Bobby Khan Enterprises Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 August 2022 |
| Neutral Citation | [2022] UKFTT 236 (TC) |
| Year | 2022 |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 236 (TC)
Judge Jennifer Dean
First-Tier Tribunal (Tax Chamber)
Income tax and Value added tax – Undeclared purchases – Assessments and closure notices – Suppression or the actions of others – Best judgment – Quantum.
[1] The Appellants have appealed against the following:
- Corporation Tax assessments raised on Bobby Khan Enterprises Ltd (hereafter BKE Ltd) for Accounts Periods Ended (APE) 31 January 2011 and for APE 31 January 2013 to 31 January 2017 inclusive under paragraph 32, Schedule 18 to the Finance Act (FA) 1998;
- A Closure Notice issued to BKE Ltd for APE 31 January 2012 under paragraph 41 Sch 18 FA 1998;
- Decisions issued under section 8 of the Social Security Contributions (Transfer of Functions) Act 1999 for Class 1A NIC on BKE Ltd for the period from 6 April 2010 to 5 April 2017 inclusive;
- A VAT assessment raised under section 73 VATA 1994 on BKE Ltd for the tax period from 1 May 2016 to 31 January 2017 inclusive;
- Income Tax assessments raised on Mohammed Asif Ali for the tax years 2011/2012 to 2016/2017 inclusive under section 29 Taxes Management Act (TMA) 1970;
- A Closure Notice issued to Mohammed Asif Ali for the tax year 2010/2011 under section 28A TMA 1970;
- Income Tax assessments raised on Motia Begum for the tax years 2011/2012 to 2016/2017 inclusive under section 29 TMA 1970;
- A Closure Notice issued to Motia Begum for the tax year 2010/2011 under section 28A TMA 1970;
- Income Tax assessments raised on Mohammed Harrise Khan for the tax years 2010/2011 to 2016/2017 inclusive under section 29 TMA 1970;
- Income Tax assessments raised on Mohammed Paris Khan for the tax years 2010/2011 to 2015/2016 inclusive under section 29 TMA 1970.
[2] The revised calculations (as amended on 21 January 2021) are set out in Appendix 1 of this Decision.
[3] The company, Bobby Khan Enterprises Ltd (hereafter “BKE Ltd”) operated 4 shops during the period of enquiry for the APE 31 January 2012. The Directors of BKE Ltd were Mohammed Asif Ali, Motia Begum and their two sons Mohammed Paris Khan and Mohammed Harrise Khan.
[4] In the APE 31 January 2011 purchases were reported as £755,775 for the four shops. Enquiries were opened into the corporation tax return for APE 31 January 2012 and Mr Ali and Mrs Begum's self-assessment returns on 22 November 2012. During the course of the enquiries, information received by HMRC from the company's suppliers indicated that a significant volume of purchases had not been declared.
[5] The assessments were raised for CT liabilities and VAT on the basis that BKE Ltd failed to declare all purchases and additional profits for its shops between 2010 and 2017. HMRC treated the company funds they alleged were misappropriated by the directors as loans chargeable to tax and NIC. HMRC also assessed Mr Ali and Mrs Begum for undeclared rental income in the tax year ended 5 April 2011
[6] Mr Ali's Self-Assessment Tax Return for the tax year ended 5 April 2011 was received on 1 December 2011. An enquiry was opened into the return under section 9A TMA 1970 on 22 November 2012. There was no dispute that the enquiry was opened within the time limits prescribed by the relevant legislation.
[7] The Self-Assessment Tax Return for Mrs Begum for the tax year ended 5 April 2011 was received on 13 December 2011. An enquiry was opened into the return within the statutory time limits under section 9A TMA 1970 on 22 November 2012.
[8] The Company Return for BKE for the APE 31 January 2012 was submitted on 30 October 2012. An enquiry was opened within the statutory time limits under Para 24(1), Sch 18 to the FA 1998 on 22 November 2012.
[9] Following the enquiries, HMRC issued the decisions set out at [1] above.
[10] The Appellants appealed the CT assessments and Closure Notice, VAT assessments, section 8 Decisions and the Income Tax assessments and Closure Notices for each Director on 9 August 2018. On 23 November, following a review, HMRC upheld the decisions in relation to BKE Ltd in full, in relation to Mr Ali and Mrs Begum assessments for 2009/2010 were cancelled, the Closure Notices for 2010/2011 varied and assessments for 2011/2012 to 2016/2017 upheld in full. In relation to Mr Mohammed Harrise Khan and Mohammed Paris Khan all assessments were upheld in full.
[11] Following receipt of the witness statements of Mr Ali and Mr Harrise Khan, HMRC reviewed the calculations and the figures assessed were reduced on the basis of information provided in the statements relating to purchases from Costcutters which HMRC accepted had not supplied BKE Ltd in the relevant period. Letters were sent notifying these amendments on 21 January 2021.
[12] The Directors of BKE Ltd accepted that there may have been some omitted purchases from their accounts. However, they did not agree that this resulted in under-declared sales or additional profits, nor did they agree the amounts assessed by HMRC. The Appellants also denied any wrongdoing on their part; it was submitted by the Appellants that any purchases omitted were attributable either to the negligence or carelessness of their former accountants or the act of a former employee who must have purchased goods for his own shops using BKE Ltd's accounts without the directors' knowledge.
[13] Although both Mr Ali and Mrs Begum initially accepted that there was undeclared rental income in their SATRs for tax year 2010/2011, it was subsequently argued on behalf of Mr Ali and Mrs Begum that the assessment should not stand.
[14] The issues for the Tribunal to determine as set out in HMRC's Statement of Case were as follows:
- Whether in the APEs 31 January 2011 to 31 January 2017 inclusive there were additional profits of the company BKE Ltd;
- Whether there were any missing purchases and corresponding missing sales identified by the HMRC enquiry resulting in additional CT and VAT being due on additional profits of BKE Ltd;
- Whether, as a result of these additional profits, a charge arises under section 455 of the Corporation Tax Act (CTA) 2010 in respect of funds misappropriated by the Directors of the close company as loans or advances made to the Directors;
- Whether the loans or advances made to the Directors are benefits resulting in Class 1A NICs becoming due under section 173 of the Income Tax Earnings and Pensions Act (ITEPA) 2003 from the Company;
- Whether the loans or advances made to the Directors are benefits resulting in a charge to tax on each of the Directors as a benefit in kind;
- Although not in dispute, HMRC accepted that they must demonstrate that the discovery assessments raised on BKE Ltd and on each of the directors were validly raised.
[15] Mr McAreavey explained that although HMRC officer Mrs Maguire had previously been responsible for the investigation, and other HMRC officers had been involved at various stages, he was the decision maker once the evidence had been gathered.
[16] Mr McAreavey reviewed the information acquired by Mrs Maguire which included information provided to HMRC at a meeting on 7 March 2013 with Mr Kyle of Accountants Plus, the Appellants' former accountant, who explained that £100,000 sales had been omitted from the VAT returns of BKE Ltd for the period 1 February 2011 to 31 January 2012. HMRC advised in a letter dated 14 March 2013 that a VAT assessment would be raised for the VAT periods 04/11,7/11,10/11 and 01/12 totalling £16,441 in respect of the missing £100,000 sales. No appeal was made against this VAT assessment. Accountants Plus also confirmed that in completing the 2012 SATRs of Mr Ali and Mrs Begum it was noted that rental income of £10,000 per shop was omitted from their respective 2011 SATRs.
[17] Following the meeting, mandates were given to Accountants Plus for the directors to sign giving HMRC permission to approach BKE Ltd's suppliers to check the level of purchases from each supplier. On 27 March 2013 Mrs Maguire was provided with the mandates which were signed by Mr Ali. The suppliers were:
- United Wholesale Ltd;
- Booker Ltd;
- JW Filshill Ltd.
[18] On 5 April 2013 HMRC contacted these suppliers to request a copy of the customer accounts for BKE Ltd. The suppliers provided Mrs Maguire with copies of BKE Ltd's accounts which summarised the purchases made by each of the shops. The purchase transactions were compared to BKE Ltd's VAT returns and the missing transactions totalled £583,130 (as revised).
[19] In a fax to HMRC on 14 January 2014 Mr Nawaz (who had taken over as the company's accountant) highlighted that there seemed to be inaccuracies in the company accounts prepared by Accountants Plus and that he could prepare accounts for the year to 31 January 2014 and extrapolate from there.
[20] On 11 August 2014 Mr Nawaz requested the following additional information from HMRC before a decision was made whether to accept HMRC's Contractual Disclosure Facility offer:
- Copies of all accounts and returns submitted whether for the companies or individuals, for the period for which you have concerns. If this means 20 years then the information I require is for the last 20 years. However, if you are content to deal with matters say for the last 6 years then I would be happy to accept these. It is your call as to the period of time that you require us to look at matters.
- Copies of all correspondence exchanged, including that relating to any previous enquiries.
- Copies of all information provided including anywhere papers have been returned. I note that Mrs McGuire had returned a file relating to property ownership to my predecessors but no doubt she will have kept copies. I shall look forward to receiving copies of such documents.
- Any further material that may be relevant.
Mr Nawaz also provided draft accounts for the year ended 31 January 2013.
[21] A number of HMRC...
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