[2010] UKFTT 552 (TC)

TC00805

Appeal number: TC/2010/11307

Income tax – Self-assessments - Alleged under-declaration of earnings – Discovery assessments – Penalties - Appeal dismissed

FIRST-TIER TRIBUNAL

TAX

ANTHONY GOUDIE Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: GUY BRANNAN (TRIBUNAL JUDGE) RICHARD THOMAS (TRIBUNAL MEMBER)

Sitting in public at Holborn Bars, London EC1 on 1 October 2010

Stuart Brown for the Appellant

Nicola Parslow for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       This is an appeal against:

(1)        a closure notice issued under section 28A (1) and (2) Taxes Management Act 1970 ("TMA") amending the Appellant's self-assessment return for the two years ended 5 April 2005 and 2006;

(2)        discovery assessments made under section 29 TMA the two years ended 5 April 2003 and 2004;

(3)        penalty determinations under section 95 TMA for the four years ended 5 April 2003, 2004, 2005 and 2006.

2.       In this decision, tax years are referred to as either, for example, the tax year ended 5 April 2005 or 2004/2005.

The facts

3.       The factual evidence was contained in a bundle of documents produced by HM Revenue and Customs ("HMRC"), documents produced by the Appellant and attached to his Notice of Appeal and evidence given under oath by the Appellant and his sister, Ms Susan Goudie.

The dispute

4.       The Appellant has been a self-employed plumber since 1994. On 17 October 2006 HMRC opened an enquiry into the Appellant's return for 2004/2005. On 15 January 2009 HMRC completed the enquiry and concluded that the Appellant had understated his business profits for that year and amended his return accordingly.

5.       In particular, HMRC investigated a Woolwich bank account. This bank account was in the name of the Appellant's son but was controlled by the Appellant himself. The Appellant set up the account in his son's name because he was unable, because of his credit rating, to open an account in his own name. The Appellant had full control over and sole access to the Woolwich account. It was accepted by both parties that all deposits in the account belonged to the Appellant and not to his son.

6.       HMRC's enquiries initially focused on deposits of £10,313 paid into the Woolwich account, £6,450 of which was in cash. During the course of the enquiry the Appellant was unable to confirm the source of £8,803.01 these deposits and HMRC concluded, in the absence of an explanation of the source of these payments, that these deposits of £8,803.01 represented undeclared income from the Appellant's plumbing business.

7.       HMRC took the view that there was no reason to believe that the Appellant's business operated in a different way in the two years prior to 2004/2005 and in the following year 2005/2006. Therefore, HMRC made discovery assessments under section 29 Taxes Management Act 1970 ("TMA") in respect of the two years 2002/2003 and 2003/2004. As regards 2005/2006, HMRC amended the Appellant's self-assessment return under section 28A(1) and (2) TMA, as well as amending the return for the year originally under enquiry, ie 2004/2005.

8.       In addition, HMRC has made a penalty determination of £2,805 pursuant to section 95 TMA for the four years under consideration.

9.       The Appellant appeals to this Tribunal in respect of these amendments, assessments and penalty determinations.

The Woolwich and the Abbey accounts

10.    Mr Brown, on behalf for the Appellant, argued that the amendments and assessments (and consequently the determinations) were excessive. He examined a number of the deposits in the Woolwich account. He drew attention to a deposit on 12 October 2004 for £885.60 which, he said, was a deposit representing a check from Taylor's Plumbing, one of the contractors for whom the Appellant did work and who paid the Appellant under deduction of tax pursuant to the Construction Industry Scheme. In fact, however, this was not one of the deposits forming part of the total of £8,803.01 in respect of which HMRC was seeking to amend the return for 2004/2005.

11.    Next, Mr Brown referred to a deposit on 6 January 2005 of £1692.90, which he stated was a refund from HMRC which he had passed on to the Appellant. Again, this was not one of the deposits forming part of the £8,803.01 total.

12.    As regards two deposits of £900, Mr Brown explained that these deposits represented the proceeds of sale of puppies that had been reared by the Appellant.

13.    Mr Brown explained that the Appellant's mother had, on 23 April 2004 cashed in part of an investment (an investment bond held with St James's Place International) producing a sum of £6,000 and referred us to a letter dated 23 April 2004 from St James's Place International which referred to this partial encashment of the investment. He noted that the £6000 had been paid into the Appellant's savings account with Abbey National plc ("Abbey") on the 23 April 2004, as evidenced by the Appellant's bank statement with Abbey.

14.    Mr Brown then referred to a series of cash withdrawals from the Abbey account (e.g. £400 on 26 April 2004, £100 on 26 April 2004, £400 on 27 April 2004 £100 on 27 April 2004, £400 on 28 April 2004). Mr Brown then referred to a cash deposit of £1400 in the Woolwich account dated 28 April 2004 as suggested that the amounts that had been withdrawn in cash from the Abbey account had been credited to the Woolwich account. There was a series of similar cash withdrawals from the Abbey account in May and June 2004 and Mr Brown further suggested that these were the source of the cash deposits in the Woolwich account of £1200 on 29 July 2004, £200 on 30 July 2004 and £200 on 9 August 2004.

15.    In other words, according to Mr Brown, the cash deposits in the Woolwich account came from the Abbey account and the credit balance on the Abbey account had ultimately been funded by a £6000 transfer from the Appellant's mother. There was, therefore, no understatement of the Appellant's earnings since the Woolwich deposits originated from a non-taxable source.

16.    As regards the discovery assessments in respect of 2002/2003 and 2003/2004 and the amended self-assessment return in respect of 2005/2006, Mr Brown argued that HMRC had not demonstrated that there was any under declaration in respect of the two earlier years or the one later year. The deposits in the Woolwich account in the 2004/2005 tax year were simply "one-off" occurrences. No documentary evidence was produced to substantiate this submission.

Ms Susan Goudie's evidence

17.    Ms Goudie explained that the Appellant had received money from his mother. These receipts were used to buy furniture and linen for the Appellant's mother’s apartment in Spain. The money was transferred from the mother to the Appellant's bank account. Ms Goudie and the Appellant went on several trips to Spain in the spring or early summer of 2004 to buy furniture and fittings for the apartment in. What was left out of the money, after buying furniture and fittings, was paid into a Spanish bank account and used to pay utility bills. A number of these utility bills were produced. In addition, a certificate of non-residence from the Spanish Ministry of Interior, which Ms Goudie said was obtained on one of these trips, was also produced.

18.    Under cross examination, Ms Goudie stated that she did not have access to the Appellant's bank accounts and said that she therefore took cash provided by her brother on the trips to Spain to buy furniture. She said that her brother took money out of the bank account and converted it into Euros. There was some uncertainty as to exactly how much cash was typically taken on each trip, but at one point Ms Goudie thought that approximately €2000 would typically be taken. Ms Goudie confirmed that she and the Appellant had visited Spain in May 2004 and possibly in June 2005 (although the Appellant was not sure about the June visit).

The Appellant's evidence

19.    The Appellant confirmed that he had sole control of the Woolwich bank account. He explained that he had opened the account into his son's name because he himself had been, as he put it, blacklisted by the banks and therefore could not open his own account. He did, however, have a savings account with Abbey and confirmed that he had sole use of that account.

20.    Under cross-examination, the Appellant indicated that he and his sister would visit Spain about once a month. He thought that each month they would take approximately £1000 in cash to Spain in order to fit out the apartment. The Appellant noted that he could only draw out approximately £400 or £500 per day from Abbey.

21.    Ms Parslow referred to a deposit in the Woolwich account of £285 on 14 February 2005 and asked the Appellant where the corresponding withdrawal was for the payment. The Appellant said that he did not know. He added that at that time and money only came from his mother although he thought some had come from his son on one occasion when his son had asked for a cheque to be made out to his father.

22.    Ms Parslow, noting that Mr Brown had argued that withdrawals from the Abbey account tallied with deposits in the Woolwich account, asked the Appellant to explain how over the corresponding period £2,400 had been deposited in the Woolwich account but only £1,600 had been withdrawn from the Abbey account. The Appellant replied that his mother would have given him money and that he had to pay out £1,400 in respect of his partner's mortgage.

23.    Ms Parslow asked the Appellant how it was that £1,600 was withdrawn from the Abbey account, which Ms Goudie had said had been spent on furniture for the apartment in Spain, and yet the Appellant had deposited £2,400 in the Woolwich account. The Appellant was unable to answer this.

24.    Ms Parslow also asked the Appellant where was the corresponding withdrawal from the Woolwich account in respect of the Appellant's visit to Spain in May 2004. The Appellant could not remember.

25.    Ms Parslow drew attention to the Appellant's letter to HMRC dated 23 March 2008 in which he stated:

"As for the excess of £10,313.00 I really cannot remember most of this monies [sic] but in 2004 -- 2000 and I was struggling to pay my rent and bills. So I would have had a personal loan from my mum to help me through. So if you have to recalculate this then please do, because I will have no documentation to support this."

26.    Ms Parslow asked the Appellant how he could now remember debits from the Abbey account and credits to the Woolwich account when in March 2008 he said he could not remember where the where the money deposited in the Woolwich account had come from. The Appellant replied that whilst it was true at the time (i.e. March 2008) that he could not remember, he had now gone into it in more detail and has spoken to his sisters. He said that 2004 had been a rather traumatic time, with the illness (which was diagnosed in March 2004) and ultimately the death of his mother (approximately one year later), and consequently he had not been much interested in the questions raised by HMRC at that time.

Submissions by HMRC

27.    Ms Parslow explained that after correspondence between HMRC and Mr Brown, the deposits in the Woolwich account still in dispute amounted to £8,803.01. These deposits remained, in HMRC's view, unexplained.

28.    Ms Parslow submitted that the Appellant's explanation for these deposits, viz that cash in the Abbey account was drawn out and paid into the Woolwich account and then used as cash spending money in Spain could not be accepted. The corresponding amounts of cash were not withdrawn from the Woolwich account as was evident from the Woolwich account bank statements. The cash was withdrawn from the Abbey account and it was this cash that was used to buy furniture etc in Spain. There was, said Ms Parslow, no satisfactory explanation where the cash deposits in respect of the Woolwich account had come from. The two deposits of £900 referred to above were now explained by the Appellant as coming from the sale of puppies. This was the first time this explanation had been put forward by no documentary evidence had been produced to substantiate this assertion.

29.    For these reasons, Ms Parslow submitted that HMRC had acted reasonably in believing that the unexplained deposits in the Woolwich account represented undisclosed income for 2004/2005, and also had acted reasonably in concluding that similar amounts should be assessed  for two earlier years and for the subsequent year. Accordingly, the Appellant had been assessed on the same amount (appropriately adjusted in accordance with the Retail Price Index) for two earlier years and for one later year.

30.    Section 29 TMA allowed HMRC to make an assessment to make good a loss of tax if an officer of the Board discovers that an assessment has become insufficient where the situation is attributable to the negligent conduct of the taxpayer, or a person acting on his behalf.

31.    Furthermore section 95 TMA provides that a taxpayer may be charged a penalty where he has negligently delivered an incorrect return. HMRC had imposed a penalty pursuant to section 95, but mitigated to 25% taking into account the Appellant's degree of cooperation and the seriousness of the default. Section 100 TMA permits an officer of the Board to make a determination imposing a penalty in such amount as he considers to be correct or appropriate.

32.    Ms Parslow argued that the unexplained deposits in the Woolwich account justified discovery assessments under section 29 TMA as well as penalties in respect of negligence pursuant to section 95 TMA. In her submission it was reasonable to conclude that the Appellant had been negligent.

33.    Ms Parslow submitted that pursuant to section 50(6) TMA the onus of proof lay with the Appellant to show that the amendments and assessments which are the subject matter of this appeal are excessive.

Our decision

The closure notices

34.    After carefully considering the documentary and witness evidence, we have concluded that the Appellant has not discharged the onus of proof which lies upon him to displace the closure notice amending his self-assessment return for the income tax year ended 5 April 2005.

35.    We consider that the Appellant has not given a satisfactory explanation of the source of the deposits totalling £8803 made in the Woolwich bank account. The explanation for these deposits seemed to us unconvincing. On the one hand, the explanation put forward on behalf of the Appellant for most of these deposits was that money, originating from the Appellant's mother, was credited in his Abbey account and that sums in cash were withdrawn from that account and deposited in the Woolwich account and were then withdrawn in cash from the Woolwich account and taken to Spain to buy furniture and fittings for an apartment. Whilst we accept that the Appellant's mother deposited £6,000 in the Appellant's Abbey account in April 2004, the entries in the Woolwich account, both as regards deposits and withdrawals, simply do not accord with the rest of this explanation. We therefore reject the explanation put forward by the Appellant for these deposits.

36.    In addition, the Appellant asserted that two deposits of £900 represented the proceeds of sale of two puppies. The Appellant, however, produced no documentary evidence to support this assertion. We did not find the Appellant's explanation in this regard convincing and reject it.

37.    For these reasons, we have decided that HMRC's amendments to the Appellant's self-assessment return for the tax year ended 5 April 2005 should be confirmed and the appeal in respect of these amendments should be dismissed. The onus of proof is on the Appellant to explain the origin of the deposits in the Woolwich account. It is the Appellant who must satisfactorily explain the origin of these payments, not HMRC, since it is only the Appellant who has the information fully to explain the underlying facts. In our view, the explanations put forward by the Appellant did not satisfy the burden of proof.

38.    As regards HMRC's amendments to the Appellant's self-assessment return for the year ended 5 April 2006, these amendments have been based on an extrapolation of the under declaration for the year ended 5 April 2005, adjusted by reference to the Retail Price Index. It seems to us that HMRC have acted reasonably in making these amendments. We consider that HMRC were entitled to conclude that the unexplained deposits in the Woolwich account made in the tax year ended 5 April 2005 were likely to represent an undeclared source of income which continued in the tax year ended 5 April 2006. Although the Appellant asserted that the deposits in the Woolwich account for the tax year ended 5 April 2005 were "one off" occurrences, no evidence was produced to support this contention. Again, we have concluded that the Appellant has not discharged the onus of proof in order to displace the amendments to his self-assessment return for the tax year ended 5 April 2006. Accordingly, the appeal in respect of the amendments to the self-assessment return for the tax year ended 5 April 2006 is dismissed.

The discovery assessments

39.    Two further assessments were made under section 29 TMA for the years ended 5 April 2003 and 5 April 2004. Once again, HMRC extrapolated what they considered to be the under-declared income for the tax year ended 5 April 2005 and assessments amount, adjusted by reference to the Retail Price Index, for those two earlier years.

40.    Under section 29 TMA, if an officer of the Board discovers, as regards any person and a year of assessment that any income which ought to have been assessed to income tax has not been assessed, the officer may make an assessment which ought in his opinion to be charged in order to make good to the Crown the loss of tax. Where a return under section 8 TMA has been made the assessment under section 29 can only be made, inter alia, where the under assessment is attributable to fraudulent or negligent conduct on the part of the taxpayer. In this case HMRC argued that the under assessment has been caused by the Appellant's negligent conduct.

41.    In our view, the burden of proof to establish negligent conduct under section 29 TMA lies on HMRC. As noted above, section 29(4) TMA permits a discovery assessment where there has been fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf. It is well established on previous legislation that the burden of proof of establishing wilful default lies with HMRC: see Hillenbrand v IRC 42 TC 617. There can be little doubt that the burden of establishing fraudulent conduct under section 29(4) TMA would lie upon HMRC and we consider that the draftsman is unlikely to have established a different onus of proof as regards negligent conduct within the same subsection.

42.    We consider that HMRC are justified in taking the view that the Appellant has been negligent in respect of his tax return for the year ended 5 April 2005. We consider further that this justifies HMRC in making a discovery assessment under section 29 TMA in respect of the two preceding years on the basis of negligent conduct. It follows, therefore, that since we are not satisfied with the Appellant's explanation for the unexplained receipts in 2004/2005, no satisfactory exclamation (and certainly no additional explanation) was given in respect of those earlier years. Accordingly, we confirm the assessments in respect of the year ended 5 April 2003 and 5 April 2004.

Penalty determinations

43.    As regards the penalty determinations under section 95 TMA for the years ended 5 April 2003, 2004, 2005 and 2006, HMRC are entitled to make such determinations where a taxpayer fraudulently or negligently delivers an incorrect return under section 8 or 8A TMA. We have concluded that the penalty determinations made in respect of these years are justified by the Appellant's negligence in the submission of his tax return for the year ended 5 April 2005. Accordingly, the penalty determinations are confirmed.

Summary

44.    We have decided that the appeals against:

(1)        the amendment to the Appellant's self-assessment by closure notice under section 28 A bracket 1) and (2) TMA for the two years ended 5 April 2005 and 5 April 2006;

(2)        assessments made under section 29 TMA for the two years ended 5 April 2003 and 5 April 2004; and

(3)        penalty determinations under section 95 TMA for the four years ended 5 April 2003, 2004, 2005 and 2006

should be dismissed.

45.    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.

GUY BRANNAN

TRIBUNAL JUDGE

RELEASE DATE:  5 November 2010