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United Kingdom Special Commissioners of Income Tax Decisions

You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Hall v HM Inspector of Taxes [2004] UKSC SPC00417 (23 June 2004)
URL: http://www.bailii.org/uk/cases/UKSPC/2004/SPC00417.html
Cite as: [2004] UKSC SPC00417, [2004] UKSC SPC417
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Hall v HM Inspector of Taxes [2004] UKSC SPC00417 (23 June 2004)
    SPC00417
    PROFITS – incomplete records – estimates of car expenses and wife's wages – figures for earlier years' profits amended by applying the same percentage uplift as in the latest year rather than by applying the amount of omitted profits

    THE SPECIAL COMMISSIONERS

    ROGER HALL Appellant

    - and -

    SANDRA COUCH

    (HM INSPECTOR OF TAXES) Respondent

    Special Commissioner: DR JOHN F AVERY JONES CBE

    Sitting in public in London on 10 June 2004

    The Appellant in person

    Mrs B. Robinson, Inland Revenue Central England Regional Appeals Unit, for the Respondent

    © CROWN COPYRIGHT 2004

     
    DECISION
  1. Mr Roger Hall appeals against an amendment to his self-assessment for 2000/01 by closure notice, discovery assessments for 1997/98 to 1999/2000, and assessments made outside the normal time limits for 1992/93 to 1996/97. The Appellant appeared in person; the Inspector was represented by Mrs B Robinson.

  2. There was an agreed statement of facts as follows (I have added the figure for the Cheltenham & Gloucester interest which was agreed in the course of the hearing):

    3. (1) The appellant Mr R W Hall trades as H & H Electronics.
    (2) The business address is 6 Sheridan Way, Aston Lodge Park, Stone, Staffordshire, ST15 8XG.
    (3) A Tax Return for the year ended 5 April 2001 was issued 6 April 2001 and received by the Revenue 29 August 2001.
    (4) An enquiry under Section 9A TMA 1970 was opened on 5 September 2001.
    Business Income
    (5) The Return showed the trade as service engineer, turnover £14,780, expenses £2,541 and net profit £12,239 for the year ended 5 April 2001.
    (6) The expenditure related to motor expenses, Capital Allowances for a vehicle and an amount for tools.
    (7) The accounts are drawn up from 6 April to 5 April each year.
    (8) At the first meeting on 11 January 2002 it was established that the Return made for the year under enquiry was incorrect. The business carried on was repair of gaming machines and the business records provided in support of the Return had been written up after the commencement of the enquiry.
    (9) The appellant first commenced in business, described as a service engineer, on 14 November 1988.
    (10) The appellant provided on 6 January 2002 a signed declaration that he did not have any bank or building society accounts. Later evidence was produced to show the business account with HSBC in the name of H & H Electronics had been held since November 1991.
    (11) It has been established that the declared turnover of £14,780 in the year ended 5 April 2001 was understated. The actual turnover was £42,622 as evidenced by invoices provided. This formed the basis of additional profit for the year ended 5 April 2001.
    (12) In April 2002 the appellant provided a schedule of further business expenditure of which only the level of wife's wages and motor expenses are currently in dispute.
    (13) Documents provided by the appellant as evidence of turnover for years prior to 2000/01 are as follows:
  3. 11.02 1999/2000 business bank statements nos. 104, 106 to 115

    4. 29.01.03 Statement no. 105

    03.03.03 1999/2000 sales invoices

    24.03.03 1998/99 sales invoices and business bank statements 92 to 103

    Investment income
    (14) The balances in bank and building society accounts were as follows:
    Account 6/4/2000 5/4/2001
    HSBC – H & H Electronics 31316605 2678 8908
    HSBC – R W Hall 41302140 1035 583
    Portman 134-4017169-6 1000 1000
    Britannia 08721 056 6 2192 2272
    Bradford & Bingley 221 JF231831 H 1500 1500
    Nationwide (Joint) 0545263238095 3647 3731
    Nationwide 82644850 31707 38907
    Cheltenham & Gloucester T547794/3 47787 41653
    (15) Details of interest credited to investments accounts for the year ended 5 April 2001 has been provided as follows:
      Gross Interest Tax deducted Net interest
    HSBC 31316605 - - -
    HSBC 41302140 - - -
    Portman 134-4017169-6 49.97 9.99 39.98
    Britannia 08721056-6 99.88 19.98 79.90
    Bradford & Bingley 221JF231831H 67.22 13.43 53.79
    Nationwide 82644850 1443.68 288.74 1154.94
    Nationwide 0545263238095 (half) 52.50 10.50 42.00
    Cheltenham & Gloucester T547794/3 2386.41 477.28 1909.13
    General
    (16) The enquiry was closed and the amendment to the Self Assessment for the year ended 5 April 2001 was issued together with the discovery assessments for the years 1992/93 to 1999/2000 on 10 February 2003.
    (17) The appeals against the amendment and the assessments were received on 5 March 2003.
  4. The Appellant and the Inspector, Mrs Sandra Crouch, gave evidence. In addition there were two binders of documentary evidence. Both parties produced skeleton arguments and the Inspector produced detailed comments on points in the Appellant's skeleton. I should add that many of the points in the Appellant's skeleton were more complaints about his treatment by the Revenue than about the merits of his case, which I said would have to be pursued elsewhere, and so I did not consider these or the Inspector's replies to them.

  5. As recorded in the agreed statement of facts, the Appellant provided a signed statement that he had no bank or building society accounts, and he also repeated that in the course of a meeting; in fact he had 8 such accounts. The agreed statement of facts also records that for the year ended 5 April 2001 he declared turnover of £14,780; in fact it was £42,622 (expenses claimed were £2,541, and those allowed in the closure notice were £7,254). In addition it is not in dispute that (a) in his tax returns for the years 1992/93 to 2000/01 he declared no interest from such accounts (except for £30 gross in 1997/98); the agreed figure for the year ended 5 April 2001 is £4,099 gross, (b) he initially told the Inspector that his trade was repairing CDs and Hi Fi systems for individuals; in fact he repairs gaming machines for companies, (c) he provided the Inspector with five duplicate books and a note book purporting to show his income and expenses for 2000/01; in fact he admitted in the course of a meeting with the Inspector these were written up after the enquiry started and are false, (d) he told the Inspector that he estimated his income for 2000/01 at £25,000; as stated above, it was over £35,000, (e) he told the Inspector that his wife was employed as a radiographer with North Staffs Area Health Authority; in fact, although she is a radiographer, she was not so employed and only worked in his business, (f) figures have since been produced to show that the returns of profits for 1998/99 and 1999/2000 were also wrong (1998/99 turnover as returned £14,520; as agreed £24,998; 1999/00 turnover returned £14,630; as agreed £18,140). When these points were put to him in cross-examination he agreed that there matters were false but showed no remorse and gave no reasons except that in relation to the false records for 2000/01 and the information given at a meeting with the Inspector in January 2002 that he had recently undergone surgery, was taking pain killers and he was not thinking properly; and in relation to not declaring interest that it was easier to tick the box stating that there was none. I do not accept the former. If this were the case he would have surely pointed it out either during the meeting with the Inspector in January 2002 or when given the notes of the meeting. In any case I cannot see any connection between taking painkillers and concocting false records. In view of these many admittedly wrong answers I have approached his evidence, even evidence on oath, with caution. In general when giving evidence his replies were evasive.

  6. There is no dispute about the law. I merely record that section 29(1) Taxes Management Act 1970 permits an officer of the Board to assess an amount that he discovers ought to have been assessed in order to make good to the Crown any loss of tax. Section 29(4) gives as one of the conditions for subsection (1) to apply:

    7. "(4) The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf."

    Section 36(1) provides:

    "An assessment on any person…for the purpose of making good to the Crown a loss in income tax or capital gains tax attributable to his fraudulent or negligent conduct or to the to the fraudulent or negligent conduct of a person acting on his behalf may be made at any time not later than 20 years after the 31st January next following the year of assessment to which it relates."

    Section 50(6) provides:

    "If, on an appeal, it appears to the majority of the Commissioners present at the hearing, by examination of the appellant on oath or affirmation, or by other evidence, – (a) that the appellant is overcharged by a self-assessment…the assessment …shall be reduced accordingly, but otherwise the assessment…shall stand good."

    For years from 1996/97 section 12B requires the taxpayer to keep all such records as may be requisite for the purpose of enabling him to make and deliver a correct and complete return and to preserve such records as set out therein.

  7. I make the following further findings of fact:

    8. (1) There are no business records for years before 1998/99 of income or expenses, and no records of business mileage for any of the years in issue.
    (2) The Appellant estimated his mileage by taking the total miles during his ownership of the car (32,500 miles) (this has not been independently verified) between 1998 and 2000 and apportioning this to various years. Initially he apportioned 18,920 miles to 2000/01 but this is merely the balance that he had not claimed in earlier years. During the hearing he adjusted this to 14,533 miles for 1999/2000 and 12,920 miles for 2000/01. The logic of the higher mileage for the earlier year when the profits were lower was that he had more time for visiting clients. I am prepared to accept these revised estimates.
    Year to 5 April 2001
  8. The turnover for the year ended 5 April 2001 is agreed as are a number of items of expenditure. In dispute are the car expenses and the Appellant's wife's wages. In relation to the car expenses the Appellant kept no records of petrol or business mileage. He claimed 75 per cent business use of the car. The Inspector made a calculation of business mileage based on delivery notes relating to three customers by calculating the distance to each (5,117 miles), and other journeys of 30 miles per week (1,560 miles) with the total rounded up to 7,000 miles. I accept this as the best estimate that can be made. I have no evidence other than the Appellant's estimate, which I am not prepared to accept, about whether 75 per cent is a reasonable estimate of business use which could be applied to other items of car expenditure. In the absence of any other evidence I will apply the Inspector's estimate of business mileage of 7,000 to the Appellant's revised estimate of total mileage of 12,920 that I have accepted, which gives 54.2 per cent. I direct that the car expenses should be recomputed by estimating the petrol for 7,000 miles and applying the rounded-up figure of 55 per cent to the other car expenses.

  9. On his wife's wages the Appellant claimed wages equal to the amount of the personal allowance as a deduction. He stated that he could have claimed more but was told by the Inspector that he should have operated PAYE if the amount was more than the personal allowance. A note of a meeting with the Inspector on 30 April 2002 records that the Appellant said that "she answered the phone, she typed invoices, helped with the parcels, typed the delivery notes and did some of the smaller purchases from local shops." It also records that he estimated that she worked 25 hours per week and that £80 to £90 per week was reasonable. Some six months later the Appellant produced a list of 16 items performed by his wife which are in addition to the above: statements, manifest notes, address labels, parts labels for Maygay, cleaning of boards, wrapping boards in bubble paper, packing, monthly stock take, paying-in at bank, trips to the post office, working OK and date labels, being able to receive parcels in the Appellant's absence, deliveries including 101 visits to Maygay (4 hours per trip) and deliveries to other named customers. The Inspector pointed out that typing invoices involved less than 5 invoices per week on average. Many of the listed items are very general and there is no evidence about how long this work took or what would be a suitable hourly rate, or indeed whether his wife rather than he made all the deliveries (I notice, for example, that in the course of a meeting with the Inspector on 30 April 2002 he said that he spent considerable time driving to Wolverhampton for the business, which relates to the visits to Maygay, suggesting that not all the trips were by his wife). The Appellant could easily have recorded the hours worked per week to substantiate the figure, and his wife could have given evidence about what work she did. The Inspector initially offered to compromise at £20 per week which she later increased but the increase was not accepted. I have nothing but the Appellant's estimates to which I am not prepared to give much weight. Unless I am satisfied by evidence that the Appellant is overcharged by a self-assessment, the self-assessment stands good under section 50(6) of the Taxes Management Act 1970. I therefore adopt the figure in the closure notice of £20 per week on the basis that the Appellant has not satisfied the burden of proof of displacing this. I am satisfied on the evidence that this sum has been paid to his wife.

    10. Profits for 1998/99 and 1999/2000
  10. Having discovered the errors in the Appellant's return for 2000/01 the Inspector assessed the earlier years to make good to the Crown the loss of tax. The Inspector is permitted to do so if the situation is attributable to the fraudulent or negligent conduct of the Appellant. In support of this, Mrs Robinson contends that (a) the profits returned for 2000/01 are wrong; (b) records were submitted that were written up after the enquiry commenced and were false, and copies of the real invoices were later submitted; (c) the Appellant claimed not to have any bank or building society accounts, which was untrue; (d) statements were produced by the Appellant showing that the income and expenditure for 1998/99 and 1999/2000 were wrong; (e) the returns submitted (including the three years now admitted to have been wrong) show only car expenses and tools but not other expenditure, suggesting that turnover might have been omitted as well; (f) according to the bank and building society accounts now produced £98,546 capital had been accumulated by April 2001 of which £50,884.50 (as confirmed by a copy fetter from his solicitors) was from the sale of a property, although this precise figure was not shown to have been deposited in any of the accounts disclosed. The Appellant contended that there had been no loss of tax, particularly as he had not claimed all the expenses to which he was entitled, and that he had not been negligent. By reference to 1999/00 he points out that on certain assumptions the actual profit is no greater than that returned of £11,793. The increase in capital was entirely from profits. He demonstrated that the balance on the business bank account fell during 1998/99 by £6,000, which showed that the whole of the £7,500 deposits to his Nationwide account came out of the business, as opposed to out of profits.

  11. In my view, even if one discounts the increase in capital, the Inspector had made out a strong case for saying that the Appellant's conduct has been negligent for all the reasons she contends. Now that the figures are agreed subject to car expenses and the Appellant's wife's wages it is clear that the Inspector's discovery was justified. I do not know whether the final result of 1999/00 is that the profit is increased but the turnover was certainly increased from £14,630 to £18,140 and if the final result is that the profit has not been increased it is because the Appellant has been allowed expenses that he did not originally claim. There can be no other reason for the increase in the turnover (1998/99 turnover: returned £14,520, agreed £24,998; 1999/00 turnover: returned £14,630, agreed £18,140) than the Appellant's negligence in making his returns. I therefore find that there has been a loss of income tax attributable to the Appellant's fraudulent or negligent conduct

  12. So far as the amount of profits is concerned, I have accepted the Appellant's figures for total mileage of 14,533 miles in total for 1999/00 and 7,314 for 1998/99, with the business proportion being 55 per cent. I direct that the same adjustments as apply to 2000/01 for the business proportion of other car expenses and the Appellant's wife's wages be made to these years.

    13. Years 1992/93 to 1996/97
  13. In relation to the years 1992/93 to 1996/97 the burden is on the Inspector to show that tax has not been assessed due to the fraudulent or negligent conduct on the part of the Appellant. For the reasons given above I am satisfied that there has been a loss of income tax attributable to the Appellant's fraudulent or negligent conduct in making his returns.

    14. Profits for 1997/98
  14. This year was assessed within the normal time limits but otherwise the same principles apply to it as apply to the earlier years dealt with next.

    15. Years from 1992/93 to 1997/98
  15. The assessments for these years before were made by taking the additional profits for 2000/01 (revised assessment £35,368; profit originally returned £12,239; addition £22,572) and making an addition of the same amount of £22,572 for each year but adjusted for changes in the retail price index. It is accepted by the Inspector that this method will not now be used for 1998/99 or 1999/00 as figures have been agreed subject to the points that I have already determined. The Appellant contends that 2000/01 is an unusually good year compared to the years before and after and that any such method of relating back should be based on the profit for a more representative year such as 1999/00.

  16. In the absence of any records the question is what on the balance of probabilities were the profits for those earlier years. The turnover for 2000/01 (£42,622) is much higher than is now agreed for the two previous years (1998/99 £24,998; 1999/00 £18,140) and so it does not seem probable that the profit was underdeclared in all earlier years by the same amount as it was in 2000/01(£22,572). On the other hand, I do not agree with basing adjustments for earlier years on the amount underdeclared in 1999/00 as the Appellant contends. The year under enquiry is likely to have been considered in more detail than the other years. For example for 2000/01 there is the Inspector's estimate of business mileage based on an analysis of the delivery notes. Even though there are now some agreed figures for 1998/99 and 1999/00, the car figures are wholly estimates and I have less confidence in them. It is therefore not possible to form a view about whether one year is more representative than another. It seems to me that a fairer method would be to take the percentage increase in the profits for 2000/01 and apply the same percentage increase to the profits returned for the earlier years. This implies that the Appellant has been suppressing the same proportion of profits throughout which seems to me to be more probable than to say that he has been suppressing £22,572 per annum (adjusted for the cost of living index) throughout.

  17. Accordingly I allow the appeals in principle to the extent of the recalculations set out above but otherwise dismiss them in principle.

    18. 2000/01. I direct that in relation to profits for the year to 5 April 2001 the amendment to the self-assessment be adjusted to reflect my decision in relation to the car expenses (no adjustment arises on account of my decision in relation to the Appellant's wife's wages), and the substitution of the agreed figure of £4,099 for investment income.
    1989/99 and 1999/00. I direct that in addition to the other agreed amendments the profits for these years be adjusted on account of car expenses with the mileage determined as above and the Appellant's wife's wages on the same basis as for 2000/01.
    1992/93 to 1997/98. I direct that the profits for these years be determined by applying the same percentage increase to each year's declared profit as the percentage increase in the declared profit for 2000/01, determined after making the adjustments above.
    Investment income for years other than 2000/01. I give liberty to the Appellant to produce figures from the banks and building societies concerned for investment income for years under assessment before 2000/01 within 42 days of the date of release of this decision, in which case the figures will be adopted unless the Inspector contends otherwise on the basis that not all accounts have been disclosed, failing which I determine the figure for 1999/2000 at £3,750 with the figure for each of the earlier years successively reduced by £250.
    If any of the figures cannot be agreed they will be determined at a further hearing.
    J F AVERY JONES
    SPECIAL COMMISSIONER

    SC 3009/04 RELEASED : 23/06/2004

    Authorities referred to in skeletons and not referred to in the decision:

    Nicholson v Morris 51 TC 95
    Hurley v Taylor 71 TC 268
    Jonas v Bamford 51 TC 1
    Amis v Colls 39 TC 148
    Stott v Trehearne 9 TC 495
    Moschi v Kelly 33 TC 442

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