Assuntino Palmiero v Revenue & Customs [2011] UKFTT 755 (TC) (21 November 2011)
[2011] UKFTT 755 (TC)
TC01592
Appeal number: TC/2010/07530
Income
tax – self-assessment and discovery assessments – computation of taxable
profits – whether takings properly recorded – on facts, no – whether various
categories of expenditure deductible – held on facts that approach taken by
HMRC reasonable in circumstances – no basis for adjusting assessments and
amendments made – appeal dismissed
FIRST-TIER TRIBUNAL
TAX
ASSUNTINO
PALMIERO Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
JOHN CLARK (TRIBUNAL JUDGE)
PETER
DAVIES
Sitting in public at 45 Bedford Square, London WC1 on 23 September 2011
Eric Chee, Peter Bradley and
Associates, Chartered Accountants, for the Appellant
John Corbett, Senior Officer
of HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2011
DECISION
1. Mr
Palmiero appeals against closure notices for the years 1998-99, 2002-03,
2003-04, 2004-05, and 2005-06, as well as extended time limit discovery
assessments for the years 1999-2000 and 2000-01, and a normal time limit
discovery assessment for the year 2001-02.
The facts
2. The
evidence consisted of three bundles of documents, two of which were very
substantial, and the other much smaller. Mr Palmiero gave oral evidence, and
Richard Alexander, a Higher Officer of the Respondents (“HMRC”) gave evidence
both by a witness statement and orally. The witnesses were not sworn.
3. Evidence
was given in an informal manner, as the matters covered by the appeals were
considered under a series of category headings, in the manner set out below.
4. From
the evidence we find the following background facts; where matters were
disputed, we consider them later in this decision.
5. Mr
Palmiero’s business trades under the name “Toli Patisserie”. The business
premises are located in Kentish Town Road, opposite the Underground station. The
premises were described by Mr Palmiero’s previous accountants as consisting of
the following:
(1)
A basement, containing toilets for use by customers, store rooms, and a
small office used by Mr Palmiero;
(2)
The ground floor, consisting of a café/restaurant with a sitting area to
the front and a kitchen area to the rear;
(3)
Upper floors divided into two flats, of which Flat A includes a
bathroom/WC, a kitchen, bedroom 2, and a living room with stairs to bedroom 1
on the third floor, and Flat B includes a bathroom/WC, a kitchen, and a living
room with stairs to bedrooms 1 and 2 on the third floor.
6. HMRC
issued enquiry notices under s 9A of the Taxes Management Act 1970 (“TMA 1970”)
on the following dates:
(1)
6 October 2004, in respect of the years 1998-99 and 2002-03;
(2)
1 December 2006, in respect of the years 2003-04 and 2004-05;
(3)
21 December 2007, in respect of the year 2005-06.
7. HMRC
undertook a “full records examination” into the 2002-03 return, which included
the accounts of the business for the year ended 31 December 2002.
8. Mr
Palmiero has been represented by three different accountants. Until January
2009, his accountant was Mr Tan of Richard Benjamin & Co. From January 2009
to June 2009, his accountant was Mr Miguel. From June 2009 onwards, his
accountant has been Mr Chee.
9. On
26 October 2005 Mr Palmiero and Mr Tan attended a meeting with Mrs Patel and Mr
Ginn of HMRC. Mrs Patel asked a series of questions relating to matters under
enquiry. Mr Palmiero provided information on many of the matters raised, but in
a letter dated 4 November 2005 enclosing the notes of the meeting for signature
by Mr Palmiero, Mrs Patel asked for certain further information to be provided
to her. There was no evidence that any copy of the notes was signed by Mr
Palmiero, nor of any amendments of HMRC’s notes being suggested either by Mr
Tan or Mr Palmiero.
10. After further
correspondence, Mrs Patel wrote to Mr Tan’s firm on 26 February 2006. She
considered that progress with the enquiry had been slow, and requested a
meeting in order to move towards a settlement. On 17 May 2007, as there had
been no response despite a statutory notice being issued and penalties being
imposed for non-compliance, Mrs Patel wrote again seeking a settlement; she
made certain proposals, but indicated that if she did not hear within 30 days,
she would issue closure notices and discovery assessments based on the figures
enclosed with her letter.
11. The closure notices
and discovery assessments in respect of all the years except 2005-06 were
issued on 11 July 2007. On 18 September 2007 Mr Tan wrote to Mrs Patel to make
a formal appeal against all the assessments “for the tax years 2000 to 2005
inclusive”. No grounds of appeal were stated in his letter. Very much later, on
30 July 2008, Mr Palmiero wrote to Mrs Patel making a late appeal in respect of
the year 1998-99. He explained that the problem he was in had accumulated for
years without his knowledge; if he had been aware of it right at the outset, it
would have been much easier for him to tackle it.
12. On 24 October
2007, Mr Palmiero and Mr Tan attended a meeting with Mrs Patel and Mr Yarde of
HMRC. Mrs Patel dealt with various specific matters relating to the accounts,
and requested further information, stating that if this was not received within
two weeks, the case would have to be listed for a personal hearing at the next
General Commissioners’ meeting.
13. On 12 March
2008, Mrs Patel wrote to Mr Tan to indicate that although she did not accept
certain figures, she had decided on a without prejudice basis not to pursue
those points; she enclosed a revised schedule of figures for acceptance, and in
the absence of a response, she would assume his agreement.
14. On 1 April 2008
Mr Tan telephoned Mrs Patel about her letter. He explained that although he
could agree the proposed figures, Mr Palmiero now did not accept them, having
seen the amount of tax which he would have to pay. Mr Tan explained that if Mr
Palmiero now wished to dispute the figures, he (Mr Tan) would no longer act for
Mr Palmiero.
15. Further
correspondence did take place between Mr Tan and Mrs Patel. By early 2009,
however, Mr Tan was no longer involved. On 10 February 2009, Mr Palmiero and Mr
Miguel attended a meeting with Mr Alexander and Mr Turner of HMRC. Following
that meeting, Mr Alexander wrote to Mr Palmiero to set out proposals for
settling the outstanding matters.
16. Following the
appointment of Mr Chee, Mr Alexander wrote to him on 26 June 2009 enclosing
copies of the relevant correspondence since the enquiry started. Correspondence
relating to the various years under enquiry continued.
17. After exchanges
of correspondence, Mr Alexander wrote to Mr Chee on 19 November 2009,
explaining that an agreed settlement looked unlikely; it seemed that a formal
review and/or a Tribunal hearing would be necessary. Mr Alexander attached a
schedule setting out the basis for the revised profit figures which he was
proposing. He set out detailed explanations for his conclusions.
18. On behalf of Mr
Palmiero, Mr Chee made a late appeal on 9 April 2010 against the 2005-06
assessment made on 10 June 2009, on the grounds that it had been raised
“incorrectly”.
19. A late request
for review of the appeals for all the years in question was accepted by Mr
Alexander on 13 July 2010. He pointed out that no appeal had been made against
a penalty determination issued on 8 February 2010, and asked that if Mr
Palmiero wished to make a late appeal, this should be dealt with immediately.
20. On 16 August
2010 the review officer, Mr Agg, wrote to Mr Chee’s firm enclosing a copy of the
letter of the same date to Mr Palmiero setting out the results of the review.
In the covering letter, Mr Agg noted that no appeal had been received against
the penalty determination, which had therefore become final and conclusive. It
had not therefore been included in the review. Mr Agg’s conclusion was that the
various decisions under appeal should be amended to the amounts set out in Mr
Alexander’s letter of 19 November 2009. Mr Agg set out the detailed reasons for
the changes, and his comments on them.
21. On 16 September
2010, Mr Chee gave Notice of Appeal to the Tribunals service. Subsequently, further
correspondence was exchanged between Mr Chee and HMRC to try and negotiate a
settlement, but HMRC’s final adjustments remained as set out in the letter from
Mr Alexander dated 19 November 2009. As no agreement was reached, the appeal
proceeded. The grounds and the detailed matters raised in the course of the
hearing are considered below.
Arguments for Mr Palmiero
22. Mr Chee
explained that he had previously acted for Mr Palmiero for a number of years
until April 2000, when Mr Chee had retired from practice and retired from
providing accountancy work and taxation services. Mr Palmiero had met Mr Chee
at a funeral a couple of years ago, and Mr Palmiero had asked for Mr Chee’s
help because Mr Palmiero’s previous accountant had “let him down”.
23. It had not been
possible to obtain from the accountant the data required to support the various
items of expenditure claimed in the accounts. Attempts had been made through
the professional body to which that accountant belonged to make arrangements
for the supply of the relevant information. Mr Chee was sure that, once the
information was forthcoming, the allowability of the items of expenditure could
be determined. For the purposes of the appeal hearing, Mr Chee had to reserve
his comments at this point in time, until the previous accountant could be
forced by his professional body to produce the information.
24. Mr Chee reviewed
the various items of expenditure in dispute, as well as the records of the
takings of the business. If there had been any mistakes with the recording of
the takings, these were genuine mistakes.
25. Mr Chee produced
photographs of the state of the building. As these did not constitute formal
agreed evidence, we looked at them and handed them back; the photographs did
not contain any identifying marks or other means of linking them specifically
to the premises at which the business operated.
26. Mr Chee explained
that once he had received and examined the bundles, he had concluded that there
was a great deal which he could not understand without the additional data
being sought from the previous accountant, so he wanted to reserve the issue.
We commented on this at the hearing; see below.
27. Mr Chee
contended that Mr Palmiero had not been negligent; his declarations had been
accurate, based on his takings. The accounts had been prepared by a
professional accountant. There was no merit in Mr Palmiero not declaring
income. Any mistakes that had been made were accidental, and attributable to
employees, whom Mr Palmiero could not control for every minute of their working
time.
28. He emphasised
that Mr Palmiero was open to co-operation; HMRC could visit his premises at any
time.
29. Mr Chee and his
client were adamant that the repairs should be an allowable expense; Mr
Palmiero had been working on the shop, which was why he had not completed the
work on the flats.
30. Apportionment of
the expenditure was strongly opposed; the only items relating to the flats were
the roof, and double glazed windows to prevent weather damage to the whole
property. The upstairs had not been flats when bought; it had not been possible
to get into the upstairs except through the shop. Initially there had been no
stairs.
31. He referred to
Mr Palmiero’s financial position and lifestyle; we comment on these matters
below. Mr Chee submitted that, if anything, Mr Palmiero had been a victim of
circumstances and bad accountancy.
Arguments for HMRC
32. In relation to
the seeking of the information from the previous accountant, Mr Tan, Mr Corbett
pointed out that Mr Chee had not contacted the professional body concerned
until 18 September 2011. Mr Chee intervened to explain that Mr Tan had been
promising to forward the papers, but that he (Mr Chee) had ultimately decided
that there was no choice but to go to that body, which was now investigating
the matter.
33. Mr Corbett
explained that Mr Alexander had prepared the assessments on the basis of the
same records as those held by the previous accountants. He questioned why the
previous accountants had not noticed the drawings. There might be a question of
a negligence claim, but this was nothing to do with the appeal before the
Tribunal.
34. Mr Corbett
reviewed the disputed items of expenditure and the recording of takings. In the
course of his presentation of HMRC’s case, he put questions to Mr Palmiero and
to Mr Alexander on these issues (considered below).
35. The legislation
in question was s 74(1) of the Income and Corporation Taxes Act 1988 (“ICTA
1988”), subsequently s 34(1) of the Income Tax (Trading and Other Income) Act
2005 (“ITTOIA 2005”). HMRC also relied on s 29 of the Taxes Management Act 1970
(“TMA 1970”). The time limits for “discovery” assessments were set out in s 36
TMA 1970. Mr Corbett submitted that there was negligent conduct; the records
were not robust enough to show the income, and various items claimed as
business expenditure did not qualify under the statutory test. A revised figure
was proposed for the assessment for the year ending 5 April 2003, but all the
other years’ assessments should remain unchanged.
Discussion and conclusions
36. Mr Chee referred
to the additional information being sought from Mr Tan, the previous
accountant. Mr Chee wished to reserve the position at this stage pending the
obtaining of that information. However, as we explained at the hearing, the
appeals are before us for determination, and our powers are limited. Under s
50(6) and (7) TMA 1970, if the Tribunal decides that an assessment overcharges
or undercharges the taxpayer, the Tribunal must reduce (or increase) the
assessment,
“. . . but otherwise the assessment or statement
shall stand good.”
37. It is therefore
the task of Mr Palmiero and Mr Chee, his adviser, to satisfy us that there are
reasons for reducing the assessments. In other words, the onus of proof falls
on the taxpayer. The standard of proof is the ordinary civil standard, ie the
balance of probabilities. Unless there is evidence to establish the existence of
any such reasons, we are not in a position to adjust the assessments. We have
considered whether this is an appropriate case for the appeal hearing to be
adjourned to enable that information to be obtained. Our conclusion is that it
is not; the enquiries have already continued for an extended period, and the
appeals need to be determined at this stage rather than being subjected to
further delay. We therefore consider the appeals in the light of the evidence
put before us.
38. The matters in
dispute can be divided into two broad areas. The first is whether there was omission
of income as a result of inaccurate or incomplete recording of takings. The
second is whether various items claimed as business expenditure are allowable
in computing the taxable profits of Mr Palmiero’s business. We consider each of
these areas in detail.
Recording of takings
39. At the meeting
with Mrs Patel and Mr Ginn of HMRC on 26 October 2005, Mrs Patel asked Mr
Palmiero who did the cashing up at the end of each day and whether the “Z” reading
was reconciled with the cash in the till. Mr Palmiero said that he usually
cashed up at the end of the day, and that he would compare the Z reading to the
cash in the till. He said that the two usually did agree; there were occasions
when they did not, but the difference was normally a few pounds. On occasions
the difference could be more than £40, but this was very rare. Mr Palmiero said
that he put such discrepancies down to errors in keying the prices into the
till. Where there was a discrepancy, Mr Palmiero would change the figure on the
Z reading by hand, and therefore the figures entered into his diary record were
correct. He did not keep records of these discrepancies.
40. At the hearing
Mr Chee explained that Mr Palmiero was not knowledgeable enough on the subject
of Z readings to be able to reconcile the readings with the takings. It would
be necessary to go through the whole of the records. Instead, Mr Palmiero
counted the cash every day to match the total takings for each day. The first
machine had been faulty and had been replaced; the Z total on the second
machine had never been cleared when Mr Palmiero had begun to use it, nor had it
been cleared every day or every week.
41. Mr Corbett asked
Mr Palmiero about annotations on the Z readings included in the evidence. Mr
Palmiero explained that these had been added two years ago when he had found
out about an “over-ring”. He and Mr Chee both stated that when the relevant
button on the till was pressed in order to obtain an “X” reading, this put the
day total number up and so affected the Z reading.
42. Mr Corbett
explained to us the distinction between the Z and the X keys. The Z readings
were not tied to time; they would usually be taken at the end of the day. There
were two types of Z reading. X readings were interim readings, which had their
own sequence of numbers; they were not Z readings.
43. Mr Palmiero
stated that he used the cash takings figure “religiously”, but in response to
our question, indicated that he did not look at the Z readings; he only reconciled
the “Total” figure with the cash.
44. When asked
whether some of the “TL” readings were missing, he said that he had produced as
much as he could.
45. Mr Alexander
indicated that missing till rolls implied missing takings, and gave detailed
examples of cases where there had been scope for undeclared takings to have
been made in periods between the dates and times of some of the till rolls
provided. The records showed a cumulative discrepancy. The period in January
2002 had been chosen because it was the period for which there were the most
takings readings; he therefore considered it reasonable to use that month. For
that month the figure declared in the records was the same as that shown by the
recorded Z reading, so this suggested to Mr Alexander that there was no
difference between the reading and the cash counted by Mr Palmiero.
46. Mr Alexander
stated that Mrs Patel had showed Mr Palmiero a schedule of Z readings for the
month of January 2002 and that the missing Z readings over the month had
totalled £2,500; she had expressed the opinion that takings had therefore been
omitted. She had said that not all Z readings had been retained despite Mr
Palmiero having been asked to do so following an earlier enquiry in 1997; Mr
Palmiero had stated that he had “lost” those which he had not been able to
provide.
47. In Mr
Alexander’s letter dated 19 November 2009 to Mr Palmiero explaining the
position which HMRC would take in a Tribunal hearing, Mr Alexander had
expressed his concerns in relation to the omitted Z readings and explained why
he could not accept the explanations which had been put forward by Mr Palmiero
and his advisers. Mr Palmiero stated that the transactions covered by the
omitted Z readings were all either staff theft or staff mis-keying amounts on
the till. Mr Alexander had not found this credible, as he would have expected
Mr Palmiero to have noticed such a level of theft (£2,500 a month) occurring at
specific times where Z readings were missing.
48. In addition, it
did not seem reasonable to Mr Alexander that every transaction in the omitted Z
readings could be a result of mis-keying. The fact that all of the declared
takings for January 2002 matched the recorded Z readings suggested that there
were no mis-keyings or thefts in those periods. In his opinion, it was
reasonable to say that the omitted Z readings did reflect undeclared takings.
Some of the missing readings followed on from times where the previous Z
reading had been taken before the café closed. This meant that there was scope
for takings to have been made during the time covered by the missing Z readings
(and recorded on those readings), and therefore to go undeclared. Although Mr
Palmiero explained at the hearing that he had started to take Z readings
earlier in the day as no customers were coming in later (he had started to
close at 5 pm rather than staying open until 7 pm) and that any later takings
would go into the takings for the next day, we do not find that to be a
sufficient explanation for the gaps between the Z readings provided.
49. Mr Alexander
explained in his letter that he would use the earlier finding by Mrs Patel that
£2,500 had been missed for January 2002, which would give £30,000 for the year.
50. Mr Chee had
previously challenged that conclusion on the grounds that if Mr Palmiero and
his family had had the use of an extra £30,000, they would not have had to live
with his parents. In his letter, Mr Alexander referred to a cash control
account which he had prepared for the relevant year based on the business
income and spending, which included the declared drawings of £9,369; this
showed a cash shortfall of over £11,000 just to meet the declared spending.
Thus not all of the £30,000 had been taken by Mr Palmiero for his own personal
use.
51. The revised
gross profit ratio (GPR) for 2002-03 on the basis of Mr Alexander’s figures was
now 66 per cent. Mr Alexander stated that this should be applied to all the
years, as the figures which Mr Palmiero had declared in his returns showed this
GPR to be achievable; Mr Alexander felt that this gave realistic business
results.
52. At the hearing
we reviewed in detail the relationship between various Z readings for the month
of January 2002. Taking in to account the results of that review and our
examination of the evidence since the hearing, we conclude that the method used
by HMRC for arriving at the revised profit figure for that month was a
reasonable approach to adopt, in particular having regard to the comparison
between the GPR for that month and the GPR achieved for other periods. We do
not propose to set out in detail in this decision any record of the process of
reviewing the relationship between the till roll readings, as this process took
place at the hearing in the presence of the parties. We confirm that as a
result of that process, we are satisfied that the missing till rolls included
takings which were not included in the profits declared in Mr Palmiero’s
2002-03 return. We accept Mr Alexander’s description of the discrepancy of
£30,750 for that year as “a conservative figure”, and therefore consider it to
be reasonable.
Disputed expenditure
53. The first
category of expenditure was repairs to the property. Mr Palmiero had stated to
Mrs Patel in October 2005 that he had bought the property in January 1998 and
that this was the whole property, ie shop and flats. In a letter to HMRC dated
9 January 2006, Mr Tan had stated that the last receipts of rent were in
September 1999.
54. After this, the
flats had been “taken back to a shell”, and Mr Palmiero had spent time when
available on refurbishment. The flats were not in an inhabitable state during
the period covered by the assessments (and we understand that they remained
incomplete as at the time of the hearing). Both gas and electricity had been
turned off.
55. Mr Palmiero
stated at the hearing that the rooms upstairs were always connected to the
downstairs premises; they were used for storing rubbish and stock. The gas and
electricity had been turned off ten years ago; he had been hoping that they
would be ready in 2009, but he had never managed to finish them. The rooms were
not fit for living in; there was no kitchen and no water. When they were
finished, he intended to use them as part of his business, and let a room. On
occasions employees had used the flats to stay in. It had been his intention to
live in the upstairs part of the premises, but he had continued to live with
his father. He stated that he was investing all his money in the building.
56. Mr Corbett
submitted that the flats had been expected to be let for a combined rent, and
that they were investment properties; the intention had been to let them once
complete. The premises were distinct and had a separate entrance at the back;
what Mr Palmiero had bought was a business with two investment flats.
57. All the
expenditure on the building had been claimed as expenditure of the business. In
2007 Mrs Patel had disallowed two thirds of the expenditure on repairs on the
basis that it related to the flats and therefore was not business expenditure.
This had been her best estimate in the absence of all invoices and any evidence
from Mr Palmiero that the repairs related to the café. Subsequently Mr Tan sent
a letter enclosing a schedule breaking down the expenditure and allocating it
to the respective parts of the building, the proportion claimed as attributable
to the café being 62 per cent. HMRC did not ultimately accept this proposal.
Attempts from October 2007 until June 2009 to reach some form of agreement on
the issue were unsuccessful.
58. In his letter of
19 November 2009 Mr Alexander indicated that there was no evidence of staff
living in the flats, and that the last known residents as shown by the
electoral roll were non-employees. He rejected the claim that the flats were
being used to store stock and business records, as he could not accept that
thousands of pounds in repairs would have been spent for this reason. He also
explained that Mr Palmiero’s intentions for the flats were also a factor in
deciding whether expenditure on repairs should be allowed. Mr Chee had
previously said that Mr Palmiero was “undecided” as to whether the flats would
be let commercially. On that basis, Mr Alexander said that the intention of the
repairs could not be said to be “wholly and exclusively” for trading as a café.
He concluded that disallowing two thirds of the balance (after adjusting for
repairs which could be specifically identified as having been carried out to
the café or the flats respectively) appeared to be reasonable in line with the
facts, and that this approach would apply to all the years, as the repairs had
been ongoing since 2000. In his witness statement he indicated that this
remained his view.
59. The two
thirds/one third split referred to by Mr Alexander needs to be qualified. For
2002-03, expenditure was incurred on repairs to the roof of the premises. HMRC
accepted that 50 per cent of this expenditure was attributable to the flats and
50 per cent to the café. This was taken into account in the adjustments made by
HMRC. At the hearing a revised total of allowable repairs was put before us;
this amounted to £9,988 for that year.
60. At the hearing,
Mr Palmiero indicated that he had been able to function straight away with his
business; he had opened straight away, and carried out some refurbishment
later. He stated that he had had to concentrate on the business, and when he could,
he had worked on the upstairs. In relation to the café, he had extended the
back and installed an oven. In the basement he had refurbished the toilets. He
had worked on building up the floor. He had dealt with the ceiling,
plasterboard and walls. He had put in a mezzanine sitting area. The extension
had been built out with a flat roof. There was a new kitchen, new equipment and
counters. The roof to the whole building had had to be replaced. He put the
percentage of the expenditure attributable to the business at 80 per cent.
61. He was unable to
produce invoices for anything other than the plasterboard and timber. There had
been three ceilings to knock down. In response to Mr Corbett’s comment that
there had been no reference to this in any of the correspondence, Mr Palmiero said
that all the expenditure was shown on invoices.
62. On the basis of
the evidence before us, and despite Mr Palmiero’s indications at the hearing,
we do not think that the case for an alternative split between the expenditure
on the café and that on the flats has been made out; far more detailed and
specific evidence would have been necessary to establish this. Further, we are
not satisfied that the repairs to the upstairs part of the premises were wholly
and exclusively for the purposes of Mr Palmiero’s business. The flats were held
as investment properties at the time of his original purchase, and no
sufficient evidence has been established of any change to the premises
justifying a conclusion that their character was changed by the subsequent work
carried out on the upstairs part of the premises. We do not consider that Mr
Palmiero has established any alternative basis for allocating the expenditure,
and therefore we accept the allocation made by HMRC as reasonable in all the
circumstances, given the difficulty of establishing what specific items of
expenditure were incurred on particular parts of the premises; Mr Alexander
pointed out that many of the invoices were “generic”, which we find
unsurprising given that much of the work was carried out by Mr Palmiero
personally and that to a large extent the invoices related to the supply of
materials.
63. The second
category of expenditure was that incurred on the mortgage loans. Mr Alexander
explained that in the accounts for the year to 31 December 2002, mortgage
interest of £9,638 had been claimed. At the meeting in October 2005, Mrs Patel
had stated that from reviewing the mortgage statement, the claimed mortgage
interest was based on the whole property, and not just the café. She explained that
it would have to be apportioned so that only the interest relating to the café
was included in the café accounts. Mr Alexander commented that the percentage
relating to the flats could not be claimed for as it was not “wholly and
exclusively” used for business purposes.
64. Following the
appeals against the assessments and amendments to assessments, attempts were
made over a period of 18 months to agree an apportionment. On 10 June 2009 Mr
Alexander closed his check of the 2005-06 return and disallowed mortgage
interest on the same basis as for the accounting year to 31 December 2002.
65. In his letter
dated 19 November 2009 to Mr Palmiero and Mr Chee, Mr Alexander explained
HMRC’s position relating to the mortgage interest. At the meeting in October
2007, Mr Palmiero had explained that two loans had been taken. The original
loan was to buy the whole property in the first place, and the second was
obtained in 1999 to fund the repairs. Mr Tan had agreed that the interest
should be split 50-50, so that one half would be allowable. In Mr Alexander’s
later consideration of the position as set out in his November 2009 letter, he
concluded that on the basis of the division of the floor space between the café
and the flats (as indicated by Mr Palmiero), a 50-50 split was justifiable, so
that half of the interest payments on the original loan could be allowed in the
café accounts.
66. In relation to
the further loan of £90,000, Mr Alexander decided that as the repair receipts
had not been seen and therefore it was not clear exactly what the additional
loan had funded, he would allow one third of the interest in the café accounts,
in accordance with his comments on “repairs”.
67. Having
considered the information and arguments put forward in correspondence by Mr
Palmiero and his advisers and the limited information provided on the subject
at the hearing, we find that there was nothing to justify departing from the
apportionments of mortgage interest arrived at by Mr Alexander. We consider the
approach adopted by him to be reasonable in the circumstances, given the
absence of sufficiently specific information on the detailed nature of the
repair work undertaken. We also accept that the overall 50-50 split approach
based on the respective floor areas of the café and the flats was reasonable in
respect of the original loan, and that for the later loan, the attribution of
two thirds of the interest to the flats and one third to the café was also
reasonable.
68. The next
category of expenditure was rent and rates. At earlier stages these had been
dealt with on an accruals basis, but Mrs Patel found that in the accounts for
the year to 31 December 2002 they had been claimed on a “paid” basis. As this
would have included amounts claimed for earlier years, she requested
calculations of the claims for the earlier years to 31 December 2001. As it had
not been possible for Mr Tan’s firm to establish how those claims had been
calculated, Mrs Patel calculated the amounts to be allowed for all years in
accordance with the figures set out in a letter from Mr Tan’s firm dated 9
January 2006.
69. In his letter
dated 19 December 2009 Mr Alexander gave details of the amounts considered by
HMRC to be allowable. These were the figures allowed by Mrs Patel, but adjusted
to allow water rates in accordance with a letter from Mr Tan’s firm dated 8
November 2007.
70. We do not
consider that there is any evidence to justify departing from the approach set
out in Mr Alexander’s letter.
71. The next
category is expenditure on insurance. In the accounts for the year to 31
December 2002, an amount of £3,354 was claimed for insurance premiums. On
consideration of the detailed documentation, Mrs Patel concluded that premiums
paid for life, accident and sickness cover could not be claimed for, as they
were personal rather than business expenses. She further concluded that only 50
per cent of the buildings insurance was allowable, as only half of the premises
was used for trading as a café. Mr Alexander followed this approach in respect
of 2005-06.
72. At the hearing,
Mr Palmiero stated that he had had to pay the premiums for the insurance covering
life, accident and sickness, as otherwise the bank would not have lent the
money. Although we accept that this was the case, the expenditure still has to
be subjected to the statutory test; was it wholly and exclusively for the
purposes of the business? We find that it was not. In particular, it was partly
attributable to the element of the loan applied to the work on the flats.
Further, any proceeds of the insurance would not normally be expected to be
included in the profits of the business. The fact that in practice the
insurance was an essential step in obtaining finance is not in itself enough to
establish that the statutory test is met.
73. We consider
HMRC’s approach to the deductibility or otherwise of the insurance premiums to
have been a reasonable one to adopt.
74. In relation to
telephone expenditure, Mrs Patel had disallowed 40 per cent. Mr Alexander had
reconsidered this and concluded that a disallowance for private use of 10 per
cent was appropriate, taking account of Mr Palmiero’s own view as expressed to
Mr Tan’s firm. We therefore accept this as a suitable basis for apportioning
the expenditure.
75. One item which
had been claimed as a business expense in the accounts to 31 December 2001 was
a bad debt of £9,589. Mr Alexander explained that this was owed to Mr Palmiero
by a company named TNT Records Ltd, with which Mr Palmiero had been involved.
He had incurred costs, and the company had then ceased trading owing him this
sum. Mrs Patel stated in August 2006 that as the debt was not related to the
café business, it could not be claimed for in the latter’s accounts. Attempts
were made to agree proposals for a settlement of the disputed deductibility
claim, but these were unsuccessful, and Mr Alexander’s view remained that the
debt was not allowable. At the hearing, Mr Palmiero conceded that the debt
related to a separate activity. We therefore find that it was not deductible in
computing the profits of the café business.
76. A further
category of expenditure was additional wages not claimed for. At the meeting in
February 2009, Mr Palmiero showed Mr Alexander the diary for the year to 31
December 2002 into which he had written down wages paid out. The diary showed
that wages had been paid to people hired to carry out the repairs to the
building. This totalled £5,294, but the costs had not been claimed in the
accounts.
77. In his letter
dated 19 November 2009, Mr Alexander confirmed that he would allow one third of
that amount as additional expenses; the one third reflected the percentage of
repairs to be attributed to the café business. On the basis that wages would
have been paid since the repairs started at some time around 2000, Mr Alexander
stated that he would also allow similar amounts in the accounts for all years
for which a Tribunal appeal might apply. This remained his view. We accept this
approach as fair and reasonable in the circumstances.
78. The remaining
category of expenditure is drawings claimed as wages. At the meeting with Mrs
Patel on 26 October 2005, Mr Palmiero explained that in his petty cash book he
recorded “wages”, which included not only wages paid to employees but also his
own drawings from the business. Mrs Patel proposed adjustments to 2002-03 and
to other years. Following correspondence, Mr Alexander accepted that the only
year requiring amendment to take account of this was the accounting year to 31
December 2002 (ie 2002-03).
79. At the hearing
Mr Palmiero stated that he “invested” all his money in the building. We are
satisfied that the percentage of expenditure deductible as “repairs” is one
third, as explained above. Whatever Mr Palmiero’s cash flow position, we do not
consider that there is any justification for additional expenditure over and
above what we have accepted above as allowable. We agree that the conclusion
reached by Mr Alexander in respect of drawings for the year ending 31 December
2002 is reasonable in the light of the circumstances and the information
available.
Conclusion on expenditure
80. Our overall
conclusion relating to the expenditure is that there is no evidence to suggest
that the approach taken by HMRC should be adjusted in any way.
81. At the hearing
there was some consideration of the expenditure on the café part of the
premises and whether any of the items might be capital in nature. In the
interests of settling a long outstanding matter, we consider that the treatment
of the expenditure should remain as already taken into account in arriving at
the amounts of the assessments and adjustments. Reopening the question of the
nature of the expenditure would open up the further question whether, if it was
capital, any expenditure would have qualified for capital allowances. We do not
consider such a revision to be appropriate at this stage.
Conclusion on level of income
82. We are satisfied
that the calculation of the income of the café business has been carried out by
HMRC in a manner justifiable in the circumstances. We do not consider that any
evidence has been established to disturb the approach adopted.
83. Reference was
made to Mr Palmiero’s general financial position, and to the facts both that he
has continued to live at home, and that he does not own a motor car. Without a
great deal of background financial information, we do not consider that we can
arrive at any conclusions based on his statements as to his position. In
relation to the question of the car, we note that in the accounts to 31
December 2002, there is an item in the profit and loss account for a modest
amount in respect of depreciation of a motor car, which is shown in the balance
sheet as having cost £1,200, and after depreciation is included at £540, and
that in the income tax computations the private use of the motor car is shown
as 25 per cent. As we have not seen accounts for other periods (because they
were not included in the already substantial documentary evidence), we have no
way of establishing whether that vehicle was disposed of, or, if it was,
whether at any subsequent point a replacement was acquired. This question
illustrates the difficulty of arriving at conclusions as to Mr Palmiero’s
financial position and lifestyle in the absence of sufficient financial
information. We therefore make no findings as to his general financial
position.
Overall conclusions
84. We find that the
assessments and adjustments to assessments were properly made by HMRC, and that
there is no evidence justifying our making any adjustments to the amounts
assessed as set out on the last page of HMRC’s Skeleton Argument. (We do not
reproduce here the table setting out in respect of all the relevant years the
amounts originally assessed, the revised amounts of the assessments, and the
differences between those amounts for each year concerned.) However, Mr Corbett
did state that the assessment for the year to 5 April 2003 required to be
revised from the amount set out in the closure notice dated 11 July 2007. The
amount should be amended from £19,125.99 to 18,760.44, the amount originally
assessed being shown as £0.00.
85. We agree that
the discovery assessments were justified on the basis of the “presumption of
continuity”, as referred to by Walton J in Jonas v Bamford (1973) 51 TC
1 at 25. We also accept that there was a loss of tax and negligent conduct on
Mr Palmiero’s part, in that his returns did not truly reflect the profits made
in his business.
86. In the light of
our findings, Mr Palmiero’s appeal is dismissed.
Right to apply for permission to appeal
87. 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.
JOHN CLARK
TRIBUNAL JUDGE
RELEASE DATE: 21 NOVEMBER 2011
