SPC00540
Closure notice – Application for direction to close enquiry into return – Company – FA 1998 Sch 18 para 33 – Direction for closure within four months

THE SPECIAL COMMISSIONERS

	JADE PALACE LTD	Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Special Commissioner:  THEODORE WALLACE

Sitting in public in London on 5 May 2006

Robert Maas, FCA, of Blackstone Franks, for the Appellant 

Warren Mitchell, of the Appeals Unit, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This was an application for a direction for closure notices to be given in respect of enquiries into the Appellant company’s tax returns for the years ended 31 January 2003 and 2004.

2.	The enquiry into the year 2002-03 was opened by notice dated 24 June 2004; the closure application was dated 12 December 2005.  The 2003-04 enquiry was opened on 11 January 2006 and the closure application was dated 12 April 2006.

3.	Under the Finance Act 1998, Schedule 18, paragraph 33 a closure application is heard in the same way as an appeal, however the burden is on the Revenue to establish reasonable grounds for not giving a closure notice within a specified period.

4.	There was a bundle of documents of 145 pages mainly correspondence.  Apart from formal letters, the bundle included 15 letters from the Revenue and 11 from the Appellant.  There was a statement of facts not in dispute.  The only witness was Mrs Pauline Ackhurst, inspector of taxes, who took over the first enquiry and instituted the second.

5.	The further agreed facts were in summary as follows.  The Appellant company operates a Chinese restaurant in Wickford, Essex.  The directors are Mr and Mrs Fung who owned 75 per cent of the shares.  A previous enquiry involving Mr and Mrs Fung was opened on 14 December 1995; this included the Jade Palace restaurant, which was carried on by Mr Fung and his brother in partnership until 31 January 1995, and New Town Takeaway and Woodham Palace Fish & Chip Takeaway, both of which were carried on by Mr and Mrs Fung in partnership.

6.	A further enquiry into New Town Takeaway was opened on 21 October 1998 and closed on 11 July 2000.  The Revenue amended the partnership return but following an appeal withdrew the amendments in their entirety on 22 November 2000.  Following a complaint by Mr Fung about the handling of the enquiry an ex gratia payment of £750 was made.

7.	Neither of the returns giving rise to the enquiries now before me was included in the bundle.  

8.	The accounts for the year to 31 January 2003 were not audited, the company being exempt.  They were prepared by Neil Hamper & Co, later incorporated into Connah Goldsworthy, chartered certified accountants.  The accounts showed an operating profit of £132,044 on turnover of £502,036 and profit before tax of £137,171.  Shareholders funds were £409,460.  Cash at bank and in hand was £439,894; short term creditors of £165,118 included £84,946 directors’ loan accounts.  No dividends were paid and no directors’ endowments were paid.

9.	Following the notice of enquiry into 2002-03 Mrs Ackhurst visited Connah Goldsworthy on 28 September 2004 by appointment and reviewed the records of the Appellant. After that meeting she wrote asking for a copy of the initial and final trial balance, meal bills for December 2002 and clarification of the directors’ loan accounts; she asked for a meeting with the directors.

10.	In a letter dated 17 November 2004 Connah Goldsworthy provided the initial and trial balance and cash reconciliation sheet, but could not provide the missing meal bills.  They stated that they could deal with many aspects of the enquiry without inconveniencing  Mr Fung.  The letter entered into some detail as to meal bills and cash handling and control; it stated that a dividend of £70,000 had been declared on 28 August 2004 and credited to the loan account for subsequent drawing.

11.	Following further correspondence, Mrs Ackhurst wrote on 21 February 2005 setting out concerns as to a difference of £7,399 between the cash account balance in the reconciliation and cash on hand in the record sheets, asking to see meal bills for 5 June and 25 June 2004 when test purchases were undertaken and expressing concerns about the monies available to the directors, since they had received no remuneration and drew nothing from the loan account in the year; she asked for clarification of their personal expenditure.

12.	After a further interchange of letters, Mrs Ackhurst and another officer met Mr Hamper, of Connah Goldsworthy, on 19 May 2005 at their premises.  Mrs Ackhurst produced a six page note of the meeting.  Mr Hamper agreed that the directors’ loan account be adjusted to deal with the £7,399 difference.  Mrs Ackhurst found that there were no meal bills in the records for two of the four test purchases in June 2004.  She said that the directors’ private expenditure and resources were linked to what they took out of the business. She asked for paperwork in respect of rents received by the directors in cash.

13.	On 29 June 2005 Connah Goldsworthy replied to two letters stating that for much of the time the business was run by staff, that if there was staff suppression the directors would be unaware of it and that to the best of their belief the return was correct.  They stated that most takeaway sales were by credit card.  They said that the add-back of £7,369 would not affect profits. They wrote that the directors would not be providing any more information on life-style and asked for a notice of closure by return of post.

14.	On 8 July 2005 Mrs Ackhurst replied that she needed to be satisfied regarding means and at that stage she was not.  She asked for statements for all the directors’ bank and building society accounts with credit and store card statements or a mandate to approach the financial institutions direct, stating that otherwise she would consider the powers available under section 20 of the Taxes Management Act 1970.  After two further letters from Connah Goldsworthy, Mrs Ackhurst wrote on 20 September 2005 that if the private bank statements were not provided by 12 October she would use her powers under section 20.

15.	Connah Goldsworthy replied on 28 September stating that if HMRC required information of a personal nature they must invoke powers under section 20; they stated that their clients did not always keep bank statements.  They stated that they were seeking legal advice as to whether the frequent enquiries into their clients’ business tax affairs and threats to invoke information powers constituted a breach of their Human Rights and amounted to sustained harassment.  The letter also stated that in January 2002 Mr Fung withdrew approximately £80,000 in cash from a joint NatWest Advantage account which was then closed and that Mr and Mrs Fung had lived on this with the income from the two takeaways.

16.	In further letters dated 13 October and 18 November Mrs Ackhurst repeated her concerns about the cash balance, missing sales and the directors’ means.

17.	On 18 November 2005 Mrs Ackhurst issued a precursor letter to Mr and Mrs Fung under section 20B(1) of the TMA requiring specified documents by 28 December 2005.  The documents were all bank passbooks and statements during the period 1 February 2002 to 31 January 2003 wherever in the world the accounts were situated and any rental agreements or hire licences between Mr and Mrs Fung and the occupiers of two takeaway premises and between them and the landlords.  Three days later Mrs Ackhurst issued a letter to Mr and Mrs Fung regarding possible penalties for offences which are criminal within the Human Rights Convention.

18.	On 12 December 2005 the Appellants applied to the Special Commissioners for a direction to issue a closure notice.  The letter stated that the enquiry which was opened in December 1995 (see paragraph 5 above) was closed with no amendment to profits in July 1996.  It referred to the enquiry closed in 2000 and to a VAT enquiry.  It stated that Mr Fung has diabetes and was suffering from severe stress and asserted that the treatment of Mr Fung had been tantamount to harassment.

19.	On 11 January 2006 Mrs Ackhurst notified the Appellant that she intended to enquire into the return to 31 January 2004.

20.	The accounts to 31 January 2004 dated 31 August 2004 showed a reduced operating profit of £89,026 on turnover of £483,537.   Cash at the bank and in hand was slightly up at £429,254.  No directors’ remuneration was paid but dividends were £60,000.

21.	Also on 11 January 2006 Mrs Ackhurst wrote to Connah Goldsworthy referring to the further notice of enquiry and stating that 2003-04 may impact on the previous year.  She requested certain information by 17 February: confirmation of low turnover was arrived at including details of any adjustments; comments on the decline in turnover and gross profit rate for 2003-04; an analysis of the cash at bank and in hand figure of £429,254; a copy of the cash account for the year; detailed analysis of the directors loan account and confirmation of where the records were located.

22.	On 8 February 2006 Connah Goldsworthy supplied the information requested.  The cash in hand element of the £429,254 was £48,251, which was £2,423 more than was shown in the Appellant’s cash sheets.  They stated that sales in 2002-03 had been an all time high and that costs and competition in 2003-04 had affected margins.  The directors’ current account details were provided.  A copy of the letter was provided on 14 March.

23.	On 3 April 2006 Mrs Ackhurst replied stating that she could not conclude matters pending a decision of the Special Commissioners on 5 May and pending the outcome would withhold any further questions or review of the records.  On receipt of that letter the Appellant made the closure application in relation to 2003-04.

24.	Mrs Ackhurst’s witness statement at paragraph 43 said,  

“I believe that I am not yet in a position to issue the closure notice as I have yet to satisfy myself that the accounts are correct and therefore the Special Commissioner should not direct that the enquiry be closed.”

She identified a number of concerns.  The difference of £7,000 between cash in hand and the record sheets, which although it increased the profits in the accounts indicated “a fundamental problem with the record keeping” which she had been unable to discuss with the directors.  She referred to the two missing test purchases.  She said that cash drawings for 2002-03 were out of line with earlier years; analysis had shown a sharp difference in the amounts drawn over the years.  She had not seen the legal documents in respect of the rental income although these had been promised.  She had not been supplied with any detail regarding the directors’ living costs and wanted to see their bank accounts.  If cash had been withdrawn by the directors, such cash was not available for cash purchases, which might have been financed by unrecorded sales.  The assertion that as much as £70,000 had been held in cash conflicted with the Appellant’s relatively sophisticated bank arrangements with a small current balance and substantial business reserve and treasury reserve deposits.

25.	In relation to 2003-04 she stated that she had not yet fully reviewed the Appellant’s response to her letter.  She stated that there was still a cash discrepancy of £2,423 suggesting a problem with record-keeping.

26.	Mrs Ackhurst told Mr Maas that she would not close the enquiry without an explanation for any substantial receipts.  She would need answers as to the directors’ personal affairs and wished to put further questions to Mr Fung.  She said that she hoped that she would be able to open a dialogue.

27.	Mrs Ackhurst told the Tribunal that she would be able to make an assumption on the present information but that this would be more considered with more information.  Once the closure application was made, she had taken the view that it was not appropriate to pursue a section 20 application pending its outcome.

28.	Mr Mitchell said that Mrs Ackhurst needed as much information as possible to be satisfied as to the returns.  If a closure was not directed it was likely that the section 20 notice would be pursued and that an early conclusion would be reached on the enquiry.  

29.	Mr Maas submitted that the right to apply for a closure direction under paragraph 33 is there to protect the taxpayer company, balancing the powers of the Revenue under self-assessment with the rights of a taxpayer.  A closure notice prevents the Revenue from issuing a paragraph 27 notice for documents, requires the Revenue to reach and state a conclusion and triggers a right of appeal if an amendment is made.  Closure does not preclude a section 20 notice.

30.	He said that the Appellant company recognised that the Revenue were likely to conclude that the tax had been understated and to require an amendment but wished to bring matters to a head.  He said that the legislation makes no requirement that the Revenue must be satisfied as to the tax due before closing an enquiry. The requirement is simply that they “state their conclusions”.  He said that it was unlikely that Mrs Ackhurst would ever be satisfied.  If she obtained a section 20 notice further enquiries might take up to two years. Co-operation was wishful thinking in the light of the history of the matter.  Mrs Ackhurst could never arrive at a finite figure.  He said that under GAAP there is no correct figure, materiality being relevant together with an exercise of judgment.  He did not accept that there was good reason to inquire into the personal affairs of Mr and Mrs Fung.

31.	Mr Maas said that if an assessment was made following closure and an appeal ensued, the appeal Commissioners would have power to increase the assessment as well as to reduce it.  He asked for a direction for closure in 7 days but said that he would not object to three months. He said that it was unreasonable to leave 2003-04 open if 2002-03 was closed.

32.	In response to a question from the Tribunal, Mr Mitchell suggested that six months was needed so as to allow time for a section 20 application before the closure took effect and for further enquiries.

Conclusions

33.	The legislation covering enquiries into company tax returns and closure notices is contained in Schedule 18 to the Finance Act 1998 which is in similar but not identical terms to that in respect of individuals under the self-assessment regime.

34.	Paragraph 24 empowers the Revenue to enquire into a company tax return if they give notice within 12 months of the filing date or a slightly longer period if the return is late.  A return which has been the subject of one enquiry cannot be subject to another except in consequence of an amendment by the company.  The notice does not need to state the scope or the reason for the enquiry, see paragraph 25.

35.	If the Revenue have given notice of an enquiry under paragraph 25, they may give a further notice under paragraph 27 to the company to produce documents or provide information.  That power has not been used in the present case.

36.	Paragraph 32(1) provides,

“(1)	An enquiry is completed when the Inland Revenue by notice (a ‘closure notice’) inform the company that they have completed their enquiry and state their conclusions.  The notice takes effect when it is issued.”

37.	Paragraph 33 provides,

“(1)	The company may apply to the Commissioners for a direction that the Inland Revenue give a closure notice within a specified period.
(2)	Any such application shall be heard and determined in the same way as an appeal.
(3)	The Commissioners hearing the application shall give a direction unless they are satisfied that the Inland Revenue have reasonable grounds for not giving a closure notice within a specified period.”

38.	I accept the submission of Mr Maas that the purpose of paragraph 33 is to protect the taxpayer, balancing the company’s rights against those of the Revenue to make enquiries.  Paragraph 33 gives protection against enquiries being left open for protracted periods, see Park J at [19] in Revenue and Customs Commissioners v Vodaphone 2 [2006] STC 483.

39.	There is no requirement for the Revenue to state the reasons for an enquiry at the outset and it is not the practice of the Revenue to do so.  A proportion of returns are selected for enquiry on a random basis.   Others are selected for reasons.

40.	Once an application for closure is made it is however for the Revenue to show reasonable grounds for not giving a closure notice within a specified period.  These grounds should take account of proportionality and the burden on the taxpayer.

41.	The issue on such application is not simply whether a closure notice should be directed, but whether it should be directed within a specified period.  The reasonable grounds must cover the setting of a period.

42.	Since paragraph 32 requires the Revenue to state their conclusions when giving a closure notice, it is clear that the “specified period” within paragraph 33(1) must be sufficient for this to be possible. The period necessary will vary with the circumstances and complexity of the case and the length of the enquiry.

43.	The longer the period of the enquiry, the greater the burden on the Revenue to show reasonable grounds as to why a time for closure should not be specified.

44.	Both parties accepted that it is for the Tribunal giving a direction to specify the period.  It is not necessary for the company making the application to specify the period in the application, although this may help to focus the application.  Paragraph 33(3) refers to “a specified period” using the indefinite article and does not therefore refer back to a period to be specified in the application.

45.	In the present case there is a clear dispute as to whether the accounts correctly state the Appellant company’s profits.  There has been a protracted correspondence.  The inspector is not satisfied that the accounts are correct and has identified a number of concerns with the explanations advanced.

46.	I accept the submission by Mr Maas that the Revenue do not have to be satisfied in order to state their conclusions.  If they are not satisfied, this will be part of the conclusion; in such a case the closure notice will go on to make a judgment as to what the correct figure should be.  Such judgment will be on the same basis as on a discovery assessment under section 29.  Although it may be possible in some cases to state a figure with confidence, for example if an identified income receipt has been omitted or if specific expenditure is disallowed, in many cases no precision will be possible.  The measure of profits is often a matter of judgment.

47.	Where a judgment or estimate is necessary the Revenue must have reasonable time to make enquiries if necessary issuing paragraph 27 notices and to make a judgment as to the tax due.

48.	In the present case I find nothing unreasonable about the concerns of Mrs Ackhurst as to the accounts. The cash balances are remarkably high. She is understandably concerned as to the true level of drawings by the directors.

49.	On the other hand there have already been lengthy enquiries, which have come after earlier enquiries into the business affairs of Mr and Mrs Fung which did not result in any additional tax.

50.	There is no legal obligation on Mr and Mrs Fung to either attend a meeting or to answer questions. Paragraph 27 only covers the obtaining of documents or information from the company.

51.	It is quite clear from the correspondence and from the submissions of Mr Maas that Mr Fung is not going to attend a meeting to answer questions.  Mr Fung is fully entitled to take this stance.

52.	If the Revenue amend the return under paragraph 34(2) and the Appellant company appeals, then unless the Appellant satisfies the Tribunal that it is overcharged, the assessment will stand good under section 50(6) of the Taxes Management Act 1970. The burden of proof will be on the Appellant. If Mr Fung gives evidence, the Revenue will be able to cross-examine him at the hearing.  If there is to be an appeal, the sooner it is heard the better.  The events are already up to four years ago.

53.	In the circumstances of this case I am not satisfied that the Revenue have reasonable grounds for not giving a closure notice within a specified period.  Although Mr Mitchell resisted a closure direction, I understood his objection to be directed to an early closure notice.  I did not understand him to object to the setting of any date whatsoever. In response to a question from the Tribunal he suggested that six months would enable Mrs Ackhurst to obtain sufficient information.

54.	I have concluded that provided this matter is given proper priority four months is adequate.  I accept that it was appropriate to defer the section 20 notice pending this hearing.  It is not for me to decide whether consent will be given.  Four months will in my view allow enough time to make a section 20 application and, if consent is given, for the information to be provided and considered.  I have concluded that the enquiry into 2003-04 should also be closed within four months.  That enquiry covers much of the same ground.  If there was to be an enquiry it is difficult to see why it was not opened before.  I do not accept that having requested information  for 2003-04 by 17 February 2006 it was reasonable to defer consideration of the material provided.

55.	The business of the Appellant company is not large and complex.  It consists of a single restaurant and takeaway receiving part of its takings in credit cards.  The enquiries must have involved substantial accountancy costs.  By the time the closure notice takes effect over two years will have elapsed from the opening of the enquiry into 2002-03.  

56.	I direct that the enquiries into the returns for 2002-03 and 2003-04 be closed within four months of the release of this direction.

THEODORE WALLACE
SPECIAL COMMISSIONER

RELEASED: 23 May 2006

SC/3002/06