Malcolm
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 June 2021 |
| Neutral Citation | [2021] UKFTT 207 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 207 (TC)
Judge Natsai Manyarara, Leslie Howard
Income tax – Adjustments to self-assessment – Discovery assessment – Penalty under Sch. 24 of the FA 2007 – Whether discovery – Yes – Whether insufficiency of tax brought about deliberately – No – Careless behaviour – Appeal dismissed.
[1] The Appellant is appealing against:
- Discovery assessments issued on 16 August 2017, pursuant to s29 of the Taxes Management Act 1970 (hereinafter referred to as TMA), for the period 2008–09 to 2013–14 (inclusive) and in the amount of £124,479.94;
- A closure notice issued on 16 August 2017, pursuant to s28A TMA, for the period 2014–15 and in the amount of £22,758.39; and
- A penalty assessment issued on 18 September 2017, pursuant to Schedule 24 of the Finance Act 2007 (Schedule 24) and in the amount of £69,708.76.
[2] On 5 January 2016, the Appellant submitted his 2014–15 tax return. The turnover shown on the tax return was £59,000. On 18 November 2016, HMRC opened an enquiry into the tax return under s9A TMA (“the opening letter”). The Appellant was asked to provide bank statements for the year of enquiry. He was also asked to provide a breakdown of the figures included in his 2014–15 tax return. The Appellant responded to HMRC on 29 November 2016, explaining that he could not provide all of the information that had been requested as his computer had been corrupted by a virus. He enclosed copies of his bank statements for 2014–15 and provided a revised income breakdown of £91,179.28 for 2014–15.
[3] On 20 December 2016, HMRC wrote to the Appellant asking him a number of questions in order to establish what his business expenses for the year of enquiry were. This letter was closely followed by an Information Notice, issued under Schedule 36 of the Finance Act 2008 (“Schedule 36”) on 2 February 2017. The deadline given for a response was 6 March 2017. On 2 March 2017, the Appellant responded and he attached a page from his 2015–16 tax return, which showed expenses of £12,837.
[4] On 9 March 2017, HMRC wrote to the Appellant again and highlighted that the 2015–16 tax return showed turnover of £86,030 and expenditure of £12,837, leaving a net profit of £73,193. HMRC further highlighted that the 2014–15 expenses totalled £44,000. The conclusion reached by HMRC was that this figure seemed high for the work undertaken by the Appellant. HMRC therefore deemed that the 2014–15 tax return needed to be amended and discovery assessments would need to be applied to earlier years. On 7 May 2017, the Appellant responded and stated that he disagreed with HMRC's views.
[5] On 15 May 2017, HMRC wrote to the Appellant and repeated that the 2014–15 expenditure needed to be established. HMRC also requested bank statements from 2008–09 to 2013–14, as similar figures had been entered into the Appellant's tax returns for those periods.
[6] On 22 June 2017, HMRC wrote to the Appellant and said that as no further information had been forthcoming from him, the 2015–16 tax year would be used as a comparison to 2014–15. The turnover for 2014–15 would be uplifted to £91,179 and expenditure would be decreased to £13,677, giving a net profit of £77,502. Due to a lack of any further information from the Appellant, HMRC concluded that it was likely that the earlier years were also incorrect. HMRC decided that assessments would need to be issued using the Retail Price Index (“RPI”) for the turnover and the expenses would be calculated as 15% of the turnover figure for 2014–15. Following further exchanges of correspondence, HMRC issued the discovery assessments and closure notice on 16 August 2017. A notice of penalty assessment for inaccuracies was issued on 18 September 2017.
[7] On 7 November 2017, the Appellant's agent appealed against the decisions and on 5 December 2017, the Appellant's agent wrote to HMRC calculating the Appellant's general expenses for 2014–15. No records were however provided by the Appellant's agent. The turnover proposed by the agent for the 2014–15 tax year was £87,000 and expenses of £29,387, taken from the bank statements. HMRC responded to the Appellant's agent outlining that receipts totalling £6,244.68 included in the bank statements had been omitted from the agent's calculations. This increased the turnover to £93,245. HMRC however proposed to keep the turnover for 2014–15 at £91,179. Whilst HMRC accepted that the expenses were reasonable, £13,752 had been claimed for train fare by the Appellant, which could not be accepted by HMRC without any further evidence. HMRC added that other expenses, such as hotels, equipment and development, required evidence as there was no record of such expenses in the Appellant's bank statements.
[8] On 7 February 2018, the Appellant's agent responded and explained that the Appellant's daily commute was about 120 miles. He added that the Appellant could not get a season ticket due to the differing locations of his work assignments. He further added that credit card statements were not available due to the corruption of the Appellant's computer. On 23 April 2018, HMRC responded and said that as no further evidence had been provided, the appeal was concluded.
[9] On 13 November 2018, the Appellant lodged his appeal with the Tribunal.
[10] HMRC's case (as set out in the Skeleton Argument and the Statement of Case), can be summarised as follows:
- HMRC discovered that there had been an insufficiency of tax paid. Assessments were therefore raised under the discovery provisions of s29 TMA. The assessments were raised to make good the amount of lost tax. The Appellant under-declared income and claimed excessive expenses. A closure notice was issued for the year of enquiry.
- During the year of enquiry, the Appellant had under-declared turnover by £30,000. The Appellant stated that a virus had infected his computer in May 2015. His 2014–15 tax return was not filed until 5 January 2016. If the Appellant's records had been affected by a computer virus, the Appellant should have stated that the figures included in his 2014–15 tax return were estimates. The Appellant has not provided an explanation as to why the revised income figure was not available when his 2014–15 tax return was filed. The under-declared amount of £30,000 is a significant sum of money and it would have been difficult for the Appellant to miss such an under-declared amount of money.
- The Appellant also claimed expenses of £44,000 for the year of enquiry. He did not provide a breakdown of how his expenses were calculated and he has also claimed expenses ranging between 44% and 78% of his income, from 2008–09 to 2014–5. The Appellant could have evidenced his expenses through bank statements or credit card statements.
- Poor record keeping in the year of enquiry showed that the Appellant under-declared his income. The Appellant is required to keep records, in accordance with s12B TMA. His 2014–15 bank statements confirmed that income had been suppressed. The Appellant has been unable to provide sufficient records to demonstrate the accuracy of the figures included in his tax returns.
- HMRC considered the earlier years and concluded that it was likely that the Appellant's income would have been under-declared for the earlier years, as the income for the earlier years appeared to be estimated and consisted of round sum figures. Excessive expenses had also been claimed for the earlier years. The Appellant has not explained why his 2014–15 tax return and the tax returns for earlier years would be different from his 2015–16 tax return.
- The irregularities led to the conclusion that the Appellant's behaviour was deliberate.
[11] The Appellant's grounds for appealing against the decisions (as set out in the document entitled “Appellant Argument Outlined” [sic]) can be summarised as follows:
- The Appellant has been in a depressive state for the past two years and he has been inundated with over 60 letters from HMRC, totalling over 150 pages of requests, instructions, guidelines, penalties, surcharges and debt collection notices. His state of mind was such that he could not function. It was not possible for the Appellant to comply with HMRC's requests as the Appellant has dyslexia, which was a factor in relation to understanding HMRC's requests. The Appellant can, at times, find it difficult to digest written information and he needs additional time to read through documents. He also finds it difficult to process data.
- The Appellant emailed his representative, Roger Harding, of Gordon Dadds, regarding his dissatisfaction with Officer Barrett (of HMRC). The Appellant trusted that his representative would follow through with his instructions. Unfortunately, that was not the case.
- Since lodging his appeal, the Appellant has been able to scrutinise the evidence that HMRC have relied on to base their calculations. The Appellant has found that the information that HMRC have relied on to finalise tax calculations and penalties is incorrect. Neither HMRC nor the Appellant's representative consulted the Appellant in relation to the credits and debits in his bank statements for 2015. All payments into the bank account were wrongly calculated as income. The income calculated by HMRC was £93,245.00. The actual income amounted to £86,453.48. HMRC's calculations include income from the 2013–14 tax return. HMRC's calculations also include £4,558.75 winnings from Bookmakers, as well as money from family.
- HMRC did not take into account the fact that invoices from the Appellant's work assignments took 14 to 30 days to process. Invoices from various government departments show late payment or non-payment for invoices greater than three months old. This would affect the income shown in the bank statements. Many invoices were not voided and remained live on the Appellant's invoicing system.
- HMRC have also under-calculated the Appellant's travel expenses. HMRC's...
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