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Cite as: [2004] UKSC SPC454, [2004] UKSC SPC00454

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Guest House Proprietor v HM Inspector Of Taxes [2004] UKSC SPC00454 (20 December 2004)

Guest House Proprietor v HM Inspector Of Taxes [2004] UKSC SPC00454 (20 December 2004)

SPC454

Income tax – notice to taxpayer to produce documents in taxpayer's possession or power – whether terms of notice reasonable - section 19A, Taxes Management Act 1970

THE SPECIAL COMMISSIONERS

GUEST HOUSE PROPRIETOR Appellant

- and -

B G KENDALL

(HM INSPECTOR OF TAXES) Respondents

Special Commissioner: Dr David Williams

Sitting in Cardiff on 21 September 2004 partly in public

Mr Keith Samuel, Chartered Accountant, E Keith Samuel & Co, for the Appellant

Mr P C Williams, HM Inspector of Taxes, Appeals Unit Wales, for the Respondent

© CROWN COPYRIGHT 2004

DECISION

The taxpayer appeals, by his accountant, against a notice dated 16 January 2004 given by the respondent inspector of taxes, (the inspector) under section 19A of the Taxes Management Act 1970.

The objections by the taxpayer and his accountant the notice were to specific items in the notice only, and not to the full notice. I am pleased to record that at the oral hearing the dispute between the parties on most of those items was clarified and to some extent agreed. I deal with those items only in so far as necessary to adopt the clarifications and agreement of the parties, but I deal with the issues in dispute more fully in so far as I am able to do so within the powers under which I consider this appeal.

An application was made on behalf of the taxpayer that the appeal be heard in private in the interests of his client. The Inland Revenue did not oppose that application. Having considered the grounds for the application, I agreed that it was appropriate that I hear those aspects of the case specific to the taxpayer, but not the more general issues about the powers in question, in private.

The facts

The key facts of the case are agreed by the parties. In addition, the inspector, who gave the notice under appeal, gave evidence on affirmation of the notice and his intentions in making it. I accept that evidence in this decision.

The taxpayer is the proprietor of a guest house. With the assistance of his accountant, he submitted a tax return for the tax year to 5 April 2002 on 26 July 2002. The inspector served notice of an enquiry under section 9A of the Taxes Management Act 1970 on 29 August 2003. Informal requests for information did not receive the response sought by the Inland Revenue. Accordingly, on 16 January 2004 the inspector issued a notice to the taxpayer under section 19A of that Act by the inspector. The taxpayer promptly appealed against the notice on both general and specific grounds. There was also an exchange of correspondence on specific items as noted below. However, at the date of the hearing, neither the taxpayer nor his accountant had produced any documents or information in response to the notice.

The law

It is a precondition for the issue of a notice of enquiry under section 19A of the Taxes Management Act 1970 that a notice under section 9A (or for a partnership section 12AC) of that Act is or has been given: section 19A(1). A section 9A notice was issued in this case.

Section 19A(2), so far as relevant, provides that for the purposes of a section 9A enquiry, an officer of the Inland Revenue:

may … by notice in writing require the taxpayer, within such time (which shall not be less than 30 days) as may be specified in the notice –

(a) to produce to the officer such documents as are in the taxpayer's possession or power and as the officer may reasonably require for the purposes of determining whether and, if so, the extent to which –

(i) the return is incorrect or incomplete … and

(b) to furnish the officer with such accounts or particulars as he may reasonably require for that purpose.

Subsection 19A(3) provides that photographic or facsimile copies may be provided instead of the originals. Subsection (4) provides that the inspector may take copies of, or make extracts from, any original documents produced.

Subsection (6) provides that a taxpayer has the right to appeal to the General or Special Commissioners against any requirement in a notice to produce a document or to furnish accounts or particulars. If an appeal is made, the Commissioners may either confirm the specific requirement in the notice or set the notice aside in so far as the Commissioners are not satisfied that the document or particulars were not reasonably required by the officer. My task, in this appeal, is therefore to consider whether each of the items contested is reasonable. I have no power to add to or otherwise alter the notice. But I consider that I have the power under that section to clarify what the notice means where that is in dispute. If the extent of the notice is unclear then it may, for that reason, be unreasonable.

The objections to the notice

The taxpayer had both general and specific objections to the notice. He felt that it asked for too much information at an initial stage of an enquiry. He also felt that it was using a sledgehammer to crack a nut, and that it was not in keeping with the approach of "working together" publicised by the Inland Revenue. I indicated at the hearing that my concern was only with the issues that directly affected his client, and that I was not considering any wider point. It is of course for the Commissioners to decide if any individually challenged item demanded in a notice is reasonable, and that must be judged at the time of the notice being made. However, section 19A allows the notice to be given at the same time as a section 9A notice of enquiry. In this case there were several months between the section 9A notice and the section 19A notice during which little happened. I consider that interval to be important in assessing whether the notice and any challenged items in that notice are reasonable. Given the interval between the two notices in this case, I see nothing unreasonable in the inspector seeking full information in the section 19A notice and not dealing with it in further stages as submitted for the taxpayer.

I also do not accept the argument for the taxpayer that the Revenue should have asked for other information, such as the accounts and balance sheet and other documents rather than, or in addition to, those actually sought. As Dr. Brice emphasised in Accountant v Inspector of Taxes, 8 June 2002, "section 19A is not limited to documents which the taxpayer considers to be appropriate".

The taxpayer did not, as noted above, object to the issue of the notice as such, or to all the items in it. The notice was a formal notice reciting the power granted in section 19A. It recited that:

I am now giving you notice that you are required by law to produce the documents and provide the information listed below within 30 days from the date you received this notice.

It was served on the taxpayer and not the accountant. This is important because one of the objections put by the accountant at the hearing can be answered, as discussed below, simply by noting that the accountant himself is not directed to produce anything by this notice.

Bearing in mind the dispute that followed it is perhaps unfortunate that the notice was not accompanied by a copy of section 19A, or was alternatively written in terms that adopted rather more of the terms of section 19A specific to the particular notice. Nor did it appear to be accompanied by a leaflet about the enquiry such as I have seen in other cases.

Section 19A(2)(a), which is the specific power used in this case, relates only to "such documents as are in the taxpayer's possession or power". If the document does not exist, or is not within the possession or power of the taxpayer, then it cannot be produced. It is enough in such a case for the taxpayer to confirm that there is no such document, or that it is not within his possession or power. If a notice appears to demand documents outside that limiting provision, then either it is being misread or it is going beyond an officer's powers. I am satisfied in this case that the officer was not seeking to demand documents not in the possession or power of the taxpayer. But it might have avoided some aspects of the appeal if that had been made clearer.

The notice properly reflects the section in requiring that the documents must be "produced". But neither the section, nor the notice, nor any accompanying explanation, tell the taxpayer what that actually means for the taxpayer. I am able to record below an agreement between the parties about how the production is to take place in this particular case. I do not need therefore to deal any more generally with the details of the duty to produce. Again, however, further explanation (in particular a reference to the power in section 19A(3) to provide copies) might have avoided some aspects of this dispute.

The notice sets out 21 specific items under three cross-heads: 12 with reference to the named guest house, 4 in relation to "income from property" and the remaining 4 under the heading "other". The taxpayer objects to three items relating to the guest house and two items relating to "other".

Objections to the guest house items

The first objection is to item 4:

The hotel register, visitor's book and guest record cards for the period 1

October 2000 – 30 September 2001.

The accountant clarified the objection as being an objection to handing these over to the Revenue who would then, he anticipated, retain them for some months or possibly longer. The taxpayer was required by other legal obligations to keep the register at the premises. Other inspectors, to his knowledge, had attended guest house premises to inspect registers and guest records, so why not in this case? The inspector replied that he would be entirely happy with production at the premises at a time and date reasonably agreed and with reasonable facilities offered to allow those attending to make copies. I am happy to record that the accountant agreed with that on behalf of his client. I have commented above on the absence of any precise detail about what "production" meant in this case. Subject to that clarification, it was accepted for the taxpayer, and I accept, that this item was reasonable. I therefore confirm it.

Objection was made to items 8 and 10 in similar terms. The items are:

8 Documentary evidence confirming all expenditure claimed in your

2002 return

10 Sight of the Asset Register …

The objection was that full documentary evidence did not exist for all the items claimed, and that the taxpayer did not maintain an assets register, nor was there any reason why he should in a small guest house.

The answer in both cases lies in the terms of section 19A itself. The inspector made clear at the hearing that he was not seeking any document that did not exist. The taxpayer, or the accountant, should simply have told the inspector in response to the notice that there was no such register. Similarly, all the documentation that did exist should be produced under item 8, and no more. As a matter of law, that is right as the notice was given under section 19A(2)(a). That is subject to the limiting conditions that the documents can only be demanded if they are in the taxpayer's possession or power. If there is no assets register, it is plainly outside the provision to ask for one. I am again pleased to record that this is now accepted. So understood, these items in the notice are reasonable and I confirm them.

The "other" items

Item 18 is:

All statements, cheque book stubs, paying-in books and pass books for all Bank/Building Society A/cs you had an interest in between 1 October 2000 –

5 April 2002.

It was agreed by the parties before the hearing that this item should refer only to business bank accounts. As that is expressly agreed in writing, I treat the item as limited only to business bank accounts, and in so far as I need do so I confirm it in the light of that agreement.

Item 21, the final item, is:

Copies of any cash and bank reconciliations used in the preparation of your 2002 return.

The accountant put a number of objections to this item. The objections should, of course, only be those of the client, but it is expedient to deal with the matter in the round in order to clarify it. The accountant's first objection, made on behalf of his client, was that they did not know what the item meant. Second – and this was more of a personal objection by the accountant – was that it appeared to be asking for his, that is, the accountant's, working papers. In so far as it did, he claimed that they were privileged. Third, the accountant did not think that the Revenue was using accounting terminology correctly. That is, in my view, another way of putting the first objection.

Having received the notice, the accountant telephoned the Inland Revenue to seek clarification. Subject to such a request being made in a timely way, the Revenue accepted that was an entirely appropriate response to an ambiguous or unclear item in a notice. The Revenue response was a letter of 4 June 2004. This set out the following explanation of the item:

This amounts to a reconciliation of the cash movements in the period in question consisting of:

1 Opening cash

2 Cash receipts

3 Cash introduced from outside the business

4 Cash drawn from the bank/building society

5 Cash paid into the bank/building society

6 Vouched cash expenditure

7 Unvouched cash expenditure

8 Cash drawn from the business

9 Closing cash

10 Any balancing figures treated as either cash incomings or cash outgoings.

The inspector also provided, at the accountant's further request, a simple set of worked examples showing a total of held or incoming cash for a period together with a justification for the closing amount of cash by reference to outgoing cash. At the hearing I was told that this was a specific answer given by the Revenue to the accountant's specific question, and not merely a copy of a standard ruling or answer.

The accountant objected at the hearing that this was not, as he understood it, "a cash and bank reconciliation". He also explained that there was little point in the inspector having this information unless he had what the accountant termed "linking documents" between the information and the return. This included the audited accounts and balance sheet of the business. In his view, because it did not ask for these linking documents, the item did not make sense.

The inspector gave evidence that he had asked for similar information in similar notices and had not met a similar objection in other cases. He confirmed that what he sought was the information as indicated in the letter.

The accountant also objected that to produce all the papers that appeared to be covered by item 21 would make him, the accountant, produce the working papers he used in preparing the taxpayer's tax return for the year. Those papers were an essential part of his, the accountant's, working papers in a typical case of a return made on incomplete records, and the Revenue should not be allowed to demand them as they are privileged documents.

In response, the Revenue contended that it was entitled to demand privileged documents under section 19A, but it was not in fact doing so here. It was asking the taxpayer for his documents, and if the taxpayer could not require his accountant to hand over his working papers, then they were not covered in the notice.

Again, I do not need to deal with general issues potentially raised by this item. It is sufficient to deal with the appeal before me that I record the Revenue explanation of the meaning of the disputed phrase and the Revenue's acceptance that it is not the accountant's documents that they sought in this notice.

I did consider whether the lack of clarity to both the taxpayer and the accountant of item 21 was such as to make it unreasonable. However, the issue of privilege indicates not so much a misunderstanding by the taxpayer and his accountant of the notice as a misunderstanding of section 19A as it applied to the taxpayer. The accountant was not asked to produce any of his own documents, although as the taxpayer's accountant he no doubt had a professional duty to his client to assist his client in producing the taxpayer's documents. I am not in the position to make any formal findings of fact on the issue, and I have not seen any of the documents concerned. But it would appear from what both parties told me that the documents in question were those of the accountant, and were not documents that were within the "possession or power" of the taxpayer. The formal notice was given to the taxpayer, and only to the taxpayer. So understood, the privilege point does not arise.

Similarly, there may have been good grounds for the taxpayer to raise a timely query about the original wording of item 21 of the notice. But the accountant did raise the query for his client. And they received a detailed, timely and clear response that, in my view, did not seek to extend in any way the wording in item 21. Had the explanation gone beyond the terms of the notice, it might have raised other issues. But in this case, if anything, it had the practical effect of narrowing the scope of the notice. Taking a practical view of the matter, I consider that the explanation cured any arguable unreasonableness in the item, given that the taxpayer had also appealed the item and that therefore the Revenue did not seek to impose the terms of the notice before that clarification or in any way inconsistent with it.

For those reasons, I consider also that this item, subject to the explanation in the letter of 4 June 2004, was reasonable. As the accountant accepted, it is entirely appropriate in a business such as that of the taxpayer's for the Revenue to seek to minimise the risks associated with cash handling.

In summary, I confirm all the disputed items in the notice as I understand them, but I do so subject to the points, most of which were in the end agreed by the parties, indicated in this decision.

DR DAVID WILLIAMS

SPECIAL COMMISSIONER

RELEASED: 25 October 2004

SC 3047/04