United Kingdom Special Commissioners of Income Tax Decisions

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URL: http://www.bailii.org/uk/cases/UKSPC/2008/SPC00697.html
Cite as: [2008] UKSPC SPC00697, [2008] UKSPC SPC697, [2008] STC (SCD) 1055, [2008] STI 1881

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Mr M P Singh v Revenue & Customs [2008] UKSPC SPC00697 (03 July 2008)

Spc00697

Appeal against penalty determination – alleged inconsistency between the Appellant's penalty and certain others recently publicised – other issues raised at the hearing - Appeal Dismissed

THE SPECIAL COMMISSIONERS

MR M P SINGH Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: HOWARD M NOWLAN

Sitting in public in Birmingham on 26 June 2008

Mr T Patara of T S Patara & Co, accountants, for the Appellant

Avril MacLeod, HMIT of HMRC's Appeals Unit, Coventry, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction

This was a slightly curious and rather unsatisfactory appeal. The initial ground of appeal appeared to accept that the Appellant had rightly been taxed on rental income that had initially been omitted from his tax returns in the periods 2000/2001 to 2004/2005, and appeared also to accept that there had been neglect on the part of the Appellant in not returning the relevant income. Accordingly the Appellant simply asked for the penalty imposed on him, at 30% of the additional tax charged to be reduced to 15%, and the main ground for claiming this appeared to relate to inconsistent treatment of different taxpayers. Reference was made to an apparent 10% penalty imposed on Tessa Jowell's husband for non-declaration of approximately £300,000 income, and reference was also made to the deal offered to taxpayers with undeclared income on foreign bank accounts to limit penalties to 10% if their income was disclosed during a particular "window" period. I had no difficulty in dismissing the appeal on these issues since the penalty appeared to me to have been fixed in a reasonable manner and in accordance with standard procedures on the basis of the facts known to HMRC throughout the entire period of discussions between 2005 and 2008. I will refer below to issues of consistency.

Matters were made more complex however by the fact that, in the absence of the Appellant, his representative produced a Witness Statement signed by Mr. Singh, and in conformity with the facts summarised in this Statement, advanced the argument that there had been no neglect on the part of the taxpayer because the rental income had been received by the Appellant's wife, from whom he had been separated from about 1997 until some fairly recent date, and that he had not known about the receipt of rental income, so that he cannot have been negligent in not returning it. No mention whatever had been made before the hearing of this contention. I had no difficulty in dismissing the penalty appeal on this ground as well for various reasons that I will mention below.

While I had no difficulty in dismissing the appeal on the neglect point, I did point out, and the Respondents agreed with this observation, that if the Appellant himself had never in fact received the rent, with the rent always being received by his wife, then it would follow (albeit that the assessment on the rent was not even implicitly under appeal) that the wrong person would have been assessed. I suggested thus that if the Appellant considered that he and his wife, and the agents who had collected rents on behalf of one or other of them could establish that the rental income was in fact his wife's income, then he might be able to make an error or mistake claim, re-opening the assessment on the rental income itself. Were that approach followed and were it successful, it should mean that the tax assessed and indeed the 30% penalty would all drop away on this quite different ground, though naturally his wife would then be liable for tax, though possibly in a lesser amount.

The only matter before me however was the penalty determination and I repeat that I dismissed the appeal against the level of penalty on both the ground initially advanced and on the neglect point raised at the hearing.

The facts in more detail

Mr. Singh was in business as a haulage contractor, and had been trading since 1999. He was married but separated from his wife at some time in 1997/98, whereupon he moved from the matrimonial home at 359 Harborne Lane, Harborne, Birmingham, where his wife remained, and moved back to live with his mother at 370 Harborne Lane. It was asserted that he was often away from home, then usually sleeping in the cab of his lorry. Relatively recently he has reconciled with his wife and is now living with her again at 359 Harborne Lane.

On 10 January 2005, HMRC opened an enquiry into his 2002/2003 tax return. In a letter sent to his then accountant, various questions were raised about his business accounts, largely it seems because there was a certain lack of information and documentation. More significantly, the last paragraph of the HMRC note to the accountants asked them to "ask Mr. Singh to review the entries in the return and confirm that it is complete and correct, as I have information that suggests that this may not be the case."

The enquiry proceeded initially in a rather unsatisfactory manner with HMRC writing various reminders about information that had not been supplied, and in May 2005 threatening penalties if the information was not supplied. When it was supplied there was an assertion that no income had been omitted from the return.

There followed a further period in which HMRC encountered difficulties in obtaining responses and information from the Appellant and his then accountants. A meeting was held on 11 January 2006 to try to progress matters, one item on the agenda being again the disclosure that third party information indicated that the Appellant had an undisclosed source of income. In response to a question in relation to this at the meeting, the Appellant said that he did not wish to re-consider his earlier statement that his return had been full and accurate.

Whilst this was not disclosed to the Appellant at the time of the meeting (and indeed prior to the hearing before me) the information that HMRC had was a notification or response from a letting agent, indicating that they had let Mr. Singh's property, 359 Harborne Lane in September or October 2000, and that they were receiving rent "on behalf of Mr. Singh". The letter then indicated the amounts of rent (in the region of £5,000 a year) in various years.

In the light of this information, the relevant Inspector, Natasha Guise (who produced a careful witness statement and affirmed it to be true) asked the Appellant at the 11 January meeting about the ownership of 359 Harborne Lane, which the Appellant said he had given to his wife in 1988. The Inspector said that she had information that he was receiving rental income in respect of it, which he denied. According to the Witness Statement that was produced on his behalf at the hearing by his representative, the Appellant claims that he explained to the Inspector that "he would have to talk to her to find out about the rent." The Inspector's Witness Statement made no reference to this remark though since she confirmed that he had said that he had informally given the property to his wife, either in 1988 or "when they separated", it may well be that this claimed statement was made.

There was then a further period of confusion and delay, largely created it seems because the Appellant changed his accountant, and appointed T.S. Patara & Co to represent him and this firm found it difficult to obtain papers from the previous accountants until their bill was paid by the Appellant. During this period, the Inspector again had to threaten penalties for non-provision of documentation.

According to the Appellant's Witness Statement, the Appellant stated that "I told my new accountants to prepare rental accounts and they confirmed by telephone to the Inspector that there was rental income and that statements of rental income were being prepared and would be submitted as soon as possible". Since this appears to have followed the release of his papers by his previous accountants in July 2006, I assume that this phone call occurred at some time in July 2006, in other words about six months after the January meeting.

It then appears that somewhat speedier progress was made with the assistance of the new accountants, and it was resolved that very few minor adjustments needed to be made to the business accounts, but that in addition to assessing tax and interest in respect of the undeclared rentals, the Inspector proposed to impose a penalty on the ground that there had been neglect on the part of the Appellant.

The Inspector explained the procedures about penalties to the Appellant in writing, and explained that the maximum penalty where the taxpayer had been responsible for "neglect" was 100% of the tax initially lost as a result of the non-declaration. She also explained that the penalty was often greatly mitigated and that the standard procedures of HMRC were to reduce the penalty by some proportion of 20% where the taxpayer has disclosed the initially omitted income earlier rather than later in the enquiry process; by a proportion of 40% dependent on the taxpayer's cooperation, and by a proportion of 40% according to the seriousness of the taxpayer's overall offence and non-disclosure.

The total income that was not declared for the years 2000/01 to 2004/05 was £11,710, and the total tax and class 4 National Insurance contributions resulting from the disclosures and minor Schedule D business adjustments £2,860.51. The maximum penalty was thus that amount of additional tax, but since the Inspector conceded abatement of 10%, 30% and 30% in respect of the three possible categories of abatement summarised in paragraph 14 above, the penalty imposed was £858.

The only point in contention before me was the quantum of penalty, rather than any point concerning the taxability of the rent, or the minor business adjustments.

The relevant law

It was not in dispute that it was for the Crown to demonstrate negligent conduct on the part of the taxpayer, but once that had been done, it was then for the Appellant to prove that the level of penalty was excessive. It was open to me to eliminate the penalty if I considered that no neglect had been demonstrated, or to confirm or vary it if I considered it appropriate to do so on the Appellant's evidence and contentions.

The contentions on behalf of the Appellant

In all the correspondence, and in the grounds given for the Appeal, it was implicitly accepted that the rent had rightly been taxed and that there had been neglect, and the only initial contention was that the penalty should have been set at 15%, rather than 30% of the additional tax. Considerable stress was placed on points concerning consistency and fairness, as between different taxpayers with reference being made to a mere 10% penalty apparently imposed on the husband of Tessa Jowell in respect of undisclosed income of a vastly higher figure, and to the 10% penalty offered in the amnesty available to those individuals with undisclosed income and undisclosed interest on foreign bank accounts were they to make voluntary disclosures in a particular "window" period, 100% penalties being threatened if voluntary disclosures were not made.

At the commencement of the hearing, the Appellant's representative raised the additional point that it was now to be contended that there had been no neglect because the Appellant had not known and could not be expected to have known that his wife had received rental income. This point was advanced solely to rebut the Crown's claim that there had been neglect, rather than to suggest that the Appellant himself should not have been taxed on the rental income at all because it was his wife's income.

Whilst in my view nothing much turns on it, I should add that the Appellant's representative was critical of the whole enquiry that had been undertaken, suggesting that had the Inspector been more experienced in accountancy topics and terminology she would have realised that much of the information that she had been demanding had already been provided, and that in any event only trivial adjustments were made to the taxable income derived from the business accounts.

The contentions on behalf of the Respondents

It was contended on behalf of the Respondents that:

• the manner in which the penalty had been calculated was fair and in accordance with HMRC's standard procedures, proceeding initially on the basis that there had been neglect, which had not been disputed until the opening of the hearing;

• the 10% penalty offered to the offshore account holders was only given in return for voluntary disclosure;

• since the Appellant had not appeared at the hearing to confirm his evidence and to be cross-examined, I should hesitate before accepting the new claim that there had been no neglect because the third party information on which HMRC had been basing their contention that rental income had been omitted from the Appellant's return actually indicated that the third party in question (letting agents who had implicitly been asked questions by HMRC) responded that they had let Mr. Singh's property and collected rents "on his behalf".

My decision

I will deal with the points in this decision in the order in which they were raised in initial submissions and during the hearing, albeit that this is unfortunately the reverse of the more coherent and logical order.

Accordingly I deal first with the issue of whether I should adjust the penalty because it has been set at too high a level, or because of invidious comparisons with other taxpayers, and in this context I proceed on the assumption adopted until the hearing, namely that there had been neglect.

I have no hesitation in dismissing the appeal on this point, and thus in confirming the level of the penalty. It indeed seems to me that the Appellant had denied the existence of the income on a number of occasions and did not confirm the receipt of rental income (then without any qualification as to whose income it was) until about 18 months after the commencement of the enquiry. The Appellant failed to respond to a number of requests for information and twice had to be threatened with penalties simply to prevail upon him to provide information and answer questions. Finally the non-declaration, albeit not of very high amounts of income, spanned over a long period. In the light of these factors I consider that the 10%, 30% and 30% abatements in the level of penalty were, and the cumulative 70% reduction was, if anything fairly generous. These reductions also appeared to have been calculated in a structured way, paying due regard to the three factors that the Inspector is meant to consider in mitigating the full 100% penalty.

I entirely accept the point made on behalf of the Appellant, namely that it is vital that there should be fairness and consistency between taxpayers, and if anything more important that more highly educated and wealthy taxpayers should probably expect to suffer higher penalties than others, and certainly not lower penalties. I consider however that what the Appellant is asking me to do would produce the exact reverse of fairness and consistency, since I imagine and hope that the vast majority of other penalties imposed on negligent taxpayers are calculated in the manner that the penalties in this case were calculated. To ask me to reduce penalties to match those in two highly-publicised cases, without my knowing the full facts and considerations in those cases is not only asking me to ignore the approach which I consider that I ought to follow, but it would destroy the fair and structured approach to calculating penalties adopted by HMRC.

I have absolutely no knowledge of the circumstances in the case involving Tessa Jowell's husband, and so will not comment on that case. I will however comment on the semi-amnesty offered to the offshore account taxpayers, because I consider that the explanation given by the Respondents for the low level of penalty offered for voluntary disclose was not quite correct. The explanation that seems to me to be more coherent is that HMRC has some general discretions in operating the taxation rules, and in the case of the offshore account holders, the policy decision must have been taken that in the interests of obtaining information about the greatest number of defaulting taxpayers as quickly and efficiently as possible, there needed to be some "carrot and stick" approach to render it prudent for taxpayers to come forward and reveal the hitherto undeclared income. No other explanation makes sense in the light of the fact that virtually all of these cases will have involved very serious fraud often over a long period, and disclosure only when, with the likely provision of information by banks, it appeared that "the game was up". Whilst thus I can sympathise with the feelings of the Appellant that he has suffered a higher penalty than people whose offence will generally have been far more serious, I consider that there must have been policy reasons for the amnesty offered. Accordingly it would once again be wrong to modify the penalty in this case from the guidelines applicable in all penalty cases, just because in one very high-profile case there has been an understandable policy reason for adopting the "carrot and stick" approach.

I turn now to the contention that was raised to the effect that there was no neglect on the part of the Appellant because he did not and could not have known that his wife had let the house, 359 Harborne Lane. I approach this question in the manner in which it was advanced at the hearing. In other words it was not asserted that of course Mr. Singh knew that the house had been let, and that indeed when walking past a house seemingly only about four houses distant from the house where he was living with his mother, he had regularly seen one or more of the five tenants going into and out of 359 Harborne Lane, but had ignored this because any rental income was obviously that of his wife and not his income at all. This was never contended, but instead it was suggested that whilst he indeed remained taxable on the rental income, which was not even under appeal, he had actually not known about the existence of the letting and the five tenants at all until the HMRC's enquires led him to discuss the matter with his wife.

I dismiss this contention that there was no neglect because:

• the Appellant did not appear at the hearing in order to face cross-examination in relation to an argument that had only been advanced at the last minute;

• the letter from the letting agents which I was shown (not of course that the Respondents imagined that the neglect issue or the terms of the letter would be of any relevance in the hearing) seemed strongly to suggest that the rent was received on behalf of Mr. Singh. It also implied that the September 2000 dealings when the property was let were conducted either by him or at least with his knowledge, which is not surprising as he remained the registered legal owner of the property in question. No evidence was forthcoming as to who the rent "received by the agents on behalf of Mr. Singh" was actually paid to by the agents, or whether it was paid by cheque or in cash, so that it is just possible that the agents handed all the rent to Mrs. Singh. If that is so this may have some relevance to the third issue (see below) but I still find it impossible to accept that Mr. Singh can have known nothing about the letting in the light of the content of the relevant letter;

• I cannot accept that Mr. Singh cannot have known about the presence of five tenants living in a house with his separated wife, when he himself must have been living for a period of four to five years only a few yards from the house in question, and when perhaps at some time he may have spoken to his wife; and finally

• there seems some significance to the fact that during the period in which there have been discussions with HMRC, in which two firms of accountants have been involved, no mention has been made of this argument concerning absence of neglect until the morning of the hearing.

The obvious point that resulted from the contention on the part of the Appellant that he had known nothing of the receipt of rent, and so had not been guilty of neglect, was that if he had genuinely not known of the receipt of rent, then it would seem unlikely that he himself had received it. It should accordingly have followed that if he had not received it, then his wife must have received the rent and if the relevant property had been given in some way (either in 1988 as asserted, or when they separated in 1997/98) to his wife then it might very well follow that the rent would have been his wife's income for tax purposes, and to date the rent would have been assessed on the wrong person. Accordingly, and the Respondents agreed with this proposition, if it could be demonstrated that the agents had in fact accounted for the rent to his wife and not to him, and evidence from bank accounts could ideally support this proposition, then the Appellant might be able to make an error or mistake claim and show not only that the penalties should be discharged but that the assessment on the Appellant in respect of the rent and interest (and in consequence the penalties as well) should all be discharged.

It was not appropriate to pursue the issue of whose income the rent was in the hearing, though I do just observe that it seems curious, if the rent were his wife's, that the letter of 4 April 2007 from HMRC refers to deductions given from the taxable rental income for mortgage interest and repair costs, which implicitly had been incurred by the Appellant.

I might finally make the one further observation that if the Appellant cannot make the error or mistake claim that I am suggesting that he should be able to make if he knew nothing at all of the receipt of rent, and the reason he cannot make that claim is because he did receive the rent himself, then this would appear to confirm the reality of the ground on which I have dismissed the appeal on the neglect contention. In other words if he did receive the rent, then he can hardly claim that he was ignorant as to the receipt of the rent.

Since the only matter formally before me is the penalty issue, this appeal is dismissed.

The Appellant asked for an award of costs were he successful and the Respondents asked for no such award themselves. As a result, no order for costs is made.

HOWARD M NOWLAN

SPECIAL COMMISSIONER

RELEASED: 3 July 2008

SC 3077/2008