England and Wales Court of Appeal (Civil Division) Decisions

"Mr Hurley, the taxpayer, is now in his mid-40s. He lives in Bromley. In the years in question he owned two fairly small businesses: a solarium business in Sidcup and a motor-dealing business which he conducted from home. He also received some income from lettings of properties. The customers of the solarium business usually paid in cash, and a lot of the dealings in the motor business were likewise transacted in cash. He produced audited accounts for both businesses, but he had no reliable record-keeping system.

The Revenue had investigated Mr Hurley's tax affairs in 1987, and a small settlement resulted. In (I think) 1991 a more substantial investigation commenced, and developed into a full-scale back duty inquiry. I have the impression that the Revenue were prompted to investigate Mr Hurley's tax affairs by information which they had obtained or statements which had been made to them in another investigation of a former friend of his, a Mr Stringer.

At all events the Revenue drew up capital statements for Mr Hurley for the years from August 1982 to August 1992. Taking all the years together the figures as calculated by the Revenue produced a deficiency of over £160,000. The three largest contributions to it arose as follows.

(i) In April 1986 Mr Hurley bought 5 Addison Road, Bromley. He moved there with his family and I think that he lives there still. The purchase price was £74,000 of which Mr Hurley borrowed £50,000 from Western Trust and Savings Ltd. So allowing for costs he must have put up more than £24,000 himself. Where did that money come from?

(ii) In October 1982 Mr Hurley bought 117 Amblecote Road, London, SE12. This property has always been let. As far as I know Mr Hurley still owns it. The price was £110,000, of which Mr Hurley borrowed £70,000 from Skandia Trust. So he produced over £40,000 from other sources. Where did that money come from?

(iii) Two years later Skandia Trust required him to repay the loan for 117 Amblecote Road because, contrary to the conditions of the loan, he had let the property instead of living there. The repayment, with costs and accrued interest, cost £72,055. Where did that money come from?"

"In the event I am now wholly satisfied that Mr Hurley did not read his father's statement to the commissioners. I do not suggest for a moment that he attempted to mislead me by his affidavit. He was mistaken. I believe that I know exactly how the mistake arose: Mr Hurley did read two other documents to the commissioners. One was a statement by his father on another matter to do with Mr Stringer, and the other was the part of Mr Argles' written submission which was directed to where the father got the money from.

I confess that I have felt tempted to remit the case to the commissioners for the father's statement to be tendered to them in order that they can, if they think fit reconsider their decision in the light of it. I believe that if Mr Argles had been appearing for Mr Hurley at the relevant time the statement would have been put in, and that it was only because of Mr Hurley's lay inexperience that it was not.

However, I have decided that it would be wrong for me to remit the matter in this way. There is a lot of authority that, if either party before the commissioners does not adduce some item of evidence, it would be an incorrect exercise of discretion for the High Court to give him a second chance. The cases include R A Bird & Co v IRC 1925 SC 186 at 191, 12 TC 785 at 794-795 per the Lord President (Clyde), Murphy (Inspector of Taxes) v Australian Machinery and Investment Co Ltd (Assessed in the name of De Bernales as agent) (1947) 30 TC 244 at 260 per Tucker LJ, Bradshaw v Blunden (Inspector of Taxes) (No 2 ) (1960) 39 TC 73 at 80 per Pennycuick J, Yuill v Wilson (Inspector of Taxes ) [1980] STC 460 at 470-471, [1980] 1 WLR 910 at 920-921 per Lord Edmund-Davies in the House of Lords, and Kingsley v Billingham (Inspector of Taxes ) [1992] STC 132 at 138 per Knox J. The present case may be a particularly hard one, given the exceptional circumstances in which the father's statement was not put in, but hard cases make bad law and I must resist the temptation to depart from the general principle laid down by the authorities to which I have referred."

"No doubt, if there has been misunderstanding, we would strain a point to put that right; and if the Commissioners had failed to include or to allude sufficiently to some topic that was brought before them by way of evidence we should remit to put that right."

"It is a well-established and salutary rule that the parties to an appeal to the Court should not, in the absence of special circumstances, be enabled to go back to the Commissioners and call fresh evidence on issues which were raised in the original proceedings and as to which they had full opportunity of calling such evidence as they might be advised (see per Tucker LJ in the case of Murphy v Australian Machinery & Investment Co Ltd 30 TC 244 at page 260)."

"There is nearly always a possibility that not all the evidence which can be produced has been produced, but there is a strong presumption in the administration of the law that the parties must bring forward the whole of their case at time of trial, and once a case has been decided unless there are compelling reasons to the contrary it should not be reopened."

"I will first set out certain propositions of law, and then I will relate them to the facts of the case. My propositions of law are as follows.

1. By s 36 (1) of the Taxes Management Act 1970 an assessment to income tax can be made on a person outside the normal six years period (but subject to a maximum 20 years cut-off) ´for the purpose of making good to the Crown a loss of tax attributable to his fraudulent or negligent conduct´.

2. This requires the Revenue to show: (1) fraudulent or negligent conduct by the taxpayer; and (2) a loss of tax attributable to it.

3. On appeal to the commissioners the burden rests on the Revenue of establishing para 2 (1) and (2). If they do not discharge the burden the appeal should be allowed (see eg Hillenbrand v IRC (1966) 42 TC 617 at 623 per the Lord President (Clyde)). I will call this ´the s 36 burden'.

4. The burden does not rest on the Revenue to any greater extent than the s 36 burden. If they establish some fraudulent and negligent conduct and some loss of tax attributable to it they have satisfied s 36. From then on s 50 (6) takes over and applies as it does for in-date assessments: that is to say, thereafter the burden rests on the taxpayer to establish that the assessment is wrong (see eg Johnson v Scott (Inspector of Taxes ) [1978] STC 48 at 53).

5. Reverting to the s 36 burden which rests on the Revenue, it may or may not be discharged simply by capital statements which show deficiencies. Whether it is so discharged or not depends on whether the taxpayer tenders any explanation of the deficiencies, and if he does, on how the commissioners view his explanation. In this context there is a difference between (i) the commissioners rejecting the explanation, and (ii) the commissioners not accepting the explanation.

Normally it makes no difference whether a tribunal says that it rejects some item of evidence or that it does not accept it, and the two expressions are often used indiscriminately. Where, however, the burden of proof is in issue the distinction between them can be important.

6. To be precise about a case where the Revenue produce and prove capital statements which show deficiencies:

6.1 If the taxpayer advances no explanation for the deficiencies the capital statements by themselves can, and usually do, discharge the s 36 burden (see Hudson v Humbles (Inspector of Taxes ) (1965) 42 TC 380 at 386 per Pennycuick J, James v Pope (Inspector of Taxes ) (1972) 48 TC 142 at 150 per Ungoed-Thomas J).

6.2 If the taxpayer advances an explanation but the commissioners reject it (that is, they positively disbelieve it) the capital statements by themselves can, and usually do, discharge the s 36 burden. Commissioners often have cases where the taxpayer gives evidence seeking to explain the deficiencies by reference to betting winnings. The commissioners listen to the evidence, including the cross-examination, and in many cases they reject it: they find it to be untrue. That, taken with capital statements which show deficiencies, is enough for the Revenue to discharge the s 36 burden. This judgment should not be understood as indicating that in my view whenever a taxpayer alleges that he won money by betting, the Revenue must produce specific evidence that he did not.

What I have said in the above paragraph is subject to 7.1 below.

6.3 If the taxpayer advances an explanation but the commissioners, while not rejecting it, do not accept it either (that is, they are not satisfied on the balance of probabilities that it is untrue, but they are not satisfied on the balance of probabilities that it is true either - they are uncertain either way) the capital statements by themselves are not sufficient for the Revenue to discharge the s 36 burden. What I have said in this paragraph is subject to para 7.2 below.

7.1 If the commissioners reject the taxpayer's explanation and therefore conclude that the capital statements are themselves sufficient for the Revenue to discharge the s 36 burden, their decision may be challenged by the taxpayer on appeal to the High Court but only on the Edwards v Bairstow ground that a decision positively rejecting the explanation (as opposed to one merely not accepting it) was one which no reasonable body of commissioners could possibly reach.

7.2 If the commissioners, while not accepting the taxpayer's explanation, do not reject it either and therefore conclude that the capital statements are not themselves sufficient for the Revenue to discharge the s 36 burden, their decision may be challenged by the Revenue on appeal to the High Court, but only on the Edwards v Bairstow ground that a decision positively rejecting the explanation (as opposed to one merely not accepting it) was the only one which a reasonable body of commissioners could reach."

"The commissioners considered the oral and documentary evidence and the contentions of the taxpayer and the inspector. Their findings and reasoning are given below.

(1) They found the accounts submitted to the Revenue by the taxpayer to be unreliable because of the deficiencies in the primary records. Although the car sales business was mainly conducted in cash, there was no written record of sales and some expenses were estimated. There was no separate record of takings for the Sundays solarium for the year ended 31 August 1989 and the takings figure was based on the total bankings. The commissioners had no evidence that the records maintained changed materially in other years although the taxpayer told them daily record sheets were introduced after value added tax registration. The exercise book in which the rents received were said to be recorded was not produced to the commissioners and they were not satisfied that the photocopy of the schedule of rents said to have been received was correct. They found that there could be receipts from the Sundays solarium, car sales and furnished lettings omitted from the accounts submitted to the Revenue. They preferred to base the assessments on the capital statements prepared by Miss T Bradshaw. The capital statements contained some estimates for bank balances in the absence of details not supplied by the taxpayer. The estimated figures were not challenged by the taxpayer. The personal and private expenditure of the taxpayer had been agreed between the parties at £10,819 for the year ended 31 August 1992. For each of the years ended 31 August from 31 August 1983 to 31 August 1991, the taxpayer's personal and private expenditure in the capital statements was estimated, scaling back by reference to the retail prices index the figure agreed for the year ended 31 August 1992. The taxpayer did not challenge those estimated figures and was unable to offer any evidence of any changes in the pattern of his personal and private expenditure to reflect any changes in his personal circumstances. In some years the capital statements showed expenditure in excess of income declared. The commissioners were not satisfied with all the taxpayer's explanations of how the excess expenditure had been financed. To the extent that the capital statements showed deficiencies resulting from capital growth and expenditure in excess of income declared and loans which the commissioners found to have been made to the taxpayer, the commissioners inferred that the taxpayer's accounts under declared his income. The commissioners found that the taxpayer had been guilty of fraudulent or negligent conduct and that the inspector was justified in making assessments under the provisions of s 36 of the Taxes Management Act 1970 for the years of assessment 1983-84, 1984-85, 1985-86 and 1986-87."

"The Commissioners did not accept that Cornelius Hurley had accumulated, over the years, £123,000 from which to provide loans to the taxpayer of £118,496.81."

"(e) Working backwards through this passage, the finding of fraudulent or negligent conduct is based on the inference that Mr Hurley's accounts under declared his income; the inference that he under-declared his income is drawn because the capital statements showed deficiencies; the capital statements showed deficiencies because the commissioners were ´not satisfied' with all Mr Hurley's explanations of how the excess expenditure had been financed. What the commissioners mean (though they say it in a later paragraph which I examine in (g) to (k) below) is that they were not satisfied with his explanation that he borrowed money from his father. (They were satisfied with his further explanation that he borrowed money from Mr Stringer.)

(f) I have no fault to find with this reasoning in so far as it is directed at the only question which arises for the in-date years: has Mr Hurley discharged the onus of showing that the assessments are wrong? But in my judgment the reasoning is not good enough if it is said also to be the route by which the Revenue satisfied the s 36 onus of showing that there was fraudulent or negligent conduct by Mr Hurley and that there was a loss of tax attributable to it. It would only be good enough for those purposes if (i) the commissioners positively rejected, ie disbelieved, Mr Hurley's explanation that he borrowed money from his father, and (ii) their decision to reject it was one which a reasonable body of commissioners could reach."

"If, however, it is said that the commissioners positively found that the father did not make loans of £118,000-odd - in other words that they positively rejected Mr Hurley's explanation as untrue - I believe that that is a finding which, on Edwards v Bairstow grounds, cannot stand. The commissioners did not consider that Mr Hurley was an inveterate liar: they accepted his evidence on the hotly contested issue of the Stringer loan. They accepted that the father made some loans to Mr Hurley, and loans of not insignificant amounts. An analysis of the case stated shows that most of the accepted loans must have been made in cash. Mr Hurley's case about how his father might have had enough money was not so implausible that it could not be true. The money was suggested to be made up of inheritances from the father's deceased mother and brother, savings from 40 years working in the London docks, compensation for an accident in the docks, and severance pay when the father relinquished employment with the National Dock Labour Board. None of those sources is inherently improbable, and an aggregate of £120,000 from them was perfectly possible. I agree that the commissioners did not have to accept that it had been proved that the £120,000 existed in the father's ownership; that is why Mr Hurley's appeal failed for the in-date years when the entire onus was on him. But I believe that the commissioners crossed the boundary of what they could legitimately conclude if they purported positively to find that the father never had the £120,000, and therefore the Revenue had discharged the s 36 burden of establishing that on the balance of probability Mr Hurley was guilty of fraudulent conduct."

"(1) At the beginning of any proceedings the Tribunal shall, except where it considers it unnecessary to do so, explain the order of the proceedings which it proposes to adopt.

(2) The Tribunal shall conduct the hearing in such manner as it considers most suitable to the clarification and determination of the issues before it and generally to the just handling of the proceedings and, so far as appears to it appropriate, shall seek to avoid formality in its procedure.

(3) The parties shall be heard in such order as the Tribunal shall determine and shall be entitled -

(a) to give evidence,

(b) to call witnesses,

(c) to question any witnesses including other parties who give evidence, and

(d) to address the Tribunal both on the evidence and generally on the subject matter of the proceedings."

"The personal and private expenditure of the taxpayer had been agreed between the parties at £10,819 for the year ended 31 August 1992. For each of the years ended 31 August from 31 August 1983 to 31 August 1991, the taxpayer's personal and private expenditure in the capital statements was estimated, scaling back by reference to the retail prices index the figure agreed for the year ended 31 August 1992. The taxpayer did not challenge those estimated figures and was unable to offer any evidence of any changes in the pattern of his personal and private expenditure to reflect any changes in his personal circumstances."

"The Revenue arrived at their figures for expenditure in two stages. First, they discussed and agreed with Mr Hurley the amount of his personal expenditure for the year to 31 August 1992. It was £10,819, and Mr Hurley signed the calculation that he accepted it. Second, for the nine previous years they scaled that figure back in proportion to the changes in the retail prices index. Mr Argles submitted that, because Mr Hurley had five children on 31 August 1992 whereas he had only one at the beginning of the years covered by the capital statements, his living expenses must have gone up by more than the increase in the retail prices index; therefore the commissioners should have scaled back from £10,819 by more than the changes in the index. In my view they might have done that, but they were not bound to. As Mr Carr (who appeared for the Revenue) pointed out, if a person's family gets bigger he may increase his expenditure, but equally he may change his style of life so as to keep his expenditure more or less constant. This was a matter for the commissioners, and I cannot see an error of law in their acceptance of the expenditure figures in the capital statements."

"The commissioners' clerk wrote to the parties on 11th May 1996 setting out their findings and decisions given in paras 11, 12 and 13 [of the case stated]. Their clerk asked the parties to agree figures of assessment for each year under appeal on the basis of the commissioners' findings and decisions. As, after six weeks, the parties had not reported agreed figures of assessment to their clerk, the commissioners held a meeting on 26 July 1996 at which the taxpayer and the inspector were present. The inspector informed the commissioners that following their findings and decisions, the resulting assessments would be .... "

"The taxpayer objected to the figures but only by saying that despite the inspector's explanation, he did not understand them. The commissioners determined the assessments in accordance with the figures set out above. Their clerk notified the parties in writing on 26 July 1996 of their final determination."

"The Revenue proved their capital statements before the commissioners, leaving it to the commissioners to decide whether to accept Mr Hurley's explanations of where the extra money came from. There is ample authority that commissioners can uphold assessments based on properly prepared capital statements. Certainly for in-date years, and to some extent for extended time limit years as well (a matter which I address in the next part of this judgment), the Revenue do not need to back up capital statements by, for example, producing witnesses who say that they saw the taxpayer taking cash from a customer and putting it in his pocket rather than in the till. They can produce evidence like that, and if they have it available they probably will, but even without it the capital statements are likely to be enough, (see Hudson v Humbles (Inspector of Taxes ) (1965) 42 TC 380, Hellier v O'Hare (Inspector of Taxes ) [1990] STC 368, and R v Special Commissioners of Income Tax, ex p Martin (1971) 48 TC 1).

In this case the Revenue's capital statements, coupled with the commissioners' non-acceptance of Mr Hurley's case that he borrowed large sums from his father, mean that, to the extent to which the commissioners did not accept his explanation of the deficiencies, he had not discharged the statutory onus of displacing the assessments."

"Whether a person has professional representation before the Special Commissioners is a matter for the person to decide, but if he decides to dispense with professional representation, although a tribunal will other things being equal be anxious to prevent any unfair advantage being taken of his lack of experience and expertise, nevertheless the person subjects himself to the normal legal process and there is no transfer of responsibility from the litigant however unversed in the technicalities of the law he may be to the tribunal, in this case the Special Commissioner, of the obligations of each side to make their case before the tribunal."