Lam and Another (t/a Sunlight Takeaway Meals)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 September 2016 |
| Neutral Citation | [2016] UKFTT 659 (TC) |
| Date | 23 September 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Sarah Falk, Julian Sims, FCA, CTA
Michael Feng of Feng & Co, appeared for the appellants
Steve Goulding, Officer of HM Revenue and Customs, appeared for the respondents
Income tax – Partnership return – Whether closure notice under Taxes Management Act 1970 (TMA 1970 ), s. 28B was effective in absence of amendment to partners' individual returns under TMA 1970, s. 28B(4) – Whether amendment to partnership return to reflect alleged unrecorded sales should stand good.
In the First-tier Tribunal (FTT) found that a closure notice was valid and it was not unreasonable for HMRC to use the penalties incurred by the taxpayers not complying with information requests as the starting point for estimating the tax loss from a foreign bank account, but the FTT reduced the partnership profit figure to take account of unrecorded cash drawings which had already been taken into account in the returned profits.
Mr and Mrs Lam were partners in a Chinese takeaway outlet with the trading name Sunlight Takeaway Meals. HMRC opened an enquiry into the partnership's 2006–07 tax return and separate enquiries were also raised into Mr and Mrs Lam's personal tax returns. During the enquiries HMRC became aware that Mr and Mrs Lam had three accounts with the London branch of the Bank of East Asia and one with the bank's Hong Kong branch. HMRC obtained further information about the London branch accounts from Mr and Mrs Lam (pursuant to information notices under Finance Act 2008, Sch. 36) and the bank. HMRC used Sch. 36 notices to request details of the Hong Kong branch account, but even though appeals against the notices were rejected by the FTT in Lam TAX[2012] TC 01813 the Sch. 36 notices were not complied with. The FTT later dismissed applications for closure notices in respect of the enquiries, during which it rejected Mr and Mrs Lam's assertions that they did not hold a joint bank account in Hong Kong. Mr and Mrs Lam had incurred initial and daily penalties for non compliance with the Sch. 36 notices totalling £22,920. Appeals against the initial penalties were dismissed by the FTT in October 2013 (with the FTT finding that, although Mr and Mrs Lam denied it, they did have a joint bank account in Hong Kong) and appeals against the daily penalties dismissed by the FTT in Lam TAX[2014] TC 03494. In February 2015 HMRC sought to close the enquiry into the 2006–07 return by issuing a closure notice in respect of the partnership pursuant to the Taxes Management Act 1970 (TMA 1970), s. 28B. The closure notice increased the partnership profit figures by £67,981 on the basis that sales had been omitted. There had also been correspondence from HMRC advising that they were also intending to adjust the return figures for the years between 2000–01 and 2007–08 inclusive.
Mr and Mrs Lam appealed against the closure notice on the basis that:
1) The closure notice did not satisfy all the requirements of TMA 1970, s. 28B because HMRC had not made any amendments to the partners' individual returns as required by TMA 1970, s. 28B(4). On that basis the closure notice was invalid and therefore the enquiry had not been completed and accordingly no appeal could be brought under TMA 1970, s. 31(1) and the tribunal did not have jurisdiction to hear the appeal under TMA 1970, s. 50(6)(b) (this was referred to as the closure notice issue).
2) The amendment made by the closure notice was not justified because sales were accurately recorded or in the alternative that the amendment was excessive (the substantive issue).
On the closure notice issue, the FTT agreed that under TMA 1970, s. 28B(4) HMRC did have an obligation to amend each partner's return, but did not find that failure to comply with this subsection invalidated the closure notice. This was because it was subsections (1) to (3) of TMA 1970, s. 28B which governed the issue and effectiveness of a closure notice. A key point was that subsection (4) could not operate on its terms without a valid closure notice and it could not therefore itself be part of the process which created a valid closure notice. The FTT accordingly found that it did have jurisdiction. The FTT also found that there was nothing in relevant case law that was inconsistent with its conclusions on the closure notice issue.
On the substantive issue, the FTT summarised that HMRC had arrived at the additional profits figure of £67,981 by concluded that there were insufficient recorded drawings to meet the partners' needs. They assumed an amount of £100 additional cash drawings per week to take account of this. They also took account of actual deposits into the Bank of East Asia London branch account. In relation to the Hong Kong account, for which they had no information, HMRC's approach was based on the fact that Mr and Mrs Lam appeared willing to incur penalties in excess of £20,000 rather than provide details of the account. At a 40% tax rate this suggested to HMRC that there was a minimum of £50,000 taxable profit at stake. HMRC used 2007–08 as their starting point and scaled back the £100 per week and £50,000 amounts using RPI.
The FTT found that there were flaws in HMRC approach, for example there was no basis to use 2007–08 as the starting point when it had not been the focus of the enquiry, but the effect of this was to Mr and Mrs Lam's slight advantage.
The FTT concluded that the amended partnership profit figure was excessive insofar as the adjustments related to assumed cash spend and the London branch deposits. In the FTT's view the accounts and supporting working papers, which were not reviewed by HMRC during the enquiry, clearly reflected unrecorded cash drawings in the profits made, in an amount of £14,937. Accordingly, HMRC's assumption that the returned profits reflected little or nothing for cash taken out of the business was incorrect. On that basis adding both £15,000 for Bank of East Asia London branch deposits and a further £4,991 for other cash spend, a total of £19,991, could not be justified.
In the absence of any evidence about the scale of deposits into the Hong Kong account the FTT did not think that it was an unreasonable approach to use the amount of the penalties as a starting point to estimate the tax lost, and work back from that to a figure of £50,000 of additional profit.
The FTT allowed the appeal in part by reducing the additional partnership profits figure by £14,937 to take account of the unrecorded cash drawings already taken into account in the reported numbers.
With regard to the foreign bank account, in due course HMRC should be able to use exchange of information arrangements to obtain details of such accounts, although there may still be issues regarding sources of account deposits.
[1] This is an appeal against a closure notice issued on 18 February 2015 pursuant to s 28B Taxes Management Act 1070 (TMA) in respect of a partnership return for the tax year 2006–07. The partnership has the trading name Sunlight Takeaway Meals and the partners are a husband and wife, Mr WY Lam and Mrs SY Lam. The closure notice increased the partnership profit figure from £40,673 to £108,654, an increase of £67,981, on the basis that sales had been omitted.
[2] There are two issues for decision. First, the appellants maintain that the closure notice did not satisfy all the requirements of s 28B and on that basis was invalid (the closure notice issue). Secondly, the appellants argue that the amendment made by the closure notice was not justified because sales were accurately recorded or in the alternative that the amendment was excessive.
[3] The appeal was listed for a one day hearing. During the hearing full submissions were made by both parties on the closure notice issue and all witness evidence was heard in full. There was insufficient time to hear the full oral submissions the appellants' representative had intended to make on the substantive issue of whether the amendment to the partnership return should stand good, or to hear submissions from HMRC on that issue, so we heard a summary of the key points from Mr Feng for the appellants, allowed Mr Goulding for HMRC a shorter period of a few minutes to respond with any points he wished to make orally, and required further submissions from both parties in writing following the hearing (including an opportunity for the appellants to reply to HMRC's submissions). We have taken account of those submissions, except those parts of the appellants' reply which disregarded the specific direction that it should be a reply to any point raised in the respondents' submissions and should be limited to addressing points not addressed in earlier submissions.
[4] A second preliminary point to mention is that prior to the hearing HMRC had sought permission to include a document previously omitted from the document bundle. This document was a copy of a print out of the partnership return as amended to show the increase in profits. Mr Feng objected to its inclusion and we were required to decide whether to allow the objection. Since this point was linked to, and makes sense only in the context of, the closure notice issue it is most convenient to address those points together.
[5] We heard oral evidence from Mr Lam, through a Tribunal appointed Cantonese interpreter. Mr Lam had also produced a short written statement in English, which included what we understood to be translations of the text into Cantonese. We were informed that this was prepared with the assistance of Mr Feng. It was apparent that Mr Lam had some knowledge of English but that he was not fluent.
[6] HMRC had one witness, Mr John Corbett, who also gave oral evidence and produced a written statement. Mr Corbett is a Higher Officer of HMRC and conducted the enquiry.
[7] We found Mr Corbett to be a straightforward witness who provided clear evidence. We accept his...
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Beadle
...return “so as to give effect to the amendments of the partnership return” (section 28B(4)). See also Lam (t/a Sunlight Takeaway Meals) [2016] TC 05385 at [24] [97] It was submitted that it had sometimes been argued by HMRC that this mandatory duty can somehow be deferred until after the con......
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...v HMRC [2016] EWCA Civ 397, [2016] STC 1491, so it does not bear directly on our case. It was also for similar reasons that the FTT in Sunlight Takeaway rejected the argument that a closure notice was not valid until a subsequent step had been taken; namely the notification by HMRC of the ......
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Table of Cases
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