one or the other as a condition of using the retail scheme he employed), and this was, as she perceived it, the only means by which she could make any effective check on the returns. Although she now had doubts about its accuracy, at the time Mrs Butler thought, she told us, that the voluntary disclosure, which had been prepared by Mr Corston’s accountants, was reliable.
42.	Her initial calculation led her to the view that the difference between the true takings and those declared amounted to 22.33 per cent (that is, the true turnover was 22.33 per cent greater than the declared turnover) and she based the assessment she raised (the second assessment) on that error rate. Mrs Clements, in her later reconsideration, adjusted the error rate to 20.03 per cent. They both assumed a consistent under-statement of takings in all the accounts and the assessments, as first raised and as adjusted, are for the VAT fraction of the amount so found to have been under-declared. In fact, Mrs Clements’ reconsideration led her to the view that too little tax, overall, had been assessed, but she decided that the benefit of any doubts should be resolved in Mr Corston’s favour, and she did not increase the assessments; for the same reason Mrs Clements increased the allowance for input tax credit above that assumed by Mrs Butler and Mr Freebury.
43.	Mr Barlow’s challenge was not so much to the determination of the error rate, but to its application. As he—in our view correctly—pointed out, the Respondents’ approach was illogical. It was to treat the 1997 accounts for Grantham as reliable, but to assume that all the other accounts were unreliable. While we think, in the light of our other findings, that it is most unlikely that the 1997 accounts were reliable (we are quite sure Mr Corston was deceiving his accountants as well as the Respondents), there is no evidence available to us which might enable us to determine what the true turnover of either salon was. In the absence of evidence we cannot add something to the turnover disclosed by the accounts—we would be making nothing more than a guess. We agree with Mr Barlow that the Respondents’ approach is flawed and, as the parties indicated they would like us to do, should we so conclude, we leave them to make the necessary calculations. If they are unable to do so, either party may apply to the tribunal for further directions in respect of the continuation of the appeal for the determination of the correct amount of tax.
Was Mr Corston dishonest?
44.	The findings we have made are, in summary, that Mr Corston failed to account for VAT on the takings of the Newark salon from the moment it was acquired even though, as he was already registered for VAT, he should have declared those takings (regardless of whether or not he took over a going concern); and (as was tacitly conceded) that he claimed credit for input tax when he knew, or ought to have known, that it was not due (although he belatedly sought to correct the error by making the 2000 voluntary disclosure). We have also dismissed his contention that he was in partnership with his wife at Newark, and his further contention that he believed he was in partnership with her. It may be that he understated the takings of the Grantham salon and, once he had begun declaring the takings of the Newark salon, those of the entire business; until the parties have completed their calculations we must suspend judgment.
45.	In our view the only plausible explanation of Mr Corston’s conduct, as we have found it, is that it was designed to conceal the true extent of his liability for VAT. We are satisfied that, throughout, he knew that he should declare the Newark takings with those of the Grantham salon, that he did not do so, knowing that his conduct was wrong, and that his claims to have been in partnership with his wife were no more than a means of concealing his wrongdoing, by diverting the Respondents from investigating the Newark salon. Should it be found that he has failed to declare the entirety of the Grantham takings and, later, the entirety of the takings of both salons (by more than a modest amount explicable by simple error) there is likewise no plausible explanation other than dishonesty. We are satisfied too that his excessive input tax claims were dishonest. It does not help his case that, although he did not disclose the Newark takings, claiming that he had no need to do so, he nevertheless sought to offset against the Grantham takings input tax properly attributable to the Newark salon. We also accept Mr Cannan’s argument that the making of a voluntary disclosure in 2000, long after the period it covered, does not diminish the dishonesty underlying the inaccurate declarations it was designed to correct. We found Mr Corston an unsatisfactory witness, and were left in no doubt that he did not tell us the truth.
46.	We have considered whether Mr Corston might not have realised, in 1990, that he was liable to account for the Newark takings, but have concluded that he was aware of that liability. He had already some experience of VAT, since he had been registered, alone, for some two years and with Mr Green before that. He was advised in the purchase by his accountants; despite the shortcomings on their part to which we are about to come it is impossible to accept that they gave him no advice whatever about his obligations so far as VAT was concerned. Even if it were thought that ignorance led him to omit the Newark takings from his returns at that stage, he could no longer claim ignorance after September 1995. His application for registration in respect of the Newark salon was rejected, as we have said, by a letter of 26 September 1995, the relevant text of which is as follows:
“It is the taxable person who is registered for Value Added Tax and not his business. When a taxable person carries on more than one business a single registration for VAT covers all his business activities and any additional business he may acquire in the future, even if the businesses are carried on under different names and at different addresses.
“Therefore, your request for separate registrations in respect of VAT for your business at … Newark and … Grantham cannot be allowed. You should include particulars of all business activities carried on by you in one return.
“The bringing together of all your business activities under a single registration should not affect any separate accounting arrangements you may have. All that is necessary is for the totals in the VAT accounts of all your businesses to be aggregated at the end of each tax period for the purpose of furnishing a single tax return.”
47.	The letter is clear and we do not believe that Mr Corston, who struck us as an intelligent man, could possibly not have understood it. Yet he made no attempt to correct his past returns, and continued for a further two years to include in his returns only the takings of the Grantham salon. That conduct is in our view consistent only with a dishonest intention of understating his true liability, and it undermines any possible claim that the preceding failure to declare all the takings was due to ignorance. Mr Barlow suggested that the fact that Mr Corston had attempted to register the Newark salon separately was inconsistent with dishonesty since, by making the application, he had drawn attention to himself. We do not agree. We have concluded that the application was made because Mr Corston thought, in the light of the advice he had been given by his then accountants, that he could no longer avoid declaring the Newark takings; the (presumably unexpected) rejection of the application meant that he could instead continue as before, that is to declare only the Grantham takings, since no separate returns for Newark would be required. It was only in 1997, when the pressure from his accountants became irresistible, that he began to declare the Newark takings.
48.	It is also true that many of the documents, in particular the annual accounts and Mr Corston’s tax returns, were prepared for him by his former accountants (although he always prepared his VAT returns himself). Several of the letters from the accountants which were produced reveal, even on the most charitable interpretation, an astonishing ignorance on their part of some of the elementary rules of the VAT regime. It is also conspicuous that on at least one occasion they failed to caution Mr Corston, in strong terms, against a course of conduct which, even allowing for that measure of ignorance, it must have been obvious to the accountants was incorrect. However, the blame does not lie entirely with them.
49.	Certainly they had some understanding of the registration requirements, an understanding which led them to advise Mr Corston in August 1995 that he should register the Newark salon. The letters thereafter reveal that their advice was coloured by their belief that Mr Corston had secured a special arrangement with the Commissioners relieving him of the obligation to account for VAT on the Newark takings. That belief can have come only from Mr Corston himself, since the accountants had no contact, on his behalf, with what was then Customs and Excise. There was no such arrangement; Mr Corston had merely deflected the Commissioners from looking into the Newark salon. The accountants should, of course, have known perfectly well that such an arrangement was highly improbable, if not entirely fanciful, and they did express misgivings about it, warning Mr Corston that he might expose himself to investigation. The warnings were ignored. In our view Mr Corston cannot shelter behind a claim that he was poorly advised by his accountants. It is quite clear to us that the accountants were entirely reliant on the information which Mr Corston produced to them, and we have no doubt, not least from Mr Corston’s own evidence, that he had no scruples about giving them incorrect information. We are satisfied that he did so in order to avoid receiving the advice which he knew they ought to have given him. Eventually the advice was given, and in terms which Mr Corston recognised he could no longer ignore.
50.	There is further support for that conclusion in the voluntary disclosure which Mr Corston made in January 2000. It was made on the advice of his accountants, who had identified some errors in his records which had led to the understatement of his VAT liability. It is conspicuous that the disclosure was made only three days before Mrs Butler’s first visit, a visit which she had been trying to arrange for six months. Mr Corston had the opportunity, on the occasion of Mrs Butler’s visit, of making a full disclosure, but he did not take it; instead he persisted in his attempt to conceal the fact that he had failed to disclose the Newark takings before 1997 when he knew that they should have been dsiclosed.
51.	We have concluded, therefore, that Mr Corston’s conduct was dishonest in that he set out to conceal his true liability for VAT, in order to evade that liability, and that he knew, throughout, that his actions were dishonest. We have reached that conclusion having considered the case-law on dishonesty in this context, including the recent decision of the Court of Appeal in Khan v Customs and Excise Commissioners [2006] STC 1167. We do not accept Mr Barlow’s alternative argument that Mr Corston’s dishonesty began only in July 1996; on the contrary, we are quite sure that there was no material change at that time. We are satisfied that his dishonesty dates from his acquisition of the Newark salon. It follows from that conclusion both that a penalty was due, and that no part of the assessments was out of time. 
The penalty
52.	The penalty, as it was originally imposed, was £72,244. The maximum, 100 per cent of the tax evaded by dishonest conduct, would have been (as the Commissioners then thought) £103,207 but they decided that the maximum should be mitigated by 30% because of Mr Corston’s cooperation. The Commissioners’ position at the conclusion of the hearing (and after all the adjustments to which we have referred have been taken into account) was that the penalty should be 70 per cent of the reduced amount of tax as they then perceived it, namely £73,285, so that the penalty should be £51,299 (ignoring pence). As we have left the parties to recalculate the correct amount of tax we cannot determine a monetary penalty but we can deal with the principle.
53.	Mr Barlow did not address us about mitigation. In our view there is little he could have said in Mr Corston’s favour. He has, as we have concluded, concealed a substantial proportion of his takings over a period of several years, and he has done so systematically and methodically, misleading not only the Commissioners but also his accountants. He has fabricated a claim that he was in partnership with his wife, and he has done his best throughout the course of the Commissioners’ investigation and even during the hearing to avoid telling the truth. Were we considering the matter afresh we might well have concluded that the 30 per cent reduction in the penalty offered by the Commissioners was generous. Mr Corston has done little, if anything, to assist the Commissioners (or us) to determine the truth and, far from showing remorse, has continued to make false claims. We are, however, not of the view that the mitigation allowed is so obviously too generous that we should reduce it, and we will not do so. The penalty will remain at 70 per cent of the tax evaded, which will include the residue of the first assessment (£34,184), the adjusted voluntary disclosure (£7,136) and the figure agreed (or in default of agreement determined by us) in respect of the second assessment.
Conclusions
54.	In summary, our conclusions are that:
•	Mr Corston was, at all material times, a sole trader, and not in partnership with his wife;
•	There is no need to determine the date on which the Newark salon should have been registered for VAT;
•	The assessments, as amended, are technically valid but the second assessment must be recalculated;
•	Mr Corston’s conduct was dishonest at all material times;
•	The penalty should remain at 70 per cent of the tax due.
55.	The appeal will be allowed to the extent that the tax ultimately found to be due is less than that assessed, and as now adjusted, but it is otherwise dismissed. Mr Cannan sought a direction for costs in the Commissioners’ favour, while Mr Barlow sought one in favour of the Appellant should he succeed either in full or by securing a significant reduction in the tax or penalty. That may be the outcome, depending on the measure of the tax ultimately found to be due. At this stage we can do no more than give the parties permission to seek a further direction, after agreement or, should it be necessary, determination of the tax. We should, however, perhaps say at this stage that it is in our view a significant factor, in the context of our making a direction for costs, that (save perhaps if there is a further significant reduction in the second assessment) such success as Mr Corston has achieved has been due to technical errors and concessions made by the Respondents, rather than to the underlying merits of his case, and in particular that he has not persuaded us that the Commissioners were wrong to impose on him a penalty for dishonest evasion. 

COLIN BISHOPP
CHAIRMAN
Release Date: 25 January 2007
MAN/04/273