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Cite as: [2007] UKSPC SPC00635, [2007] UKSPC SPC635

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Ferriby Construction (UK) Ltd v Revenue & Customs [2007] UKSPC SPC00635 (06 September 2007)

Spc00635

CORPORATION TAX — amendment of self-assessment return — return first submitted showing estimated profit of £20,000 — revised return showing loss of £70,000 submitted six months later — respondents amending return to show profit of £20,000 as first disclosed — whether revised return credible — no — whether amendment justified — yes — appeal dismissed

THE SPECIAL COMMISSIONERS

FERRIBY CONSTRUCTION (UK) LIMITED Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Special Commissioner: Colin Bishopp

Sitting in public in Manchester on 20 and 21 June 2007

Phillip Webster, accountant, for the Appellant

June Kennerley of their Northern Appeals Unit for the Respondents

DECISION

This is an appeal by Ferriby Construction (UK) Limited ("Ferriby") against amendments issued on 26 June 2006 to the company's self assessment returns for the years ended 31 July 2002 and 31 July 2003. The effect of the amendment to the return for the earlier year was to convert a claimed loss of £70,069 into a net profit of £20,000. The amendment in the following year was no more than the consequential one of excluding the loss for 2002 which Ferriby had brought forward; the return has otherwise been accepted and no other amendment has been proposed. I am therefore required to decide a fairly simple issue, namely whether the company in fact suffered a loss of £70,069 in the year to 31 July 2002 or, instead, the respondents' assessment that the company made a profit of £20,000 in that year is fair and reasonable. I was not asked to determine myself what profit or loss had been made, rather I was asked to choose between the parties' respective positions, though they left open the possibility that I might determine that the truth lay somewhere between those positions.

Ferriby, which is in the business of constructing extensions to its customers' homes, was represented by its accountant, Phillip Webster, and the respondents by June Kennerley of their Northern Appeals Office. I heard the evidence of only one witness, the assessing officer Karen Warren.

Ferriby's return for the year to 31 July 2002 was submitted, about a month late, on 28 August 2003. It revealed chargeable profits of £20,000, but the return made it clear that it included estimated figures and it was not accompanied by financial statements, accounts, or indeed any other supporting paperwork. The return was signed by Mr M Allot, one of the two directors and shareholders of the company, and it was submitted by Mr Webster's office. The reason given in a covering letter for the submission of estimated figures was that "during the financial year our client company suffered data loss and we are currently reconstructing actual figures".

On 3 February 2004 a revised return was submitted, again by Mr Webster's office. The covering letter said that it contained actual figures and, on this occasion, the return was accompanied by the company's financial statements for the year. The revised return had again been signed by Mr Allot and it also bore the date 28 August 2003. This return revealed the claimed loss of £70,069 and it could be reconciled to the accompanying accounts. It is, however, conspicuous that the accounts had been signed both by Mr Allot and his fellow director, Mr Jamieson, above the type-written date 19 May 2003. Within the bundle of documents produced to me was also a copy of the abbreviated financial statements signed, according to the accounts themselves, on 27 August and filed by Ferriby at the Companies Registry on 29 August 2003. No profit and loss account was included. The figures included in the abbreviated accounts—essentially, a balance sheet—are quite different from those in the accounts submitted with the revised return. A comparison between the abbreviated accounts and the figures included in the original, estimated, return is not possible.

The respondents opened an enquiry into the 2002 return on 14 April 2004. The return for the year to 31 July 2003 was submitted, with financial statements, in October 2004 and an enquiry was opened into that return as well. Nothing turns on the fact that enquiries were opened; the challenge is only to their outcome.

Though he did not call any evidence, I had an explanation from Mr Webster of the relevant events, and of how it came about that an estimated return was submitted, followed by what is claimed to be a more accurate revised return, and additionally an explanation of the discrepancies between the annual statements submitted with the revised return and the abbreviated accounts already submitted to the Companies Registry. He told me, as indeed the letter submitting the estimated return indicated, that Ferriby had suffered data loss when the disk used by its computer, on which it ran a proprietary accounting software programme, had become corrupted. The estimated return had not been prepared by Mr Webster himself but by a former employee, and he was unable to say from where the figures included in that return had been derived, although he suggested that the turnover had been calculated by reference to the deposits into the company's bank account and that the difference between the turnover figures which accompanied, respectively, the estimated return and the revised return might be accounted for by the inclusion in the former and the exclusion from the latter of VAT (which I accept to be arithmetically possible).

The return was already late when it was first submitted and it had been decided to put one in, and indeed to submit a return to the Companies Registry, since Ferriby would otherwise have been exposed to the imposition of penalties. No reliance could be placed, Mr Webster said, on the figures included in the estimated return or those submitted to the Companies Registry; they had been compiled merely in order to meet the deadlines for submission. Instead, one should rely on the financial statements submitted in February 2004, which had been put together after reconstruction of the company's records. He pointed to the fact that the abbreviated accounts submitted to the Companies Registry in the following year adopted as the brought forward figures those derived from the actual accounts rather than from the abbreviated accounts which had been filed in August 2003. I accept that this is so.

Mr Webster's explanation of the chronology and of the corrupted data was, however, rather less cogent. He told me that his own firm's computer software retained the date first input into a client's self-assessment return, and that the fact that the same date appeared on both the estimated and the revised returns for 2002 was attributable to that retention. He did not explain, at least to my satisfaction, why the accounts submitted to the respondents in February 2004 and said to be accurate bore the date 19 May 2003 while those submitted to the Companies Registry, and now said to be inaccurate, were dated 27 August 2003. I can accept that, by accident or conceivably even design, one might retain an original date on a revised self-assessment return, though I would myself expect the date on which the return was signed to be accurately recorded on it. I do not, however, see how the explanation offered by Mr Webster accounts for the different dates on the full and the abbreviated accounts, both of which are derived from the same source material.

The correspondence between the parties about the corrupted disk is also significant. In the letter accompanying the return as it was submitted in August 2003, Mr Webster's office referred only to "data loss". In a telephone conversation between Malcolm Husband, then the officer dealing with the investigation of the return, and Mr Webster on 1 November 2004, Mr Webster is recorded to have said that both the original and the back-up disks were corrupt, and that they had been sent to the software house (Sage) whose product was used by the company in order that, if it was possible, the data might be recovered. In a letter of 15 March 2005 Mr Webster stated that it had not been possible to extract any information from the back-up disk; he did not mention the original disk. Mr Husband asked further questions about the discovery that the disk was corrupt, and the efforts to recover the data, in a letter of 27 April 2005. Mr Webster addressed the matter in his reply of 24 May, mentioning (contrary to his earlier assertion) that the disks had not been sent to Sage, but to a local engineer. It is apparent from the terms of his letter that he was waiting to hear from the engineer about his success in recovering data, also contrary to his earlier assertion that it had not been possible to recover any. Rather oddly, he also stated that the accounts—those sent with the amended return—had been prepared from the computer records. The discrepancies were pointed out in Mr Husband's reply of 1 June, but Mr Webster did not respond to his observations. In a letter of 12 September he stated that the engineer had indicated orally that no data could be recovered but that, despite requests, he had failed to put his conclusion in writing. The correspondence on the topic ended at that point.

At the hearing Mr Webster produced detailed figures which, he said, supported the accounts submitted in February 2004 with the amended return. Although it is not immediately obvious, in some respects, how the two can be reconciled I accept Mr Webster's explanations of them, and that the figures he produced are consistent with the accounts. However, Mr Webster did not produce, either at the hearing or in the course of the earlier correspondence between the parties, any supporting documentation, save for Ferriby's bank statements. He said that Ferriby did not produce invoices, but collected stage payments followed by final payments from its customers. Mr Webster had, nevertheless, produced a list of invoices identifying the customer, the net amount charged, the VAT and the gross amount, but no dates were provided and no attempt appears to have been made to reconcile the amounts charged to Ferriby's bankings. It was apparent that the purchase records were also incomplete.

Mrs Warren took over the enquiry when Mr Husband embarked on sick leave (he has since retired). She accepted that he had made some errors in his calculations but she had, she said, not used those calculations in coming to her conclusion that the estimated profit of £20,000 first submitted was to be preferred to the claimed loss within the revised return. She did so because she did not consider the accounts submitted with the revised return were reliable. They corresponded with the return but she had detected a number of internal inconsistencies which, even at the hearing, Mr Webster was not able to explain fully, and she was unwilling to accept the accounts without adequate supporting documentation, which was not forthcoming. A profit of £20,000 was more nearly consistent with Ferriby's results in earlier years (and was she thought, probably an understatement) but, thinking that she would never arrive at an accurate figure, she decided that the only practicable course was to amend the return in order to show that figure, and to assess the tax due accordingly. She doubted whether the 2003 accounts were any more accurate but had no information on which she might base an amendment, so had felt obliged to accept them as submitted.

Mr Webster told Mrs Warren in the course of his cross-examination that the company's business had changed; it had originally been an installer of double glazing in the East Yorkshire area but, in about 2001, had sold that business and had embarked instead on the construction of domestic extensions in London. The material before me showed that until 31 July 2001 the directors of Ferriby had traded in partnership as "Ferriby Windows and Construction", and the cessation accounts for the partnership (it was with these accounts that Mrs Warren made her comparison) do indicate that various assets were transferred on cessation to Ferriby which, it seems, had hitherto been dormant; but I agree with Mrs Warren that it is difficult, if not impossible, to reconcile that statement with what appears in Ferriby's 2002 accounts, which contain no corresponding statement about the acquisition of the assets, nor monetary entries consistent with their acquisition.

Mr Webster accepted that the relevant approach was encapsulated in the judgment of the Privy Council in Bi-Flex Caribbean Limited v The Board of Inland Revenue (1990) 63 TC 515 at 522:

"The element of guess-work and the almost unavoidable inaccuracy in a properly made best judgment assessment, as the cases have established, do not serve to displace the validity of the assessments, which are prima facie right and remain right until the taxpayer shows that they are wrong and also shows positively what corrections should be made in order to make the assessments right or more nearly right. It is also relevant, when considering the sufficiency of evidence to displace an assessment, to remember that the facts are peculiarly within the knowledge of the taxpayer."

Here, it is necessary to replace "assessment" with "amendment", but the principles remain valid. I cannot accept, on the evidence before me, that Mrs Warren's approach was unjustified. To succeed in this appeal, Ferriby must satisfy me that the determined profit of £20,000 is wrong, and that some other identifiable figure should be substituted for it. I have little doubt that £20,000 is not right, but there is no evidence at all from which I might conclude that some other figure is appropriate. I find it difficult to accept that Ferriby's customers are all willing to pay substantial sums for the construction of extensions at their homes but do not require invoices setting out the nature of the work undertaken and the price paid for it. I am surprised, to say the least, that the software used by Ferriby did not automatically produce invoices. Mr Webster's changing statements about the problems with the computer disks can lead only to the conclusion that he has not been entirely candid. I cannot accept that Ferriby's bankings are a credible guide to its takings when, as the documentary evidence produced to me showed, it was in the habit of paying some of its outgoings in cash, suggesting strongly that some takings were used for that purpose without being banked. The inconsistency between the partnership's cessation accounts and Ferriby's 2002 accounts is, in my view, a further indication that the latter are not reliable.

A trader who does not keep accounting records to a reasonable standard can scarcely complain if his claims to have produced accurate and reliable annual accounts are doubted. I am far from persuaded that any reliance can properly be placed on the 2002 accounts which accompanied the return, unsupported as they are by primary records or sworn evidence. In short, there is no credible material before me which would enable me to disturb the amendments: thus Ferriby has not discharged the burden of showing both that the amendment to the first return is wrong, and that some other figure should be adopted. The appeals must therefore be dismissed.

COLIN BISHOPP

SPECIAL COMMISSIONER
Release Date: 6 September 2007

SC/3027/2007