In a case which vividly reveals that dabbling in the black economy can have crushing financial consequences, a property developer who paid sub-contractors in cash and submitted bogus invoices to the tax authorities is facing a penalty of almost £40,000 after failing to convince the First-Tier Tribunal that naïve incompetence was his only fault.
The developer had attended regularly on a residential construction site with large sums in cash to pay sub-contractors who did not provide invoices. A subsequent inspection by Her Majesty’s Revenue and Customs (HMRC) uncovered gaping holes in his company’s purchase records. In an attempt to explain those discrepancies, ‘copies’ of invoices were submitted to HMRC which the tribunal found were ‘very poor fabrications’ and which bore no resemblance to bona fide invoices.
HMRC found that more than £70,000 in VAT had been evaded and that sum was demanded from the company. The developer, as the company’s sole director, was also ordered to personally pay a dishonest evasion penalty of £43,753 under section 61 of the Value Added Tax Act 1994.
On appeal to the tribunal, the developer argued that his difficulties had coincided with the departure of the company’s book keeper and that his actions should be characterised as naïve incompetence, rather than dishonesty. However, dismissing those arguments, the tribunal found that his attempt to pass off fabricated invoices as genuine, in the hope that they would satisfy HMRC, fell below the ordinary standards of reasonable and honest people.
On reviewing the relevant figures, however, the tribunal reduced the assessment of evaded VAT from £72,924 to £64,917 and, accordingly, also reduced the penalty payable by the developer personally to £38,590.