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URL: http://www.bailii.org/uk/cases/UKSPC/2008/SPC00726.html
Cite as: [2008] UKSPC SPC726, [2008] UKSPC SPC00726, [2009] STI 148, [2009] STC (SCD) 139

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Mr A C Haskins v Revenue & Customs [2008] UKSPC SPC00726 (04 December 2008)

Spc00726

Income tax - Errors in Return - Appeal against reconstructed Assessment made by HMRC - Appeal allowed in part

THE SPECIAL COMMISSIONERS

MR A C HASKINS Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: HOWARD M NOWLAN

Sitting in public in London on 31 October 2008

The Appellant failed to attend the hearing and was not represented

Brian Skelley, and Graham Conway, both of HMRC. for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction

This was a very unsatisfactory case. It revolved simply around the evidence, or rather the startling lack of reliable evidence, in relation to the income on the Appellant's Return for the period ending 5 April 2004. Although I have allowed the Appeal in part, the realistic way to express this is that since the burden of proof is on the Appellant to show that the reconstructed assessment made by HMRC is wrong, and he has advanced no satisfactory evidence to establish this, the Appeal is in substance dismissed. I have simply made two adjustments, one to concede an estimated figure of expenses of £3,000, which was agreed at the hearing with the representatives of HMRC, and the other to make a further adjustment in the light of one document produced by the Appellant that the Appellant had been seeking to locate prior to the hearing, and which he has delivered to HMRC since the hearing.

The prelude to the hearing

The hearing was preceded by a request for a postponement of the hearing by the Appellant. The Appellant claimed that he was hoping to obtain from the Official Receiver of one of two related companies (that I will refer to as "the Abbey Building companies") that had gone into liquidation, a crucial document that would establish that he had been regarded as an employee by one or both of the relevant companies, and which would also establish that one or other of the companies had deducted or at least had indicated that they had deducted tax from the employment income paid to the Appellant.

The request for the postponement was met by an immediate and detailed response by the Respondents, objecting to the application. This was on three different grounds. Firstly the Appeal had already been postponed, and the Respondents suggested that the request for a postponement was tactical. Secondly the Appellant had had a great deal of time in which to prepare for his appeal, and it was simply unacceptable for the Appellant to request a postponement when the Appeal had already been postponed from May to October. He had had ample time in which to prepare and provide evidence, and had to date provided virtually no satisfactory evidence. Thirdly, the Respondents were not remotely persuaded that the Appellant was going to find any evidence that he had been regarded as an employee by either or both of the Abbey Building companies. The Respondents had already verified amongst their own records that the Appellant had not been shown to be an employee of the Abbey Building companies on the returns that those companies had made of their total employees to whom employment income had been paid in the relevant year. Furthermore the respondents had also been notified by Moore Stephens, who had acted in relation to the liquidation of the companies, that they had seen no evidence that the Appellant had been employed by either of the companies, and ostensibly been paid any employment income under deduction of tax by either of the companies.

In response to the application for a postponement and the objections advanced by the Respondents, I issued an immediate Direction, indicating that the Appeal should proceed as arranged but that I would grant an adjournment during the hearing, should it emerge that further evidence might become available which would be relevant. In response to this the Appellant indicated that he would not be attending the Appeal. I had no hesitation in deciding not to re-visit the question of whether I should grant the adjournment, since I regarded the Direction that I had issued as entirely reasonable, and I regarded it as unacceptable that the Appellant should seek to undermine this approach by simply boycotting the appeal hearing.

The background facts

The Appellant is a bookkeeper, operating it seems in and around Bristol. He had a number of clients who he invoiced, and was plainly chargeable to income tax under Schedule D Case I in respect of the profits from this activity. He indicated on his Tax Return for the period ending 5 April 2004 that he had also received employment income of £17,722, from which it was asserted that tax of £3,898.84 had been deducted. Whilst the identity of the employer was not disclosed on the Return, it emerged later that the alleged employment was with one or both of the Abbey Building companies. The Appellant claimed that he had been employed from 4 May to 9 October 2004, when the companies went into liquidation.

There was no evidence as to whether the Appellant's activity with the Abbey Building companies was rightly classed as an employment. In a curious way the Appellant had invoiced these companies on four occasions during the relevant tax year, generating gross income of £150, £5,300, £450 and £500, all of which income was said to have been received in cash, and all of which was assumed to have been received in the course of his Schedule D activity. It was not clear why some of his income was received in the course of his general trade, whilst £17,722 was allegedly paid, net of tax and National Insurance contributions on the basis that he was employed. For the purpose of this appeal, the only significance of the claimed distinction was the issue of whether tax had been deducted, or at least whether tax should have been deducted under the PAYE machinery from the figure returned as his gross employment income.

The Appellant's Tax Return figures

The figures on the Appellant's Tax Return for the period ending 5 April 2004 disclosed gross income in respect of his Schedule D trade of £21,411. He ended up with only a profit of £8,280 since he claimed deductions for £2114 in respect of "costs of sales" (the nature of which was never clarified), £1250 in respect of unidentified "premises costs", £166 for repairs, £500 for "general admin", £1800 for motor expenses, £420 for "travel and subsistence", £300 for advertising and promotion, £411 for legal expenses, £4,000 in respect of a bad debt and £900 for "other expenses". There was then an "add back" of £850 as a result of that expenditure being accepted to be non-deductible for tax purposes. Capital allowances were then claimed in respect of £200 for cars, and £1,920 for "plant", leaving the claimed net taxable profit at the figure of £8,280.

The enquiry into the return

On 14 November 2005, Mrs. Pauline Naish, one of HMRC's officers responsible for verifying self-assessment returns, wrote to Mr. Haskins, indicating that she proposed to investigate his Return. Mrs. Naish gave evidence before me and struck me as an honest, and also not remotely confrontational, individual. In her opening letter she indicated that she wanted to see Mr. Haskins' business accounts and the records underlying those accounts and she wanted to know the identity of the employer by whom the asserted employment income had been paid.

On 14 December there was a meeting between Mrs. Naish on behalf of HMRC and Mr. Haskins and a Mr. Bulled. Mr. Bulled was Mr. Haskins' accountant, as well as being the person who had been responsible for filing details of employees of the Abbey Building companies and of the employment income paid to them, and also some sort of loose business associate of Mr. Haskins. At the meeting, Mr. Haskins said that his Return had been wrong and that it had been compiled by a colleague on his behalf and allegedly signed on the day of his father's funeral when he had not particularly been concentrating on the contents of the Return. Mr. Haskins had brought with him various documents including a schedule of customer invoices in date order totalling £17,943.70, a folder of expenditure receipts which all related to the previous tax year, which were thus were completely irrelevant, some diesel receipts (some of which related to a Mr. C Smith, a client of Mr. Haskins, and none of which indicated whether the relevant mileage was business or private mileage), a schedule indicating Mr. Haskins' gross and net remuneration from the Abbey Building companies, and various other fairly irrelevant documents. Mr. Bulled confirmed that he had unfortunately left behind his revised Profit and Loss account for Mr. Haskins' Schedule D business and that that would be forwarded on the next day.

There were two unusual features to the schedule indicating the gross and net receipts from Mr. Haskins' alleged employment with the Abbey Building companies. One was that the schedule was not an official PAYE document, but simply a schedule that had been compiled to give the relevant figures. The other was that the amounts of net pay were in round numbers, virtually all of them indicating weekly pay of £500, whereas the equivalent gross numbers were of £713.93, or in some cases £713.71. This led to a tentative assumption on the part of Mrs. Naish that the figures had been compiled from the figures actually paid (in other words the amounts of £500), and that the gross pay had been calculated by simply grossing-up the net pay. This tentative supposition was somewhat confirmed when Mrs. Naish established from one of her colleagues who held PAYE records that Mr. Haskins had not been recorded as an employee of either of the Abbey Building companies on the forms that those companies had completed showing the list of employees to whom employment income had been paid, which form had been completed and signed by Mr. Bulled.

At the meeting, it was agreed that Mr. Bulled would immediately forward the revised Profit and Loss account and that he would send a cheque for £3,500 from his client account, paying some or all of the tax now thought to be owing. On the following day, those items were sent, but the cheque itself subsequently bounced. The Profit and Loss account indicated increased gross receipts of £22,148, increased (but still unexplained) "Cost of sales" of £3,124, and then expenses of £2,000 for wages, £1,585 for "motor expenses", a revised bad debt claim of £2,500, and miscellaneous expenses of £2,243. The resultant net profit was the figure of £10,696.

Mrs. Naish wrote to Mr. Bulled on 12 January 2006, indicating that she could not reconcile the gross takings with the lower figures in the schedule of customer invoices referred to in paragraph 9 above, and asking who the wages had been paid to, which customer had occasioned the bad debt claim, whether any capital allowances were to be claimed, and whether Mr. Bulled, who had compiled the PAYE figures for the Abbey Building companies could confirm that employment income had been paid to Mr. Haskins and the indicated tax deducted under the PAYE machinery.

There was a further meeting between Mr. Haskins and Mrs. Naish on 22 February 2006. This meeting was not attended by Mr. Bulled because by this time it appeared that Mr. Bulled had suffered a nervous breakdown from which he was said to have recovered, and more recently had suffered a very serious stroke.

In response to Mrs. Naish's comment that she was unable to reconcile the gross receipts indicated in Mr. Bulled's figures, provided on 11 December (at £22,148) with the £17,944 receipts indicated in the schedule of Mr. Haskins' invoices to clients, Mr. Haskins handed over a further sheet of figures and said that his gross receipts should in fact be £28,418. This sheet then indicated deductions for "purchases" of £1254, labour expenses of £2154, overheads of £3,145, and motor expenses of £4,896. This left a net profit of £16,978, but Mr. Haskins had also handed over a piece of paper claiming first year capital allowances of £4,896, a figure for which he had no written evidence, but which he had recalled "from memory".

Mr. Haskins indicated, in response to further questions from Mrs. Naish, that he had no business records to support the turnover figures or the deductions. All the papers had been handed to Mr. Bulled and could not now be obtained. Similarly the form P60 from Abbey Building companies, that he had received, had been handed over to Mr. Bulled, as also had all paper-work relating to the items purchased (in cash he thought) in respect of which capital allowances had been claimed. None of the papers had been retrieved, and seemingly no paper-work was provided by Mr. Haskins in relation to any of the items mentioned in this paragraph 15 between the date of the meeting in February 2006 and the date of the hearing before me over two and a half years later.

As regards the wages allegedly paid to an assistant, Mr. Haskins said that he had paid between £40 and £50 to a Miss Sashi Becker, who had been a student and former neighbour of his. She now had an address somewhere in Kent that was on the P 46 that she had signed, but that form was also with Mr. Bulled and was accordingly unobtainable.

There was also a discussion about the bad debt claim that had been made, namely the figure of £2,500 claimed in the accounts that Mr. Bulled had sent to Mrs. Naish on 11 December 2005. Mr. Haskins said that this was in respect of part of an invoice for £5,000, that had been rendered against the Abbey Building companies in about September 2003, the invoice number or numbers having been between 21 and 26. Mrs. Naish indicated that on the schedule of gross takings and invoices that had been supplied to her, the invoices ended at number 20, and I note in passing that all four invoices recorded on that schedule against Abbey Building companies had been said to have been paid in cash. Mrs. Naish perhaps not unsurprisingly said that she could hardly allow a bad debt claim in respect of an invoice that had not been included in the schedule of gross turnover.

The explanation as to how Mr. Haskins produced a turnover figure of £28,418 at the meeting on 22 February 2006 is something of a mystery. Mrs. Naish asked Mr. Haskins to explain this in a subsequent letter, and I believe received no response. It was pointed out to me at the hearing that, whether this was a coincidence or not, the figure of £28,418 was exactly the sum total of the gross employment income of £17,722 and the figure of net profit of £10,696, shown in the figures handed over by Mr. Bulled on 11 December. I have no idea whether this is the explanation of how the turnover jumped to a figure of £28,418, but I do note that if this was the explanation, then it appears that deductions are being double counted, in that the figure of £10,696 was already a net figure, after all deductions (though without any claim for capital allowances). By "double counted" I do not of course mean anything as simple as to suggest that the same figures were deducted on two occasions. For instance in Mr. Bulled's figures, there was a claim for "motor expenses" of £1,585, whereas in Mr. Haskins' 22 February there was a figure for motor expenses of £4,896, making a total, assuming that both figures were effectively deducted in the 22 February figures, of £6,481.

The assessment made by Mrs. Naish and the revision to that assessment

Faced with the various astonishing facts that Mr. Haskins had now effectively put forward three sets of quite different figures, had admitted that the original Return was wrong, had not furnished any proof or indication that any of the expenses had been incurred or that the items allegedly purchased to sustain the capital allowance claim had been purchased, had made a bad debt claim in respect of an invoice that appeared not to have been included amongst the turnover figures produced, and that no PAYE documents had been provided to establish that Mr. Haskins had been an employee (when the documents filed with HMRC indicated that he had not been amongst the employees of the Abbey Building companies), Mrs. Naish made an assessment in which she took the gross turnover indicated by the schedule of invoices mentioned at paragraph 9 above, namely £17, 944, treated the claimed figure of employment income of £17,722 as further gross receipts for Schedule D purposes and disallowed all the expenses, and the claim for capital allowances. Thus she made an assessment in the amount of £35,666. Following discussions with a colleague, this was reduced to reflect the expectation that the alleged employment figure of £17,722 had never been received, but that instead the net figure of £12,400 had been received, and the higher figures was simply derived by Mr. Haskins and Mr. Bulled by grossing up the actual cash figures received, which totalled the £12,400. On this basis the assessment was reduced to £30,344.

Further correspondence

There was considerable further correspondence between the parties. In this Mr. Haskins has often complained about the conduct of Mrs. Naish. Naturally I was not present at any of the meetings, so that I cannot judge whether Mrs. Naish acted in an aggressive manner at the meetings. All that I can do is to say that in all the correspondence, that from Mrs. Naish and other HMRC officers was absolutely correct and the correspondence simply requested information. Whilst the correspondence might have done that repeatedly, it has to be said that the explanation for the repeated requests was that no relevant information was ever provided. By contrast the correspondence from Mr. Haskins was generally complaining about something, and seemed oblivious to the fact that when he had admitted that the original Return was totally incorrect, and when both sets of subsequent figures were in conflict, and none supported by any documentation at all, the burden really was upon him to respond to the reasonable requests, rather than just complain. Two examples of this may illustrate the attitude of Mr. Haskins.

Mr. Haskins' letter of 26 July 2006 read as follows:

"Thank you, for your letter of the 25^th July additionally with reference to that letter.

You put forward a meeting, usually my expectations would be conceivably I may have necessitated such a meeting to give my full assistance and offer any information (corroborative or not) I know how to make available and put to an end to this enquiry: Nonetheless my judgment is that it is meaningless due to your predetermined mind-set on this specific enquiry.

Therefore I leave you to draw to a close, in that direction you deem factual.

Yours sincerely, "

A rather more relevant extract is in the document where the Appellant gave the grounds of his appeal, in the following terms:

"I appeal

Opening enquiry was in every respect one of "iniquity" by a colleague of Mrs. Naish, a Mr. Bishop.

Material evidence supplied of my status "vis a vis" employed self employed has been utterly disregarded.

Statutory documents verify my status: I am completely taken aback that Mrs. Naish is not capable in comprehending the particulars incorporated in HMRC documents (i.e. p60).

This enquiry has been greatly personalised by Mrs. Naish.

Use of outside agencies by Mrs. Naish has at best been a transgression.

Language used uncommonly in meetings along with letters has been vituperative.

It is my judgment, Mrs. Naish has used this enquiry to settle "issues" that had transpired with my former colleague Mr. Bulled.

The amendment is therefore fallacious.

I for that reason request a Special Commissioners hearing".

My decision

My understanding of my jurisdiction is that I can confirm or amend the assessment made if I consider that it over-charges the Appellant, albeit that the burden of proof in demonstrating that rests with the Appellant. This case is unsatisfactory in a number of respects, including particularly in the present context the fact that the Appellant chose not to attend the hearing, and appeared to have been focused entirely on the one questions of whether he had indeed been employed by either or both of the Abbey Building companies, and whether thus tax had been or should have been deducted in respect of employment income from those companies. The Appellant appeared altogether to lose sight of the fact that his appeal also involved major questions concerning the computation of his gross turnover, and the admissible deductions in calculating net profits.

Until I was sent a letter after the hearing by HMRC attaching a document that I will refer to below, I was initially minded to adjust the assessment by conceding a deduction for expenses of £3,000 against the amount assessed. The representatives of the Respondents confirmed that they considered this reasonable. The reasons why I considered that the assessments should otherwise be confirmed, and why I conceded the deduction for £3,000 of expenses, were as follows. I consider that by taking the gross turnover as one of the lowest figures ever mentioned, namely the figure of £17,944 derived from the list of actual invoices, HMRC has at least commenced its efforts to compute the profits in the absence of reliable information from a solid starting point, and from a reasonable one. By adding in the alleged employment income at merely the net figure of £12,400, when HMRC had no evidence that Mr. Haskins had been an employee of the relevant companies and when his name had not been amongst the list of employees on the forms filed by the companies, signed by Mr. Bulled, that indicated the identity of their employees, and when the figures of employment income were round figures only in their "net" rather than "gross" or "grossed-up" amounts, HMRC again acted reasonably. In relation to the denial of any deduction for expenses, I need to mention a number of factors. There is first the compelling fact, not only that the Appellant has altogether failed to produce any evidence to sustain any claim to deduct anything, but the various utterly conflicting figures that have been produced leave one with a feeling of total lack of confidence in everything said by the Appellant. The motor expenses that have now rocketed to a very high figure indeed, in comparison with turnover, were initially accompanied by receipts for diesel purchased by someone else, and with no attention to the split between private and business mileage. The eventual figure for capital allowances was produced without any supporting documentation, "from memory" and without any indication of what had been purchased. There was no evidence of income having been paid to an employee, and even no information available to demonstrate who that employee was. The bad debt claim related to invoices not included amongst those included in the figures of gross turnover, and every invoice in the schedule of invoices against the Abbey Building companies had been paid in cash. In total furthermore the expenses claimed were a very high proportion of the Appellant's turnover.

In short, the Appellant, who after all is a bookkeeper, and who has been assisted or hindered by support from an accountant, has seemingly given new meaning to the expression about the "shoe-maker being worst shod". I simply cannot accept that it has been impossible in a period of nearly three years to retrieve documents or re-create them, so as to do a better job of proving the entitlement to any deductions in some faintly reliable fashion. I have decided that a figure of £3,000 should be conceded as a deduction for expenses because it is natural that the Appellant would have incurred some expenses. In the light of the fact that of the sum assessed, £12,400 derived from the Abbey Building companies are that no particular expenses were attributable to that income (and indeed none were claimed when the grossed-up figure was reported as employment income), the figure of deductible expenses is rather closer to a 20% rather than 10% deduction, and I think that very reasonable.

The further information

Since the hearing, the Appellant delivered, without comment or any explanation, a single sheet of paper that appeared to be a copy of a form P 60 in respect of employment income of Mr. Haskins from Abbey Building Consultants Limited for the year ending 5 April 2004. This shows, somewhat surprisingly, gross pay paid to the Appellant of £9,679.78, subject to a deduction of £2,129.38 in respect of PAYE tax, and subject also to a deduction in respect of employee's primary Class 1 National Insurance contributions. In forwarding this photocopy of a form to me, the Respondents have commented that the figures on the form do not correspond with any of the figures that emerged in their enquiry or that were mentioned in the hearing, and they have also said that the origin of the document, of which they and I have only seen a copy, is a mystery. Amongst other matters, since the Appellant was not an employee of the companies on his own admission after 9 October 2003 when the Abbey Building companies were placed in liquidation, the form submitted should have been a P45, and not a P60, the latter indicating the employment income of employees only at the end of the tax year.

The fact that this form was handed in at the Bristol tax office without explanation or comment is again very unsatisfactory. The fact that induces me to take it seriously is that it does not contain the figures that everyone had talked about. Were it in other words a fabrication, I imagine that the figures would have tallied with those initially claimed. As it is, I accept that the evidence for concluding that the form is genuine is fairly slim, but because of the disparity in figures, I am inclined to accept that this amount of income should be accepted to have been paid as employment income, with the liability then on the employer to account for the tax, purportedly deducted from the income. It thus follows that the figure initially included in the Appellant's assessment of £12,400, representing the net equivalent of the amount initially claimed as gross employment income of £17,722, should be reduced by the amount of employment income indicated on this copy P60, net of the PAYE tax and National Insurance shown to have been deducted. If I rightly understand that the employee NIC deduction was for £800, and the income tax £2,129.38, this would put the net equivalent of the income shown on the P60 as £6,750, leaving thus £5,650 to be included in the Schedule D assessment in place of the figure of £12,400. It seems to me that this provides generous treatment to the Appellant.

HOWARD M NOWLAN

SPECIAL COMMISSIONER

RELEASED: 4 December 2008

SC 3089/2007