England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE GENERAL COMMISSIONERS

		Royal Courts of Justice Strand, London, WC2A 2LL
		15/06/2007

The Honourable Mr Justice David Richards:

1. This is an appeal by way of case stated from a decision of the General Commissioners for the Divisions of Grays and Brentwood. Before the General Commissioners the appellants challenged assessments on partnership income arising from the management of a restaurant in Shenfield, Essex, called Tandoori Nights, for the years 1995/1996 to 1999/2000. The total income assessed for each appellant for those years was £237,500 giving rise to a charge to income tax totalling £71,341.31.
2. The assessments were made under section 29(1) of the Taxes Management Act 1970 which, as substituted by the Finance Act 1994 and subsequently amended, provides:

"If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment-

(a) that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax have not been assessed, or

(b) that an assessment to tax is or has become insufficient, or

(c) that any relief which has been given is or has become excessive,

the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax."

3. The grounds of appeal to the General Commissioners which remain relevant were, first, that the assessments were invalid because they were not supported by a bona fide discovery of loss of tax and, secondly and alternatively, that the quantum of the assessments was excessive and not supported by the evidence relied on by HMRC.
4. The General Commissioners found that HMRC had exercised due care and diligence and had made a bona fide discovery of loss of tax and that therefore the assessments were valid. They also found that there had been a suppression of income by the appellants. On the basis of revised calculations proposed by HMRC, they found that the assessments were excessive in amount but not such as to invalidate the assessments, and they determined the total partnership profits for each appellant over the five years in question as £129,939.
5. The questions of law stated for the opinion of the High Court are, first, whether the assessments are valid on the facts as found by the General Commissioners and, secondly, whether their decision on the quantum of the assessments was one which was reasonable to make.
6. The appellants' grounds of appeal, as stated in their skeleton argument, are as follows:

i) The General Commissioners erred in law in finding that the discovery assessments were valid because they adopted the wrong test as to validity and would have upheld the appeal had they applied the correct test to the facts.

ii) In the alternative, the General Commissioners adopted the wrong test as to the validity of the discovery assessments and the case should be remitted to the General Commissioners to make relevant findings of fact.

iii) In the alternative, even if the General Commissioners adopted the correct test as to validity, their finding that the discovery assessments passed the test was not open to them on the facts.

iv) In the alternative, the level of profits attributed by the General Commissioners to the appellants in the years in issue is such that no General Commissioners, properly instructed as to the law, could find.

At the end of his submissions on behalf of the appellants, Mr Conolly withdrew the third ground and accepted that HMRC had a proper basis for saying that paragraph (a) or (b) of section 29 of the Taxes Management Act 1970 applied in this case. On that basis there could be no challenge to the General Commissioners' finding that HMRC had made a bona fide discovery of loss of tax. Further, Mr Conolly accepted that it had been agreed before the General Commissioners that amounts paid to a Mr Mostafa should be attributed to the appellants. The appellants therefore accepted that there had in fact been a loss of tax. It was not submitted that there could be a challenge on this appeal to the General Commissioners' finding that there had been a suppression of income by the appellants.

7. The thrust of the appeal was therefore that the discovery assessments were invalid because HMRC had not exercised due care and diligence in its assessment of the amount of lost tax and had no honest belief in that assessment, and that there was no proper basis for the lower amount of tax substituted by the General Commissioners.
8. In view of the focus of the appeal, I shall summarise the relevant evidence before the General Commissioners.
9. The appellants are brothers. The restaurant had, as the appellants always accepted, been operated by them in partnership prior to August 1995. On 28 February 1994 they admitted underpayment of income tax and class 4 NIC for the four years commencing 1988/89 by reason wholly or partly of their default. At all times until the commencement of the hearing before the General Commissioners, the appellants asserted that their partnership had ceased in August 1995 and that the business had then been taken over by Mr Mostafa. Mr Mostafa had been employed as a chef at the restaurant on a weekly wage of £80. The appellants had maintained that thereafter they were employed by Mr Mostafa as waiters at a weekly wage of £120. At a meeting with HMRC in March 2001, one of the appellants, Mr Momin, had strongly maintained that the partnership had ceased in 1994 and that thereafter the appellants were employees of Mr Mostafa.
10. It was only at the commencement of the hearing before the General Commissioners that the appellants admitted that this was untrue and that they had continued to own and operate the business in partnership. The appeal to the General Commissioners had been made on the grounds that during the period covered by the assessments the appellants had been employees, not partners, and tax had been deducted at source from their income, and also on the grounds that the assessments were excessive. The grounds of appeal referred to in paragraph 2 above were added by counsel for the appellants at the hearing, notice having been given to HMRC by means of his skeleton argument supplied a week earlier. HMRC did not object. The inspector who had made the discovery assessments was no longer with HMRC. In the short time available after notice was given of the intended new grounds of appeal, it was not practicable to trace him and call him as a witness. HMRC called Ms Tracey Beard, who had conducted some investigations into the restaurant.
11. The appellants have not at any time provided any figures for their partnership earnings in the years in question, whether in the form of profit and loss accounts, drawings or otherwise.
12. The investigations undertaken or relied on by HMRC, as they appeared from the evidence, comprised three main elements. First, observations and test purchases were undertaken in February and August 1999 by officers of HM Customs & Excise for the purpose of a VAT investigation. Ms Tracey Beard took part in those observations and purchases and provided written and oral evidence to the General Commissioners. She provided copies of her notebook entries. The observation logs had not been retained. The business records were uplifted and, on the basis of discrepancies between the number of customers observed and those declared, Ms Beard concluded that there was a significant suppression rate (41.47% on a Saturday evening and 26.75% on a Monday evening). Applying an average uplift of 34.1% to the declared earnings of the business produced the figures for suppressed earnings which were accepted by the General Commissioners.
13. Secondly, HMRC had conducted interviews with Mr Momin and corresponded with him and his accountant. These interviews elicited facts about the business and the parts played in it by the appellants and Mr Mostafa. HMRC put forward its belief, with reasons, that the appellants had continued to run the business in partnership and had earned substantially larger incomes than they had declared. Mr Momin and his accountant denied that this was the case. As noted, Mr Momin now accepts that his denials of a partnership were untrue.
14. Thirdly, HMRC made private side enquiries as regards Mr and Mrs Momin. Mrs Momin voluntarily provided bank statements and mortgage application forms. Mrs Momin was said by Mr Momin to earn about £48 per week working in a local school kitchen and to receive family credit of about £110 per week. Her bank statements showed monthly mortgage payments of about £586 for the house where Mr and Mrs Momin lived. She was the sole registered proprietor of the house. Her bank statements also disclosed substantial deposits, principally in cash. For example, there were three deposits totalling £23,000 on 1 and 3 June 1998 and deposits of £6,110 and £28,848 on 20 July and 25 August 1998. In an interview, Mr Momin's accountant said that Mrs Momin was a member of a large extended family in the United Kingdom, that several family members were quite wealthy and that she received regular financial assistance. HMRC requested full details of the gifts and loans received in the year to 5 April 1999, but it does not appear from the evidence that they were provided. Mrs Momin also owned a Lexus car, which was bought in June 1998 for £22,500, with a cash deposit of £10,000 and a car in part exchange to a value of £5,500, and the balance of £7,000 payable in 24 monthly instalments of about £382.
15. Mr Momin gave oral evidence before the General Commissioners as to which they state in paragraph 6 of the case stated:

"We heard evidence from Mr S A Momin but were not impressed with his evidence. In particular, during examination by Mr Conolly, we noted that most sales in the restaurant were settled by credit card with few settled in cash yet wages were allegedly paid in cash. During cross examination by Mr Callanan we noted that Mr Momin gave evidence that he knew nothing about his wife's bank accounts; that all sales were correctly recorded; that his wife owned a Lexus car and his 20 year old son a Honda Civic, both with personalised registration plates; that the restaurant had a capacity of 52 and that generally there were two sittings especially at weekends although there were fewer customers during the week; and that he did not know a Mr Ali, the signatory to a letter on Tandoori Nights headed paper dated 4 June 2000 addressed to the Insolvency Service, in which Mr Ali had signed in his capacity as "the Manager", the identical role which Mr Momin claimed was his in his witness statement. We also noted that Mr Momin was not re-examined by Mr Conolly."

16. Counsel were agreed before me that the correct approach to assessments under section 29 TMA was as stated in R v Commissioner of Taxes, ex parte Hooper [1915] 7 TC 59 and in Bi-Flex Caribbean Ltd v The Board of Inland Revenue [1990] 63 TC 515. In the former, the Divisional Court accepted previous judicial statements that "discover" means "comes to the conclusion from the examination [HMRC] makes and from any information [HMRC] may choose to receive" or "has reason to believe" or "satisfies himself". Lord Reading CJ said at p.63:

"The surveyor may be mistaken in the 'discovery', but if there is information before him which he could, and did honestly believe the person to be liable to the duties, the only remedy is by the appeal prescribed by the Statutes."

And at p.65:

"…there must be information before the surveyor which would enable him, acting honestly, to come to the conclusion that a person is chargeable."

17. Bi-Flex was a decision of the Privy Council, on appeal from the Court of Appeal of Trinidad and Tobago. The relevant legislation enabled the Inland Revenue to determine the amount of chargeable income "to the best of its judgment" if it refused to accept a return or if a return had not been delivered. Section 29(1)(b) TMA as then in force used the same expression. The Privy Council referred to a number of authorities which established that an element of guesswork as to the amount of the assessment would often be necessary and would not invalidate the assessment. Lord Lowry, delivering the unanimous judgment of the Privy Council, said at p.522-523:

"The element of guesswork and the almost unavoidable inaccuracy in a properly made best of judgment assessment, as the cases have established, do not serve to displace the validity of the assessments, which are prima facie right and remain right until the taxpayer shows that they are wrong and also shows positively what corrections should be made in order to make the assessments right or more nearly right. It is also relevant, when considering the sufficiency of evidence to displace an assessment, to remember that the facts are peculiarly within the knowledge of the taxpayer."

Lord Lowry cited the following passage from the judgment of Latham CJ in Trautwein v Federal Commissioner of Taxation [1936] 56 CLR 63 at 87:

"In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.

The application of s.39 is not, in my opinion, excluded as soon as it is shown that an element in the assessment is a guess and that it is therefore very probably wrong. It is prima facie right – and remains right until the appellant shows that it is wrong. If it were necessary to decide the point I would, as at present advised, be prepared to hold that the taxpayer must 'at least as a general rule' go further and show not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right. I say 'as a general rule' because, conceivably, there might be a case where it appeared that the assessment had been made upon no intelligible basis even as an approximation, and the court would then set aside the assessment and remit it to the commissioner for further consideration."

18. Mr Conolly submitted that this case falls within the exception recognised by Latham CJ at the end of the passage cited above. There was, he submitted, no intelligible basis, even as an approximation, for the amount of each assessment.
19. The surviving grounds of the present appeal are as follows. First, the test applied by the General Commissioners was whether HMRC had a bona fide belief that there had been a loss of tax, and did not, as they should, consider also whether there was a bona fide belief in the amount of tax lost and hence in the amounts of the assessments. Secondly, if they had applied the correct test, they could not on the evidence have concluded that there was a bona fide belief in the amount of the assessments, or the case should be remitted to the General Commissioners for further consideration on the basis of the correct test. Thirdly, the lower figures accepted by the General Commissioners were unsupportable on the available evidence.
20. As regards the first ground of appeal, I do not accept that the General Commissioners considered only whether there had been a bona fide discovery of loss of tax, without considering whether there was a bona fide belief in the amounts assessed. As recorded in the case stated, HMRC had submitted that the amounts assessed had not been plucked out of the air, although it was inevitable that there would be a certain amount of guesswork and reference was made to Bi-Flex. Also recorded in the case stated were HMRC's submissions that it had undertaken an exercise to establish undeclared profits and that, in conclusion, "a discovery [of lost tax] had been made and the assessments had been properly arrived at". The General Commissioners found that HMRC had exercised due care and diligence and held a bona fide belief that there had been a loss of tax and that, while they thought the amounts included in the assessments were excessive in the light of the evidence presented, it did not invalidate the notices of assessment. In view of the General Commissioners' conclusions, read in the light of the submissions and evidence before them, there is in my judgment no basis for saying that they did not apply the correct tests.
21. In relation to the other grounds of appeal, the criticisms made on this appeal of the assessments were as follows. First, the appellants had never known and still do not know the basis of the figures as stated in the assessments. Secondly, the figures prepared by Ms Beard provided no basis for either the original or the revised figures. They were based on observation evidence which would have been rejected by a VAT tribunal and which should have been rejected by the General Commissioners. In support of this submission, Mr Conolly referred to two decisions of VAT tribunals, JHK Fu v CCE (1992) VAT tribunal decision 11718 and Mohammed Abdul Matin v CCE (2001) VAT tribunal decision 17441. The General Commissioners should have been particularly sceptical of the value of Ms Beard's observations in circumstances where they were purely external and not supported by any internal observations, the logbooks had not been retained, the test purchases made by Ms Beard appeared in the business records and her investigations had not led to a VAT assessment. Thirdly, enquiries were made only of Mr Momin and not his partners, showing a lack of due diligence on HMRC's part. Fourthly, HMRC failed to make adequate private side enquiries, that is enquiries into the lifestyle and private expenditure of the appellants.
22. Taking the points made on behalf of the appellants in turn, the basis of the assessed amounts was the totality of the material then before the HMRC, including the evidence as to the apparent income of Mr and Mrs Momin, their outgoings and the deposits into Mrs Momin's account as well as Ms Beard's evidence and calculations. The objections taken to Ms Beard's observations as a basis for her calculations of suppressed income were raised in her cross-examination and were argued before the General Commissioners. It was a matter for them to decide the weight to be given to her evidence and observations and to assess the soundness of the figures extrapolated from them. The fact that in other cases, on other facts, two VAT tribunals have found the observation evidence in those cases to be inadequate did not require the General Commissioners to reject the observation evidence in this case. The fact that inquiries were directed at Mr Momin, not the other appellants, does not assist them. They were equal partners, as they now admit, so that evidence of a loss of tax and the amount of the loss as regards one would indicate a similar loss of tax as regards the others. Moreover, it has been open to any of the appellants to provide relevant information as to their partnership income to HMRC but they have failed to do so. In view of Mr Momin's assertion that he has no bank accounts and in view of the inquiries made with respect to Mrs Momin and to their joint lifestyle, there is in my view no force in the submission that there were inadequate private side enquires.
23. This is precisely the type of case in which there is liable to be a significant element of estimate or guesswork in the amounts assessed. The appellants have over a period of many years denied the true facts and have failed to provide any evidence of their partnership income. In my view, there is nothing in some of the points made on behalf of the appellants and the others involved, as Mr Nawbatt for HMRC submitted, rearguing matters which were essentially for the General Commissioners. As to the second ground of appeal, the totality of the evidence fully justified the General Commissioners' conclusion that there was nothing about the amounts which invalidated the assessments, and that there has been an honest belief on proper grounds in the amount of the assessments.
24. As regards the third ground, I have already said that the assessment of Ms Beard's observation evidence and her calculations were a matter of fact-finding for the General Commissioners. They were entitled on the material before them to accept the figures put forward on the basis of her calculations. As Mr Nawbatt explained, these lower figures were put forward by HMRC to the General Commissioners to simplify matters. The appellants, while not accepting the revised figures, did not adduce evidence as to the correct figures.
25. I conclude therefore that this appeal must fail. There was no error of law by the General Commissioners and there existed a proper basis in the evidence for their findings and decision. Both questions of law raised in the case stated are answered affirmatively. This is in my judgment an appeal without merit, involving an assertion of lack of good faith against HMRC in circumstances where HMRC has been severely hampered by the untruthful assertions of the appellants and by their failure to provide any records of their partnership income.