United Kingdom Special Commissioners of Income Tax Decisions

SPC00470

TRADING PROFITS – whether taxpayer has satisfied the burden of proof in reducing the estimate based on incomplete records – figures reduced

THE SPECIAL COMMISSIONERS

HAYLEY McEWAN Appellant

- and -

COLIN O'DONOGHUE

(HM INSPECTOR OF TAXES) Respondent

Special Commissioner: DR JOHN F AVERY JONES CBE

Sitting in public in London on 30 March 2005

David McEwan, the Appellant's father, for the Appellant

Nicky Parslow, HM Inspector of Taxes, Central England Appeals Unit, for the Respondent

© CROWN COPYRIGHT 2005


 


DECISION

1. This is an appeal by Miss Hayley McEwan against closure notices dated 29 May 2002 in respect of the years 1997-98 and 1998-99. The Appellant was represented by her father, Mr David McEwan, and the Inspector was represented by Mrs Nicky Parslow.
2. I heard evidence from the Inspector in charge of the enquiry, Mr Stephen Kilford, and find the following facts:

(1) The Appellant carried on business as a beautician from one room in Guy Lodge Farm.

(2) Enquiries were opened in relation to the Appellant's 1998 and 1999 self-assessment returns. The Inspector obtained all the business records. These consisted only of bank statements, a list of monthly takings which seem to have been drawn up from the bank statements, and therefore meaning bankings rather than takings, and a list of monthly drawings.

(3) Mr Kilford was not satisfied with the records and after obtaining some explanations closure notices were issued on 29 May 2002 in respect of both years making the following adjustments: for the year 1997-98, disallowing rent of £5,000 as it had not been paid, disallowing purchases of £576 which had not been substantiated, increasing sales by petty cash expenditure of £459.43, and increasing sales by £7,853.81 on account of unidentified deposits in three bank or building society accounts: £7,341.81 into the Bradford & Bingley Maximiser account, £212 into the Bradford & Bingley Time Saver account, and £300 into her Midland Bank account. For 1998-99 rent of £5,000 was disallowed, personal national Insurance payments of £328 and tax payments of £449 were disallowed, and sales were increased by £8,000 in line with the previous year's increase.

(4) During negotiations adjustments for the rent and the National Insurance and tax payments and the £212 and £300 were conceded by the Appellant's accountants but the concession was withdrawn by Mr McEwan at the hearing. The £576 is agreed to be reduced to £27. The petty cash sales of £459.43 are agreed to be reduced to £435.75.

(5) The rent was said to have been charged (but was not paid) for the room in Guy Lodge Farm from which the business was carried on. The whole property was transferred from Mr McEwan to the Appellant on 13 May 1998.

3. I find from these facts that the Appellant has not kept sufficient business records as required by s 12B Taxes Management Act 1970.
4. Mr Kilford said that was satisfied in the course of a meeting with the Appellant in February 2003 that the £7,341.81 deposited in the Bradford & Bingley Maximiser account had been identified with declared sales. However, he was not satisfied with the accounting records and still maintained the same addition to sales. Mr McEwan was unaware that he was so satisfied and I agree that the notes of the meeting do not make this clear. Mr McEwan contends that he has sufficiently demonstrated that this figure does not represent undeclared takings.
5. It seems to me that, Mr Kilford having conceded that this figure does not represent undeclared takings, the Appellant has satisfied the burden of proof in relation to this sum. While I can understand that Mr Kilford is still not satisfied about the accounting records, he has used what were then thought to be unidentified bankings as the method of measuring undeclared takings and, so far as the Maximiser account is concerned, the Appellant has identified the bankings to his satisfaction. I consider that is all the Appellant is required to do and that there is no justification for the addition of £7,341.81 for the first year. I doubt that if he had come to that decision before the closure notice he would have included the £7,341.81 in the closure notice. If that figure is removed from the first year there is no justification for the £8,000 addition in the second year.
6. So far as the rent is concerned, for the first year for this to be allowed there would need to have been an agreement between Mr McEwan and the Appellant. Although Mr McEwan said there was such an agreement, in the absence of any evidence from the Appellant, and bearing in mind that it is agreed that no rent was paid, I am not satisfied that there was any such agreement. For the second year, from 13 May 1998 the Appellant was the owner of the property and so after that date she cannot have paid rent to herself. If anything this must represent a contribution to the running expenses that Mr McEwan said he paid. Again, in the absence of any payment and any evidence from the Appellant I am not satisfied that any such expenditure was incurred.
7. The unsubstantiated purchases of £576 are agreed to be reduced to £27. The petty cash sales of £459.43 is agreed to be reduced to £435.75 and Mr McEwan contended that there was a further £45 to be deducted. There is another withdrawal of £45 marked "C & C" [cash and carry] on 29 May 1997 and so I accept a further deduction of £45 reducing the figure to £390.75.
8. Mr McEwan has not satisfied me that there is any explanation other than undeclared takings for the £212 deposit in the Time Saver account and the £300 into the Midland Bank account. The National Insurance and tax payments in the second year are clearly not deductible.
9. Accordingly I allow the appeal in part and determine that the profits as returned for 1997-98 should be increased by £5,929.75 (£5,000+£27+£390.75+£212+£300), and for 1998-99 by £5,777 (£5,000+£328+£449).
10. Mr McEwan had applied for costs in correspondence with the Clerk before the hearing on the grounds that the investigation had been continued unnecessarily, which I overlooked at the end of the hearing. I direct that the Respondent may make any representations in writing within 30 days of the date of release of this decision against the making of an award of costs, following which I shall make a decision.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER

RELEASE DATE: 5 April 2005

SC 3060/04

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

Jonas v Bamford 51 TC 1

Norman v Golder 26 TC 293

T Haythornthwaite and Son Ltd v Kelly 11 TC 657

Nicholson v Morris 51 TC 95

Hurley v Taylor [1999] STC 1