[2011] UKFTT 620 (TC)
TC01462
Appeal number
TC2010/3541
INCOME TAX
& NATIONAL INSURANCE – Assessment – whether employer failed to account
for income tax and class 1 National Insurance Contributions – yes – quantum of
the assessment too high – assessment reduced – Appeal allowed in part.
FIRST-TIER TRIBUNAL
TAX
MR
SAJAAD HUSSAIN Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
MICHAEL TILDESLEY OBE (JUDGE)
ALBAN
HOLDEN
Sitting in public at Phoenix House, 1-3 Newhall Street, Birmingham B3 3NH on 27, 28 and 29 June 2011
Mohammad Yousaf of Malick
& Co, Chartered Certified Accountants for the Appellant
Philip Oborne, Presentation
Officer of the Appeals and Review Unit for HMRC
© CROWN COPYRIGHT
2011
DECISION
The Appeal
1. The
Appellant appealed against determinations by HMRC under section 8 of Social
Security Contributions (Transfer of Functions etc) Act 1999 and regulation 80
of Income Tax [Pay As You Earn] Regulations 1999 in respect of his liability
as an employer to pay the income tax and national insurance contributions for
his employees.
2. The
original determination dated 2 September 2009 was in the amount of
₤56,968.30.
|
Year/Period
|
Description
of Determination
|
Date of Issue
|
Amount Due
(₤)
|
|
2005/06
|
PAYE
|
2/09/09
|
4,999.50
|
|
2006/07
|
PAYE
|
2/09/09
|
14,872.00
|
|
2007/08
|
PAYE
|
2/09/09
|
14,026.10
|
|
1/12/2005 to
18/02/2008
|
Class 1 National Insurance Contributions
|
2/09/09
|
23,070.00
|
3. On
30 October 2009 HMRC issued a revised calculation of the amounts due without
formally amending the determinations. The revised total amount was
₤23,103 which was broken down as follows:
|
Year/Period
|
Description
of Determination
|
Date of Issue
|
Amount Due
(₤)
|
|
2005/06
|
PAYE
|
30/10/09
|
2,266.00
|
|
2006/07
|
PAYE
|
30/10/09
|
7,138.56
|
|
2007/08
|
PAYE
|
30/10/09
|
6,732.00
|
|
1/12/2005 to
18/02/2008
|
Class 1 National Insurance Contributions
|
30/10/09
|
6,967.44
|
4. The
Appellant was the proprietor of a food takeaway named The Balti King situated
in Market Street, Ely between 1 December 2005 and 18 February 2008. On 8
September 2006 the Appellant registered as an employer with HMRC for PAYE and
national insurance contributions. On 25 May 2007 HMRC opened an enquiry into
the Appellant’s P35 returns and potential failure to register for VAT. On 27
June 2007, Officers Kiwerski and Gaynor held a meeting with the Appellant and
his accountant in respect of the enquiry into the Appellant’s business. On 18
October 2007 the same Officers made an unannounced visit of the Appellant’s
business premises. They also carried out a surveillance of the premises on 12
November 2007 between 16:35 and 23:25 hours. Officers March-Killen and Shadbolt
undertook a further surveillance on 13 November 2007 between 16:35 and 19:06
hours.
5. The
Appellant argued that HMRC’s determinations were speculative wholly based on
casual observations of his premises. The determinations had no regard to the
commercial realities of the Appellant’s business as a food takeaway. HMRC
disagreed, pointing out that the Appellant held inadequate business records to
substantiate the payments made by way of wages to his employees. HMRC contended
that the determinations were made to best judgment derived from the information
given to it by the Appellant, and its observations of the Appellant’s business.
The Evidence
6. The
Tribunal heard evidence from the Appellant, Mr Shifait Miran, an employee, and
from the Appellant’s brothers in law, Mr Mohammed Mahboob Yousaf, Mr Mohammed
Mansha Yousaf, and Mr Habib Yousaf. The Appellant also tendered witness statements
from Mohammed Pazeer, an employee, and Mr Manib Yousaf, one of the Appellant’s
brothers in law.
7. Mrs
Yvonne Gaynor and Ms Lorraine March Killen gave evidence for HMRC. The Tribunal
received a bundle of documents in evidence.
8. The
Tribunal heard the Appeal over three days, at the end of which the Tribunal
reserved its decisions but issued directions for HMRC to provide additional
information by 8 July 2011 with a right of reply to the Appellant by 22 July
2011.
The Facts
Background
9. The
Appellant started the food takeaway business on 1 December 2005 from scratch,
purchasing second hand equipment using his savings and money loaned from
relatives. The business was located in the market town of Ely with a population
of 15,000, and encountered intense competition with nine other Indian takeaways
and restaurants in the vicinity. The Appellant had no previous experience in
the catering industry. The premises was formerly a record shop which had been
converted to a takeaway business. The Appellant rented the shop but was unable
to provide details of the lease including its term. The Appellant sold a range
of meals including burgers, pizzas, kebabs and curries and provided a home
delivery service. On 18 February 2008 the Appellant sold the business as a
going concern for ₤25,000 to a Mr Asad.
Takings for the Business
10. The Appellant
declared takings of ₤49,539, employee’s costs of ₤9,100 and a net
loss of ₤2,210 in his 2006/2007 tax return for the accounting year ending
30 November 2006. His tax return for the following year which was made up to 18
February 2008 showed takings of ₤61,923, staff costs of ₤26,918 and
a loss of ₤20,573. The 2007/2008 return was based on estimated figures as
the original records had been lost. The bundle included records of takings kept
by Appellant which were served on the HMRC. The record for the period 10
December 2006 to 28 April 2006 showed a takings figure of ₤19,742.50. The
record from 22 July 2007 to 18 August 2007 gave a takings figure of
₤3,659.30. The average weekly takings for this period were ₤975.04.
HMRC Dealings with the Appellant
11. At the meeting
on 27 June 2007 the Appellant informed HMRC Officers Kiwerski and Gaynor that
the business was open 5-11pm Sunday to Thursday, and 5pm-3am Friday and Saturday.
He employed five part-time members of staff who worked 16-17 hours per week,
and were paid weekly in cash at an hourly rate of ₤5.35. The Appellant
kept no records of the shifts worked by the part-time members of staff. He
would inform the members of staff the day before when they were required to
perform a shift. The Appellant would bring the part-time members of staff to
work from Peterborough except one member of staff who was resident in Ely.
12. The Appellant
said that there were at least three persons including himself engaged in the
takeaway on Monday to Thursday. The busy period was Friday to Sunday when there
would be at least four persons including himself in the shop. The Appellant was
also assisted by his wife and four brothers-in-law in the takeaway who did not
receive payment for their services. Two members of staff were mostly employed
on home deliveries.
13. At the meeting
Officer Gaynor requested the Appellant to provide the names, addresses and
national insurance details of all persons working in the takeaway, whether paid
or unpaid. The Appellant did not comply with the request which resulted in
Officer Kiwerski on 21 August 2007 issuing a formal notice for the information
including forms P45 and P46 by 6 September 2007.
14. On 19 September
2007 the Appellant’s accountants supplied HMRC with the names and addresses of
current employees but not the P45 and P46 forms which had been archived.
15. On Thursday 18
October 2007 at 22:50 hours Officers Kiwerski and Gaynor carried out an
unannounced visit on the Appellant’s premises. Officer Gaynor observed five men
working behind the counter. When the Appellant saw the Officers he spoke to one
of the five men who was preparing vegetables at the preparation table. The man
put on his coat and hat and left the takeaway. The Appellant advised Officer
Gaynor that the other men in the shop were Shakeel Mohammed, Faraz Aslam, and
his brother-in-law, Habib Yousaf. According to the Appellant the man who left
was a friend of Shakeel Mohammed. The Appellant had not kept timesheets for
each employee which was in contravention of the instruction given by Officer
Gaynor at the 27 June 2007 meeting.
16. Mr Kiwerski
followed up the meeting with a letter dated 19 October 2007 reminding the
Appellant of his obligation to produce within 14 days forms P45 or P46 for all
members of staff from the date of commencement of business, and to keep records
of the working hours of each member of staff.
17. Officer Kiverski
received authorisation to carry out covert surveillance of the Appellant’s
business which was done on Monday 12 and Tuesday 13 November 2007. Officers
Kiverski and Gaynor undertook the surveillance on the 12 November 2007 between
the hours 16.35 and 23:25 hours. Officers March-Killen and Shadbolt were
involved with the surveillance on 13 November which took place between 16:35
and 19:06 hours. The purposes of the surveillance were to count the number of
customers entering the premises, the number of home deliveries made, and the
number of persons working at the premises.
18. On Monday 12
November 2007 the Officers observed seven Asian males, one of whom was the
Appellant, arriving at the premises in two vehicles at 16:50 and 17:00 hours
respectively. The first group of three Asian males to arrive opened the
premises. The Appellant was in the second group. At around 17:25 hours one of
the Asian males drove off with two passengers to make a delivery, returning at
18:01 hours without the two passengers. At various times during the evening the
Officers observed three Asian males working in the takeaway with two additional
persons out on delivery. At 20:30 hours the Officers noticed a fourth Asian
male working behind the counter. At 23:00 hours the Appellant closed the
premises. At 23:20 hours four Asian males left the premises in a vehicle driven
by the Appellant. The driver of the other vehicle had left previously at 23:11
hours to make a delivery. The Officers did not record the driver returning to
the premises.
19. On Tuesday 13
November 2007 at 17.01 hours the Officers saw a vehicle with five Asian males
arrive at the premises. The Officers observed four younger Asian males get out
and open up the premises. The driver who was older than the others entered the
takeaway some ten minutes later. At 17.35 hours an Asian male attended the
premises in another vehicle with four bags for deliveries. At 18:28 hours the
Officers witnessed at least two persons working behind the counter. The
Officers were required to terminate their surveillance at 19:10 hours because
their observation post had been compromised.
20. On 26 November
2007 Officer Gaynor repeated the request in writing for forms P45 and P46 plus
details of the Appellant’s brothers in law and wife. This information to be
provided within three weeks of the letter. The Appellant did not comply with
the request resulting in further correspondence from Officer Gaynor dated 6
February 2008 demanding a response by 4 March 2008.
21. On 12 February
2008 the Appellant’s accountants supplied forms P46 for current and past
employees covering the period from 1 September 2006. The details of which together
with the information on the form P 14 were as follows:
|
Name
|
Commencement of Employment
|
Earnings as stated on P14 for tax year 2006/07
(₤)
|
Earnings as stated on P14 for tax year 2007/08
(₤)
|
|
Mohammad Pazeer
|
2 April 2007
|
|
4,607.52
|
|
Muhammed Shakeel
|
9 December 2006
|
1,455.20
|
4,607.52
|
|
Shafhit Miraon
|
4 September 2006
|
2,771.10
|
4,607.52
|
|
Christopher Jones
|
4 September 2006
|
2,548.80
|
4,607.52
|
|
Faraz Aslam
|
4 December 2006
|
1,455.20
|
4,607.52
|
22. On 25 February
2008 Officer Gaynor responded requesting from the Appellant forms P46 for the
period from December 2005 to 1 September 2006, and at the same time requested
information about the brothers-in-law.
23. On 29 April 2008
the Appellant’s accountants supplied the names and addresses of the
brothers-in-law, stating that the Appellant could not recall the average time
worked by his brothers-in-law at the take-away. The Appellant believed they
worked regularly between 20 to 40 hours a week and sometime more depending on
requirement.
24. On 24 November
2008 Officer Gaynor sent the Appellant a letter with his estimated liability
for PAYE and Class 1 National Insurance Contributions in the sum of
₤62,792 which included interest, and requested his comments. Officer
Gaynor received no response. She decided not to issue penalties but issued the PAYE
and National Insurance determinations on 2 September 2009 in the sum of
₤56,968.30.
25. On 30 September
2009 the Appellant appealed against the determinations. On 26 October 2009 HMRC
met with the Appellant and his representatives with a view to reaching a
settlement. The Appellant’s representative offered ₤9,000. Officer
Hendley said that if it was ₤9,000 plus interest plus a fixed penalty of
₤1,200 he would put it forward for consideration. The Appellant did not
agree with HMRC’s suggestion and withdrew his offer.
26. On 30 October
2009 Officer Gaynor reconsidered the information and issued a revised
determination which was the subject of this Appeal.
The Revised Determination
27. Officer Gaynor’s
revised determination used the following assumptions which were derived from
the information supplied by the Appellant and from HMRC’s observations of the
business premises:
(1)
The food takeaway was open for 50 hours a week.
(2)
Six people were working each day at the takeaway.
(3)
The Appellant advised that there were five employees on the payroll, and
each worker was employed for 16 hours a week.
(4)
An allowance of 50 hours a week for the Appellant, and 50 hours a week
for his brothers-in-law. The Appellant had supplied no evidence when and for
how long the brothers-in-law worked at the take-away.
(5)
According to Officer Gaynor this left a shortfall of 120 hours not
covered by the employees.
(6)
The hourly rate for the said 120 hours was at the rate of the national
minimum wage.
28. Officer Gaynor’s
assumptions were summed up in the following table:
|
|
Hours worked (open 50 hours per week
|
|
The Appellant
|
50
|
|
Brothers-in-law
|
50
|
|
5 employees on the payroll working 16 hours per week
|
80
|
|
Total hours accounted for
|
180
|
|
Total hours to be covered from observations 6 workers x
50 hours
|
300
|
|
Hours not covered by known workers
|
120
|
29. Based on the
above assumptions Officer Gaynor decided that the 120 hours should be split
between four unknown employees with the result that the additional hours were
taxed at the basic rate of 22 per cent with no personal allowance. She
considered that the unknown employees would have used their personal allowance
in the recorded hours. She, however, decided to give the employees the benefit
of the lower earnings limit for the purposes of calculating the national
insurance arrears.
30. The resulting
calculation was as follows:
|
Year
|
Gross (₤)
|
Tax 22% (₤)
|
Ees NI
(₤)
|
Ers NI
(₤)
|
Total(₤)
|
|
2005/06
|
10,300.00
|
2,266.00
|
429.76
|
500.48
|
3,196.24
|
|
2006/07
|
32,448.00
|
7,138.56
|
1,348.88
|
1,571.44
|
10,058.88
|
|
2007/08
|
30,600.00
|
6,732.00
|
1,440.40
|
1,676.48
|
9,848.88
|
|
Grand Total
|
73,348.00
|
16,136.56
|
3,219.04
|
3,748.40
|
23,104.00
|
The Appellant’s Evidence
31. The Appellant
stated that Muhammed Shakeel, Mohammed Pazeer, Christopher Jones and Faraz
Aslam were the only employees working with him during the time he ran his
business at the Balti King. He stated that most of his employees worked 16
hours or less, with their wages paid in cash from the takings. The Appellant
also confirmed that his four brothers in law and his wife assisted him with the
running of the business. The Appellant’s brothers in law said that they helped
out regularly in the takeaway without payment. Three brothers-in-law were
holding down full time jobs, whilst the other one ran a property business. Mr
Miran confirmed that he worked 16 hours a week in the take-away as a kitchen assistant.
His witness statement, however, said that he worked 18 hours a week, which
apparently was typographical error.
Consideration
32. Under regulation
80 of the PAYE Regulations 2003 if it appears to HMRC that there may be tax
payable for a tax year under regulation 68 by an employer, HMRC may determine
the amount of that tax to the best of its judgment, and assess the outstanding
tax on the employer as if it is income tax charged on the employer.
33. Under section 8
of the Social Security Contributions (Transfer of Functions) Act 1999, an HMRC
Officer can decide whether a person is or was liable to pay national insurance
contributions of any particular case, and if so, the amount he is or was
liable to pay. A section 8 decision must be made to the best of the information
and belief of the HMRC Officer.
Under paragraph 3 schedule 1 of Social Security Benefits Act 1992 the employer
is liable in the first instance to pay the earner’s primary Class I National
Insurance contribution as well as the employer’s secondary contribution.
34. In this Appeal
HMRC concluded that the Appellant had not been fulfilling his responsibilities
as an employer under PAYE and the National Insurance Scheme by not deducting
the required amount of income tax and NI contributions from his employees’
wages, and remitting those deductions together with the employer’s NI
contribution to HMRC. In those circumstances HMRC decided to recover the
outstanding amounts from the Appellant in his capacity as an employer rather
than from his employees by means of the regulation 80 determination and the section
8 decision.
35. The Tribunal’s
powers on Appeal against a regulation 80 determination and a section 8 decision
are governed by different legislative provisions. Section 50 of the Taxes
Management Act 1970 defines the Tribunal’s powers on Appeal in respect of a regulation
80 determination. Essentially if the Tribunal considers on the evidence that
the Appellant is overcharged by the determination it shall reduce the
determination accordingly, but otherwise the determination shall stand good.
The Tribunal, however, has the power to increase the determination if it
considers that the Appellant has been undercharged by the determination. The
Appeal against a section 8 decision is governed by regulation 10 of the Social
Security Contributions (Decisions & Appeals) Regulations 2003 which states
that if the Tribunal on the evidence determines that the section 8 decision
should be varied in a particular manner, the decision shall be varied in that
manner but otherwise shall stand good.
36. The Appellant
has the burden of proving on the balance of probabilities that the amounts
assessed for income tax and National Insurance were incorrect. In this respect
the Appellant misunderstood the legal requirements regarding burden of proof
with one of its grounds for Appeal, which stated that the tax officers had not
adequately or satisfactorily discharged the burden of proof in respect of the
disputed decisions.
37. The Appellant’s
case was that the assessments were not made to best judgment (or best of
information and belief in respect of the section 8 decision), and that in any
event they were wrong. The Appellant asserted that he had fulfilled his
responsibilities as an employer, and that there were no arrears of income tax
and Class 1 National Insurance contributions.
38. The Higher
Courts have examined the concept of best judgment in assessments for VAT under
section 73 of the VAT Act 1994. The Tribunal considers that the principles
decided by the Higher Courts in VAT assessments are equally applicable to best
judgment or best information under section 80 PAYE determinations and section 8
decisions.
39. Woolf J in Van
Boeckel v Customs and Excise Comrs [1981] STC 290 decided that the exercise
of best judgment by HMRC officers involved three elements: (i) they had to
perform their functions honestly and bona fide; (ii) they had to have some
material upon which they could base their judgment; (iii) they were not
required to do the work of the taxpayer in order to form a conclusion as to the
amount of tax which in their best judgment was due.
40. Lord Justice
Carnwath in Customs and Excise Commissioners v Pegasus Birds Ltd [2004] STC 1509 stated that the Tribunal’s primary task on an Appeal against an
assessment to VAT was to find the correct amount of tax. Lord Justice Carnwath
offered the following advice (per curiam) to Tribunals when dealing with issues
of best judgment:
“When faced with 'best of judgment' arguments in
future cases the tribunal should remember the following four points. (i) Its
primary task is to find the correct amount of tax, so far as possible on the
material properly available to it, the burden resting on the taxpayer. In all
but very exceptional cases, that should be the focus of the hearing, and the
tribunal should not allow itself to be diverted into an attack on the
commissioners' exercise of judgment at the time of the assessment. (ii) Where
the taxpayer seeks to challenge the assessment as a whole on 'best of their
judgment' grounds, it is essential that the grounds are clearly and fully
stated before the hearing begins. (iii) In particular the tribunal should
insist at the outset that any allegation of dishonesty or other wrongdoing
against those acting for the commissioners should be stated unequivocally; that
the allegation and the basis for it should be fully particularised; and that it
is responded to in writing by the commissioners. The tribunal should not in
any circumstances allow cross-examination of the Customs officers concerned,
until that is done. (iv) There may be a few cases where a 'best of their
judgment' challenge can be dealt with shortly as a preliminary issue. However,
unless it is clear that time will be saved thereby, the better course is likely
to be to allow the hearing to proceed on the issue of amount, and leave any
submissions on failure of best of their judgment, and its consequences, to be
dealt with at the end of the hearing”.
.
41. In order to
complete the picture Chadwick LJ in Pegasus Birds at paragraph 80 rejected
the submission that where a Tribunal has substantially reduced an assessment it
must inevitably follow that the assessment was not made to best of judgment:
“In Rahman (No 2) the tribunal had
made their own assessment of the correct amount of VAT due from the taxpayer.
They had reduced the Commissioners' 73(1) assessment by about 50%. The
submission that I was addressing in paragraph 32 of my judgment in that appeal
was to the effect that, where there has been a substantial reduction by the
tribunal in the assessments made by the Commissioners on the same material, it
must inevitably follow that the Commissioners' assessment was not made to the
best of their judgment. In rejecting that submission I said this:
'[32] ... But non
sequitur: on a true analysis all that can be said is that the fact that, on
considering the same material, the tribunal has reached a figure for the VAT
payable which differs from that assessed by the commissioners requires some
explanation. The explanation may be that the tribunal, applying its own
judgment to the same underlying material at the second, or "quantum",
stage of the appeal, has made different assumptions--say, as to food/drink
ratios, wastage or pilferage--from those made by the commissioners. ... Or the
explanation may be that the tribunal is satisfied that the commissioners have made
a mistake--that they have misunderstood or misinterpreted the material which
was before them, adopted a wrong methodology or, more simply, made a
miscalculation in computing the amount of VAT payable from their own figures.
In such cases--of which the present is one--the relevant question is whether
the mistake is consistent with an honest and genuine attempt to make a reasoned
assessment of the VAT payable; or is of such a nature that it compels the
conclusion that no officer seeking to exercise best judgment could have made
it. Or there may be no explanation; in which case the proper inference may be
that the assessment was, indeed arbitrary”.
42. The Appellant in
this Appeal did not make explicit at the outset of the Appeal his case in
respect of HMRC Officers not exercising best judgment. Essentially the
Appellant’s case on best judgment comprised inferences from his perception
about the unreliability of the determinations. In this respect, the Appellant’s
failure to keep proper records was the principal cause for why Officer Gaynor
had to resort to other sources of information for arriving at the figures in
her determinations of unpaid income tax and National Insurance contributions.
Thus the Appellant’s criticisms of Office Gaynor were in a reality a reflection
of his own shortcomings in not keeping proper records.
43. The Tribunal is
satisfied that Officer Gaynor exercised best judgment in respect of the
regulation 80 determination and the section 8 decision. There was no evidence
that she acted dishonestly or capriciously in determining the income tax and
National Insurance contributions due. She based her assessments on the
information supplied by the Appellant and the observations conducted of the
Appellant’s business operations. Finally Officer Gaynor revisited her
determinations when provided with fresh information by the Appellant.
44. The question,
therefore, is the quantum of the determinations. The Appellant argued that the employee
details in the form P46 were correct as were the amount of earnings declared in
the form P14 for each employee. If that was the case the earnings in the
disputed years were below the threshold for the charging of income tax and
National Insurance contributions. The Appellant submitted that his assertion
that family members helped him with the business was supported by the evidence
from his brothers-in-law. The Appellant expressed strong doubts about the
reliability of HMRC’s surveillance of the business premises. He contended that HMRC’s
view of the inside of the premises was obscured by the frosted glass. Finally
the amounts demanded by HMRC had no relationship to the economic realities of
the take away business. HMRC had not enquired into the Appellant’s tax returns
for the years in question, and, therefore, HMRC was not in a position to
challenge the size of the takings declared for the business. According to the
Appellant, HMRC’s calculation of the outstanding arrears presupposed a level
of employees’ earnings which was equivalent to the total takings from the
business, and in those circumstances made no sense.
45. The Tribunal
considers the Appellant’s claim about the authenticity of the information in
forms P14 and P46 must be treated with circumspection. The Appellant was tardy
with complying with HMRC’s requests for the form P46. The figures and dates
recorded in the forms P14 and P46 were not substantiated by supporting records.
The Appellant’s reason for not keeping employees’ records was lame and
unconvincing, particularly as he ignored Officer Gaynor’s requirement which was
made on at least two occasions to keep timesheets for each employee. The
Appellant’s method of paying the wages from cash in the till ensured that no
record of payments could be traced.
46. The evidence
from the Appellant’s employees was equally unconvincing. The Appellant adduced
witness statements from just two of his five employees, only Mr Miran gave oral
testimony. The Tribunal was not impressed with Mr Miran’s testimony. The
Appellant prepared his witness statement and told Mr Miran what was in it. Mr
Miran was unsure when he commenced employment at the Balti King. Mr Miran said in
his witness statement that he worked 18 hours per week but changed this to 16
hours in his oral testimony. He stated that the 18 hours was a typographical
mistake.
47. The Tribunal
considers the outcomes of HMRC’s unannounced visit and surveillance of the
Appellant’s business relevant in that they contradicted the Appellant’s
assertions about the number of people working at the takeaway. The Appellant
stated that there were at least three members of staff including himself
working at the takeaway at any one time and at least four persons including himself
on Friday and Saturday. The visit and the surveillance took place on weekdays when
the HMRC Officers identified at least five people working at the establishment.
Also on the unannounced visit one of the members of staff left the premises
after being spoken to by the Appellant when he saw the HMRC Officers entering
the takeaway, which suggested that the Appellant had something to hide.
48. HMRC did not
challenge the fact that Appellant was dependent upon the unpaid help from
family members to run his business. Officer Gaynor allowed in her calculation
50 hours of unpaid help attributable to the Appellant’s brothers-in-law. HMRC’s
disagreement with the Appellant was about the extent of that help. In this
respect the Appellant did not give a clear account of the help received from
members of his family. In a letter dated 29 April 2008 his accountant said that
the Appellant was unable to recollect accurately the average time worked by his
brothers-in-law at the takeaway. However, he went on to state they were working
regularly between 20 to 40 hours a week, and sometime more depending on
requirement. The accountant in a further letter dated 18 August 2009 contradicted
the information in earlier correspondence when he said that the Appellant’s two
brothers-in-law and his wife made up the remaining 50 hours per week. The
Tribunal heard evidence from three brothers-in-law who all said they worked
regularly in the takeaway business. There was also a witness statement from the
fourth brother-in-law.
49. The Tribunal
accepts that the Appellant received unpaid assistance from members of his
family, and that the family’s input was probably considerable at the beginning
of the business, and more evident on the busy days of Friday and Saturday. The
Tribunal, however, has reservations about the extent of that help during the
week. Three brothers-in-law were in full time employment, whilst the fourth ran
a relatively extensive property business. In the Tribunal’s view, the
commitments of the brothers-in-law to their own jobs and immediate family would
place restrictions on the extent of their help to the Appellant’s business. The
accountant’s letter of 18 August 2009 interestingly mentioned two not four brothers
in law. Whilst the Tribunal considers that Officer Gaynor’s assessment of 50
hours unpaid assistance was about right for business as usual, the Tribunal
decided that some additional recognition should be given for the extra help
from members of family during the start of the business and on the busy days of
Friday and Saturday.
50. The Appellant
placed weight on the fact that HMRC had not enquired into his tax returns for
2006/07 and 2007/08 with the effect that HMRC was stuck with the figures
declared for the takings of the business. In those circumstances the Appellant
argued that the determinations and the assessed sum for employees’ wages were
out of all proportion to the takings and for that reason the determinations
should be struck out as being totally unrealistic. The Appellant also adduced evidence
about general trends on the profitability of food takeaway businesses, and the
proportion of business income allocated to salaries and wages.
51. The Tribunal did
not consider the size of the declared takings pivotal to the outcome of this
Appeal. The central issue in the Appeal was whether the Appellant had
undeclared his expenditure on wages. In this respect the supposed accuracy of
his declared takings was not relevant. The fact that employees’ expenditure may
be disproportionate with the takings from the business may be due to other
factors. The Appellant may not be good at running a business or his business
may be beset with trading difficulties. The evidence showed that this was the
Appellant’s first business venture in the United Kingdom. Also the business
suffered a significant trading loss in its final year.
52. The Tribunal
finds that the Appellant was evasive in his dealings with HMRC on the level of
employees’ wages during the disputed years. Further the Tribunal is satisfied
that the Appellant’s failure to keep adequate records on his employees was
deliberate, which together with the payment of wages in cash established that
the Appellant was concealing the true extent of his liability under PAYE and
National Insurance contributions. Thus the Tribunal decides that the Appellant
has not paid the correct amount of tax and national insurance contributions due
under his responsibilities as an employer of the Balti King.
53. The issue for
the Tribunal is, therefore, to determine the correct amount of the underpayment
without the benefit of accurate records. The Tribunal’s sole reference point
for its examination was the methodology adopted by Officer Gaynor. The
Appellant made no alternative suggestions since his case was based on the
grounds of no liability. Officer Gaynor determined that the total number of
unaccounted hours was 120 hours per week. The Tribunal decides that number of
unaccounted hours should be reduced to 70 hours per week. The reason for the
reduction is that on the evidence the Tribunal considers that there were on
average five people not six people working each day at the take-away. Thus the
Tribunal makes the following adjustment to the table at paragraph 28:
|
Total hours accounted for
|
180
|
|
Total hours to be covered from observations 5 workers x
50 hours
|
250
|
|
Hours not covered by known workers
|
70
|
54. The Tribunal
agrees with Officer Gaynor’s allowance of 50 hours per week each for the Appellant
and the unpaid help from members of his family. The Tribunal’s decision to fix
the number of people at five, however, gives some recognition to the fact that
family members may give extra assistance on the busy days of Friday and
Saturday, which would take the number of people working on those days to six.
The Tribunal determines that the additional help on Fridays and Saturdays from
the sixth person was unpaid.
55. Officer Gaynor
treated the unaccounted hours as attributable to four additional unknown workers
who would not be entitled to a personal allowance for income tax purposes but
would have the benefit of the lower earnings rate for National Insurance
contributions. The Tribunal considers Officer Gaynor used different premises
for the respective calculations of income tax and National Insurance
contribution arrears, which resulted in an inherent contradiction in the
methodologies applied. Essentially she was giving a personal allowance for
National Insurance contributions but not for income tax. Also the Tribunal
considers her assumption of four additional workers did not fit with her
finding of five known employees.
56. The Tribunal
decides that the more appropriate allocation of the unaccounted hours was to
apportion the 70 hours between the five known employees resulting in them
working 30 hours per week as opposed to the 16 hours alleged by the Appellant.
By adopting this approach the calculation of the Appellant’s tax liability was
more accurate with the application of the personal allowance and the 10 per
cent tax rate to the calculation of the income tax arrears, which also
eliminated the inconsistency between the income tax and National Insurance
contribution liabilities. The Tribunal adopts the minimum wage hourly rates as
used by Officer Gaynor in her calculation.
57. The Tribunal
decides upon an effective start date of the five employees as the 5 April 2006.
This acknowledges the Tribunal’s finding that the Appellant required a start up
period to set up his business, and during that time he would have relied upon
the unpaid help from family members. The effect of this decision is that the
Appellant incurred no liability for income tax and National Insurance
contributions in 2005/06.
58. The Tribunal’s
revised computation based on the above findings is set out in Appendix one
attached. The Appellant’s total liability for unpaid tax and National Insurance
contributions for the disputed periods is ₤11,175.20. This
represents a reduction in the Appellant’s assessed liability for income tax but
as small increase in the National Insurance contributions which arises from the
Tribunal’s decision to allocate the unaccounted hours to five employees rather than
four unknown employees.
Decision
59. The Tribunal
decides that the Appellant has not paid the correct amount of tax and national
insurance contributions due under his responsibilities as an employer of the
Balti King. The Tribunal, however, for the reasons given above reduces the regulation
80 determinations and varies the assessment for unpaid class 1 National
Insurance contributions as follows:
(1)
Regulation 80 determination for 2005/06 is reduced to nil.
(2)
Regulation 80 determination for 2006/07 is reduced to £2,094.70.
(3)
Regulation 80 determination for 2007/08 is reduced to £1,907.66.
(4)
The section 8 decision in respect of primary and secondary Class 1
National Insurance contributions for the period 1 December 2005 to 18 February
2008 in respect of the earnings of workers shall be varied to ₤7,172.84.
60. The Tribunal’s
decision results in an overall reduction in the Appellant’s liability for
income tax and National Insurance contributions, and in that respect the
Tribunal allows the Appeal in part.
61. 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.
TRIBUNAL JUDGE
RELEASE DATE: 14.09.2011
