Mathew
| Jurisdiction | UK Non-devolved |
| Judgment Date | 31 March 2015 |
| Date | 31 March 2015 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Anne Redston, Ms Helen Myerscough
Mr James Onalaja of Counsel, instructed by and acting appeared for Mr Mathew.
Mrs Yeeni Naylor and Ms Harry Jones of HM Revenue & Customs Appeals and Reviews Unit appeared for the Respondents.
Income tax – Appeals against information notices issued under Finance Act 2008 (“FA 2008”), Sch. 36 – Whether to stay the case – Whether appeals made to HMRC – What are statutory records – Whether burden of proof is on HMRC – Sch. 36 notices varied – Closure notice applications – Whether HMRC has reasonable grounds for not issuing closure notices – Held – Yes.
The First-tier Tribunal (FTT) decided that: these appeals against information notices should not be stayed pending a preliminary hearing which was to be listed for a company of which the taxpayer was a director; although the information notices had not been appealed to HMRC the late appeal was accepted; the information notices should be varied; and there were reasonable grounds for not directing HMRC to close the enquiries into the taxpayer's tax returns within a specified period.
HMRC opened enquiries into Mr Mathew's self-assessment tax returns for five years, believing there to be discrepancies between Mr Mathew's lifestyle and his declared income. As part of the enquiries HMRC issued two information notices under Finance Act 2008, Sch. 36 (Sch. 36 notices), seeking to establish whether Mr Mathew received employment income dressed up as loans and whether he was receiving other taxable income or gains which he had omitted from his tax returns. Mr Mathew applied to the FTT asking it to direct that HMRC immediately close the enquiries and notified the FTT of appeals against the Sch. 36 notices.
Mr Mathew's representative submitted that this case should be stayed pending a preliminary hearing which was to be listed for a case involving a group of companies of which Mr Mathew was a director of the holding company, another director (Mr Onalaja) and other companies, on the basis that if the Sch. 36 notices were upheld they could be used by HMRC in that litigation. The FTT found that the key issue to be determined in the other case was the relationship between HMRC's civil powers and a possible criminal prosecution of Mr Onalaja and that previously Mr Mathew had submitted that his case should be treated independently of the other case. The FTT found no reason to stay the case.
It was clear to the FTT that Mr Mathew had not appealed the Sch. 36 notices to HMRC, but instead made a direct application to the FTT which the FTT had no jurisdiction to hear. The FTT considered whether a complaint letter Mr Mathew had sent to HMRC could be read as an appeal, but found that it could not. Following an adjournment HMRC advised that they had accepted an oral appeal from Mr Mathew and accepted that he had a reasonable excuse for the late appeal. Mr Mathew then made an oral application to the FTT to hear his appeals, which the FTT accepted in the interests of justice.
The FTT considered what constituted “statutory records” and where the burden of proof lies in Sch. 36 appeals. The FTT found that “information” as well as “documents” came within the meaning of statutory records in the Taxes Management Act 1970 (“TMA 1970”), s. 12B. Although the FTT found that the weight of authority was that the burden of proof in relation to the “reasonably required” test in Sch. 36 notices rested on the appellant, it acknowledged that the differences between the cases of R (on the application of Derrin Brother Properties Ltd) v R & C Commrs TAX[2014] BTC 21 and R v IR Commrs, ex parte TC Coombs & Co TAX[1991] BTC 89 on the one hand, and Mr Mathew's position on the other, meant that it remained arguable that the burden was on HMRC. The FTT was also conscious that it had very limited submissions and it therefore decided to approach each item of the notices on the assumption that HMRC had the burden of showing that it was reasonable to require the information or documents. Had the FTT found that HMRC had not met that burden, it would have adjourned the case for further submissions in relation to the burden of proof, but as HMRC were found to have met the burden of proof this point did not need to be decided. The FTT took the same view on the burden of proof in respect of statutory records.
The FTT went on to consider each of the individual information requests within the Sch. 36 notices, to decide: whether any of the documents/information required were statutory records against which no appeal was possible; whether Mr Mathew had already complied with the requirements; and if not whether information or documents which were not statutory records were “reasonable required” for the purposes of checking Mr Mathew's tax position. The details of the FTT's findings on each of the items required can be found in para. 101–183 of the decision and the varied notices in appendix 1. The key findings were:
• a schedule of interests was not a statutory record in this case, but was reasonably required;
• HMRC could not simply repeat information requests because they did not trust the answers they had already been given;
• as it was assumed that HMRC had the burden of proof, the FTT decided that a schedule of loans was not a statutory record (although it would have been if the interest paid was insufficient to eliminate a benefit in kind charge);
• loan or mortgage agreements relating to personal assets were not statutory records, but it was reasonable for HMRC to ask for them in this case where the issue was whether there was a discrepancy between Mr Mathew's lifestyle and his means; and
• employment/director contracts were not statutory records, but were reasonably required.
Mr Mathew's representative also submitted that the Sch. 36 notices were part of a “fishing expedition” and/or an abuse of power by HMRC. With reference to Derrin, the FTT agreed that HMRC were not permitted to use the Sch. 36 powers to “fish” for possible issues, but found that in this case the Sch. 36 notices (as varied) were “genuinely directed for the purposes for which the noticed may be given” and were not part of a “fishing expedition”. The FTT noted that it did not have judicial review jurisdiction and therefore could not decide or take account of whether HMRC had abused their powers, but for completeness noted that there was no evidence to support this claim.
The FTT found that given the volume of information which had yet to be supplied by Mr Mathew and the degree of uncertainty there were reasonable grounds for not issuing a closure notice now, either in respect of the years for which the Sch. 36 notices had been issued or the earlier years which had been opened to protect HMRC's position, but for which no information had been requested.
This case is very fact specific, but there are some interesting points made by the FTT.
In respect of possible “fishing expeditions” by HMRC, in this case the FTT noted that “HMRC are not permitted to use the Sch. 36 powers to “fish” for possible issues”, whereas in the FTT case of Spring Capital Ltd TAX[2015] TC 04220, the FTT found that “HMRC are entitled to undertake “fishing expeditions” when checking returns: they do not need suspicion in order to check a tax return.”
The FTT did not reach a conclusion (because it did not need to) on where the burden of proof lies in relation to whether information and documents contained in Sch. 36 notices are “reasonably required” and noted that a decision on this point “may be the task of another tribunal, on another day”.
Topic |
Paragraph |
Introduction |
1 |
Summary of decision |
5 |
Legislation and evidence |
9 |
Findings of fact |
15 |
Preliminary matters |
29 |
Whether to stay the appeal |
30 |
Appealing the Sch 36 Notices |
40 |
Records, Proof and Submissions |
49 |
What are statutory records? |
50 |
The burden of proof in Sch 36 appeals |
66 |
The parties' main submissions |
93 |
The First Sch 36 Notice |
101 |
Schedule of interests in entities |
101 |
Benefits in kind other than loans |
115 |
Loans |
120 |
Bank accounts |
141 |
Charges on personal assets |
145 |
Decision on the First Notice |
149 |
The Second Schedule 36 Notice |
151 |
The tax year 2011–12 |
152 |
The tax year 2012–13 |
179 |
Conclusions on the Sch 36 Notices and Direction |
183 |
The Closure Notice Applications |
188 |
The law on closure notices |
188 |
Submissions on 2011–12 and 2012–13 closure notices |
193 |
Decision on 2011–12 and 2012–13 closure notices |
196 |
Closure notice applications for earlier years |
203 |
Appeal rights |
207 |
Appendix 1: The Schedule 36 Notices as varied |
|
Appendix 2: Legislative provisions |
[1] HM Revenue & Customs (“HMRC”) opened enquiries into Mr Mathew's self-assessment (“SA”) returns for the five years 2008–09 through to 2012–13 (“the relevant years”). They also issued two Notices under Finance Act 2008, Schedule 36 (“Sch 36”).
[2] Mr Mathew applied to the Tribunal, asking it to issue a direction that HMRC close all enquiries forthwith. He also notified appeals to the Tribunal against the Sch 36 Notices.
[3] The issues in the case were:
1) whether the case should be stayed pending the preliminary hearing which is to be listed for Gold Nuts Ltd v R & C Commrs; and if not
2) whether Mr Mathew had appealed the Sch 36 Notices to HMRC as required by Sch 36, para 32;
3) if so, whether the Tribunal should confirm, vary or set aside the Sch 36 Notices; and
4) whether the Tribunal should issue a direction that HMRC close one or more of the SA enquiries.
[4] Although Mr Mathew had been issued with a £300 penalty for non-compliance with one of the Sch 36 Notices, Mr Onalaja confirmed that this had not been appealed and was not before the Tribunal.
[5] The Tribunal decided that the case should not be stayed, for the reasons given at paragraph 35ff.
[6] As explained at paragraph 43ff, the Sch 36 Notices had not been appealed to HMRC; however, HMRC exercised their...
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