First-tier Tribunal (Tax)

[2011] UKFTT 258 (TC)

TC01122

Appeal number TC/2009/14355

Self assessment; over-declaration.

FIRST-TIER TRIBUNAL

TAX

MR JOSEPH OKOLO Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: GERAINT JONES Q.C.

ANTHONY HUGHES ESQ.

Sitting in public at Audit House, Victoria Embankment, London on 11 April 2011.

The Appellant in person.

Mr. Osborne, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1. The appellant, Mr Okolo, signed his tax return for the fiscal year ended 5 April 2003 on 5 January 2005. He submitted it to HMRC along with his completed tax return for the fiscal year ended 5 April 2004. Although not directly in issue in this appeal it is also appropriate to note that at the same time the appellant submitted self-assessment tax returns for each of the fiscal years ended 5 April 2001 and 2002.

2. On the basis of the submitted tax returns the appellant was assessed as owing a modest amount of income tax for each of the years ended 5 April 2003 and 2004. Then, on 16 January 2006 HMRC, by its Ms Hurley, wrote to the appellant to inform him that an enquiry was being undertaken into the return for the year ended 5 April 2004. HMRC was entitled to undertake that enquiry pursuant to section 9A Taxes Management Act. The letter of 16 January 2006 had a Schedule attached to it which set out a list of documents and information which HMRC wished to receive from the appellant so as to undertake its investigation.

3. The appellant replied on 2 March 2006 stating :” I no longer keep nor have any of the records you have requested in your correspondence.”  On 14 March 2006 HMRC replied to the effect that penalties could be imposed for inadequate record-keeping and that the appellant should forward any remaining documents that might assist the enquiry being made. At page 9 in the bundle provided to us appears an Attendance Note of a telephone conversation that then took place on 25 April 2006 where Ms Hurley recorded that the appellant had informed her that he did still have most of the relevant documents and was in the process of gathering everything together. That was in direct contradiction of what the appellant had said in his letter of 2 March 2006.

4. The appellant's tax returns had proceeded on the basis that in addition to his employment, he also had income from self-employment. He had claimed to be a “Property Developer” although in reality the appellant was then saying that he had income from what might best be described as jobbing building.

5. In the appellant's tax return for the year ended 5 April 2003 he stated that he had a business turnover of £94,175. He then went on to list various business expenses, including £31,286 paid to subcontractors under the Construction Industry Subcontractor Scheme. The turnover figure for the year ended 5 April 2004 was higher at just over £107,000, with various figures inserted for various costs and expenses. For the year ended 5 April 2003 the appellant said that he had a net profit of £6,076 whereas for the year ended 5 April 2004 he contended that he had a net profit of £6,307.

6. The enquiry for the year ended April 2004 was primarily aimed at the various expenses and costs said to have been legitimately set against the turnover of £107,109. On 8 May 2006 the appellant wrote to HMRC saying that he could not provide detailed wage and material cost breakdowns, but had based his figures upon average costs for work sites comparable with those where he had recently worked, being in Sittingbourne, Rainham and Maidstone. He went on to say that he was in that dilemma because most of the labour that he had used was paid on a cash in hand basis so as to keep his costs and overheads down to a manageable level. We suspect, by that, the appellant meant that he would thereby avoid paying national insurance contributions, even assuming that he was employing persons lawfully allowed to work in the United Kingdom. The same letter went on to give explanations for some of the expenses and costs listed in the tax return and a promise to try to provide further receipts or documents. HMRC replied on 22 May 2006 asking for various specified details, to which the appellant replied by letter on 22 June 2006. In that letter he contended that he had done work on residential properties in Sittingbourne, Rainham and Maidstone which belonged to individuals who wanted them refurbished or redecorated.

7. On the 15 October 2006 the appellant wrote to HMRC to say that he was not then self-employed and had not been self-employed since February 2005; that assertion carrying the implication that he had been self-employed prior thereto. In the appellant's next letter, being that of the 24 October 2006, he stated that his income from self-employment had been generated sporadically and had been used ”to offset existing borrowings some of which are not itemised in the records that you hold.”  

8. A meeting took place between the appellant and Ms Hurley on 7 March 2007. Ms Hurley prepared a note of that meeting which the appellant refused to sign because he thought that if he signed it, that would add legitimacy to it. He has not identified any significant parts of the note which he says either misrepresent or mis-record what had passed between him and Ms Hurley.  The note records that the appellant stated that he had set up a company in 2004 but prior to that had traded informally on a self-employed basis. The note records that Ms Hurley asked the appellant to explain how he could have a turnover in excess of £107,000 for the year ended 5 April 2004 if, as he was then saying, he had only done small jobs for a few hundred pounds a time. Later during the discussion the appellant discussed his expected profit margin on each job that he undertook and went on to say that he was usually paid in cash but sometimes by cheque with all monies either been banked or being used for expenses incurred. The last comment is, in our judgement, important. That is because the appellant has argued that there is no correlation between the sums banked by him and the turnover which he claimed to have enjoyed. The difficulty with that argument is twofold. The first difficulty is that, as we find, the appellant represented that he was often paid in cash and some, if not all of that cash, was used to pay expenses or for labour, rather than being banked. The second difficulty is that the bank statements which are relied upon in support of the correlation argument, are incomplete. On page 5 of the Note (bundle page 51) the appellant is recorded as saying that his turnover figure had been calculated by his agent on the basis of information provided by him throughout the year. At that stage he is recorded as saying that all income received was paid into a bank account, contrary to what he had said earlier during the interview or discussion.

9. HMRC continued its investigation and, in due course, received a letter dated 28 May 2007 from the appellant. In that letter he said that he was attaching a list of individuals who had worked for him. He said that they were neither employees nor subcontractors. He did not say into what category they fell. However, he attached a list containing the names of 20 people, with their respective addresses, and the amount paid to each of them in the period 2001 - 2004.

10. On the 01 August 2007 HMRC completed its enquiry into the tax return for the year ended 5 April 2004 and, by dint of various amendments to the return, assessed the sum due from the appellant at £32,498.45. A similar substantial increase took place in respect of the year ended 5 April 2003.

11. Perhaps prompted by the increase in the sum that was then being demanded of him, the appellant instructed Grant Thornton to act on his behalf. That firm wrote to HMRC on 5 November 2007, that being 21 months after the enquiry for the year ended 5 April 2004 had been opened. That letter stated, upon instructions from the appellant, that the information set out in the appellant's tax returns for the years ended 5 April 2003 and 2004 was false and, as I put it at the appeal hearing, make believe. The letter says that the appellant was not self-employed nor did he undertake any work of any kind on any properties belonging to other people, for which he was paid. The explanation for this apparent overstatement of income, upon which tax would be levied, was that the appellant “felt that he had a poor credit rating as he had been turned down for a loan via an application he made online.”  It was contended that the business or self-employment figures put into his tax returns for the four years, 2001 - 2004, were false and made up. Information to a similar effect was provided to HMRC during a telephone call on the 26 November 2007. The additional assessments were amended after a Review took place. The appellant has appealed each of them.

12. At the appeal hearing before us the appellant's evidence was that his return for the year ended 5 April 2003 was prepared by an agent, upon his instructions, because he wanted to gain credibility so far as a trading history was concerned because he was contemplating working abroad, probably in Nigeria. He accepted that his case amounted to him saying that he wished to have false information or documents available so that he could deceive people in other countries into believing that he had something of a track record as a businessman. He claimed that that would give him credibility. In effect it is his case that the tax that he thought he would have to pay (rather than the higher amount of tax now demanded) was a price worth paying in pursuit of his desire to deceive others, quite probably fellow Nigerians, into believing that he was a person with business credibility. He said that this was done over a period of four years, including the tax returns for the years ended 5 April 2001 and 2002, to build up what he claimed would be a pattern of experience.

13. It is now the appellant's case that the only property that he has ever refurbished or worked upon is the house in which his family lived at 108 East Street, Sittingbourne. The appellant said that it was only after Grant Thornton had become involved in late 2007 that he told Ms Huntley that his earlier tax returns had been an entire fabrication.

14. We heard evidence from Ms Hurley in accordance with her witness statements dated 17 February 2010. When she was cross examined she said that she had first become aware that it was the appellant's case that his tax returns for the years ended April 2001, 2002, 2003 and 2004 contained false information when she had received the letter from Grant Thornton in November 2007. She made the point that the appellant did have some receipts relating to work done and that during her enquiries he had given the names of sites at which work was done; the names of people who had undertaken work for him; and detailed information about various sums spent on different expenses or overheads.

15. This is a strange appeal in that the appellant is saying that he submitted four self-assessment tax returns to HMRC each of which overstated his income which, in turn, would result in him having to pay tax which, in truth, was not due. It was, as we find, when the appellant realised that the sum that he thought he would have to pay may prove to be very much larger, that he then asserted that he had never been self-employed and had never had the kind of turnover or expenses referred to in the detailed information provided by him in the four tax returns to which we have referred.

16. We accept that there is no persuasive correlation between the appellant's disclosed bank accounts and the sums referred to as turnover in the tax returns that he has submitted. However, for the reasons which we have given above, we do not consider that to be a significant indication of wherein lies the truth. It is for the appellant to satisfy us that, as a matter of probability, he was not self-employed and was not earning taxable sums from that employment. That has only become the appellant's case since November 2007. Prior to the letter from Grant Thornton the appellant was putting forward assertions to the effect that he had been self-employed at identified locations employing identified tradesman or labourers. We consider it wholly improbable that the appellant would have made up such an elaborate lie for the first reason that he has given. We should also record that the appellant later gave a different reason for his supposed lies, being that he wished to impress certain generals in Nigeria so that, in turn, they might assist him in gaining business both in this country and, possibly, in Nigeria.

17. We do not accept the truth of the case now being asserted by the appellant. Whilst he appeared to give his evidence earnestly, that evidence has to be judged against a background where, on the appellant's case, he has lied to his erstwhile accountants, lied to HMRC and done that in a bid to deceive others into believing that he has a business record or business credibility that, in truth, he now says he did not possess. We find it beyond credence that the appellant would have overstated his income knowing that that would result in him having to pay tax on sums which, according to him, he did not earn. We completely reject the evidence that the appellant engaged in such dishonesty simply to boost his credit rating or, as latterly alleged, to deceive unspecified people, including Generals, in Nigeria into believing that he had a particular business profile. In circumstances where we entirely discount the reasons advanced for the appellant declaring income which he now says he did not have, we readily arrive at the conclusion that his case, to the effect that he has fabricated this story about self-employment and earnings therefrom, should be roundly rejected.

18. The appellant's case was not argued on the basis that the assessments for the years ended 5 April 2003 and 2004 were overstated. That would be a difficult alternative case to run given the basis upon which this appeal has been pursued. It simply does not lie in the appellant's mouth to argue (and, in fairness, he did not seek to argue) that HMRC made inappropriate adjustments to his costs and overheads when arriving at the adjusted net profit figures.

19. In our judgement the assessments, as amended, for the years ended 5 April 2003 and 2004 must be upheld.

20.  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.