Cooksey v Revenue & Customs [2009] UKFTT 275 (TC)

FTT-Tax
Cooksey v Revenue & Customs
[2009] UKFTT 275 (TC) · 2009-10-21
[1]In this decision notice the tax authorities are referred to throughout as HMRC, although for much of the time covering the events in question the relevant department was called Inland Revenue.[2]On 18 and 19 December 2002 (20 March 2003 in respect of the 1982-83 year of assessment) HMRC raised discovery assessments under section 29 of the Taxes Management Act 1970 (“TMA”) on the Appellants (“the Taxpayers”) as follows: Year of assessment ended 5 April Amount of assessment in respect of Mr Cooksey £ Amount of assessment in respect of Mrs Cooksey £ 1983 19,413.50 - 1984 7,471.30 - 1985 4,886.79 - 1986 6,612.80 - 1987 8,869.85 500.00 1988 9,198.75 540.00 1989 1,545.25 500.00 1990 2,800.00 579.65 1991 1,900.00 1,187.50 1992 2,000.00 1,187.50 1993 1,887.45 1,312.50 1994 2,216.90 2,016.20 1995 2,300.00 1,437.50 1996 1,719.15 1,500.00 1997 2,500.00 1,684.64 1998 5,534.00 2,800.00 1999 1,389.43 1,900.59 2000 2,242.31 3,000.00 2001 2,654.58 1,488.77[3]On 16 January 2003 (21 March 2003 in respect of the 1982-83 year of assessment) both Mr and Mrs Cooksey appealed against all those assessments on general grounds.[4]In 2004 HMRC issued closure notices under section 28A TMA on the Taxpayers as follows: Year of assessment ended 5 April Amount of assessment in respect of Mr Cooksey £ Amount of assessment in respect of Mrs Cooksey £ 1998 2,800.00 2,800.00 1999 1,746.55 1,884.76 2001 2,430.70 1,488.77[5]On 10 November 2004 both Mr and Mrs Cooksey appealed against all those closure notices.[6]The amounts assessed in years prior to 1986-87 were additional trading profits taxable under Case I of Schedule D. The amounts assessed in 1986-87 onwards were a mix of overseas interest taxable under Case V of Schedule D and a benefit in kind (being advances to directors) taxable under Schedule E pursuant to section 160 of the Income & Corporation Taxes Act 1988 (as then was).[7]HMRC raised no point concerning the validity of the appeals. Evidence taken and facts found[8]The Tribunal took evidence as follows. For the Taxpayers: Mrs Cooksey adopted and confirmed a witness statement dated 20 February 2009 and gave sworn oral evidence; Mr Cooksey adopted and confirmed a witness statement dated 20 February 2009 and gave sworn oral evidence; Mr Webster adopted and confirmed a witness statement dated 23 February 2009 and gave sworn oral evidence. For HMRC: Mr Michael Cochrane, formerly the senior tax partner at Latham, Crossley & Davis Chartered Accountants (“Lathams”), adopted and confirmed a witness statement dated 22 September 2008 and gave sworn oral evidence; Mr Peter Howarth, formerly a tax director at Lathams, adopted and confirmed a witness statement dated 25 November 2008 and gave sworn oral evidence; Mr Stephen Valentine, formerly a tax partner at Pomfrets Chartered Accountants, adopted and confirmed a witness statement dated 1 August 2008 and gave sworn oral evidence; Mr Philip Greener, an investigator in HMRC’s Special Civil Investigations office in Liverpool, adopted and confirmed two witness statements dated 14 May 2009 and 10 September 2009 and gave sworn oral evidence.[9]As is common in back duty cases, there were several significant conflicts of evidence. We cover the relevant evidence taken by following an approximate chronological order of events. The business[10]Mr Cooksey stated that he started working in the early 1960s as a young man with his father, who was a bedding sheet maker. A customer approached the firm to make quilt covers and Mr Cooksey set up John Cooksey & Co to pursue this line of business. The business was originally a partnership with his wife and incorporated in 1987. It had moved to larger premises over the years. Portland House Textiles Ltd (“Portland”) was established in 1980 and its shareholders and directors were the Taxpayers. The companies’ customers were large blue-chip concerns who would supply cloth printed to their own bespoke designs, together with packaging again printed to their own designs. The fabric arrived on massive rolls; damaged cloth would not be made up and would be returned, together with any printing errors, to the customer; the fabric never belonged to the companies and their only stock was thread and fasteners for making-up and assembly. Mr Cooksey stated that because of the bespoke designs, the customers would not have sold any fabric to the companies and any attempt to sell goods made from those fabrics would be easily detectible in the market. Portland outsourced all its work to Pakistan; apart from receiving print samples to check for quality, it saw none of the fabric or finished goods. The companies were wound up between 2000 and 2003.[11]Mrs Cooksey’s evidence was that she worked for the companies part-time as a general administrator; her husband dealt with the financial affairs of the business; Mrs Cooksey had no dealings with the companies’ banks or accountants and no involvement with the companies’ bookkeeping; she could not understand the allegations of cash leakage or the assessments. The Tribunal accepts all of Mrs Cooksey’s oral evidence. The offshore investments[12]Mr Cooksey stated that in 1968 his father made him a wedding present by putting £3,000 into an investment with Credit Suisse in Switzerland. Mr Cooksey’s father’s family came from Rhodesia (as then was) and South Africa and because of trade sanctions and currency restrictions they considered it usual to hold funds in safe countries such as Switzerland. On his father’s death in 1983 Mr Cooksey presented the death certificate to Credit Suisse, as previously instructed by his father, and was told that £55,455 had been credited to his investment. In evidence this was referred to as coming from an overseas family trust fund.[13]In 1993 Mr Cooksey took advice from Pomfrets Chartered Accountants where a Mr John Penrose and Mr Webster advised him to transfer the funds from Credit Suisse into a new arrangement involving a Cayman Islands entity called JOTIS. Mr Cooksey also invested a further £30,000 from funds held by NatWest. Mr Cooksey was issued with a chequebook (relating to a JOTIS account with Barclays in Jersey) and a credit card to enable him to draw on the funds held by JOTIS. He expended money from the account to pay for a holiday in Cyprus, to buy a car in the Isle of Man, to purchase shares through his stockbrokers Hargreave Hale, and to pay various professional fee notes raised by Guildhall Tax Consultants (in which Mr Webster was a partner) and an entity called Jafis (Mr Cooksey’s evidence was that he believed Jafis was owned by Mr Penrose). The start of HMRC’s investigation[14]On 28 September 1998 HMRC wrote to the accountants who had submitted the 1997 tax returns for the two companies. That firm had been replaced by Messrs Ashworth Treasure and the letter was forwarded to them. The letter raised a number of points concerning the tax affairs of the companies and also, at the end, asked the following questions concerning the Taxpayers:
“(a) Have any of the directors invested money overseas, if so please let me have details. (b) Have any of the directors either directly or indirectly had any dealings now or in the past with any overseas company or overseas trust.”
On learning of this Mr Cooksey was concerned because he did have money invested overseas – in JOTIS and earlier the Credit Suisse investment. He spoke with a friend (now deceased) who advised him that he may have a tax problem in that, contrary to Mr Cooksey’s understanding, gains in that account may be liable to UK tax even though the amounts had not been received in the UK. His friend pointed him to Lathams for advice. Mr Cooksey consults Lathams[15]There are two versions of events at the meeting(s) between Mr Cooksey and Lathams. Mr Cooksey’s version is as follows. He says he met Mr Cochrane, the senior tax partner in Lathams, and Mr Howarth, a tax director at the firm, on 17 November 1998. The meeting was a short one of around 15 minutes; they did not sit down; it was an informal hands-in-pockets discussion; and no minutes were taken. The advice he received was that HMRC would treat the offshore monies as having originated from undeclared cash sales of the businesses. He did not make any admission of cash sales. He says there was no further meeting. Instead on 19 November 1998 he dropped off at Lathams’ offices a package of some bank statements and some schedules prepared by a friend of his. He says he never instructed Lathams to contact HMRC. He did not recall the Hansard statement (described later in this decision) being discussed. Lathams did not examine any business records, apart from some bank statements that they later returned, and did not show him any working papers.[16]The alternative version is from Mr Cochrane and Mr Howarth and is as follows. Mr Cochrane stated that his first contact with Mr Cooksey was when Mr Cooksey telephoned him and asked to come to see him. They had a brief meeting at which they sat in Mr Cochrane’s office. He had not taken a note during the meeting. He recalled that Mr Cooksey was very concerned but it was a situation with which Mr Cochrane was familiar from other clients, including other clients of Pomfrets. Mr Cooksey had salted away cash overseas and this had grown to a substantial sum. Mr Cochrane weighed up the facts, figures and possible tax offences. He decided that his colleague Mr Howarth should conduct the case. He introduced the two. His only further involvement was a telephone conversation with Mr Cooksey when he summarised Mr Howarth’s conclusions on the case: that a total liability of around £150,000 was indicated, which included £60,000 interest; and that a further couple of months of work was required. Mr Cooksey was surprised and Mr Cochrane explained that since matters had been going on for 24 years there was a large interest liability.[17]In cross examination Mr Cochrane confirmed that he had not examined the prime business records of his client; that Mr Cooksey had described off record cash sales; and that cash defalcations were a common issue in these types of case.[18]Mr Webster placed great weight on the fact that Mr Cochrane was the author of a book on tax investigations titled “Guilty until proved innocent”. He suggested that this demonstrated the attitude of Mr Cochrane and Lathams to their clients. Mr Cochrane stated that, on the contrary, the title of the book was intended to reflect the feeling of many of his clients who, when under investigation and faced with the burden of disproving the assertions of HMRC, felt that they were having to prove their innocence. The Tribunal has no difficulty in finding Mr Cochrane’s version the correct explanation.[19]Mr Howarth stated that he was introduced to Mr Cooksey by Mr Cochrane. On 17 November 1998 he and his colleague Mr Iddon met with Mr Cooksey. Both accountants took a note of the meeting. Mr Cooksey told Mr Howarth that he manufactured quilts but had offcuts that he sold for cash; he added some of his own money and then banked the money offshore. Mr Cooksey had prepared some calculations; he took these away and brought back others; Mr Howarth said they would look at the actual records instead but this was never done as their instructions were withdrawn. There was a second meeting on 19 November 1998 at which Mr Howarth explained to Mr Cooksey his options. He advised that in view of the significant amounts, the offshore arrangements and the possibility of conspiracy with others, HMRC may consider a criminal prosecution. He advised Mr Cooksey to try to get HMRC’s agreement to make a full disclosure under the Hansard procedure. Mr Cooksey requested that Mr Howarth go ahead. That afternoon Mr Howarth telephoned Mr Matthews (the Inspector who sent the letter dated 28 September 1998 enquiring about offshore investments). Mr Howarth confirmed as correct the contents of a file note made by Mr Matthews which read as follows:
“Haworth (sic) rang and the following was discussed 1. His firm has been engaged to deal with the investigation into the 2 companies. 2. The Cookseys have made disclosures and the loss of corporation tax is in excess of £100,000. 3. Cooksey has admitted 24 years of off record cash sales. Basically they stem from additional sales of cloth for cash that had not been put through the company books. 4. The Cookseys have at least £300,000 in one offshore account. This is held in an offshore trust scheme set up by Webster and Pomfret. The whole of the deposits in the accounts arise from off record sales. 5. I said to Haworth I appreciated the call. I would obviously have to take advice and would speak to [Special Compliance Office] and if necessary get them to ring Haworth.”
[20]In response to a question from the Tribunal, Mr Howarth stated that it was inconceivable that he could have misunderstood or misinterpreted his conversation with Mr Cooksey so as to conclude incorrectly that there had been undeclared cash sales when in fact Mr Cooksey had said no such thing.[21]Mr Webster pointed out that the matter of alleged cash sales was not covered in the witness statements of either Mr Cochrane or Mr Howarth; only their oral evidence covered this.[22]Mr Webster cross-examined both Mr Cochrane and Mr Webster on the fact that Lathams had not obtained written instructions from Mr Cooksey to approach HMRC or request a Hansard meeting. Mr Howarth said he felt urgent attention was needed in view of what Mr Cooksey had told him. Mr Cochrane said it was important to be proactive so that HMRC would later give credit for disclosure. Both commented that they had been aware that HMRC had taken a dim view of the affairs of certain other clients of Pomfrets.[23]Asked why Mr Howarth should choose to give HMRC false information about the cash sales, Mr Cooksey suggested it was because Lathams saw the opportunity to earn lucrative fees in connection with the HMRC investigation of the Taxpayers. The Tribunal considers that not to be a credible possibility; no explanation is necessary because the information given by Mr Howarth in his telephone conversation with Mr Matthews was given in good faith and was indeed what he had been told by Mr Cooksey in the meeting with himself and Mr Iddon.[24]Mr Cooksey subsequently fell out with Lathams over fees and alleged unresponsiveness, and disinstructed the firm. In February 1999 Mr Cooksey instructed Mr Martyn Perkins, a chartered accountant, to advise him. The Hansard meeting[25]On 20 April 1999 a meeting (“the Hansard Meeting”) was held between representatives of HMRC’s Special Compliance Office and the Taxpayers, Mr Perkins, Stephen Cooksey (brother of John Cooksey) and his accountant (Mr Fox of Ashworth Treasure). The meeting started at the business premises and then moved to the Taxpayers’ home. At the outset of the meeting HMRC confirmed that they were conducting an investigation under Code of Practice 9 (suspected serious fraud) and read out the Hansard statement in its then form:
‘The practice of the Board of Inland Revenue in cases of tax fraud is as follows: 1. The Board may accept a money settlement instead of instituting criminal proceedings in respect of fraud alleged to have been committed by a taxpayer. 2. They can give no undertaking that they will accept a money settlement and refrain from instituting criminal proceedings even if the case is one in which the taxpayer had made a full confession and has given full facilities for investigation of the facts. They reserve to themselves full discretion in all cases as to the course they pursue. 3. But in considering whether to accept a money settlement or to institute criminal proceedings, it is their practice to be influenced by the fact that the taxpayer has made a full confession and has given full facilities for investigation into his affairs and from examination of such books, papers, documents or information as the Board may consider necessary.’
[26]Mr Webster sought to persuade the Tribunal that the purpose of HMRC giving the Hansard statement was to signal the instigation of a criminal investigation to gather evidence with a view to securing a criminal conviction for fraud. The Tribunal considers that is wrong. The Tribunal preferred the evidence of Mr Greener and Mr Cochrane who both stated that the purpose of giving the Hansard statement was to induce the taxpayer to make a full disclosure of irregularities safe in the knowledge that (save in exceptional circumstances which Mr Greener had never encountered in practice) the taxpayer would not face a criminal prosecution. On 3 March 1999 Mr Howarth had written to Mr Cooksey, “I am disappointed by your decision to dismiss us, specially just as we have secured “Hansard” for you, so clearing the way for a safe disclosure.”[27]The Hansard Meeting covered a number of issues relating to the business and personal affairs of the Taxpayers. Mr Cooksey answered questions about the business dealings of the companies. He explained the JOTIS arrangements and showed HMRC the chequebook stubs. It was agreed that a disclosure report would be prepared on behalf of the Taxpayers for consideration by HMRC. HMRC told the Taxpayers that they should not destroy any documents.[28]HMRC prepared a note of the Hansard Meeting which they sent to the Taxpayers. Mr Perkins replied that the Taxpayers would not sign the note as a true record and made a number of suggested changes. HMRC refused to accept those amendments. Documents etc are sent to JOTIS[29]Mr Cooksey stated that he learned that he had been given the chequebook in error and he was asked to return it. He sent the chequebook, the credit card and all bank statements relating to the Jersey bank account to JOTIS. He had not been asked to repay the monies drawn while he had the chequebook.[30]Mr Cooksey denied that this was an attempt to cover his tracks but accepted that he should have copied the documents before returning them. Mr Perkins prepares his disclosure report[31]Mr Perkins spent much time and effort in compiling the disclosure report promised at the Hansard Meeting. In November 1999 Mr Perkins sent to HMRC a disclosure report that was rejected as being inadequate and on 23 May 2000 another disclosure report (“the Perkins Report”) was submitted by Mr Perkins to HMRC. The Perkins Report made no disclosure in respect of any undeclared sales. It contained a calculation of tax due of £12,000 in respect of undeclared capital gains accruing on the Credit Suisse investment. Mr Cooksey made a payment of £12,000 to HMRC.[32]HMRC requested sight of Mr Perkins’ working papers. One of the contents was a handwritten note, which Mr Webster described as a rough note prepared by Mr Cooksey of the performance of the Credit Suisse investment which was part of the papers given by Mr Cooksey to Mr Perkins for preparation of the Perkins Report. Mr Cooksey stated it was a rough note he made when Pomfrets were reviewing alternative investments for the Credit Suisse funds. In his evidence Mr Greener emphasised that despite repeated requests no documentation in relation to the Credit Suisse investment had ever been provided to HMRC, apart from this handwritten note. Mr Webster stated that all relevant papers would have been held by Pomfrets and probably destroyed when that firm closed in June 1997; it had not proved possible to get information from Credit Suisse.[33]There were further correspondence and meetings. In January 2001 Mr Greener referred his file to HMRC’s criminal investigations unit, in view of his belief that an incomplete disclosure had been made by the Taxpayers. The file was returned to him in January 2002 with an instruction to continue with the Code of Practice 9 enquiry. HMRC obtain documentation pursuant to information notices[34]In September 2002 HMRC issued information notices pursuant to section 20 TMA on several persons involved with the Cookseys, including NatWest, Lathams, Ashworth Treasure and Hargreave Hale.[35]Among the documents disclosed to HMRC by NatWest were:(1) A “request for deferment” dated 15 July 1999 prepared by a Mr Dodd. This contained the passage, “The facility on an unsecured basis against the revised Personal Guarantee is considered quite satisfactory against this customer’s means as we are now aware he has a Bond with Sun Life worth £500,000 … In addition Mr Cooksey I know has further funds offshore, full details of which have not been detailed and in reality he is an extremely wealthy customer in his own right.” In cross-examination Mr Cooksey stated that the Sun Life bond was an investment held by JOTIS; the reference to further funds was a mistake by Mr Dodd.(2) A “credit assessment” dated 22 February 2000 prepared by Mr Cooksey’s bank manager, Mr Graves. This contained the passage, “… his means seem to be substantial. “Off the record” he advises me that he has liquid funds (available within 2 weeks) of £1m+, plus his pension fund of £500,000+ …”. In cross-examination Mr Cooksey stated that this was total fantasy; the bank manager may have aggregated the Credit Suisse and JOTIS investments when in fact the latter replaced the former; otherwise he could not explain how the misunderstanding may have arisen.(3) A note of a meeting on 28 April 2000 between Mr Cooksey and a Mr Mackenzie. This contained the passage, “John estimates his share portfolio to be valued in excess of £1m but stressed this must be confidential.” In cross-examination Mr Cooksey said that this was absolutely crazy; he had traded unsuccessfully in penny shares on two or three occasions; it was important for his business that he came across as a man of means; he denied lying to the bank; he could not explain how three separate NatWest staff all misunderstood.[36]Among the documents disclosed to HMRC by Lathams were:(1) Handwritten notes of the meeting held on 17 November 1998. In his evidence Mr Howarth stated these were prepared by his colleague Mr Iddon who was present at the meeting and Mr Howarth considered them to be an accurate record of the meeting. These contained the passages, “£750 fiddles - £250 added to - £1000 banked offshore”; and “Nordic Textile – Brian Heap salesman – carried on the business – used warehouse – imported cloth from Holland – JC bought some and sold on at profit – 1985 started”. In cross-examination Mr Cooksey accepted that some of the notes (not quoted here) contained factually correct detailed information but said he never used the word “fiddles”; he had later tried to prevent Lathams giving copies of the notes to HMRC because he had been advised by Mr Webster that the meeting and notes had been privileged.(2) Further handwritten notes of the meeting held on 17 November 1998, which in his evidence Mr Howarth confirmed were his notes. These contained the passage, “27 years – some personal cash deals – bank manager said put in IOM and took it for him – try Switzerland.” In cross-examination Mr Howarth stated that he remembered the case well because of subsequent developments including the section 20 notices.(3) The schedules presented to Lathams by Mr Cooksey, which he said were prepared by his friend. One of these was marked “Original done by client” and showed a year-by-year analysis from 1973 to 1994 of cash additions and interest accruals to an account; the opening balance was £500 and the closing balance £333,387, which had been analysed as total cash £85,650 and total interest £247,737. In cross-examination Mr Cooksey stated that the figures made no sense at all; his friend had just been playing around with the numbers.[37]Among the documents disclosed to HMRC by Ashworth Treasure were:(1) Handwritten notes of “queries” dated 2 October 2000 prepared by the accountants. These contained the passage, “Confirm who were beneficiaries – per letter of trust & wishes JLC in lifetime & then to CC – JLC settlor & only one A exemption – per FW in joint names – sale of units – units within a bond”. Mr Webster contended that a letter of trust & wishes was an administrative requirement for an account in joint names.(2) Handwritten notes of a meeting held on 7 December 2000. These contained the passage, “Capital transfer £14,000 … – JC telephoned F Webster whilst I was there & he confirmed that the terms of the letter of trust & wishes had been amended & that it was now in joint names – correct to disclose as above – The above related to the sale of units within a bond in offshore investment a/c”. Mr Webster contended that realised gains in relation to the JOTIS investment had been properly reported by the Taxpayers; he said this may not be apparent on the face of the relevant tax returns because the disposals might not result in a chargeable gain in excess of the annual exempt amount.[38]Among the documents disclosed to HMRC by Hargreave Hale were:(1) A “client details” form for JOTIS International Ltd dated 14 July 1999 which gave as a contact email address “john@jotis.demon.co.uk”. Mr Cooksey confirmed that was an email address for himself; he confirmed he had signed the form underneath a declaration agreeing to be bound by the broker’s standard terms.(2) Several dealing slips in the name of JOTIS each marked “Instruction given by (if not client): John Cooksey”. Mr Webster contended that the words “if not client” distanced Mr Cooksey from JOTIS. Assessments are issued[39]Mr Greener explained to the Tribunal that the assessments up to 1985-86 had been raised on Mr Cooksey in relation to undeclared sales; until the hearing HMRC had understood Mr Cooksey was a sole trader in this period, rather than in partnership with his wife. For later years, the basis of assessment was(a) undeclared profits in relation to the overseas investments; and(b) monies extracted from the companies and thus constituting advances to directors taxable as benefits in kind. HMRC understood that Mrs Cooksey was a 50% shareholder in the companies and a director of both; in the absence of any further information the assessments for each of these years had been made in equal amounts on Mr and Mrs Cooksey. Mr Webster’s evidence to the Tribunal[40]Mr Webster gave evidence as well as acting as advocate for his clients, the Taxpayers. The Tribunal attempted to ensure he appreciated the difference between those two roles.[41]Much of Mr Webster's evidence was directed to explaining or justifying his role in the offshore arrangements set up on behalf of the Taxpayers.[42]Mr Valentine stated in his evidence that Mr Webster had advised four named clients of Mr Valentine in relation to the establishment of offshore structures. Mr Webster denied this in his evidence and stated that Mr Valentine must be making it up, but then when as advocate cross-examining Mr Valentine he made reference to the details of the arrangements entered into by those clients. When challenged on this by the Tribunal Mr Webster claimed he was referring to general rather than specific examples. We preferred the evidence of Mr Valentine, who was clear and concise.[43]Mr Webster in evidence gave the dates of his involvement with the Taxpayers. He then conceded that it was he who had completed the (numerous) notices of appeal against the discovery assessments for the Taxpayers, which conflicted with his earlier answer. He said he considered that to be involvement with Mr Perkins (then acting for the Taxpayers) rather than involvement with the Taxpayers.[44]There was also a confusing contradiction in his evidence concerning whether bank accounts were established in the Channel Islands as part of the offshore arrangements he had put in place or advised on. Further, there were contradictions about his knowledge of and involvement with JOTIS.[45]The Tribunal found Mr Webster not to be a credible witness. Given that conclusion we find that Mr Webster's evidence adds little to that of the other witnesses and does not need to be considered further in this decision notice.[46]The Tribunal did not allow Mr Webster’s shortcomings as a witness to affect our view of the contentions he put forward as an advocate on behalf of his clients. The Tribunal’s findings of fact from the evidence[47]In evaluating Mr Cooksey's evidence the Tribunal took into account that many of the events in question occurred over a decade ago; also Mr Cooksey's age and state of health. However, even making allowances for those factors we found Mr Cooksey not to be a credible witness. In relation to both the information he gave to Lathams and his offshore arrangements, we do not accept his evidence which was contradicted by contemporaneous written evidence prepared by individuals with no reason to make false statements and who could not reasonably be considered to have misunderstood what Mr Cooksey told them face-to-face.[48]On more than one occasion the Tribunal reminded Mr Webster and the Taxpayers that they bore the burden of proof to satisfy the Tribunal that the assessments under appeal were incorrect. Mr Webster directed us to the Perkins Report but offered no further explanation or evidence of how the Taxpayers' offshore wealth may have arisen or the sources of the substantial amounts referred to in the documents disclosed by NatWest. Mr Perkins was not presented as a witness, apparently because he is now elderly and lives far from London, where the hearing took place. The Perkins Report does not attempt to address let alone refute the allegation of cash sales. It concludes that the JOTIS account arrangements have been properly taxed, but that there were some capital gains in relation to the Credit Suisse investment that were not reported.[49]The Tribunal finds the following facts. Mr Cooksey did admit to Lathams that there had been undeclared cash sales for many years. The proceeds of such sales were placed in offshore accounts or investments. Those accounts or investments accrued income or gains over the years. Mr Cooksey could draw freely on those funds using the JOTIS chequebook. No evidence has been produced by the Taxpayers as to why or how such income or gains (both in relation to JOTIS and earlier Credit Suisse) should not be subject to UK taxation. The Taxpayers have failed to discharge the evidential burden on them to disprove the assessments which are the subject of these appeals.[50]Before moving on to the legal issues raised in these appeals, we record that in his closing submissions Mr Webster stated that he felt that at one point in his cross-examination Mr Nawbatt had been badgering Mr Cooksey and that thereafter Mr Cooksey had been confused. The Tribunal considers that is incorrect. When Mr Webster objected during the cross-examination the judge took over the question put by Mr Nawbatt and the witness had ample time to give his answer. Mr Nawbatt's questioning was perfectly proper. The Tribunal were informed of Mr Cooksey's state of health at the start of the hearing and bore it in mind throughout. During Mr Cooksey's cross-examination there was a 15 minute break, suggested by Mr Nawbatt. Mr Cooksey showed no more signs of confusion than any witness who finds his evidence being contradicted in many particulars. Legal issues raised in the Appeals[51]The legal issues raised in these appeals fall into two categories. First, the consequences of there being express or implicit allegations of fraud. Secondly, whether HMRC had made a “discovery” to entitle them to issue assessments pursuant to section 29 TMA. The consequences of there being express or implicit allegations of fraud[52]Mr Webster for the Taxpayers contended that once the Hansard statement had been read then the HMRC enquiry took on the form of a criminal investigation. In the Hansard statement itself, the notes of the Hansard Meeting, and in subsequent correspondence from HMRC to the Taxpayers’ agents there were references to “fraud” and “serious fraud”. It followed from that that the burden of proof of wrongdoing fell on HMRC and that the appropriate standard of proof was that required by the criminal courts (that is, beyond reasonable doubt). HMRC had referred the file internally for consideration of a criminal prosecution but the file had been returned for continuation of the enquiry; that must have been because HMRC themselves considered there was insufficient evidence to secure a criminal conviction. Further, the criminal nature of the investigation invoked the Taxpayers’ rights under Article 6 of The European Convention for the Protection of Human Rights and Fundamental Freedoms (“ECHR”), in particular the rights to a trial within a reasonable time and for the accused to see the evidence against him. The HMRC enquiry had begun in 1999 but the current hearing had not been held until 2009; that was a ten year delay. HMRC had repeatedly refused to disclose to the Taxpayers the basis of the case against them; the Taxpayers only saw the evidence against them when they were presented with HMRC’s bundle for the current hearing.[53]The Tribunal chooses, for the sake of completeness, to address all the assertions made even though the conclusions on some may make others otiose. The burden of proof[54]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.”
[55]That puts upon the taxpayer the burden of proving that he has been overcharged by the assessment. We quote at length from the judgment of Rattee J in MacEachern v Carr [1996] STC 282 (at 286–287), “… the Crown submits that the burden of proof is placed fairly and squarely upon the taxpayer, and it is no objection to an assessment, or its confirmation by the [Tribunal], that there is no evidence before them to support the assessment. It is for the taxpayer to prove that the assessment is wrong. The Crown accepts, quite properly, that nevertheless an assessment can only properly be made to the best of the judgment of the inspector who makes it, so there must be some basis on which the assessment can be shown to have been made. An assessment cannot properly be made simply by the inspector plucking a figure out of the air without any possible basis on which to charge the taxpayer concerned. However, in the present case the Crown argues, as it argued before the [Tribunal], that there was good reason for inferring, in the absence of evidence to the contrary, that the payments now in issue were made by the development company, either directly or indirectly through the construction company, to the taxpayer by way of additional emoluments from the construction company to him. The basis of that submission is that the taxpayer accepted that the sum of £4,000 received by him from the development company and paid into his building society account in June 1988 was a receipt by him of an emolument from the construction company. The Crown says it may well be that, given that that method was adopted on one occasion for funding the taxpayer's emoluments from the construction company, it could have been adopted on other occasions, and that that is the likely explanation for the payments in issue which the [Tribunal] found were unexplained by any evidence adduced before them. The Crown submits that in that situation the inspector was entirely justified in making the assessments in the sums in which they were made, and that by virtue of s 50 of the Taxes Management Act 1970 the assessments stand unless the taxpayer disproves them. Mr Brennan for the Crown points out, with considerable force, that if it were the case that these payments had not been received by the taxpayer one would have expected the taxpayer to put in evidence before the [Tribunal] his personal accounting records and bank statements, as well as all the relevant bank statements of the company, to show that, wherever else the unexplained payments went, they did not go to him. The Crown points out that the taxpayer, not the inspector, was the person in whom one might expect the relevant information to reside. He was a director of both companies, and he admitted that on one occasion he received a payment directly from the development company by way of payment of an emolument to him from the construction company. Therefore, it was for him to adduce evidence, were it available—as one might have expected if the other payments were indeed not received by him—to show where they went, or at any rate that they never found their way into his bank account. The short answer, in my judgment, is as the Crown submits. The taxpayer wholly failed to discharge the burden of proof placed on him by s 50(6) of the Taxes Management Act 1970 to show that the assessments made by the inspector were excessive, except to the extent that the [Tribunal]accepted that the first assessment for 1987–88 was excessive, as a result of which they reduced the sum from £20,000 to £5,941. Mr Davies for the taxpayer submits as against that, that it is incumbent on the [Tribunal] not simply to accept the Crown's contentions before them as they have recorded them, namely, that the proper assumption to be made is that the relevant moneys have been received by the taxpayer, but to make findings of primary facts as best they can on the evidence before them. In my judgment, that submission is misconceived in the context of an appeal against an assessment, the procedure of which is governed by s 50 of the Taxes Management Act 1970. As is apparent from the terms of s 50(6), it is not for the [Tribunal] to decide whether or not the assessment under appeal has been proved to be correct. It is the duty of the [Tribunal], and their only power, to decide whether on the evidence before them it has been shown that the assessment is excessive. In this case, the taxpayer chose not to adduce any evidence to rebut the inference which the Crown sought to draw from the evidence before the [Tribunal], namely, that, as in the case of the £4,000 admittedly received by the taxpayer in June 1988, the other sums in issue had been similarly received by him by way of emoluments from the construction company. Given that the [Tribunal]found no evidence to displace that inference, and no evidence to establish that the assessments were excessive, it seems to me that they were perfectly correct—indeed, it was the only course that they could take—in upholding the assessments and dismissing the taxpayer's appeal to the extent they did. I see no grounds on which any interference with their decision would be justified, and I dismiss the appeal.”[56]The fact that fraud has been expressly or implicitly alleged does not shift that burden away from the taxpayer onto HMRC. In Brady v Group Lotus Car Companies plc [1987] STC 635 Mustill LJ stated (at 642 - 645), “The starting point is an ordinary appeal before the [Tribunal]. Here, however unacceptable the idea may be to the ordinary member of the public, it has been clear law binding on this court for sixty years that an inspector of taxes has only to raise an assessment to impose on the taxpayer the burden of proving that it is wrong: Haythornthwaite & Sons Ltd v Kelly ( Inspector of Taxes ) (1927) 11 TC 657 . The taxpayer companies do not dispute this principle but maintain that they have done everything which it requires by tendering senior officials and the auditors of the taxpayer companies to give evidence and producing the taxpayer companies' accounts and records to show that there is nothing in them to justify the raising of an assessment in respect of the sums which the inspector has asserted were wrongfully diverted from the taxpayer companies' funds. They go on to say that the burden of displacing this evidence rested on the Revenue, given that the case against them was fundamentally one of fraud, a case which the party asserting it must always be under a heavy burden to prove.” … “It may well be that, if the taxpayer companies' version does not correspond with the true facts, it must follow that someone was guilty of fraud. This does not mean that, by traversing the taxpayer companies' case, the Revenue have taken on the burden of proving fraud. Naturally, if they produce no cogent evidence or argument to cast doubt on the taxpayer companies' case, the taxpayer companies will have a greater prospect of success. But this has nothing to do with the burden of proof, which remains on the taxpayer companies because it is they who, on the law as it has stood for many years, are charged with the task of falsifying the assessment. The contention that, by traversing the taxpayer companies' version, the Revenue are implicitly setting out to prove a loss by fraud, overlooks the fact that, in order to make good their case, the Revenue need only produce a situation where the [Tribunal] are left in doubt. In the world of fact there may be only two possibilities: innocence or fraud. In the world of proof there are three: proof of one or other possibility, and a verdict of not proven. The latter will suffice, so far as the Revenue are concerned.” … “I should mention the contention that there is a presumption of innocence which operates in any case where the defendant, by controverting the case put forward by the plaintiff, impliedly suggests that he has been guilty of dishonest conduct. I do not accept this argument. The fact that the possibility of fraud is on one side of the case will of course require the tribunal to take particular care when weighing the evidence, given the seriousness of any finding which puts in question the honesty of a party to a civil suit (see Hornal v Neuberger Products Ltd [1957] 1 QB 247 ). At the same time, I cannot accept that this bears on the burden of proof. The burden is material only to the question of which party succeeds if the tribunal is left in doubt. I can see no reason why the rule which entails that the taxpayer should fail in such a situation needs to be completely turned round simply because the alternative version of the facts to that advanced by the taxpayer is one which is explicable only on the ground of dishonesty on his part.” … “I therefore conclude without hesitation that the [Tribunal] were in error in stating that it was for the Revenue to prove fraud if the taxpayer companies' claim for an adjustment of the assessments was to be defeated.”[57]On the basis of those authorities we conclude that the Taxpayers bear the burden of proof regardless of any express or implicit allegations of fraud. The standard of proof[58]The recent case of Revenue and Customs Commissioners v Khawaja [2008] STC 2880 concerned a penalty charged pursuant to section 95 TMA which requires that “a person fraudulently or negligently delivers any incorrect return” – we note the similarity of that wording to sections 29(4) and 36 which are in point in the current appeal. Mann J held (at paragraph 25) that the applicable standard of proof in proceedings for direct tax penalties is the civil standard (that is, the balance of probabilities). Further, concerning Article 6 of the ECHR (at paragraph 29):
“it is plain that art 6 does not automatically introduce the criminal standard of proof.”
[59]Given that that is the case for direct tax penalty proceedings, we conclude on the basis of that authority that the civil standard certainly applies to appeals against assessments to income tax. Self-incrimination[60]In R v Allen [2001] STC 1537 [2001] UKHL 45 the House of Lords considered the human rights implications of the Hansard procedure, and the risk of self-incrimination. Mr Allen argued that producing a schedule of assets under the Hansard procedure breached his Article 6 right against self-incrimination, as the delivery of the schedule had been induced by the assurance in the Hansard statement that he would not be prosecuted if he disclosed the required information. In the version of the Hansard statement given to Mr Allen and also in that given to Mr & Mrs Cooksey, HMRC had given no definite undertaking to refrain from prosecution, even in a case where a full confession had been made. Lord Hutton (at paragraph 35) stated, “If, in response to the Hansard statement, [Mr Allen] had given true and accurate information which disclosed that he had earlier cheated [HMRC] and had then been prosecuted for that earlier dishonesty, he would have had a strong argument that the criminal proceedings were unfair and an even stronger argument that the Crown should not rely on evidence of his admission …”. We understand from Mr Greener’s evidence that those criticisms resulted in 2002 in HMRC making revisions to both the Hansard statement and Code of Practice 9, indicating that HMRC would not pursue a criminal prosecution if a taxpayer made a full and complete confession of all tax irregularities.[61]In the current case there is no question of any confession or self-incrimination. The Taxpayers have always denied, and continue in these proceedings to deny, absolutely that there were any undisclosed cash sales. We have already found that the information given to HMRC was false, in that it omitted to disclose the cash sales. Similarly in Allen ( ibid) , “ However, in … this case [Mr Allen] did not give information contained in the documents and the schedule respectively which the Crown claimed was true, [he] gave false information and [was] prosecuted for giving that false information. To the extent that there was an inducement contained in the Hansard statement, the inducement was to give true and accurate information to the Revenue, but [Mr Allen] did not respond to that inducement and instead of giving true and accurate information gave false information. Therefore, in my opinion, the appellant's argument in this case that he was induced by hope of non-institution of criminal proceedings held out by the Revenue to provide the schedule and that its provision was therefore involuntary is invalid.”[62]We conclude on the basis of that authority that Article 6 is not in point in relation to self-incrimination on the facts of the current appeal. The issue of penalties and/or interest[63]In King v Walden [2001] STC 822 Jacob J held (at paragraph 71), “… the system of imposition of penalties for fraudulent or negligent delivery of incorrect returns or statements is “criminal” for the purposes of Article 6(2)”. Although the case concerned VAT penalties rather than income tax penalties, we also note C&E Commrs v Han [2001] STC 1188 where the Court of Appeal, by a majority, held that penalties for dishonest evasion of VAT gave rise to criminal charges, thus invoking the Article 6 right to a fair trial. In R v Gill [2003] STC 1229 the Court of Appeal held that tax evasion involved the commission of a criminal offence and therefore an HMRC investigation of tax evasion constituted the investigation of a criminal offence.[64]In response to a question from the Tribunal Nr Nawbatt, after taking instructions from his clients, confirmed to the Tribunal:(a) the amounts charged by the assessments under appeal comprised only income tax and did not include any element of interest or penalty;(b) HMRC did not intend and undertook not to charge any penalty in relation to any of the amounts charged by the assessments under appeal; and(c) HMRC reserved the right to charge statutory interest on all or any of the amounts charged by the assessments under appeal. Given that confirmation and undertaking by HMRC that no penalties are involved in this case, it is not necessary for the Tribunal to consider Article 6 in relation to penalties.[65]Turning to the interest that HMRC may charge, this would be charged pursuant to section 86 TMA (interest on overdue income tax). The purpose of the charge under section 86 is to cancel any financial advantage that might accrue to the taxpayer by delaying payment of tax due. The charge under section 86 is not conditional on fraudulent or even negligent conduct of the taxpayer. It arises even in the case of innocent error resulting in late payment. The calculation of the charge is purely arithmetic using the amount of tax overdue, a day count, and rates of interest prescribed by statutory instrument (section 178 Finance Act 1989). For those reasons we conclude that the system of charging interest pursuant to section 86 does not constitute a “criminal” matter for the purposes of Article 6. Delay[66]Mr Webster cited the European Court of Human Rights case of Hozee v Netherlands [1998] ECHR 41 . In that case there was a delay of over 8 years between Mr Hozee being first questioned in connection with a tax fraud investigation and the conclusion of legal proceedings. The court held that that delay did not violate Mr Hozee’s Article 6 right to a “hearing within a reasonable time”.[67]Mr Nawbatt contended that to the extent there had been any significant delays in the course of the investigation these were due to the Taxpayers’ failure to comply with requests for information; also over the last three years there had been delays (and non-compliance with directions issued in these proceedings) due to the ill health of Mr Cooksey.[68]We find that in the particular circumstances of this case the length of the investigation was not so excessive as to be unreasonable and thus there was no violation of the Taxpayers’ rights under Article 6. Disclosure of case[69]Mr Nawbatt contended that the Taxpayers were well aware of the basis of the case against them at least as early as July 2003 when Mr Webster himself met with Mr Greener and there was a detailed discussion of the reasons why HMRC were pursuing the enquiry.[70]We find that the Taxpayers have not been denied information as to the nature and cause of the investigation into their tax affairs, and that such information was supplied in a reasonable timescale taking into account the continued failure by the Taxpayers to make disclosure of the matters being investigated by HMRC. Whether HMRC had made a “discovery” to entitle them to issue assessments pursuant to section 29 TMA[71]Most of the assessments were made pursuant to section 29 TMA (for full details see the table at the start of this decision notice). Those assessments cover a span of 19 years and the legislation has been amended several times during that period. However the wording relevant to these appeals can be summarised as follows for all the years of assessment except 1982-83. Assessment where loss of tax discovered (1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment— ( a ) that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or ( b ) that an assessment to tax is or has become insufficient, or ( c ) that any relief which has been given is or has become excessive, the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax. … (3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above— ( a ) in respect of the year of assessment mentioned in that subsection; and ( b ) in the same capacity as that in which he made and delivered the return, unless one of the two conditions mentioned below is fulfilled. (4) The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf. … (8) An objection to the making of an assessment under this section on the ground that neither of the two conditions mentioned above is fulfilled shall not be made otherwise than on an appeal against the assessment. (9) Any reference in this section to the relevant year of assessment is a reference to— ( a ) in the case of the situation mentioned in paragraph ( a ) or ( b ) of subsection (1) above, the year of assessment mentioned in that subsection; and ( b ) in the case of the situation mentioned in paragraph ( c ) of that subsection, the year of assessment in respect of which the claim was made.[72]In respect of 1982-83 there was no requirement for the underassessment to be “ attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf”.[73]The time limits for making assessments under section 29 are set out in sections 34 to 41 TMA. Section 36 has been amended several times during the period covered by the assessments but the wording relevant to these appeals can be summarised as follows for all the years of assessment except 1982-83. Fraudulent or negligent conduct (1) An assessment on any person (in this section referred to as “the person in default”) for the purpose of making good to the Crown a loss of income tax or capital gains tax attributable to his fraudulent or negligent conduct or the fraudulent or negligent conduct of a person acting on his behalf may be made at any time not later than 20 years after the 31st January next following the year of assessment to which it relates.[74]In respect of 1982-83 the position was governed by what was then section 37 TMA where the relevant words were “a loss of tax wholly or partly attributable to the fraud, wilful default or neglect of any person”. That provision also required the leave of the General or Special Commissioners to be given for the assessment to be made; such leave was granted by the Liverpool General Commissioners on 13 March 2003 in respect of the 1982-83 assessment.[75]Mr Webster for the Taxpayers contended that the section 29 assessments were flawed on two grounds. First, HMRC had alleged fraud and thus they had to prove “fraudulent conduct” to satisfy the requirements of section 36 in relation to the back duty assessments. Mr Nawbatt for HMRC contended that for HMRC to discharge the burden upon them they need only satisfy the Tribunal that it is more likely than not that the failure to assess profits to tax was due to the negligent conduct of the taxpayers (for 1982-83, neglect of any person); HMRC did not have to satisfy the Tribunal in relation to fraudulent conduct as that was an alternative to negligent conduct. The Tribunal prefers Mr Nawbatt’s contention as this is fully in accordance with the extracts from Lotus Group Cars cited above. For the sake of completeness, we consider it self-evident that submitting returns which fail to report cash sales or overseas income or gains constitutes at least negligent conduct.[76]Mr Webster’s second contention was that for a “discovery” to be made in a case where HMRC had interviewed taxpayers under the Hansard procedure and had alleged that there were undisclosed profits arising from unreported business transactions, HMRC must conduct a thorough review of the business’ prime accounting records and the taxpayer’s personal financial records. He referred the Tribunal to the contents of HMRC’s own Manual concerning accounts investigations, which stipulated the work and tests expected to be performed on accounts, prime records and accountants’ working papers. His cross examination of Mr Greener had established that HMRC had done no such work.[77]In relation to the Manual, even if the Tribunal were to give any weight to this, the Tribunal accepts Mr Greener’s evidence that the passages quoted by Mr Webster relate to District investigations and are not relevant to Code of Practice 9 enquiries.[78]In relation to the wider point of sufficiency of a discovery, Mr Nawbatt for HMRC contended that the test for HMRC to demonstrate a discovery constituted a low hurdle. He referred to Mr Greener’s evidence and put forward five grounds of discovery which would justify the issue of section 29 assessments for all the relevant years.(1) Mr Howarth’s telephone call to HMRC giving a disclosure of underdeclarations.(2) The results of the Hansard Meeting, particularly the visit to the Cookseys’ home and the examination of the JOTIS chequebook stubs.(3) The notes of meeting with Mr Cooksey prepared by Lathams, which confirmed the information given in Mr Howarth’s telephone call.(4) The NatWest documents referring to a share portfolio in excess of one million pounds and an inference of more than one offshore fund.(5) The Ashworth Treasure notes, which indicated that a trust existed with Mr & Mrs Cooksey as beneficiaries, and the existence of a letter of trust and wishes.[79]In R v Kensington Income Tax Comrs, ex p Aramayo (1913) 6 TC 279 Bray J considered whether in that case anything could have been said to have been discovered, and said (at 283):
“… it seems to me to be quite clear that the word “discover” cannot mean ascertain by legal evidence; it means, in my opinion, simply “comes to the conclusion” from the examination he makes, and, if he likes, from any information he receives.”
Then Avory J said (at 289):
“The other point of substance between the parties is as to the meaning of the word “discovers” in [the Taxes Management Act 1880]. I think that word means “has reason to believe.”
If it is construed in the sense “has reason to believe,” it is consistent, and only in that way is it consistent, with the whole scheme of this legislation.” Further, Lush J said (at 290):
“Now if you take the word “discovers,” as I think it clearly was intended to be taken, as merely an alternative to “find” or “satisfy himself,” the difficulty disappears.”
[80]The Tribunal considers that the five factors summarised by Mr Nawbatt clearly demonstrate that HMRC did receive information to give them reason to believe that there was income which ought to have been assessed to income tax which had not been assessed. Those factors were sufficient to satisfy themselves as to the existence of unassessed income. Thus there was a discovery for the purposes of section 29 TMA. Decision[81]The appeals are dismissed. T he assessments listed at the beginning of this decision notice shall stand in the amounts originally assessed. Liberty to the parties to apply for clarification or determination of figures. Right of appeal to Upper Tribunal[82]Section 11 of the Tribunals, Courts and Enforcement Act 2007 provides that any party to a case has a right of appeal to the Upper Tribunal on any point of law arising from a decision of the First-tier Tribunal. The right may be exercised only with permission which may be given by the First-tier Tribunal or the Upper Tribunal. Rule 39(2) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 SI 2009/273 provides that a person seeking permission to appeal must make a written application to the Tribunal for permission to appeal, which application must be received by the Tribunal no later then 56 days after the date that the Tribunal sends full written reasons for the Decision. Rule 39(5) provides that an application for permission to appeal must identity the decision of the Tribunal to which it relates, identify the alleged error or errors in the decision, and state the result the party making the application is seeking.[83]This document contains the full written reasons for the Decision. Signed Tribunal Judge Issue Date: 21 October 2009