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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> McAdam v Revenue and Customs (INCOME TAX/CORPORATION TAX : Penalty) [2016] UKFTT 838 (TC) (20 December 2016) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2016/TC05563.html Cite as: [2016] UKFTT 838 (TC) |
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TC05563
Appeal number: TC/2016/02797
INCOME TAX – discovery assessments – Closure Notice – omitted cash sales – wife’s wages – penalties – assessments and penalties confirmed – Appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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WILLIAM ![]() |
Appellant |
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- and - |
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THE COMMISSIONERS FOR HER MAJESTY’S |
Respondents |
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REVENUE & CUSTOMS |
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TRIBUNAL: |
JUDGE ANNE SCOTT |
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MEMBER: IAN MALCOLM |
Sitting in public at Eagle Building, Glasgow on Monday 12 December 2016
Mark Lees, for the Appellant
Matthew Mason, Officer of HMRC,
for the Respondents
© CROWN COPYRIGHT 2016
DECISION
Issues for the Tribunal
1.
In the Statement of Case HMRC
had identified three issues,
namely:-
(a) whether there are omitted cash sales from work done by the appellant resulting in the turnover being understated,
(b) whether the deduction for wife’s wages was reasonable, and
(c) whether
in view
of the alleged inaccuracies in the 2010-2014 self-assessment tax
returns, penalties under Schedule 24 Finance Act (“FA”) 2007 are
due.
At the outset of the hearing we enquired of the parties whether these were still the issues and it was confirmed that that was the case.
Background
2.
On 15 April 2015, HMRC
wrote to Mr
McAdam
to advise of their
intention to open an enquiry under Section 9A Taxes Management Act 1970
(“TMA”) into the appellant’s self-assessment tax return for the 2013/14 tax
year. That opening letter was followed by a detailed request dated
5 May 2015 for the business records together with details or analysis
of estimates/balancing figures, turnover/income, drawings, cost of sales and
other papers. Copies of the letters were also issued to Mr
McAdam’s
representative, Mr Lees.
3.
As far as the business records for the period 6/4/13 to 5/4/14 were
concerned, HMRC
stipulated that they needed to see the statutory records
including income/sales invoices, receipts books, purchase/expense invoices /receipts,
business bank statements (and if business transactions were dealt with through
personal bank accounts then statements for the personal accounts), credit card
statements, cash books, sales day book, wages records and booking diaries.
4. The business records produced were a ledger, business bank records and purchase invoices.
5.
On 27 May 2015, Officer Steven met with Messrs McAdam
and Lees and thereafter on 29 May 2015 wrote to Mr Lees enclosing
three pages of Notes of Meeting stating: “If
you feel any items are inaccurate or I have missed any important points, then
please let me know”. No objection was taken at any point until this
hearing.
6. The said letter pointed out that the main issues arising were summarised at “Summary” in the Notes of Meeting. That read as follows:-
“Steven outlined three main issues so far:
(1) The sales records are weak and there is no way for him to test the accuracy or completeness of the cash income from the business records. Steven asked to see all the private bank records including savings/ISAs for the period of his checks, ie 6/4/13 to 5/4/14 …
(2) Evidence is required concerning the purchase and funding of the second property …
(3) Steven felt the deduction claimed for wife’s wages was unreasonable …
Steven indicated that he was not satisfied at this point that the account/return was accurate”.
7.
On 16 July 2015, HMRC
were furnished with the evidence requested.
On 24 July 2015, Officer Steven responded pointing out that in one
Royal Bank of Scotland bank account there were deposits which were neither drawings
nor transfers totalling £1,950 which it was assumed was cash that had been
banked. The other private bank account had deposits which were not drawings
totalling £9,280 and which again was assumed to be cash that had been banked.
Officer Steven accepted that approximately £6,960 may have come from Mr
McAdam’s
daughter and that that left £2,320 for which there was no evidence of
the source.
8.
He also pointed out that he had reviewed the cash drawn from the
joint account either by cashback or cashline and only £690 had been withdrawn
in the entire year with gaps, and sometimes long gaps, in cash drawn. He asked
for credible explanations and evidence as to how Mr McAdam
covered private cash
expenditure.
9. Lastly, he pointed out that, as far as wife’s wages were concerned, this was a small service trade business with a turnover of £35,000 and the accounting records were limited to a ledger which simply mirrored the bank statements. Obviously, he was satisfied in regard to the second property.
10.
On 14 August 2015, Mr Lees wrote to HMRC
with
explanations of the unexplained cash deposits shown in the two Royal Bank of Scotland accounts. On 3 September 2015, Officer Steven wrote back pointing out that, in
regard to the first account, the deposits of £1,950 could not possibly have
come as gifts from Mr
McAdam’s
late mother and cash discovered at her home
after her death since all the deposits were made after her death and the Confirmation
had shown cash of only £26. In regard to the other account, where there was
excess cash of the order of £2,320 which “came
from possibly his daughter, his brother and his son”,
HMRC
asked for
further evidence and pointed out that the detail was
vague
and there were
doubts as to the credibility of the explanation.
11. That letter concluded with Officer Steven pointing out that:-
“It is my view,
based on the information
currently available, that Mr
McAdam
has understated his turnover and claimed
excessive expenses in terms of the deduction claimed for his wife’s wages. If
there is any evidence available which you feel may effect this
view,
then of
course you should let me have this as soon as possible… I propose you speak to
Mr
McAdam
again concerning these issues and the accuracy of his returns.”
On 23 September 2015, in a telephone call to
Officer Steven it was confirmed that Mr McAdam
believed that the records,
accounts and returns were all accurate.
HMRC
disagreed.
12.
On 2 October 2015, HMRC
wrote to the firm representing
Mr
McAdam
setting out their
views
and advising that they would now open an enquiry
into previous years and would also look at the question of penalties.
13.
On 11 November 2015 Officer Steven wrote to Mr McAdam
explaining
the action that he would take. In regard to turnover he stated “The only record you have to support the turnover
returned is the business bank records”.
14.
On 13 November 2015, HMRC
issued a Closure Notice for
2013/14 under Section 28A(1) and (2) TMA 1970 and discovery assessments
for the tax years 2009/10 to 2012/13 in terms of Section 29 TMA. On the
same day
HMRC
issued a penalty explanation letter in respect of their decision
to charge a penalty under Schedule 24 FA 2007.
15. On 11 December 2015 that was appealed and on 9 February 2016 an independent review of both assessments and the penalty assessment was requested.
16. On 21 April 2016, the reviewing officer upheld the disputed decisions.
17. On 20 May 2016, this appeal was lodged with HMCTS.
The appellant’s Grounds of Appeal
18.
Mr McAdam
argues that a salary of £90 per week for his wife is
not excessive for the duties that his wife carried out and that is “… to maintain the administrative and accounting
functions and these duties extend, and are not restricted to, taking telephone
enquiries, processing orders and checking part prices”. No new argument
was advanced in relation to cash lodgements in the bank accounts. He states
that almost all of the payments into the second bank account would have been
made by his wife and the funds did not derive from his trading income. In
these circumstances, there should be no penalties.
HMRC’s
arguments
19.
The appellant is a plumbing and heating engineer and has been
self-employed since 1 July 2008. Having examined the records
maintained by the appellant, HMRC
take the
view
that the appellant had not
complied with his obligations in terms of Section 12B TMA to keep
statutory records. Further
HMRC
have identified £11,230 in cash being
deposited to Mr
McAdam’s
private bank accounts, of which £6,960 is accepted as
being attributable to the appellant’s daughter.
HMRC
argue that the appellant
has failed to establish the derivation of the remaining £4,270.
20.
In regard to “wife’s wages”, HMRC
state that they are not wholly
and exclusively paid for the purposes of the trade and are in any event
excessive.
HMRC’s
stance is that calls made to the appellant’s home telephone
number would be few and far between and it is far more likely that calls would
be made to the appellant’s mobile telephone. Even if calls were made to the
home telephone it would presumably be the appellant who would contact the
clients to establish what was required and to issue quotations.
HMRC
argue
that an appropriate wage would be of the order of £1,344 per annum at an hourly
rate of £8.
HMRC
accept that some work would be involved in writing up the
ledger with the bank statements and therefore attribute two hours a month to
updating the ledger and three hours a week for taking calls, checking part
prices and ordering parts.
21.
HMRC
based their argument for the earlier years on the “presumption of continuity”described in Jonas
v
Banford[1]
in which Judge Walton commented:-
“There can be no doubt at all that the Inspector of
Taxes discovered that Mr Jonas was the possessor of resources which would not
be explained by reference to known sources of capital and income. This is
virtually
the classic case of ‘discovery’ … but, so far as the discovery point
is concerned, once the Inspector comes to the conclusion that, on the facts
which he has discovered Mr Jonas has additional income beyond that which he has
so far declared to the Inspector, then the usual presumption of continuity will
apply. The situation will be presumed to go on until there is some change in
the situation, the onus of proof of which is clearly on the taxpayer”.
22.
HMRC
aver that the amounts assessed by Officer Steven are based
on his best judgement from the records made available to him and in the absence
of evidence to support the figures declared by the taxpayer. In that regard
HMRC
reduced the unidentified deposits in 2014 by the Retail Prices Index for
each year and added an amount that for disallowed wages to arrive at the additional
amount of profit to be added.
Discussion
23.
The first point for the Tribunal was the competency and timing of
the discovery assessments. We had an unchallenged witness statement from
Officer Steven and we heard from Mr Mason. HMRC
have established, to our
satisfaction, that the assessments were both competent and timeous. There was
no challenge in that regard by Mr
McAdam.
24. The next issue for the Tribunal was the question of the unidentified cash deposits.
25. Essentially the appellant offered absolutely no new evidence whatsoever and relied on the same arguments that had been advanced to Officer Steven.
26.
When we pursued that with Mr McAdam
we found that he now stated
that the first substantive paragraph in the letter of 14 August 2015 (see
paragraph 10 above) from Mr Lees was not correct. He now said that cash funds
had not been held by his mother at home and discovered by the family after her
death and the source of the cash deposits to the first bank account were
cheques from his brother and sister who were the executors. Unfortunately, he
was wholly unable to identify a single cheque payment into the bank account.
27. Section 50(6) TMA provides (so far as relevant) –
“If, on an appeal, it appears to the [tribunal] … that the appellant is overcharged by an assessment … the assessment shall be reduced accordingly, but otherwise the assessment … shall stand good.”
That puts upon the taxpayer the burden of proving that he had been overcharged by the assessment. The applicable standard of proof is the usual civil standard, namely on the balance of probability.
28.
In Nicholson v
Morris 1976 STC 269 Walton J stated (at
280) (approved by Goff LJ on appeal – 1977 STC 162 at 168):
“… The Taxes Management Act 1970 throws on the
taxpayer the onus of showing that the assessments are wrong. It is the
taxpayer who knows and the taxpayer who is in a position (or, if not in a
position, who certainly should be in a position) to provide the right answer,
and chapter and verse
for the right answer, and it is idle for any taxpayer to
say to the Revenue, ‘hidden somewhere in your
vaults
are the right answers: go
thou and dig them out of the
vaults’.
That is not a duty of the Revenue. If
it were, it would be a
very
onerous,
very
costly and
very
expensive operation,
the costs of which would of course fall entirely on the taxpayers as a body.
It is the duty of every individual taxpayer to make his own return and, if
challenged, to support the return he has made, or, if that return cannot be
supported, to come completely clean; and if he gives no evidence whatsoever he
cannot be surprised if he is finally lumbered with more than he has in fact
received. It is his own fault that he is so lumbered.”
29.
We have considered carefully the basis of adjustment of the
turnover adopted by Officer Steven (which we consider was a reasonable and
conscientiously performed exercise) and also the very
vague
arguments offered
by Mr
McAdam.
Officer Steven has not adjusted the turnover to reflect the
very
low level of personal drawings. In calculating the revised profits,
Officer Steven considered the limited information provided by Mr
McAdam
and arrived at the additions in the enquiry year based on the unidentified cash
deposits and an amount added back for disallowed wages.
30.
As far as “wife’s wages” are
concerned, Mr McAdam
wished to produce to the Tribunal job sheets from this
year to demonstrate that his wife would pin receipts to the job sheets. He
said that he had been keeping job sheets since 2001 and that she would
therefore have performed the same function in the years in question. He was
wholly unable to explain why these had not been produced to Officer Steven
if they had existed at the time. He had not challenged the Notes of Meeting
which recorded that the only business records were the ledger, business bank
records and purchase invoices. The letter of 11 November 2015 to which we
refer in paragraph 13 above was sent to Mr
McAdam
himself and made it
clear that the only record in relation to turnover was the business bank
records. He could not explain why, even if at that late stage, the job sheets
had not been produced. It was put to him that Officer Steven had recorded
in the Notes of Meeting that he was concerned that “…
there were no invoices/receipts book to support the jobs recorded in the
ledger. The ledger simply shows a date, and name and the sum for the job.”
31.
Mr McAdam
tried to argue that his wife did most of the banking of
the cash and cheques, albeit he did some. That was in stark contrast to the
Note of Meeting which stated “Mr
McAdam
banks
cash and cheques once or twice a week”. Since
that had not been challenged until the date of the hearing, we find that on the
balance of probability, the contemporaneous account is correct. On a similar
note, he argued that she answered telephone inquiries yet the Notes of Meeting
record that “Mr
McAdam
confirmed she also took
the occasional phone call …”. Mr
McAdam
again tried to argue that that
was incorrect. However, he conceded in evidence that in reality his wife took
a note of the calls coming to the landline but most of the calls went to
his own mobile telephone. It was he who contacted the clients and offered
quotes. On the balance of probability we consider it more than likely that the
vast
majority of calls would be to the mobile number.
32.
In summary, Mr McAdam
tried to argue that his wife “worked for the business for 9 or 10 hours per week”.
By contrast Officer Steven was prepared to accept that she might spend say
three hours a week, taking some calls and checking part prices and ordering
parts for 48 weeks of the year and she might spend two hours per month to
update the ledger from monthly bank statements.
33. We have been furnished with no credible evidence to support even that level of activity.
34.
It is not disputed that there has been no significant change in
the way the business is operated over the years in question and therefore we
accept HMRC’s
argument that the usual presumption of continuity will apply (see
paragraph 21 above). Nothing whatsoever has been produced by Mr
McAdam
to
suggest that there has been any change.
35.
In order to calculate the amounts of the earlier years HMRC
reduced the unidentified deposits in 2014 by the Retail Prices Index for each
year and added an amount back for disallowed wages to arrive at the additional
amount of profit to be added.
36.
Lastly, we considered the position in relation to penalties and
having considered carefully the evidence and HMRC’s
basis of calculation, we
can see no reason to disturb the percentage rates calculated by
HMRC.
We do
not accept Mr Lees argument that Mr
McAdam
had, at worst, been careless and, at
best, should not be exposed to any penalties. Since we find that the
assessments are upheld the penalties follow. Mr
McAdam
clearly had cash
receipts which were not disclosed in turnover. In those circumstances Mr
McAdam
must have been deliberate in submitting his tax returns to
HMRC
when
they contained an inaccuracy.
37.
We agree with HMRC
that there was a prompted disclosure and that Mr
McAdam
did give access to the records including private bank accounts in the year of
enquiry. At no stage has Mr
McAdam offered any assistance in quantifying the
adjustments.
Decision
35. As we pointed out at the hearing, it is trite law that an appellant wishing to challenge a tax assessment, including an assessment to this tax, must produce credible evidence from which the Tribunal can determine the correct amount of tax.
36. We have absolutely none of the credible evidence we need if we are to make any adjustment to the assessments. Any adjustments we did make would amount to nothing more than a guess, and a guess is not open to us. It follows that there are no adjustments, the penalties are confirmed and the appeal is accordingly dismissed.
37. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.
ANNE SCOTT