Title: Mr W C Harbron v The Commissioners for Her Majesty's Revenue & Customs [2010] UKFTT 127 (TC) (24/03/2010) ~INCOME TAX/CORPORATION TAX ~Assessment/self-assessment ~~
Author: npantelides
Last saved by: joe.ury
Company: DCA

[2010] UKFTT 127 (TC)

TC00438

Income tax – direct sales manager – undisclosed profits – appeals against assessments, closure notices and penalties – enquiries by HMRC revealed Appellant’s self assessments were understated – whether assessments, decisions and penalties were justified – yes with minor amendments – appeals dismissed – sections 36, 28A, 95 and 74 TMA 1970

FIRST-TIER TRIBUNAL (TAX CHAMBER)                             Appeal No. TC/2009/11121

 
 	
					MR. W C HARBRON	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Ian Vellins (Judge)
		Howard Middleton (Member)
			
Sitting in public in Leeds on 19 February 2010

The Appellant did not appear and was not represented at hearing

Francis Healey, senior officer of Her Majesty’s Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2010
DECISION

The adjournment request
1.	This appeal was originally listed to be heard at Leeds on 16 November 2009.  The Appellant requested an adjournment of that hearing on the grounds that his representative, Mr. G Davey was intending to be out of the country on holiday and unable to represent him at that hearing.  The Appellant’s request was allowed and the hearing was adjourned.  On 26 November 2009 the Appellant and his representative were notified that the appeal was to be heard at Leeds on 19 February 2010.  The Appellant failed to respond to directions requesting him to provide a bundle of any documents that he wished to rely on at the hearing.  During the enquiries of HMRC the Appellant had frequently prevaricated and delayed responses to HMRC.  On 4 February 2010 Mr. Davey wrote to the Appellant stating “since I have been tied up all February with tax return filing deadline I have only just noticed that the hearing with HMRC is scheduled for 19 February at 10am.  I am sorry but I will be unable to attend that day as I shall be out of the country.”  On 10 February the Appellant wrote to the Tribunals Service requesting a postponement of the hearing until the end of April / beginning of May 2010 when Mr. Davey had informed the Appellant that Mr. Davey was available again.  That application for a postponement of the hearing on 19 February 2010 was refused by Judge Barbara Mosedale on 16 February 2010.  On 18 February 2010 the Appellant sent a fax to the Tribunals Service again requesting a postponement of the hearing and stating that he did not intend to attend at Leeds on 19 February 2010.
2.	We are satisfied that the Appellant and Mr. Davey  - on 26 November 2009 – had been notified of the hearing well in advance and had ample time to prepare for the hearing.  We find that the request for an adjournment by the Appellant was not reasonable, and was justifiably refused by Judge Mosedale.  We considered that it was in the interests of justice to proceed with the hearing in the absence of the Appellant under rule 33 of The Tribunal Procedure (First-Tier Tribunal) (Tax Chamber) Rules 2009.
The appeal
3.	In this appeal the Appellant is Mr. W C Harbron, who operated as a direct sales manager from his home address in North Yorkshire.  He appeals against the following decisions of HMRC in relation to the profits returned by him in his tax returns, resulting in the following assessments, closure notices and penalties, namely:-
a)	1999 / 2000 £2,213.44 assessment under s.36 Taxes Management Act 1970 (“TMA 1970”)
b)	2000 / 2001 £5,800 assessment under s.36 TMA 1970
c)	2001 / 2002 £7,128.20 assessment under  s.36 TMA 1970
d)	2002 / 2003 £8,657.66 assessment under s.36 TMA 1970
e)	2003 / 2004 £10,806.34 assessment under s.36 TMA 1970
f)	2004 / 2005 £13,986.03 closure notice under s.28A (1) and (2) TMA 1970
g)	2005 / 2006 £10,942.23 closure notice under s.28A (1) and (2) TMA 1970
h)	1999 – 00 – 05/06 £23,813 penalty under s.95 TMA 1970
4.	At the hearing of this appeal as stated above the Appellant did not attend.  HMRC were represented by a senior officer, Francis Healey, who produced two bundles of documents on behalf of HMRC.  The Appellant had provided no additional documents.  HMRC did not call any witnesses.  Mr. Healey summarised the case on behalf of HMRC and made submissions.  We make the following findings of fact based on the evidence before us and the principles of law involved.
Findings of fact and decision
5.	In April 199 HMRC issued a 1998 / 1999 tax return to Mr. Harbron.  The return was not submitted by the due date of 31 January 2000, and other correspondence issued to Mr. Harbron by HMRC was returned as not delivered.  Consequently because HMRC no longer had a current address for Mr. Harbron a 1999 / 2000 return and subsequent returns could not be issued by HMRC.  It was not until 2004 that HMRC obtained a new address for Mr. Harbron.  This was obtained by anonymous, unsigned letters which had been sent to HMRC and which provided various information on Mr. Harbron including information that Mr. Harbron had purchased a property at 6 Heatherbank Avenue, Keithley.  On 30 April 2004 HMRC wrote to Mr. Harbron at this new address stating that HMRC understood that Mr. Harbron had continued working self-employed as a consultant, that he had moved to a new address without informing HMRC, and requesting full details of his business and confirmation that his self-employment had continued.  Mr. Harbron failed to respond to that letter.  Accordingly in June 2004 HMRC issued five sets of tax returns to the Appellant for completion, namely for the years from 1999 – 2000 to 2003-2004.  Mr. Harbron delayed submitting those outstanding tax returns until June 2005 when he submitted the five returns a year after they were issued.
6.	The profits returned by Mr. Harbron as shown on the returns ranged from a loss of £1,699 in 1999 / 2000 to a profit of £6,736 in 2002 / 2003.  Other than in the first year where he had returned a loss, Mr. Harbron was liable to income tax on the profits he declared, and because of that liability he also became liable to a penalty under s. 7 TMA 1970.  HMRC decided not to charge a penalty for the offence, but in view of the fact that the profits returned on Mr. Harbron’s 2005 return (£5,284) were less than those declared in the earlier years, and in view of the earlier offence, Mr. Harbron’s 2005 return which he submitted on 23 January 2006 was selected for enquiry for HMRC, who had obtained confirmation from HM Land Registry that Mr. Harbron had purchased the property in Keithley for £210,000 in June 2003.
7.	We now turn to the enquiry of HMRC’s inspector Mrs. Laynton.  Her enquiry was directed both as to the income or gross profit disclosed by Mr. Harbron on his self-employment return for 2004 / 2005, and as to the expenditure namely the total expenses disclosed by Mr. Harbron on that return.  The gross profit was shown by Mr. Harbron as £28,350 with expenses totalling £23,066, and showing a net profit of £5,284.  The expenses were split up as to £1,059 for telephone and cleaning expenses, £13,484 for motor expenses, £8,323 for hotels and subsistence, and £200 for legal and accountancy costs.
8.	The enquiry into the 2005 return was opened in April 2006 and at that time the business books and records of Mr. Harbron were requested.  In support of the business income declared on the return Mr. Harbron submitted weekly recruitment sheets from mid-August 2004 to April 2005.  A typical sheet shown in HMRC’s bundle itemised advance commission, car allowance, and a miscellaneous commission of £50 per head in respect of those persons whom the Appellant had recruited onto a course.  Those payments received from Safestyle UK appearing from 27 August 20004 to 8 April 2005 totalled £28,250, which was only £100 less than that declared by Mr. Harbron on his returns.  
9.	Mr. Harbron provided bank statements of his account at Abbey showing his bank transactions in the year to 5 April 2005.  Mrs. Laynton analysed that although Mr. Harbron had declared gross income from his business in the year to 5 April 2005 in the sum of £28,250, there were cash and cheque deposits into this Abbey account totalling £48,885.  The payments out of that account were in excess of that.  The majority of Mr. Harbron’s business income, namely the payments from Safestyle UK could be cross-referenced to being paid into the account, but the question remained as to what was the source of the remaining deposits?  These were discussed at a meeting held with Mr. Harbron in February 2007 and again with his accountant on 10 October 2007.  In essence Mrs. Laynton established that there had been approximately £20,000 paid into the bank account over and above Mr. Harbron’s declared income.  At the meetings Mr. Harbron admitted that around £7,000 was business income which he had not declared from a company called Virgo.  Mr. Harbron did not dispute that this was undeclared income, which he had not declared on his return.  This left approximately £13,000 worth of deposits which were in dispute and were mainly deposited prior to the declared first payment made by Safestyle UK in August 2004.
10.	We deal now with the disputed deposits.  Among the deposits into the bank account for the year ended 5 April 2005 totalling £48,885, were cheques and cash of £4,250, £3,559 and £750, which Mr. Harbron stated was in respect of the sale proceeds of a BMW car.  Following the meetings Mrs. Laynton wrote to Mr. Harbron on 11 October 2007 for evidence of the sale of the vehicles to support the explanations given.  Mr. Harbron did not submit either to HMRC or to this tribunal any documentation in support of these purported vehicle sales.
11.	Mr. Harbron further submitted that some of the monies which were deposited into his bank account were monies that he loaned to a man, Nick Leek, which he said were repaid to him in dribs and drabs.  Mrs. Laynton requested supporting documentation from Mr. Harbron.  Although Mr. Harbron did submit some partial documentation there was no evidence as to whom, or for what purpose a withdrawal of £5,000 from Mr. Harbron’s credit card on 19 May 2004 had been paid or that any of the disputed deposits into his bank account were repayments of this amount, which in any event were not consistent with the “dribs and drabs explanation” given by Mr. Harbron at his interview.  Accordingly Mrs. Laynton was not satisfied with the explanations given by Mr. Harbron either in connection with the vehicles or the alleged transactions with Mr. Leek.  Mrs. Laynton then arrived at adjustments on the income side, namely the difference between the total cash deposited into Mr. Harbron’s bank account and the income that he declared on his return.  The cash deposited into his bank account had totalled £48,885.  Mr. Harbron had declared business income of £28,350 gross.  The different was £20,515 which Mrs. Laynton concluded was the difference attributable to unrecorded taxable income, in the absence of reasonable explanations or documentary evidence by Mr. Harbron.  Having considered all the evidence in this appeal we find that the Appellant had claimed that he had received income from various sources during that tax year to 5 April 2005 but has been unable to provide sufficient records to verify his explanations.  We find as a fact that Mr. Harbron did not provide and has not provided sufficient evidence of the source of the deposits into his bank account, and with regard to income during that tax year we uphold Mrs. Laynton’s conclusion to assess an additional £20,515 as undisclosed income for that period.
12.	We turn now to the other side of Mrs. Laynton’s enquiry, namely the expenditure side.
13.	On 26 April 2006 Mrs. Laynton wrote to Mr. Harbron’s accountant requesting various information in support of the expenditure contained on Mr. Harbron’s 2005 return.  Because the information was not supplied Mrs. Laynton issued a formal information notice on 7 June 2006.  The information was still not supplied by 1 July 2006, and Mrs. Laynton issued a penalty warning latter for the failure to supply information.  A £50 penalty notice was issued to Mr. Harbron on 8 August 2006 in view of the continued failure to supply the information.
14.	In August 2006 Mr. Davey, on behalf of Mr. Harbron, responded with documents.  These documents included a letter to Mr. Davey from Mr. Harbron explaining the expenses claimed in the tax return.  Although Mr. Harbron was claiming total expenses of £23,066 no receipts or invoices whatsoever were submitted by him to support the expenses claimed, in breach of the legislation requiring the keeping of records.
15.	Section 74 of the Income and Corporation Taxes Act 1970 specifies what expenditure is allowable for income tax purposes.  To be allowable for income tax purposes the expenditure has to be incurred wholly and exclusively for the purposes of the trade and further that the expense has to be actually paid or there has to be a liability to pay the expense.  It appeared to the inspector that all of Mr. Harbron’s business income was deposited into the bank account and therefore it followed that if this was the case Mr. Harbron must then withdraw funds from this account in order to pay for any business expenses or private expenses that he has to meet.
16.	Dealing with the breakdown of expenditure Mr. Harbron in an undated letter to his accountant stated that his total expenditure for hotel costs during the year amounted to £6,370.  Mr. Harbron did not submit any hotel bills to corroborate the expenditure.  Mrs. Laynton disallowed all of the hotel costs because of the lack of receipts or invoices to support the expense.  However, at the hearing of the appeal Mr. Healey was able to identify from Mr. Harbron’s bank account expenditure of £1,589.25 which could be identified as being potential hotel expenditure, as the bank account referred to inns, lodges and hotels in respect of that total figure.  We find on the evidence, with the consent of Mr. Healey, that we should allow to Mr. Harbron £1,589 in hotel expenses rather than the zero allowed by Mrs. Laynton.
17.	With regard to motoring expenses Mr. Harbron had claimed £13,484 motoring expenses in the 2004 / 2005 return.  Mrs. Laynton had requested documentation from Mr. Harbron in respect of that claim.  There were no petrol purchases on Mr. Harbron’s credit card statements and no MOT certificates had been provided by him to confirm his business mileage.  Mrs. Laynton identified £1,829 worth of petrol payments on his bank account, equating to about 14,000 miles travelled, but any private mileage included in these figures would have to be disregarded.  Mrs. Laynton disallowed all of the motoring costs because of the lack of receipts or invoices to support the expense.  However at her meeting with Mr. Davey on 10 October 2007 she later suggested that 16,000 business miles should be allowed, and under the Mileage Rate Scheme Mr. Harbron’s motor expenses would come out at £5,500 on that figure.  Having considered all the evidence, we find, with the consent of Mr. Healey, that we should allow £5,500 motoring expenses in respect of that return rather than the zero motoring expenses allowed by Mrs. Laynton in her enquiry amendment.  We find that such an allowance is just and equitable taking into account all the evidence in this appeal.
18.	With regard to subsistence expenses Mr. Davey and Mr. Harbron were claiming £1,922 subsistence allowances.  However Mr. Harbron did not submit any receipts for this expenditure, and food is not an allowable business expense.  Mrs. Laynton disallowed the whole of the £1,922 claimed, and we uphold Mrs. Laynton’s decision to disallow the £1,922 claimed by Mr. Harbron for meals as a subsistence expenditure.
19.	Mr. Harbron claimed £435 as an expense for a cleaner.  No evidence was produced in respect of such a claim, and at the meeting between Mrs. Laynton and Mr. Davey on 10 October 2007 Mr. Davey conceded that the cleaning costs should be disallowed.  We agree that the cleaning expense of £435 should be disallowed.
20.	Mr. Harbron had claimed £624 in telephone expenses and £200 for accountancy expenses.  At the meeting on 10 October 2007 subsequent to the decisions Mrs. Laynton stated that she was prepared to allow the telephone and accountancy costs in full.  We find on all the evidence that the expenses of £624 for telephone expenses and £200 for accountancy fees claimed by Mr. Harbron in respect of that return be allowed.
21.	Mrs. Laynton had concluded her 2005 enquiry by increasing Mr. Harbron’s self assessment by £43,581 under section 28A Taxes Management Act 1970.  She had concluded her enquiry in June 2007 which was before the October meeting with Mr. Davey.  Following the comments made in that meeting and following HMRC having conducted a further detailed review of the bank statements submitted by Mr. Harbron, Mr. Healey submitted that the amendments made to Mr. Harbron’s 2005 self assessment as originally assessed by Mrs. Laynton should be reduced in the light of the expenses which we have indicated should be allowed.  In summary Mr. Harbron had returned net profits of £5,284 upon which there would have been a tax liability of £97.02.  We find, as did Mrs. Layton, that the total profits were the figure shown in the bank account of £48,865, but with allowable expenditure of £7,913, leaving an adjusted figure of £40,952.  This would then result in the figure of tax shown on the closure notice of £13,986.03 being reduced by £3,244.33 (attributable to the allowed expenses), leaving a figure for additional liability to tax by Mr. Harbron of £10,741.70.  This therefore effectively reduces the figure in the closure notice of £13,986.03 to £10,741.70 in respect of the period 2004 / 2005.
22.	We turn now to the earlier years from 1999 / 2000 to 2003 / 2004.  Mrs. Laynton raised assessments for those five prior years to 2004 / 2005.  These were raised under the principle of presumption of continuity, on the principle that if omissions had occurred in one year there is the likelihood that omissions had also occurred in other years as well.  We find that Mr. Harbron failed to notify his chargeability to income tax for the years 1999 / 200 to 2003 / 2004.  When signing his 2005 return he stated that the information given on that return was correct and complete to the best of his knowledge and belief.  However he has accepted that at least £7,000 was omitted by him from the return.  Submitting an incorrect return was an offence under the Taxes Acts.  When for the year 2004 / 2005 he returned profits of £5,284, he had made mortgage repayments of over £11,000 as shown on his bank account and similar payments were likely to have been made prior to 2005 bearing in mind that his house was purchased in 2003.  Consequently Mrs. Laynton did not consider it unreasonable to concluded that Mr. Harbron’s earlier returns were also likely to be understated.  HMRC are allowed to raise assessments under section 36 Taxes Management Act 1970.  Mrs. Laynton considered that Mr. Harbron was negligent with regard to his income tax responsibilities and we agree.  Although Mrs. Laynton could have issued assessments for years prior to 1999 / 2000 under section 36 TMA, she only issued assessments for those years where Mr. Harbron had also failed to notify his chargeability.
23.	In respect of the year to 2005 this tribunal has reduced the additional profits from £43,581 by the sum of £7,913 to £35,668.  HMRC take the view, and we agree that the amounts assessed for the previous years from 1999 / 2000 to 2003 / 20004 were still in line with that level of profits.  Accordingly we confirm the assessments made by HMRC under section 36 TMA 1970, in the sums £2,213.44, £5,800, £7,128.20, £8,657.66, and £10,806.34 in respect of those earlier years.
24.	Turning now to the year 2005 / 2006 Mr. Harbron had returned a net profit of £20,383 on which the liability for tax would be £4,395.60.  Mrs. Laynton increased the profits from £20,383 by a additional £32,000 making a total of £52,383.  In order to be consistent with the revised profits for 2005 we find that the 2005 / 2006 additional profits should be reduced from £32,000 by £12,000 revising the figure to £20,000.  By adding this £20,000 to the profit returned by Mr. Harbron of £20,383 results in a revised profit of £40,383.  The result of this is that the figure shown on the closure notice of £10,942.23 should be adjusted and reduced to £6,022.23.
25.	We turn now to the penalty determination issued by Mrs. Laynton in the total amount of £23,813.  These penalties were charged under section 95 Taxes Management Act 1970.  We find that Mr. Harbron has been negligent in completing his income tax returns.  Mrs. Laynton has charged a penalty of 40%.  She set out how she arrived at that percentage in a letter dated 24 April 2008.  She used a figure of 15% in respect of disclosure.  We find that Mr. Harbron failed to produce evidence to substantiate his explanations and we consider that a reduction of penalties amounting to 15% as allowed by Mrs. Laynton is appropriate under the heading of disclosure.  Under the heading of cooperation we find that there has been poor cooperation on the part of Mr. Harbron.  It was necessary to serve upon him formal notices requiring him to supply various documents and information and there were numerous instances of delay and prevarication on the part of Mr. Harbron.  The enquiry was opened in April 2006 and there were considerable delays by Mr. Harbron.  Mrs. Laynton allowed a reduction of penalties amounting to 20% under the heading of cooperation and we agree with that figure.  Under the heading of seriousness Mrs. Laynton reduced the penalty by 25%.  Mr. Harbron had made errors in his returns, unexplained deposits in his bank account and had inflated his expenses.  His taxable profits for the enquiry year were substantially increased.  Mrs. Laynton considered that a 25% reduction was appropriate and we agree.  We see no reason to adjust the percentages allowed by Mrs. Laynton.  The penalties for the years 1999 / 2000 to 2003 / 2004 as imposed by Mrs. Laynton are confirmed.  Because of the reductions which we have made to the years 2004 / 2005 and 2005 / 2006 the amounts of the penalties for those years are reduced to £4,296 and £2,408 respectively.  The total penalties are therefore reduced by us to £20,546, instead of the £23,813 penalty imposed originally by HMRC.  We find that Mr. Harbron has been negligent in completing his tax returns and therefore incurred a penalty under section 95 Taxes Management Act 1970.  The 60% reduction of the penalty is appropriate in the circumstances and we confirm the 40% penalty on the revised duties arising from our decision.
26.	Accordingly we dismiss the Appellant’s appeal.
Summary of decision
a)	1999 / 2000 £2,213.44 assessment confirmed
b)	2000 / 20001 £5,800 assessment confirmed
c)	2001 / 2002 £7,128.20 assessment confirmed
d)	2002 / 2003 £8,657.66 assessment confirmed
e)	2003 / 2004 £10,806.34 assessment confirmed
f)	2004 / 2005 closure notice of £13,986.03 reduced by £3,244.33 to £10,741.70
g)	2005 / 2006 closure notice of £10,942.23 reduced by £4,920 to £6,022.23
h)	Penalties of 40% on above sums reduced from £23,813 to £20,546
The Appellant has a right to apply for permission to appeal against this decision in accordance with rule 39 of the Rules.  The parties are referred to “Guidance to accompany a decision from the First-Tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.
TC/2009/11121

IAN VELLINS
JUDGE
Release Date: 24 March 2010