Hurley v Taylor (Inspector of Taxes)

JurisdictionEngland & Wales
Judgment Date20 January 1998
Date20 January 1998
CourtChancery Division

Chancery Division.

Park J.

Hurley
and
Taylor (HM Inspector of Taxes)

Robert Argles (instructed by TG Baynes, Orpington) for Mr Hurley.

Bruce Carr (instructed by the Solicitor of Inland Revenue) for the Crown.

The following cases were referred to in the judgment:

Amis v Colls (HMIT)TAX (1960) 39 TC 148

Bird & Co v IR CommrsTAX (1924) 12 TC 785

Bradshaw v Blunden (HMIT) (No. 2)TAX (1960) 39 TC 73

Brady (HMIT) v Group Lotus Car Companies plc TAX[1987] BTC 48060 TC 359

Edwards v BairstowELR [1956] AC 14

Hellier v O'Hare (HMIT)TAX (1964) 42 TC 155

Hillenbrand v IR CommrsTAX (1966) 42 TC 617

Hudson v Humbles (HMIT)TAX (1965) 42 TC 380

James v Pope (HMIT)TAX (1972) 48 TC 142

Johnson v Scott (HMIT)TAX (1978) 52 TC 383

Jonas v Bamford (HMIT)TAX (1973) 51 TC 1

Kingsley v Billingham (HMIT) TAX[1992] BTC 9365 TC 133

Murphy (HMIT) v Australian Machinery & Investment Co LtdTAX(1948) 30 TC 244

R v Special Commrs, ex parte MartinTAX (1971) 48 TC 1

Ransom (HMIT) v HiggsWLR [1974] 1 WLR 1594

Rea v Highnam (HMIT)TAX (1990) 63 TC 287

Yuill v Wilson (HMIT)WLR [1980] 1 WLR 910

Income tax - Back duty - Assessments made for ten years - Assessments for earlier years requiring a loss of tax attributable to fraudulent or negligent conduct - Onus of proof on Revenue to show fraudulent or negligent conduct - Whether Revenue had discharged onus of proof before general commissioners - Taxes Management Act 1970 section 36 subsec-or-para (1) section 56 subsec-or-para (6)Taxes Management Act 1970, ss. 36(1), 56(6).

These were appeals by the taxpayer by way of case stated by the general commissioners for Bromley whereby the commissioners upheld in reduced amounts assessments to income tax for ten years of assessment made as a result of a back duty enquiry.

The taxpayer, Mr Hurley, carried on a solarium business and a motor-dealing business. He also received some income from lettings of property. The customers of the solarium business and the motor business often paid in cash. Mr Hurley produced audited accounts for both businesses, but he had no reliable record-keeping system.

After investigating Mr Hurley's affairs, the Revenue drew up capital statements for 11 years from August 1982 to August 1992. Taking all the years together the figures as calculated by the Revenue revealed a deficiency of £160,000. The greater part arose as a result of two residential properties which he had bought. These were partly paid for from his own resources and partly with mortgages which were eventually repaid. The Revenue took the view that Mr Hurley had not accounted for the source of the money. They therefore made income tax assessments on him for the years from 1983-84 to 1992-93. The amounts of the assessments were based on discrepancies shown in the capital statements.

The assessments for the last six years (1987-88 to 1992-93) were "in-date" assessments: that is they were made within the normal limitation period of six years provided by the Taxes Management Act 1970 section 34 subsec-or-para (1)Taxes Management Act 1970, s. 34(1). The assessments for the first four years (1983-84 to 1986-87) were "ETL assessments" ("extended time limit" outside the six-year limit) made under the Taxes Management Act 1970 section 36Taxes Management Act 1970, s. 36 on the ground that, as the Revenue alleged, Mr Hurley had been guilty of "fraudulent or negligent conduct". (The expression "fraudulent or negligent conduct" had replaced fraud, wilful default or neglect in 1989, but the concept remained the same.)

Mr Hurley advanced two explanations for the source of the money used in buying the properties and paying off the loans. He said that part of it was lent to him by a former friend and part provided by his father who had died.

The commissioners accepted Mr Hurley's explanation regarding the money lent to him by a friend, but did not accept that his father had the resources to lend him the amounts which he claimed. The appeals were therefore partly successful and the assessments were reduced accordingly.

Because the onus of proof was on the Revenue to show that there had been a loss of tax attributable to fraudulent or negligent conduct in relation to the ETL years, the Revenue had opened the case before the commissioners, dealing not only with those years but also with the in-date years.

In the High Court Mr Hurley sought to introduce a written statement made by his father before his death which was not put before the commissioners.

Held, allowing the appeals in part:

1. The effect of the Taxes Management Act 1970 section 50 subsec-or-para (6)Taxes Management Act 1970, s. 50(6) was that the onus of discharging an assessment was on the taxpayer. That was so even where the Revenue had opened the case before the commissioners:Jonas v Bamford (HMIT)TAX (1973) 51 TC 1 at p. 20-21 per Walton J followed.

2. However, for the ETL years, there was an initial burden on the Revenue, under Taxes Management Act 1970 section 36 subsec-or-para (1)s. 36(1) of the Taxes Management Act 1970, to show a loss of tax attributable to fraudulent or negligent conduct. In discharging that burden, if the commissioners disbelieved the taxpayer's explanation of the source of funds, they could, and normally would, rely on the capital statements and uphold the assessment. If they believed the explanation they would discharge the assessment. If they did not accept the explanation, not positively disbelieving the taxpayer's evidence, but unable to say if it was true or not, then because the initial burden was on the Revenue to prove on the balance of probabilities that it was not true was not satisfied, the assessment had to be discharged.

3. The commissioners had said that they "did not accept" that the father had made the loans because Mr Hurley was unable to prove that his father had sufficient resources. That did not mean that they positively disbelieved that the father had not made the loans, but that they were not satisfied that he did. Consequently, it followed that the Revenue had not discharged the s. 36 burden of establishing fraudulent conduct or neglect for the ETL years. But Mr Hurley had not discharged his burden under Taxes Management Act 1970 section 50 subsec-or-para (6)s. 50(6) in relation to the in-date years. Accordingly the assessments for the ETL years were discharged and the assessments for the in-date years were upheld in the reduced amounts confirmed by the commissioners.

4. New evidence which was not put before the commissioners could not be introduced on appeal.

CASE STATED

1. At meetings of the general commissioners for the division of Bromley held on 27 January 1994, 16 February 1994, 22, 23 and 24 April 1996 and 25 July 1996 Mr Anthony Cornelius Hurley ("the appellant") appealed against assessments to income tax made on him under Income and Corporation Taxes Act 1988Case I of Sch. D and Class 4 National Insurance Contributions in respect of profits from a solarium, car sales and as a general dealer and against assessments under Income and Corporation Taxes Act 1988Case VI of Sch. D on profits from furnished lettings. [There followed a list of details of the amounts assessed.]

Meetings arranged for 8, 9 and 10 August 1994 were cancelled because the appellant produced medical evidence that he was unable to attend on those dates. The appellant produced medical certificates dated 14 August 1994, 26 August 1994 and 12 September 1994 certifying that he was suffering from panic attacks or anxiety/depression. On 17 January 1995 the appellant's general practitioner indicated that the appellant should be able to continue with the appeals by the middle of 1995. Meetings arranged for 20, 21 and 22 November 1995 were cancelled because, following the death of his father, the appellant was in an anxiety depressive state. At the resumed hearing on 22, 23 and 24 April 1996, neither party served notice that the SI 1994/1812General Commissioners (Jurisdiction and Procedure) Regulations 1994 were not to apply.

2. All assessments for 1983-84 and 1984-85 and the assessments on the profits from the car sales and solarium for 1985-86 and 1986-87 were made under the provisions of Taxes Management Act 1970 section 36s. 36 of the Taxes Management Act 1970.

3. Shortly stated the questions for our determination were:

  1. (2) Whether the accounts of the solarium, car sales and furnished lettings businesses submitted to the Revenue on behalf of the appellant were correct and if not, what was the correct amount attributable for each year of assessment under appeal.

  2. (3) Whether the assessments under appeal should be reduced or increased accordingly.

  3. (4) Whether for the years 1983-84, 1984-85, 1985-86, and 1986-87 tax had been unpaid for each or any of the years of assessment by reason of the appellant's fraudulent or negligent conduct.

4. At the meetings on 27 January and 16 February 1996, the appellant was present and represented by Mr GRA Argles of counsel, instructed by Messrs TG Baynes & Sons of Downe House, High Street, Orpington. At the meetings on 22, 23 and 24 April and 25 July 1996, the appellant was not represented and appeared in person. At all the meetings, Mr AW Taylor, the respondent inspector of taxes (hereinafter called "the inspector") appeared in person. All oral evidence was given on oath. We heard evidence from the appellant. The following witnesses gave evidence on behalf of the appellant; Mr C Cherryman, an employee of Midland Bank plc since September 1977 and Mr C Wakefield, an employee of Midland Bank plc from September 1979 to February 1992. Miss T Bradshaw, an inspector of taxes and Mr David John Stringer (hereinafter called "Stringer"), a motor car dealer, owner of a transport business and a UK insurance agent gave evidence on behalf of the inspector.

5. At the commencement of the hearing on 27 January 1994, the inspector submitted that because all the assessments for 1983-84 and 1984-85 and the assessments on the...

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