[2010] UKFTT 230 (TC)

TC00531

Appeal number: TC/2009/11940

INCOME TAX - adjustments to self assessment - discovery assessment - - fairness of estimates by HMRC – penalties for failure to notify liability to income tax and for negligently delivering incorrect tax returns - appeal dismissed

FIRST-TIER TRIBUNAL

TAX

                                    KANCHAN DEVI AGNIHOTRI                   Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                       REVENUE AND CUSTOMS (Income Tax)    Respondents

                        TRIBUNAL: NICHOLAS ALEKSANDER (TRIBUNAL JUDGE)                                                         PHILIP GILLETT                                       

Sitting in public in London on 20 April 2010

M Patel of Mahendra Patel & Co, accountants, for the Appellant

Philip Rowe, Officer of HM Revenue & Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       Mrs Agnihotri appeals against an amendment made to her self assessments for the year ended 5 April 2003 and "discovery" assessments for the years 1996/7 to 2004/5 (but excluding 2002/3) following enquiries made by an officer of HMRC.  She also appeals against penalties levied.

2.       At the hearing Mrs Agnihotri was represented by Mr Patel and HMRC was represented by Mr Rowe.  As Mrs Agnihotri's command of English is poor, the Tribunal had the benefit of an interpreter, Mr Minhas.   The Tribunal had before it bundles of documents, and heard evidence from both Mrs Agnihotri and from Mr Robin Moseley, an officer of HMRC who was responsible for the enquiry into Mrs Agnihotri's affairs.

3.       Mr Patel sought to introduce various bank and building society passbooks and statements as well as schedules of income in evidence before the tribunal at the hearing.  Copies of these documents had not previously been provided to HMRC or the tribunal. Mr Rowe told us that for HMRC to be able to analyse this new evidence, the hearing would need to be adjourned to another date to give them sufficient time to do so.  Mr Patel could give no substantive reason why these documents could not have been provided to HMRC previously.  We noted that Direction 5 of the Directions given by the tribunal on 2 July 2009 required all documents on which a party sought to rely to be included in a bundle which was to be provided to the Tribunal and the other party by no later than 5pm on the fourteenth day before the hearing.  Given that the hearing had been postponed on three previous occasions, and over two and a half years had elapsed since the appeals were lodged, we were reluctant to postpone the hearing again.  As the documents had not been included in the bundles in accordance with the Directions, we directed that they were not admissible in evidence.

Background facts

4.       Information was received by HMRC that Mrs Agnihotri was in receipt of rental income.  As HMRC had no live tax record for Mrs Agnihotri, tax returns were issued to her for 1997/8 to 2002/3.  These were completed and captured onto HMRC's self assessment computer system.  HMRC records showed that Mrs Agnihotri had run a clothing shop in partnership with her husband, but that this had ceased on 31 October 1989.  The tax returns submitted showed income from self-employment as a sole trader, the business being described as a "retail shop".

5.       On 5 March 2005, Mr Moseley opened an enquiry into Mrs Agnihotri's 2002/3 tax return under section 9A, Taxes Management Act 1970 ("TMA"). Mrs Agnihotri's tax return showed income from a retail shop and from land and property.   It took some time for some of the information and documents requested to arrive, and Mrs Agnihotri's accountant explained that Mrs Agnihotri had been suffering from stress, and that a bag of records had been stolen from her shop.  The records that were delivered included purchase invoices, divided into VAT quarters, with one quarter missing, business bank statements with some statements missing, and personal Abbey National and Nationwide passbooks, with two passbooks missing.  Not sent were sales records, expenses invoices, credit card sales records and letting documents for the flat above the shop.

6.       Because of the incomplete records available to him, Mr Moseley had concluded that bankings should be reviewed, and he found that there were excess cash bankings over declared cash sales of £20,578.  There were also numerous deposits to the private building society accounts, two passbooks were missing and the interest on these accounts had not been declared on Mrs Agnihotri's tax return.  There was also another account at Barclays Bank, and the statements for this account had not been sent to him.

7.       The credit card sales records were sent subsequently, but by January 2006, HMRC were still awaiting records, and accordingly Mr Moseley asked for a meeting.  Mrs Agnihotri cancelled the first meeting, and did not turn up for a rearranged meeting.  On 16 May 2006, Mr Moseley issued a series of written questions to Mrs Agnihotri's accountant, on the assumption that she did not want a meeting.  However, Mrs Agnihotri decided that she did want to meet, and a meeting took place on 12 June 2006.  In the meeting Mrs Agnihotri informed Mr Moseley, amongst other things, that (a) the business turnover was calculated from the till rolls, which were then thrown away, (b) that she did not submit tax returns as she completed VAT returns and thought that was enough, and (c) the business was a husband and wife partnership.  As a result of this and other information given to Mr Moseley at the meeting, on 19 June 2006 he wrote requesting further documents, including additional personal and business bank statements and passbooks, and information to ascertain whether Mrs Agnihotri's business was a partnership with her husband.

8.       No response to the letter was received, and on 11 September 2006 HMRC issued a formal notice for the documents and information.  Mr Moseley warned Mrs Agnihotri that penalty proceedings would commence if she did not comply with the notice.  She did not, and on 15 November 2006 a £50 initial penalty was issued under section 97AA(1)(a) TMA.  Still Mrs Agnihotri did not provide the documents and information requested, and on 21 December 2006, a daily penalty of £15 per day was issued, totalling £525.  On 29 January 2007 Mr Moseley wrote to Mrs Agnihotri advising her that the documents and information were still outstanding and that there would be further daily penalties if they remained so.  Mrs Agnihotri was encouraged to make contact with Mr Moseley.  She did not, and on 19 February 2007 a further penalty of £1770 was issued (based on £30 per day).

9.       In the face of this "wall of silence", Mr Moseley considered that he would have to proceed to bring the enquiry to a close on the basis of the information that he had before him, and issue amendments to the self-assessment for 2002/3 and discovery assessments for the other years.  He calculated that the profit should be increased from £287 to £38,865 calculated on the basis of excess bankings of £20,587 and an estimate of £18,000 deposits to the private bank and building society accounts for which statements or passbooks had not been provided. This £18,000 was based on the amounts that were being paid into the other accounts on a weekly basis and the pattern of banking shown in the passbooks that were provided.  Mr Moseley acknowledged that this was just an estimate.   However, in the light of Mr Moseley's local knowledge of the business, he considered that this figure was too high, and giving Mrs Agnihotri the benefit of the doubt and recognising that some of the deposits could be private, he concluded that a more realistic figure for additional profit would be £20,000 – a reduction of £18,865 from his original calculation.  This figure was used as a basis for 2002/3, and was adjusted by reference to the retail price index to arrive at profits for the other years.  The assessments and amendments were issued on 25 May 2007.

10.    On 29 June 2007, Mr Moseley wrote to Mrs Agnihotri explaining the penalty position, and outlining his views on the abatement she might expect.  On 14 August 2007 she made a late appeal against the amendments and assessments for all years, which late appeals were accepted by HMRC.  The appeals were listed to be heard by the General Commissioners, but the appeal was postponed due to the impending issue of penalties.  At that point, Mr Moseley was transferred to another office and had no further involvement in the case.

11.    On 19 June 2008, Mrs A Handa (the officer who took over this case from Mr Moseley) wrote to Mrs Agnihotri enclosing penalty determinations.  The base penalty is 100% of the additional taxes due, but this percentage was abated in accordance with HMRC practice as set out in their booklet  IR160.  The abatement was 20% for disclosure, 20% for cooperation and 20% for seriousness.  Thus the penalties were levied at a rate of 40%.   Two penalties were levied.  The first was under section 7 TMA for failure to notify that she was chargeable to tax for 1997, in the amount of £1954.  The other was under section 95(1)(a) TMA and section 16 Social Security Contributions and Benefit Act 1992 for negligently delivering an incorrect income tax return for the years 1998 to 2005 in the amount of £16,454.

12.    The case was transferred to the First Tier Tribunal (Tax Chamber) following the abolition of the General Commissioners.

The Law

13.    In the case of Johnson v Scott (1977) 52 TC 383 at 393 in the High Court, Walton J observed:

The true facts are known, presumably, if known at all, to one person only - the Appellant himself. If once it is clear that he has not put before the tax authorities the full amount of his income, as on the quite clear inferences of fact to be made in the present case he has not, what can then be done? Of course all estimates are unsatisfactory; of course they will always be open to challenge in points of detail; and of course they may well be under-estimates rather than over-estimates as well. But what the Crown has to do in such a situation is, on the known facts, to make reasonable inferences. When, in para 7(b) of the Case Stated, the Commissioners state that (with certain exceptions) the Inspector's figures were 'fair", that is, in my judgment, precisely and exactly what they ought to be - fair. The fact that the onus is on the taxpayer to displace the assessment is not intended to give the Crown carte blanche to make wild or extravagant claims. Where an inference, of whatever nature, falls to be made, one invariably speaks of a "fair" inference. Where, as is the case in this matter, figures have to be inferred, what has to be made is a "fair" inference as to what such figures may have been. The figures themselves must be fair. So far from representing an inference that the Commissioners did not appreciate the Inspector's figures fully, this demonstrates that they did. I think the point can be put conversely in another way. At times during Mr. Hall's address to me it almost appeared as if what he was requiring by way of his "lawful proof" was a duly audited certificate as to the Appellant's undisclosed expenditure. Of course, this was not what he was seeking; but once it is clear that this is not, and in the nature of things cannot be, available, then it follows as night follows day that some form of estimate must be made.

14.    We are of the view that the estimates of income made by HMRC in this case were fair and were reasonably based on the information before them at the time the assessments and amendments were made.  The onus is now on Mrs Agnihotri to show otherwise.

15.    As regards penalties, the onus of proof is on HMRC to show that penalties are due, and that the amount of the penalties are appropriate in all the circumstances.

Taxable Income

16.    There were three areas where Mrs Agnihotri demonstrated, on the basis of the documents before us, that we should consider in more detail whether the amount of her taxable income should be adjusted.

17.    The first relates to the impact of VAT on her gross turnover.  Mr Moseley based his calculations on the amount of Mrs Agnihotri's unexplained bankings, assuming that these represented trading income.  Any such bankings would have been inclusive of VAT.  The VAT element of the sales prices should therefore be deducted from the bankings.  Mr Patel in cross examination put this point to Mr Moseley, and suggested that there would be a reduction of approximately £8000 attributable to VAT.  Mr Moseley did not disagree with the principle, but considered that this amount might be an overestimate as some of Mrs Agnihotri's sales would be of zero-rated children's clothing.

18.    The second relates to rental income.  Mr Moseley's calculation of rental receipts was based on rents banked between November 2001 and October 2002.  Mr Patel submitted that the actual rents accruing over the tax year (April to March) was less – and there should be an adjustment of £2839 representing the difference.

19.    Finally, Mrs Agnihotri in evidence told us that she recycled funds between her business credit card and her business bank account in order to stay within their respective credit and overdraft limits.  We did not have copies of the credit card statements, but we reviewed the business bank statements.   There is a clear pattern in many months of a large deposit shortly before the interest and capital repayments are due on the business loan, and these large deposits are often similar in amount to the business credit card repayment made shortly thereafter.  When this was put to Mr Moseley, he said that he thought that these deposits in fact corresponded to payments by Streamline, the company used by Mrs Agnihotri to service customers' credit cards.  Mr Moseley produced a schedule of payments made by Streamline, which Mr Moseley told us that he had prepared during the course of the enquiry on the basis of Streamline statements provided by Mrs Agnihotri (unfortunately the Streamline statements were not available to us at the hearing).  We have sought to reconcile these large monthly  deposits to the Streamline schedule, but were unable to do so.  Indeed in some months, the total Streamline receipts for the month were less than the large deposits for that month.  We therefore consider that Mrs Agnihotri's explanation for these large monthly deposits is credible, and these deposits should be deducted from the income calculation.  Mr Patel submitted that the adjustment should be £8,856, being the aggregate amount transferred over the year from the business bank account to the business credit card account, as this would represent the amount of debt recycled from the credit card.  However, this amount would also include expenditure incurred through the credit card, and not just borrowings.  We therefore prefer to take the aggregate of the large deposits made into the business bank account shortly before the business loan payments, where the amount deposited is approximately equal to the credit card repayment made shortly after the business loan payment. The deposits in question are those made on 22 November 2001, 21 December 2001, 21 January 2002, 22 February 2002, 22 April 2002, 23 July 2002 and 22 August 2002, and total £7110. 

20.    These three adjustments aggregate to £17,949.  We note that Mr Moseley originally determined that there were excess bankings of £38,865, but reduced this by £18,865 as from his knowledge of the area, he considered that the total figure was too high.  We note that this is of a similar order of magnitude to the adjustment that we consider appropriate. Even if we take Mr Patel's figure of £8,856, the aggregate adjustment would still be of the same order of magnitude.  In all cases, the adjustments are of course estimates, as in the absence of a full set of statements and business records, accurate figures are not available. We also note that Mr Moseley when being cross examined about the possible adjustments said that these kinds of adjustments were built into his decision not to raise an assessment on £38,000.

21.    Although we consider that Mrs Agnihotri has satisfied us that there might have been a case for adjusting HMRC's "gross" estimate of income to reflect the accrual of rent, VAT on turnover and the recycling of debt, these adjustments are of the same order of magnitude as the final adjustment made by Mr Moseley and incorporated into the calculation of the assessment.   The question before us is whether Mr Moseley's determination of Mrs Agnihotri's income is "fair".  The burden of proof is on Mrs Agnihotri to show otherwise, and she has not satisfied this burden.

22.    We are satisfied that Mr Moseley made a discovery for the purposes of section 29 TMA.

23.    We therefore uphold the amendment made by HMRC to Mrs Agnihotri's self assessment for 2002/3 and the assessments made for the other years.

Penalties

24.    From the evidence before us, we are satisfied that Mrs Agnihotri (i) failed to notify HMRC that she was chargeable to income tax and NICs for 1996/7; and (ii).  failed to keep adequate business records and in consequence she negligently delivered incorrect tax returns for each of the years 1987/8 to 2004/5.  She is therefore liable to penalties under ss7 and 95(1)(a) TMA and section 16 Social Security Contributions and Benefit Act 1992. Mr Patel did not dispute this.

25.    The question is therefore whether the abatement of 60% made by HMRC is appropriate.  In our view this abatement is generous, given that Mrs Agnihotri did not cooperate with Mr Moseley's enquiries and failed to disclose information – even after having received formal notices and having substantial daily penalties levied.  We consider that HMRC would have been justified in making a significantly smaller abatement than 60%.  However, in all the circumstances of this case, we are not minded to interfere with the level of the penalty.

Conclusions

26.    For the reasons we have given above, we dismiss the appeal.

27.    This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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.

NICHOLAS ALEKSANDER

TRIBUNAL JUDGE

RELEASE DATE: 20 May 2010