First-tier Tribunal (Tax)

[2011] UKFTT 220 (TC)

TC01085

Appeal number TC/2010/02648

TC/2010/02652

Appeal against penalties imposed on Appellants under Section 95A (1)(a)(i) of the Taxes Management Act 1970 on basis that the abatements allowed were not sufficient having consideration to all the facts- appeal allowed in part in respect of abatement allowed by the tax inspector for co-operation

FIRST-TIER TRIBUNAL

TAX

MR BALVINDER MALHI Appellants

MRS JASWINDER KAUR

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: S.M.G.RADFORD

H. MYERSCOUGH

Sitting in public at Portal House, Colchester on 14 February 2011

Mr N. Singh for the Appellants

Mr T O’Grady for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.       This is an appeal against the penalties of 50% imposed following a fairly lengthy enquiry into the partnership return for the Bruntsfield nursing home covering the year ending 31 March 2005. As a result of the enquiry it was agreed that additional tax for the Appellants, who were the partners, for the three years ending 5 April 2006 was due and the amount due was agreed with the Appellants.

2.       The Appellants appealed on the basis that all the sum of all the penalties should be reduced to 15% but did not put forward any argument to suggest that the personal and partnership returns were not negligently submitted.

3.       For the year 2003/2004 Mrs Kaur submitted profits of £26,127 and tax due of £6,204.55. Her revised profits were agreed at £125,077 with £45,497.26 of tax due. There was therefore an additional £39,292.71 of tax due.

4.       For the year 2004/2005 Mrs Kaur submitted profits of £31,796 and tax due of £7,859.99. Her revised profits were agreed at £137,533 with tax due of £50,429.85. There was therefore an additional £42,569.86 of tax due.

5.       For the year 2005/2006 Mrs Kaur submitted profits of £20,035 and tax due of £4,282.78. Her revised profits were agreed at £140,028 with tax due of £51,266.38. There was therefore an additional £46,983.60 of tax due.

6.       For the year 2003/2004 Dr Malhi submitted profits of £26,128 and tax due of £6,204.85. His revised profits were agreed at £125,077 with £45,497.26 of tax due. There was therefore an additional £39,292.71 of tax due.

7.       For the year 2004/2005 Dr Malhi submitted profits of £31,797 and tax due of £7,860.22. His revised profits were agreed at £137,533 with tax due of £50,429.85. There was therefore an additional £42,569.63 of tax due.

8.       For the year 2005/2006 Dr Malhi submitted profits of £20,035 and tax due of £4,282.77. His revised profits were agreed at £140,028 with tax due of £51,266.37. There was therefore an additional £46,983.60 of tax due.

9.       Mrs Kaur omitted personal taxed interest of £1,203.15 from her return for the three relevant years. Dr Malhi omitted personal taxed interest of £1,910.51 from his return for the three relevant years.

10.    On 14 November 2006 the partnership return for the Bruntsfield House Nursing Home for the tax year 2004/05 was taken up for enquiry together with the tax returns for the two partners, Mrs Kaur and Dr Malhi.

11.    Certain queries were addressed to the Appellants’ agent Mr Dubb of Nielsens and he telephoned Mr Parmenter of the HMRC on 21 November 2006 to say that he had spoken to his clients who denied the existence of any other source of income. Mr Parmenter asked Mr Dubb to put this in writing but commented that it was rare that their information turned out to be inaccurate.

12.    By 5 January 2007 HMRC had received no reply from the agent and so he telephoned the agent. Mr Parmenter, the HMRC inspector, informed the agent, Mr Dubb, that he was under pressure to issue Section 19A Taxes Management Act 1970 (“TMA”) notices when replies to opening queries were not answered promptly. Mr Dubb asked that the issue of the notices be delayed until 15 January due to his current pressure of work so that he had a month to supply the necessary information.

13.    On 19 January 2007 Mr Parmenter issued three Section 19A information notices and on 7 February 2007 Mr Dubb replied. On 16 February 2007 further letters were sent to Mr Dubb and the Appellants as not all of the items requested had yet been provided. On 21 February 2007 the inspector sent a further letter to the agent and the Appellants requesting information which he had omitted from his earlier letter.

14.    On 1 March 2007 Mr Dubb telephoned apologising for the delay as he had been on holiday. He asked for a little extra time to provide the information and it was agreed that provided that Mr Parmenter had everything by the end of March 2007 there would be no problems.

15.    On 9 March 2007 penalty warning letters were issued to both the Appellants for their failure to fully comply with the Section 19A notices issued to them. Mr Parmenter wrote to Mr Dubb confirming that although he had agreed that Mr Dubb had until 31 March 2007 to provide the necessary information, procedurally he had to inform Mr Dubb’s clients that if they failed to meet this deadline he would have no option but to impose penalties. As Mr Parmenter was going on holiday he extended the deadline to 16 April stating that if this deadline was met the question of penalties would not be taken any further.

16.    Mr Dubb replied on 27 March 2007 and 2 April 2007 but there was still information outstanding. Consequently on 20 April 2007 fixed penalty notices were issued to each of the Appellants for their failure to comply with the Section 19A notices.

17.    Mr Dubb called Mr Parmenter on 23 April 2007, 25 April 2007, 17 May 2007 and 29 May 2007. Mr Malhi called the inspector on 26 April 2007 and told him that he thought that his agent was not doing his job properly. He believed that all the information had been passed to Mr Dubb to be sent to the inspector. He said that his business records had gone missing during a move together with the bank records. Mr Parmenter then asked him to obtain duplicates.

18.    Mr Dubb wrote to the inspector on 29 May 2007 enclosing some of the missing bank statements and stating that the bank had been asked for duplicates of the others.

19.    By 7 June 2007 the information notices had still not been fully complied with and further penalty warning letters were sent and on 11 June 2007 Mr Dubb called the inspector to apologise for his oversight in failing to provide his clients private records.

20.    Although further information was provided by Mr Dubb on 26 June 2007 and 27 July 2007 by 3 August 2007 Mr Parmeneter had still not received all the items which he needed and suggested that a meeting be held with the Appellants.

21.    On 14 August 2007 Mr Dubb wrote to Mr Parmenter and told him thatvarious paying-in books and cheque stubs had been lost when Dr Malhi had moved house. The care home had been temporarily closed and until it was reopened his clients would not be available for a meeting.

22.    He also telephoned Mr Parmenter on the same day to inform him that his clients did not wish to attend a meeting. Mr Parmenter told Mr Dubb that on examination of the available records there appeared to be serious discrepancies between the turnover in the accounts and the amounts going into the various business bank accounts which he had seen.

23.    On 10 September 2007 Mr Parmenter wrote to Mr Dubb asking for more information and Mr Dubb replied by telephone on 14 September 2007 with the available information that he had. He asked that in future all correspondence went directly to his clients.

24.    On 20 September 2007 Mr Parmenter again requested a meeting with the Appellants but Mr Dubb telephoned on 21 September 2007 to say that his client was in a state with the closure of the care home and still did not want a meeting.

25.    On 1 November 2007 Mr Dubb telephoned to express the wish that the case be settled by Christmas. Mr Parmenter told him that the papers had been referred to another office for consideration. In fact the papers had been referred to HMRC’s civil investigation of fraud office given the potential level of omissions indicated by the deposits made to the business bank account.

26.    The fraud office took some time to reply and Mr Parmenter telephoned Mr Dubb twice to explain that he was still awaiting a reply from the other office.

27.    On 1 February 2008, 12 February 2008, 20 February 2008 and 27 February 2008  Mr Dubb, telephoned Mr Parmenter to ask whether the enquiry was now settled. Mr Parmenter confirmed that the papers were still being considered at the other office and again asked for a meeting but once again this was refused.

28.    On 25 March 2008 Mr Dubb again telephoned for an update. Mr Parmenter apologised and told Mr Dubb that whist the papers were now back he had not yet had a chance to look at them. He confirmed that where there had been a delay on HMRC’s part this would be taken into account if HMRC felt it was necessary to charge a penalty in due course.

29.    There was a further telephone conversation on 28 March 2008 when Mr Parmenter again suggested that a meeting would be the best way forward. Once again Mr Dubb confirmed that his clients were not prepared to meet so Mr Parmenter agreed to put his concerns in writing.

30.    On 17 April 2008 Mr Parmenter wrote to Mr Dubb with a copy to the Appellants highlighting a number of concerns including the fact that with regard to income the business account lodgements for the year 2004/05 came to £673,511 whereas the turnover per the accounts for that year was stated as £339,219.

31.    Between 8 May 2008 and 24 July 2008 despite further correspondence little further progress was made and on 24 July 2008 Mr Parmenter wrote to Mr Dubb to say that formal action now seemed appropriate. He also wrote that despite the likelihood of substantial further tax being due, a payment on account had yet to be made.

32.    On 28 July 2008 a completion notice was issued in respect of the 2004/05 partnership enquiry and discovery amendments were also issued in respect of the partnership returns for 2003/04 and 2005/06. On 15 August 2008 appeals were submitted against the notice and amendments made.

33.    On 9 October 2008 the appeals were heard by the General Commissioners and it was decided by them that £22,855.74 should remain in charge for Dr Malhi and £22,592.04 for Mrs Kaur. Mr Parmenter wrote to the Appellants on 22 October 2008 to inform them of this.

34.    Finally on 29 January 2009 Dr Malhi attended a meeting with Mr Parmenter and a subsequent exchange of correspondence between them enabled Mr Parmenter to determine the appeals which Mr Dubb had lodged on behalf of the Appellants. This resulted in revised agreed profit figures for the care home.

35.    On 25 September 2009 the Appellants’ personal returns for the three years ended 5 April 2006 were amended to reflect their increased profit shares. These adjustments gave rise to the extra tax payable and it was this which formed the basis for the penalty calculations against which the appeal was made.

36.    The HMRC officer in making the penalty determination may abate the maximum penalty by up to 20% (exceptionally 30%) for the amount of disclosure offered by the taxpayer; up to 40% for the amount of co-operation received from the taxpayer during the enquiry and up to 40% depending on the seriousness of the offence.

37.    The total abatements allowed by Mr Parmenter in respect of the penalties arising on the additional partnership profits came to 50% calculated as 5% for disclosure; 25% for co-operation and 20% for size and gravity. It is the amount of these penalties which are still in dispute. It was not alleged that there was fraud.

38.    Mr Singh for the Appellant submitted that until 29 January 2009 the tax enquiry was deal with by Mr Dubb of Nielsens and the Appellants had no personal involvement. After this Dr Mahli took matters into his own hands and the matter was dealt with in eight months. Dr Mahli had been ill with cancer and had assumed that Mr Dubb, whose company had prepared the tax returns, would deal adequately with the enquiries.

39.    Apparently in 2004 the accountants made a basic error and then repeated the error in subsequent years. Mr Parmenter had accepted that the Appellants had not deliberately misled HMRC.

40.    Mr Singh said that an abatement of only 5% for disclosure was not sufficient as once Dr Malhi took over the enquiry was resolved in eight months and so the abatement should be 15%.

41.    He thought that 25% for co-operation was not enough bearing in mind how quickly the matter settled once Dr Mahli took over and that this abatement should be 35%.

42.    As to the size and gravity he thought that this abatement should be increased to 35% so that the total penalty amounted to 15% rather than 50%. The Appellants were not negligible – it was their accountants and although HMRC had all the documents HMRC had done nothing from May 2007 until March 2008.

43.    Mr O’Grady submitted that the Appellants had accepted that they had been negligent. They had business receipts for over £600,000 for the enquiry year but the accounts only showed some £300,000.

44.    The Appellants had signed their tax returns and knew that the enquiry was going on and yet resisted all request for a meeting. They refused to make any payments on account even when it became obvious that more tax was owed.

45.    The Appellants had been sent Section 19A notices requesting information and they had to take responsibility for their tax returns. They should have realised that the figures were well below the amounts they had received.

46.    Although the matter settled in eight months once Dr Malhi took over by then the matter had gone on for more than two years.

47.    We find that the Appellants signed the relevant returns and that it was their responsibility to check the amounts returned. They should have been aware that their turnover had been significantly understated.

48.    Mr Parmenter explained to Dr Malhi that in order to qualify for the full 20% discount for disclosure, a full disclosure of all material errors should have been made at the earliest opportunity. However neither of the Appellants made any disclosures even after Mr Parmenter’s letter dated 17 April 2008 which highlighted the fact that the lodgements in the business account came to a total which was considerably higher than the turnover reported in the accounts.

49.    Mr Dubb telephoned Mr Parmenter on 21 November 2006 to say that he had spoken to his clients who denied the existence of any other source of income.

50.    Dr Malhi called the inspector on 26 April 2007 and told him that he thought that his agent was not doing his job properly yet he still did not get involved. We agree that only a nominal 5% abatement should be allowed for disclosure.

51.    Mr Parmenter explained that the discount for co-operation had been put at 25% because the enquiry had taken almost three years; at the start of the enquiry it had been necessary to use formal information powers supported by penalty determinations for non compliance before all the information was finally supplied; and no payments on account were made despite requests.

52.    We have carefully checked through all the correspondence and notes of telephone calls produced to the Tribunal and note that although it took a long time to obtain the information the agent kept regularly in touch. We also take into account Dr Malhi’s illness and the delay caused by HMRC. We find therefore that the abatement in respect of co-operation should be increased to 30%.

53.    We find that the final additions to the partnership profits were far from insignificant and therefore the abatement of 20% should be reduced to 15% in respect of size and gravity.

54.    The abatement for co-operation is increased to 30%, the abatement for size and gravity is reduced to 15% and the amount of the abatement of 5% in respect of disclosure is hereby confirmed. The penalty therefore remains at 50%.

55.    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.