First-tier Tribunal (Tax)

[2010] UKFTT 468 (TC)

TC00730

Appeal number: TC/2010/01499

Income tax – whether assessments made to the best of HMRC’s judgement- whether returns by Appellant were correct and business records adequate

FIRST-TIER TRIBUNAL

TAX

MR AJAY SHARMA Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: MRS.S.M.G.RADFORD (TRIBUNAL JUDGE) MRS.S.CHEESMAN

Sitting in public at Holborn Bars, London EC1N 2NQ on 3 September 2010

Mr Tack for the Appellant

Mr Lloyd for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       This is an appeal against HMRC’s revenue amendment increasing the Appellant’s assessable profit for tax year 2003/04 from £5,782 to £20,000 and against the subsequent discovery assessments, based on the findings of the enquiry into tax year 2003/04, increasing the profit for 1999/00 from £4,900 to £16,000; for 2001/02  from £5,783 to £18,000; for 2002/03 from £4,178 to £19,000; for 2004/05 from £7,023 to £21,000; for 2005/06 from £1,373 to £10,000; and for 2000/01 to £17,000.

2.       Additionally penalty determinations in the amount of £9,331 were made on 20 October 2009.

3.       The tax at stake including the penalties amounts to £32,658.

Background and Facts

4.       The Appellant was self employed as a builder and double glazier from 1992 until 2005 when he formed his own limited company.

5.       An aspect enquiry was opened into the Appellant’s 2003/04 tax return on 23 September 2005. Following a review of the records the enquiry was converted to a full enquiry as there were concerns about some discrepancies in the business records.

6.       In the absence of further records being provided the enquiry inspector arranged a meeting with the Appellant and his accountant. The inspector expressed concern with the standard of the business records maintained and highlighted certain discrepancies such as the bank deposits exceeding recorded income, missing sales invoices and names on purchase invoices that appeared to relate to employees. The Appellant stated that he did not have any further business records.

7.       Following the meeting the inspector requested details of the Appellant’s mortgage application together with confirmation of which account was used to meet these repayments, his private bank statements and details of the employees referred to in the purchase invoices. These details were not provided despite the issue of several information notices and the imposition of daily penalties amounting to £1,540.

8.       In the absence of the information required the inspector issued the revenue amendment under Section 28(1) and (2) of the Taxes Management Act 1970 and the discovery assessments based on the enquiry into the 2003/04 tax year. The revenue assessment was made as a result of the inspector’s concerns regarding missing sales invoices, banking in excess of recorded income, low means and undeclared employee wages.

9.       The enquiry officer had concluded that there were no wages records, no indication in the records of wages being paid out and conflicting explanations concerning the employees; that there was evidence suggesting off record wages; that there were missing sales invoices; and that the banking in the business banking account exceeded the declared income figure and did not match the invoices.

10.    The inspector’s concerns also related to the ability of the family to meet its expenditure given that the total income available was the declared profit figure of £5,782 on the Appellant’s return which was not even sufficient to cover the mortgage repayments let alone any other expenditure. The mortgage and life assurance payments totalled approximately £11,000. This was without taking into account any weekly family expenditure on food, clothing and household bills.

11.    HMRC also contended that the Appellant had been negligent in not maintaining reliable business records in order to demonstrate that his tax returns were correct.

Appellant’s Submissions

12.    Mr Tack, the Appellant’s representative, dealt with the issues arising from the tax return submitted for tax year 2003/04 as it was as a result of the enquiry into this return which had led to the subsequent discovery assessments.

13.    Mr Tack stated that in his view proper records were kept considering the type and size of the business. His firm were of the opinion that the accounts for the year ended 5 April 2004 presented a true and fair view.

14.    Only a profit and loss account was prepared showing a net profit of £5,852. A balance sheet was not included. Had a balance sheet been produced and submitted it would have satisfied most of the concerns raised by the enquiry inspector covering such items as debtors and work in progress.

15.    He said that HMRC had wrongly calculated the mortgage repayments. They had estimated them at £1,274.33 per month whereas they were in fact £719.95 per month. This made a difference of £6,653 for the year and the estimated annual expenditure would therefore be reduced to £17,453. The mortgage was paid from the Appellant’s wife’s HSBC account.

16.    Referring to HMRC’s statement of case he said that there was no lack of full sales records and all the copy invoices were available in the document bundle. He also produced to the Tribunal a bundle of these invoices totalling £51,307.

17.    HMRC had stated that the materials invoices showed that more work had been undertaken than that declared but at the meeting with HMRC on 23 October 2007 the Revenue officer had pointed out that the materials purchased were only £32,484 and many of these were paid by cash or card.

18.    HMRC had contended that the banking exceeded the turnover. The turnover was £51,037 and the banking was £55,449, a difference of £4,412. He said that the Appellant was under pressure to keep the account as fully funded as possible.

19.    The additional sources of capital came from deposits for materials received from the customers, debtors, cash drawn from credit and debit cards and then deposited, the Appellant’s wife who earned £90 per week amounting to £4,680 for the year and from his daughter’s earnings.

20.    The enquiry officer had found it difficult to believe that all the Appellant’s income was cashed but again Mr Tack emphasised that the Appellant was under pressure to keep his bank account fully funded.

21.    Although the enquiry officer had contended that it was likely that the employees were used and paid with undeclared cash, Mr Tack said that there was always a shortage of cash. The business was too small to have full time employees and although the accounts showed the Appellant’s wife as an employee this in fact was not the case. The only regular employee for the year in question was Surinder Dosanjh although he was not working full time.

22.    The workers whose signatures were on the purchase invoices were T.S.Brar who earned 3 x £40 for the year, Balwinder Singh who earned 2 x £340 for the year and Surinder Singh Dosing who earned 8 x £340 for the year.

23.     Although it had been contended that the large cheque withdrawals from the bank account suggested that more materials had been purchased than declared these large payments included settlement with debt collectors.

24.    HMRC  had alleged that income had been received from the London Borough of Hillingdon and Mr Tack stated that the remittances advices and paying in slips were included in the bundle of documents.

25.    The Appellant was forced to remortgage his house in 2005 and the documents evidencing this were produced to the Tribunal. Mr Tack contended that if the Appellant was earning as much as HMRC alleged this would not have been necessary.

26.    If the Tribunal decided against the Appellant he would have no option but to declare bankruptcy as he did not have the resources to meet the tax bill nor the means to raise any additional finance. Work was sparse and very slow.

HMRC’s Submissions

27.    The estimates were based on the findings for the enquiry year and given that there were no changes in the way that the business operated, the presumption of continuity was used as a basis for estimating the earlier years. They were based on the best judgement of the enquiry officer who considered that there was a lack of co-operation and a failure to provide the relevant bank details.

28.    HMRC made reference to the case of Bi-flex Caribbean Limited v The Board of the Inland Revenue 63TC 515 in which it was held that “the assessments had been made to the best of the Board’s judgement”. In that case it was felt that a reasonable estimate could be used to displace the declared figures and the burden of proof was confirmed as being that of the Appellant to displace the best of judgement assessments under appeal.

29.    Although the Appellant has produced business records these are felt to be unreliable for the reasons set out by the enquiry officer at the conclusion of his enquiry. As the records appear unreliable so too must be the figure of profit. A reasonable estimate was substituted for the declared figure for tax year 2003/04. £20,000 was deemed reasonable in the light of deposits paid into the Appellant’s wife’s bank account, some £11,500 and the remaining cash expenditure that would have to have been incurred. Using the presumption of continuity similar estimates were used for the other years.

30.     HMRC contended that the Appellant had failed to maintain complete business records. There are missing sales invoices and named individuals on purchase invoices are not reflected in the wages records. The banking in the business account exceeds the declared sales figure and there is no record of unbanked cash.

31.    In the case of one specific transaction a job was subcontracted to Johal Roofers. It was confirmed by the Appellant that he had paid them £2,500 and invoiced the customer £2,600 but this invoice did not appear to have been recorded although the £2,500 was claimed as expenses.

32.    HMRC submitted that the crux of the matter was that the burden of proof rested on the Appellant to demonstrate that the assessments were incorrect and excessive. HMRC contended that the evidence produced to the Tribunal had not discharged this responsibility. There had been little in the way of documentary evidence to account for the discrepancy between the amount of income declared to HMRC on the tax return and the level of the Appellant’s private expenditure and mortgage payments. The level of income declared for the enquiry year was £5,782 which fell short of the mortgage payments and life assurance costs which amounted to £11,000. This amounts to a £5,000 shortfall even without considering the rest of the usual family expenditure. HMRC submitted that in the absence of documentary evidence to the contrary and in view of the unreliable records, this shortfall was met by business profits.

33.    The Appellant has attempted to explain the shortfall by claiming it was made up from contributions from his wife and eldest daughter but insufficient evidence has been produced to substantiate this and neither of them has attended the Tribunal to provide verbal evidence.

34.    The Appellant had claimed that his wife’s wages as a doctor’s receptionist had helped to fund the family expenditure but HMRC had reviewed its records for the Appellant’s wife which show that she received no recorded income or benefits for the 2003/04 tax year. For the year 2004/05  HMRC found that she had received income as a doctor’s receptionist but no wages appear to have been paid to her during tax year 2003/04 from this source.

35.    The Appellant’s wife’s bank statements show more money being deposited in her bank account than is available in accordance with the amounts declared in the tax return for the enquiry year. There was no documentary evidence to show how the family expenditure on food, clothing and household bills was met. It did not appear to have been met from any of the accounts for which statements were provided.

36.    The explanation that they were funded by Amita Sharma has not been substantiated by her bank statements. Although possible explanations have been put forward no actual proof has been provided.

37.    It had been claimed that the mortgage had been paid from the Appellant’s wife’s bank account but these payments appear to have been subsidised by regular payments from the business account.

38.    In all the circumstances HMRC therefore contended that in the enquiry year the Appellant had failed to maintain reliable business records on which he could make an accurate return of income and therefore it is probable that he negligently submitted his returns for the period covered by the discovery assessments. HMRC referred to the case of Blyth and Birmingham Waterworks which contains the standard definition of negligence.

Findings

39.    We have carefully checked all the business records produced to us and in particular the sales invoices which relate to the enquiry year. As submitted by HMRC we are unable to find an invoice for £2,600 in respect of the work subcontracted to Johal Roofers although the payment to them of £2,500 has been charged to expenses.

40.    Insofar as the payments from the London Borough of Hillingdon are concerned although they appear to have been paid into the bank account we cannot find them reflected amongst the sales invoices.

41.    We were provided with Amita Sharma’s P60 for tax year 2008/09 but unfortunately this does not provide us with any proof of what monies she provided to the family during the tax year under enquiry nor has the Appellant provided any proof of his wife’s earnings, if any, for that year.

42.    Without such proof we are unable to find any reasonable explanation as to how the family met its expenditure with three daughters at home and Mrs Sharma apparently not working unless they were subsidised by undeclared income from the business.

43.    We checked Mr Tack’s claim that in estimating the family’s expenditure for the year HMRC had overestimated the mortgage payments. However although Mr Tack was correct in his calculation of these payments amounting to some £8631.30, we did not find that HMRC had over calculated by some £6,000 as they had regularly stated both in correspondence and in making submissions to the Tribunal that the mortgage and life assurance payments together amounted to some £11,000.

44.    The onus here is on the Appellant to prove his case and regrettably we find he has not done so. We agree with HMRC that the business records are woefully inadequate.

Decision

45.    The appeal is dismissed and the assessments are hereby confirmed.

46.    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.

MRS.S.M.G.RADFORD

TRIBUNAL JUDGE

RELEASE DATE: 5 October 2010