[2014] UKFTT 78 (TC)
TC03218
Appeal number: TC/2012/01089
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Income tax – amendments
to Appellant’s self-assessments for 2005-06 and 2006-07 – no business records
supplied to support the figures in the Appellant’s original returns –
significant extra deposits in bank accounts controlled by the Appellant
explained as sale proceeds of motor vehicles “done up” by the Appellant as a
hobby and not as a trade – amendments proposed by HMRC (as reduced at the
hearing) not arbitrary or capricious, being based on the amounts of the
deposits – Appellant had not discharged the burden of showing the amendments
were wrong – amendments (as so reduced) therefore upheld – associated
penalties reduced because of extra 10% mitigation for “size and gravity”
arising from downward adjustment to the amendments proposed by HMRC at the
hearing, but increased by 5% by Tribunal on grounds of lack of co-operation,
net 5% reduction in applicable rate – appeal determined in principle on this
basis, liberty to apply if necessary to determine final figures
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FIRST-TIER TRIBUNAL
TAX CHAMBER
-and-
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THE
COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS
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Respondents
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TRIBUNAL:
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JUDGE KEVIN POOLE
CHRISTINE OWEN FCA
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Sitting in public at Prestatyn
Magistrates’ Court on 15 October 2013
Phil Jones, Presenting Officer
of HM Revenue and Customs, for the Respondents
The Appellant did not appear
and was not represented
©
CROWN COPYRIGHT 2014
DECISION
Introduction
1.
This appeal concerns amendments to the Appellant’s self-assessment tax
returns for the years 2005-06 and 2006-07 and associated penalties.
2.
The Appellant failed to attend the hearing of his appeal but the
Tribunal was satisfied that he was aware of the date and place of the hearing
and that it was in the interests of justice to proceed with the hearing.
Attempts to contact him by telephone on the morning of the hearing to ascertain
his whereabouts and intentions did not succeed.
3.
The Appellant had applied on 8 October 2013 for a postponement of the
hearing listed for 15 October, on the basis that he had only received that day
a 16 page witness statement of the HMRC officer involved in the investigation
(Officer Roberts). The application was refused, on the basis that the witness
statement had been voluntarily supplied by HMRC (no direction for its delivery
had been made) and it did little more than set out in chronological sequence
the history of the enquiry – matters with which the Appellant should already be
well familiar. The Appellant was informed of this refusal by telephone on 11
October 2013.
4.
A summary decision was issued on 21 October 2013 following the hearing.
By two copies of the same letter dated 4 November 2013 (one received at the
Tribunal on 5 November and one received on 11 November), the Appellant acknowledged
receipt of the summary decision, expressed disappointment that the hearing had
taken place in his absence and requested full findings of fact and reasons for
the decision, with a view to making an application for permission to appeal to
the Upper Tribunal. These are the full findings and reasons requested by the
Appellant.
The facts
5.
HMRC opened enquiries into the Appellant’s self-assessment tax return
for the year 2005-06 (in January 2008), and into his return for the year
2006-07 (in January 2009). The Appellant had returned £6,582 turnover and
£4,410 profit for 2005-06 and £9,469 turnover and £6,638 profit for 2006-07.
He declared the nature of his business on his returns as “handyman”.
6.
The Appellant provided no proper business records (indeed, he claimed
that no such records existed) and no satisfactory explanation of cash deposits
into two bank accounts for which some (but not all) statements were supplied by
him.
7.
The Appellant maintained that, in general terms, the deposits could be
explained by reference to what he described as his “hobby” of buying,
refurbishing and selling motor vehicles.
8.
In the absence of any records or proper explanation of any of his
business activities, HMRC eventually issued closure notices in respect of the
two outstanding years on 28 July 2011, pursuant to a direction to that effect
made by the Tribunal on the application of the Appellant.
9.
The increases they made (and the reasons for them) were as follows.
10.
They increased the Appellant’s taxable income for the year 2005-06 by
£47,623. This was calculated as follows:
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Unexplained deposits to bank account 1
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£31,465
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Unexplained deposits to bank account 2
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£7,740
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Estimate of unexplained deposits to other bank accounts
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£15,000
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Total actual and estimated unexplained deposits
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£54,205
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Less declared business turnover
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- £6,582
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Increase to declared turnover and profit
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£47,623
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11.
They increased the Appellant’s taxable income for the year 2006-07 by
£79,531. This was calculated as follows:
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Estimated unexplained deposits to bank account 1 (actual
unexplained deposits for first month totalled £5,620)
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£31,500
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Estimated unexplained deposits to bank account 2 (based on
previous year, no statements supplied)
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£7,500
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Estimate of unexplained deposits to other bank accounts
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£50,000
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Total actual and estimated unexplained deposits
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£89,000
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Less declared business turnover
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- £9,469
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Increase to declared turnover and profit
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£79,531
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12.
In relation to both years, they did not consider it appropriate to
include credit for any amounts in respect of assumed expenses/cost of sales, in
the absence of the production of any other bank statements. They considered
that the failure to produce bank statements for any other bank accounts
indicated the likelihood that even if those statements reflected expenditure
which should be treated as expenses/cost of sales, they would be likely also to
disclose further undeclared income. Alternatively, even if purchases/expenses
were paid for in cash, it was just as likely that there were corresponding
undeclared cash takings.
13.
To the extent that the payments were received in respect of sales of
motor vehicles, they considered the Appellant to be carrying on a trade, the
profits of which would also fall within the charge to income tax.
14.
They also imposed penalties in respect of the underdeclaration.
Starting from the maximum possible penalties of 100% of the tax and NIC
underdeclared, they applied abatements of 0% for disclosure, 10% for
co-operation and 20% for seriousness, resulting in a net rate of penalties of 70%.
15.
The Appellant appealed against the amendments to his returns and against
the penalties.
16.
At the hearing, HMRC opened by stating that they proposed a reduction in
the amounts claimed, by taking out of account the estimated amounts of £15,000
(for 2005-06) and £50,000 (for 2006-07) which they had previously included as
presumed undeclared business takings.
17.
Thus the amendments that they were now seeking to defend at the hearing
were as follows:
2005-06. Having originally sought to add
£47,623 to the Appellant’s declared taxable profit of £4,410, they were now
only seeking to add £32,623. This would result in a revised taxable profit of
£37,033.
2006-07. Having originally sought to add
£79,531 to the Appellant’s declared taxable profit of £6,638, they were now
only seeking to add £29,531. This would result in a revised taxable profit of
£36,169.
18.
In view of the reduction to the amounts claimed, they also felt it
appropriate to increase the penalty abatement for “seriousness”, allowing a 30%
abatement rather than the 20% abatement originally given. They proposed no
change to the abatements previously given for “disclosure” (nil) and
“co-operation” (10%). Thus in principle they were proposing to recalculate the
penalties at the rate of 60% (rather than 70%) of the total tax and NIC
underdeclared for the two years.
Discussion and decision
19.
In the absence of any evidence from the Appellant (either produced to
HMRC during the long course of their enquiries, or produced to the Tribunal at
or before the hearing) we were satisfied that even if his explanation as to the
source of the various deposits were accepted, his activities in buying,
refurbishing and selling vehicles undoubtedly amounted to a taxable trade. If
there was such a trade, the evidence of it was extremely sketchy and the
Appellant had deliberately avoided providing full information which might have
shown the source of funds for any such purchases, but which might also have
shown other unexplained receipts. Alternatively, the payments received could
just as easily have been attributable to undeclared earnings from his handyman
trade.
20.
We are satisfied that the modified amendments proposed by HMRC at the
hearing are not capricious or wholly without foundation, based as they are on
reasonable inferences from the sketchy information actually supplied by the
Appellant. It is therefore clear that the burden lies on the Appellant to
satisfy the Tribunal that the amendments proposed by HMRC to his
self-assessments are wrong, and in the absence of any evidence from him, he has
failed to discharge that burden. HMRC are therefore entitled to have the
appeal against the amendments dismissed.
21.
As to the penalties, we accept HMRC’s proposal that, in view of the
reduced size of the amendments they propose, the abatement for “seriousness”
should be increased from 20% to 30%, with a corresponding reduction in the
penalty. However, we also feel that in the light of the Appellant’s conduct
throughout the enquiry, their abatement of 10% for co-operation is
over-generous and we consider it should be reduced to 5%. We therefore confirm
the penalties in the reduced amount of 65% of the total underdeclared income
tax and NIC for the two years.
22.
We therefore confirm HMRC’s amendments to the Appellant’s
self-assessments as set out at [17] above and we set the penalties at the level
of 65% of the tax and NIC attributable to the Appellant’s underdeclarations.
We determine the appeal in principle on this basis.
23.
Either party has liberty to apply to the Tribunal for a final
determination of the tax, NIC and penalty liability for the two years in
question if they are not agreed on the basis of this decision in principle.
24.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
KEVIN POOLE
TRIBUNAL JUDGE
RELEASE DATE: 13 January 2014
