[2012] UKFTT 694 (TC)
TC02363
Appeal number:
TC/2010/04064
Income Tax - Closure Notice - Discovery Assessments -
Penalties - whether sufficient disclosure made by appellant - whether
oppressive demands made
FIRST-TIER TRIBUNAL
TAX CHAMBER
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MICHAEL J RAYNER
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE W D F COVERDALE
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MR R PRESHO
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Sitting in public at North
Shields on 20th January 2011
The Appellant in person
Mr JI Daley, Officer of HMRC
for the Respondents
© CROWN COPYRIGHT
2012
DECISION
1.
The Appellant Mr Michael Rayner is a solicitor practising from offices
in Darlington. He submitted his Self Assessment Income Tax Return for the year
ended 05.04.2007 and this was received by HMRC on 02.10.2007. It included
details of his solicitor’s practice income and expenditure for the accounting
year ending on 01.04.2007.
2.
HMRC selected Mr Rayner’s Self Assessment Return for an enquiry in
accordance with Section 9A Taxes Management Act 1970 and an opening Enquiry
letter was issued on 01.08.2008 asking for information, analyses and supporting
business documentation for all amounts declared as business income and
expenditure.
3.
The requested information not having been forthcoming by 15.09.2008 a
formal request letter was issued in accordance with S19A Taxes Management Act
1970. This letter warned Mr Rayner of the possibility of penalties if the
information and documents were not provided. Mr Rayner did not appeal against
the S19A Notice.
4.
On 15.01.2009 a final penalty warning letter was issued informing Mr
Rayner that the continued failure to provide the requested information and
documents could result in an initial penalty of £50 under S97AA Taxes
Management Act 1970.
5.
In a letter dated 27.02.2009 Mr Rayner provided some explanation of the
business accounts entries but no analyses or documents were supplied. HMRC took
the view that the explanations and information that were provided suggested
that income had been omitted for the period 01.01.2006 to 01.04.2006 and that
the business account details in the 2006/07 Return were either based on
estimates or were not fully supported by records. In a letter dated 23.03.2009
HMRC requested documentary evidence to support the accuracy of the declared
business income and the amounts of expenses being claimed.
6.
Mr Rayner’s response was that he was reluctant to provide any documents
to HMRC. He had a large number of reasons for this attitude (and further
reference will be made to these below) and there was then correspondence
between him and HMRC which attempted to break the impasse that had apparently
occurred. Agreement could not be reached as to the manner of disclosure or
indeed as the requirement for disclosure at all and on 19.05.2009, some nine
months after the Enquiry had opened, an Initial Penalty of £50 was imposed
under S97AA Taxes Management Act 1970.
7.
Mr Rayner appealed against the £50 penalty by letter dated 09.06.2009;
the letter did not specify the grounds of appeal but concentrated upon
allegations of misconduct by the officer conducting the enquiry and indicated
that he would complain “to the ombudsman”.
8.
Having been requested to do so by HMRC (letter dated 16.06.2009) Mr
Rayner gave further details of the basis of his appeal in a longer letter dated
19.06.2009: it was said that “the notice was invalid as the information
contained in it was incorrect and false”; reference was made to the alleged
deliberate loss of documentation by HMRC; Mr Rayner maintained that HMRC was motivated
by malice towards him.
9.
On 24.09.2009, in the continuing absence of the requested documentation
and information, a Daily Penalty Notice was issued in the sum of £640. Mr
Rayner had evidently failed to refer his 09.06.2009 appeal to the Tribunals Service
despite having been given full details of the appeals procedure in a letter
from HMRC dated 10.07.2009; no issue about that has been taken and the Tribunal
is prepared to admit that appeal and deal with it today.
10.
The Daily Penalty charge was based on a penalty of £5 per day for a 128
day period covering 20.05.2009 to 23.09.2009.
11.
In subsequent correspondence Mr Rayner alleged that he did not receive
the Daily Penalty Notice dated 24.09.2009.
12.
On 01.12.2009 HMRC wrote to Mr Rayner informing him that it was intended
to bring the Enquiry to a close by amending amounts of expenditure which had
not been justified by information or documents; the proposed amendments would
be invoked if the required information and documents were not submitted within
30 days of 01.12.2009.
13.
In response to a letter from Mr Rayner (mistakenly dated 27.02.2009)
received by HMRC on 30.12.2009 a decision was made by HMRC on 24.02.2010
(presumably in the interests of fairness) to transfer the enquiry to a more
senior officer. It was stressed that “this in no way reflects upon the work
that [the enquiry officer] has done which as far as I can see has on his part
been conducted professionally and in accordance with normal HMRC procedures”.
14.
The replacement officer, having reviewed the case, informed Mr Rayner by
letter dated 09.03.2010, that she intended to issue a Closure Notice for the
year ended 05.04.2007 and to make discovery assessments for the years 2003/04.
2004/05 and 2005/06 in the amounts stated in the letter dated 01.12.2009 (mentioned
in paragraph 12 above). The assessments and the Closure Notices were issued on
15.03.2010.
15.
On 16.04 2010 Mr Rayner submitted an Appeal to the Tribunals Service. In
summary the Assessments under appeal today are as follows:
2006/07
Closure Notice Tax £3,086.34
2005/06
Discovery Assessment Tax £3,300.00
2004/05
Discovery Assessment Tax £2732.00
2003/04
Discovery Assessment Tax £3280.00
19.05.2009
£50 Initial Penalty under S97AA & 100 Taxes Management Act 1970
24.09.2009
£640 Daily Penalties under S97AA & 100 Taxes Management Act 1970
16.
HMRC correctly observes, therefore, that the points at issue in today’s
appeal are:
1.) Whether business
income and expenditure for the years 2003/04, 2004/05, 2005/06 and 2006/07, as
declared by Mr Rayner in Self Assessment Returns for those years, are correct
and complete and can be fully supported by documentary evidence.
2.) Whether an Initial
Penalty of £50 and subsequent Daily Penalties of £640 have been validly charged
due to Mr Rayner’s failure to comply with a formal notice for Information and
Documents issued under S19A Taxes Management Act 1970.
17.
Mr Rayner’s position is set out in his Notice of Appeal dated
16.04.2010. In summary he says that:
1.) He contends that there
was some defect in information supplied in the context of the appeal process
relating to the Initial Penalty of £50.
2.) He denies that he received
the Daily Penalty Notice dated 24.09.2009.
3.) With regard to the
Closure Notice and Discovery Assessments covering the years 2003/04, 2004/05,
2005/06 and 2006/07 he contends that HMRC are not prepared to give an
undertaking to pay any replacement costs for documents that may be lost by
HMRC; he says that he would not be able to afford to pay for replacement
documents. He says that as a consequence of his failure to produce his
documents, which was deemed to be a refusal, he was reassessed for the year 2006/07
and “acting out of spite” HMRC reopened his claims for the previous three years
and reassessed them.
4.) Mr Rayner then goes on
to make a number of personal comments and allegations against HMRC staff and
suggests that there has been bad faith in dealing with his tax affairs.
18.
With regard to the appeal process relating to the Initial Penalty Notice
for £50 dated 19.05.2009 Mr Rayner has not pursued any complaint about this in
his submissions to the Tribunal today. It is acknowledged that the appeal relates
to this penalty and it has already been noted in Paragraph that the matter is
before the Tribunal. Further reference will be made to this penalty in the
context of the Tribunal’s findings and determinations in respect of the
substance of this appeal.
19.
It is apparent that a Daily Penalty Notice in the sum of £640 was sent
to Mr Rayner on 24.09.2009. A copy of it appears at page B83 of the Basic
Bundle produced by the Respondents. Mr Rayner says that he did not receive it.
The Tribunal is prepared to acknowledge that there is a presumption that a
letter purporting to have been sent by post will have been received by the
intended recipient. It is therefore for Mr Rayner to rebut that presumption.
There has been a very large volume of correspondence passing between Mr Rayner
and HMRC and he has not alleged that any other correspondence addressed to him
(copies of which are in the Basic Bundle) has failed to reach him. He has not
alleged that he has had any problem with his post.
20.
Mr Rayner wrote to HMRC on 04.11.2009 stating that he did not receive
the notice and, surprisingly, there does not appear to have been any response
to that letter. The obvious thing to have done would have been to reply and
send a copy of the notice.
21.
Nevertheless Mr Rayner was clearly aware (from the contents of his
letter dated 04.11.2009) of the existence of a penalty notice. The Tribunal
concludes that, on the balance of probabilities, he did receive the Daily
Penalty Notice sent to him by post on 24.09.2009. There have, therefore, been
no procedural defects in the issue and service of the Initial Penalty Notice or
the Daily Penalty Notice.
22.
In 2008 HMRC had identified a number of substantial issues with Mr
Rayner’s 2007 Tax Return. It is appropriate to set these out in some detail in
order to demonstrate the scale of the enquiries that were being made.
23.
On an internal Memorandum dated 14.04.2008 it had been noted that Mr
Rayner’s accounts should be drawn up on an accrual basis and although the
expenditure had not been incurred the liability had and therefore if a balance
sheet had been prepared this would show a creditor with the appropriate
deduction in the profit and loss account. Expenditure as claimed should have
been allowed against 2007.
24.
Furthermore the fact that Mr Rayner did not claim the expenditure in the
original profit and loss account suggested that he was drawing up his accounts
on a ‘cash’ basis instead of an ‘accruals’ basis and this was considered to be
unacceptable.
25.
It was noted that the debit for employer’s costs of £21,500 appeared to
be an estimate and had been the same figure for the previous two years.
‘General Admin’ of £24,000 also appeared to be an estimate. Mr Rayner had
claimed for depreciation of £4,000 together with capital allowances; the
depreciation had not been added back in the tax computation. The 2006 Return
appeared to be full of estimates in that the turnover was in a round sum
figure, employee costs, general administration, repairs, travel and subsistence
and depreciation had been claimed and not added back and capital allowances had
been claimed. Furthermore the 2005 Return appeared to be comprised largely of
estimates. The 2007 Return needed to be amended to allow a substantial
professional indemnity insurance premium of £32, 010.
26.
On 01.08.2008 Mr Rayner was sent a schedule of Information and
Documentation required, namely:
·
Details of estimated or balancing figures and the basis of any
estimates used.
·
Details of any adjustments for own goods or private use of
business assets.
·
Computations showing the application of UITF 40 in the accounts
for the period ended 01.04.2007.
·
Analysis of the figure for Turnover of £98,709.
·
Analysis of the figure for employee costs of £21,500.
·
Analysis of the figure for repairs of £773.
·
Analysis of the figure for General Administration costs of
£24,000.
·
Analysis of the figure for motor expenses of £3,191.
·
Analysis of the figure for Travel and subsistence of £1,200.
·
Analysis of the figure for advertising of £1,009.
·
Analysis of the figure for Legal and Professional fees of £43,508.
·
Analysis of the figure for Other finance charges of £282.
·
Analysis of the figure for Depreciation of £4,000 with
explanations.
·
Analysis of the figure for Other expenses of £2821.
·
Analysis of Debtors/prepayments.
·
Analysis of Stock/work in progress.
27.
A substantial quantity of specific documentation was also requested ,
namely:
·
A copy of the financial accounts for the period ending 01.04.2007
including the capital allowance and income tax computations.
·
All business records from which the accounts were prepared
including all sales and purchase invoices.
·
Non-financial records such as business diary or appointment book.
·
All employee records including names, addresses and National
Insurance numbers of all employees.
·
Computer records if these were kept in the business.
·
Bank Statements, cheque stubs and paying-in books for all bank
accounts used in the business.
·
Credit card statements if a credit card was used in the business.
·
Business cash books.
28.
The above requests were repeated in a letter dated 08.08.2008 and in the
Notice requiring documents and other information issued pursuant to S19A of the
Taxes Management Act 1970 on 15.09.2008. That Notice stated that in opening any
enquiry HMRC is required to give consideration to minimising the burden to the
taxpayer in terms of their time and finances. It was believed that the request
for information and documentation was reasonable and proportional and that its
sole purpose was to establish the accuracy of Mr Rayner’s 2006/07 Tax Return.
29.
On 15.10.2008 Mr Rayner telephoned HMRC to say that he was happy to give
the information requested but was not satisfied with the reasons for the
enquiry.
30.
There then followed further extensive correspondence but the requested
information and documentation was not forthcoming from Mr Rayner.
31.
The Tribunal considers that the requested information and documentation
was reasonably required by HMRC and that, although the request was extensive,
it was not oppressive and was properly required for the purpose stated in
paragraph 28 above. It is typical information that will be required by HMRC
while they discharge their statutory duties and was information that Mr Rayner
had in his possession and could reasonably be expected to produce.
32.
In the absence of the requested information HMRC were entitled to issue
the Initial Penalty Notice and the Daily Penalty Notice.
33.
Mr Rayner continued in his failure to provide the requested information
and documents. Specifically he tells the Tribunal that he was victimised by
being selected for a full enquiry at a time when his legal practice was not
functioning (he had been suspended as a practising solicitor). He met with HMRC
staff but no agreement could be reached with regard to the process of
production of documents. Some information was supplied but most was not.
Nevertheless Mr Rayner tells the Tribunal that “I have no problem dealing with
any legitimate Revenue enquiry”.
34.
Mr Rayner has identified a number of perceived problems which prevented
him from further compliance with HMRC requests. He says that his photocopier
was broken; that problem could have been solved by his producing original
documents to HMRC for them to inspect and copy as appropriate. He complains
that some 360 client files were being requested; issues of confidentiality
arose and he would have had to obtain the consent of all clients and the
administrative cost would have been a burden and would have cost thousands of
pounds.
35.
Mr Daley, the HMRC Presenting Officer, deals with this matter of
confidentiality by referring to strict protocols that HMRC have in place and
the severe penalties that can be imposed if confidentialities are breached. He
denies any breach of the high standards of integrity that are demanded of HMRC
staff and, in so far as Mr Rayner has alleged that an Enquiry Agent was sent to
go through his waste paper bins, Mr Daley absolutely denies that any such
practice would be initiated or condoned by HMRC; in 41 years he has never heard
of such a thing happening.
36.
Mr Daley also observes that it was not, in any case, the entire client
files that were being requested: it was only the invoices contained in some 300
or 400 files. This is therefore substantially less, in volume, than Mr Rayner
suggests.
37.
Mr Rayner says that some of the files were Legal Aid matters and the
Legal Services Commission routinely requested sight of a number of files for
audit purposes. This is done with all Legal Aid practices. Mr Rayner was
concerned that he might be unable to comply with such requests if his files
were in the hands of HMRC. He does not suggest to the Tribunal that he had made
any enquiry of the Legal Services Commission as to their attitude if any files
or part files were in the possession of HMRC in circumstances beyond his
control. The Tribunal has no reason to believe that the Legal Services
Commission would not be sympathetic in such a situation and defer any
inspection or indeed choose other files for random inspection.
38.
HMRC offered to Mr Rayner to come and collect the documentation. He
declined. They offered to him that he could take them to his local tax office
which would transfer them securely to the office dealing with the Enquiry. He
declined.
39.
Mr Rayner’s particular concern was that HMRC might lose his
documentation. He suggests that they had done so in the past. It is not clear
whether this had indeed happened before but even if it had it would be absurd
to suggest that a taxpayer should be entitled to withhold information from HMRC
simply on the basis of a fear of loss. HMRC would be unable to function if
taxpayers were entitled to take such an arbitrary view. Mr Rayner alleges bad
faith on the part of HMRC (see below) but his concerns could easily be
addressed if he feared deliberate ‘loss’ or concealment by HMRC: he could have
delivered up his papers and obtained a receipt.
40.
Mr Rayner requested from HMRC an undertaking to pay for the cost of
obtaining duplicates of any documents that might be lost while in the custody
of HMRC. Such an undertaking was not forthcoming. This was ultimately to be the
basis of the impasse that occurred. The Tribunal concludes that Mr Rayner’s
request was unreasonable and the production of a receipt by HMRC would have
been sufficient to allay his concerns.
41.
Throughout the correspondence in this matter (and there is a substantial
bundle of it produced to the Tribunal today) there has been an underlying and
ongoing theme pursued by Mr Rayner and he has addressed the Tribunal at
considerable length about it: he maintains that HMRC’s enquiries have been
motivated by malice against him. He has recited a very long account of problems
in his dealings with HMRC and has made a considerable number of very serious
allegations about the personal lives of HMRC staff. He has suggested that there
have been breaches of confidences and improper interference with the relationship
between him and his former employer. He alleges corruption. One of the many
reasons for his withholding documentation from HMRC has been that he believed
that a member of his former employer’s family worked at his local tax office
and that this person might have colluded with HMRC in ‘losing’ documents.
Nearly half of Mr Rayner’s lengthy submissions to the Tribunal today have been
concerned with historical matters with particular reference to his professional
problems as a solicitor and his being subjected to Court proceedings with
unhappy outcomes. Indeed Mr Rayner has acknowledged a number of legal outcomes
that do him little credit but the Tribunal today has remained focused upon the
issues of production of documents and information pursuant to legitimate
requests and draws no adverse inferences from historical matters.
42.
There is no evidence whatsoever before the Tribunal, whether in the
bundles of documents and correspondence or in oral submissions today, of any
malfeasance on the part of HMRC or any member of HMRC staff. There is no
evidence of impropriety in their personal lives. There is no evidence of
corruption by anyone associated with Mr Rayner or his previous employment.
There is no evidence of dishonesty or malice.
43.
Correspondence from HMRC addressed to Mr Rayner has been restrained and
professional. On the other hand his correspondence has had recurrent themes of
the unwarranted allegations mentioned in paragraph 41 above and has at times
been intemperate. For example in his letter dated (mistakenly) 27.02.2009 and
received by HMRC on 30.12.2009 he said:
“Previously you lied to me saying this was a genuine
enquiry. The fact that you then purport to go back every tax year is obvious
that this is an enquiry of spite, an enquiry at the behest of your corrupt
colleagues ... you had a vested interest in helping your friends ... I have
wasted about 50 hours of fee earning time dealing with you and I require not
your office but YOU to pay compensation, I require 50 hrs at £180, so I require
a payment from you personally of £9,000 by 31st December.”
That language is completely inappropriate. It damages Mr
Rayner’s credibility in this appeal.
44.
In addition to enquiring into Mr Rayner’s 2006/07 Self Assessment Tax
Return HMRC has chosen to reopen enquiries into Tax Returns for the previous
three years. They are entitled to do so. In the light of Mr Rayner’s continued
lack of co-operation they had every reason to do so. Their requests for
documentation were appropriate and proportionate. Mr Rayner has failed without
good cause to meet those requests.
45.
Therefore the Initial Penalty of £50 was properly imposed. The Daily
Penalties of £640 were properly imposed. The Closure Notice and the Discovery
Assessments listed in paragraph 15 above were properly issued: in the absence
of full disclosure by Mr Rayner HMRC were entitled to conclude that business
income and expenditure for the years 2003/04, 2004/05, 2005/06 and 2006/07 as
declared by him in Self Assessment Returns for those years were incomplete and
not fully supported by documentary evidence. The Tax listed in paragraph 15 is
properly due and payable by Mr Rayner. This appeal is dismissed.
46.
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.
W D F COVERDALE
TRIBUNAL JUDGE
RELEASE DATE: 23 October 2012
