Moosa v Revenue & Customs [2010] UKFTT 248 (TC)

FTT-Tax
Moosa v Revenue & Customs
[2010] UKFTT 248 (TC) · 2010-05-20
[1]This is an appeal by Amanullah Haji Moosa (the Appellant) against the following:(i) a closure notice under s.28A(1)&(2) Taxes Management Act 1970 (TMA) and a revised self-assessment in the sum of £5045.63in relation to the tax year ended 5 April 2002 (“the 2001/2 assessment”);(ii) a discovery assessment under s.29 TMA and additional profits charged by this assessment resulting in additional tax £6056.95 in relation to the tax year ended 5 April 2002/3 (“the 2002/3assessment”);(iii) in respect of the tax year ended 5 April 2004 a discovery assessment under s.29 TMA and additional profits charged by this assessment resulting in additional tax in the sum of £5711.10 in relation to the tax year ending on 5 April 2004 (“the 2003/4 assessment”);(iv) penalties, totalling £5881.00, charged under s.95 TMA in respect of under-declarations of income tax arising out of the above assessments[2]The assessments and penalties were raised by the inspector of taxes following an enquiry into the Appellant’s tax return for 2001/2. The enquiry commenced with a letter dated 12 February 2003 but was not completed until the closure notice was issued on 14 December 2007 and the assessments under appeal were issued. The 2002/3 and 2003/4 assessments were issued as a result of information discovered during the course of the enquiry into the 2001/2 tax return. There is no dispute that the 2001/2, 2002/3 and 2003/4 assessments have each been issued within the statutory time limits.[3]When the enquiry commenced the inspector of taxes was concerned about a possible failure by the Appellant to disclose fully his rental income in his 2001/2 return and the enquiry was directed towards the Appellant’s property holdings and how the purchases had been financed. There is now no dispute that in his 2001/2 return the Appellant only disclosed half of the rental income he had received in respect of 236 Green Lane Road and that an additional £2860 of rent should have been included in the return. At a meeting on 22 September 2003 the Appellant’s then accountant disclosed that an error had been made when completing the 2001/2 return in that the accountant said that when preparing the return he had asked the Appellant about the rental income and had been told that the it was the same as the previous year but that he had not appreciated that in 2000/1 the property had been let for only 6 months whereas it had been let for the full year in 2001/2. That explanation was accepted by the inspector of taxes. There was also however a question whether a capital gain might not have been disclosed on the disposal of another property, 13 Harwood Street. As a result of information provided by the Appellant’s then accountant in February 2004 it became clear that there had been a gross capital gain of £10,000 on the sale of 13 Harwood Street. At a meeting held on 5 March it was accepted that there would be a small capital gain to be included in the 2001/2 return and on 3 May 2005 the Appellant’s then accountants submitted a capital gains computation showing a net chargeable gain of £2000 on the disposal of 13 Harwood Street which was agreed by the inspector of taxes on 11 May 2005. The closure notice includes the additions of £2860 and £2000 and we are satisfied that these amounts were properly included in the 2001/2 assessment.[4]The remaining element in the closure notice relates to other income which the Respondents say was not disclosed in the 2001/2 return. This income is commission earned by the Appellant which it is said he failed to disclose in his 2001/2 return. In the closure notice the Appellant has been assessed on the basis that he received £15,000 commission in 2001/2. The discovery assessments are also in respect of commission which it is said by the Respondents the Appellant earned in 2002/3 in the sum of £22,000 and in 2003/4 in the sum of £23,366.[5]The notes of the meeting on 7 March 2005 (pages C27 to 31 in the bundle) show that the Appellant said that he had been involved in a hawala money transfer system for the transfer of money between England and Pakistan. He is recorded as having said that he had acted as an intermediary and that the hawala system was quicker and less expensive than using the banking system. He is also noted as having said (at page C30) that he had started in a small way in 2000 but that his activities had ceased when HM Customs had taken away his cash float and his records. He is recorded as having said that his cash float had been £56,000 but that HM Customs had taken this money. At page C30 he is also recorded as having said that in 2001/02 he had earned commission but that it was “not much”. A copy of the notes of this meeting was sent to the Appellant’s then accountants (see page C32 of the bundle) and they were invited to tell the inspector of taxes if there was anything in the copy of the record with which they disagreed. There is nothing in the documentation before the Tribunal to show that the accountants who are recorded as having been present at the meeting ever suggested that the record was incorrect and there has been nothing in the oral evidence given by the Appellant at the hearing of the present appeals to challenge the accuracy of that record. The Appellant has in his oral evidence said that he did not in fact start his hawala business until 2003.When he was asked in evidence in chief whether he could have started the business in 2002 he said that he was “not sure” but that it took time for the business to build up. While this was clearly a leading question, it is noteworthy that that the Appellant did not say that he had not been engaged in a hawala business in 2002.[6]In a signed statement dated 4 November 2004 (page D88 in the bundle) the Appellant refers to another matter where Customs officers were making enquiries relating to fax transactions for the period between September 2003 and February 2004 whereby approximately £1.5 million had been transferred from Pakistan to the United Kingdom. In this statement the Appellant said that he had been involved in a money transfer business whereby he would receive instructions by fax from Pakistan to pay either in cash or into a bank account to a named person or company a sum of money, that the fax would come from a bureau in Pakistan called “Money Exchange”, that as far as he was concerned the source of the money was legitimate and that he would receive a small percentage for carrying out this service. He also said that his son, Ashfiq, did not have anything to do with this business apart from “occasionally” helping him to carry out his services. At paragraph (6) of the statement he described the arrangement between himself and Money Exchange in Pakistan as follows:
“...I would receive money in the United Kingdom from customers who would want to transfer money to Pakistan. I would use this money to pay customers who were to receive money from Pakistan. There would then be an accounting procedure between me and Money Exchange and the balance would be paid to me by telegraphic transfer. It was very rare for their (sic) to be a balance whereby they needed to send money to me”
. In response to a question from the Member, the Appellant accepted that under this system for transfer of funds he would not need to take surplus funds from his other businesses and that he did not need to have any “big bank of cash”.[7]A hawala business is a well known system for the transfer of funds between countries such as the United Kingdom and Pakistan. It operates essentially as described by the Appellant at paragraph (6) of his statement dated 4 November 2004. Persons in the United Kingdom would give money to someone such as the Appellant which they wished to transfer to another person or persons abroad, commonly members of their family. The money which the party such as Appellant received would not in fact be transferred abroad but would be used to pay persons in the United Kingdom who were expecting to receive funds from abroad. A third party or counterparty would be involved who would receive funds abroad which were to be transferred to someone in the United Kingdom. In effect the funds received by such as the Appellant in the United Kingdom would be offset against the funds received by the counterparty abroad and generally no money would actually pass between the 2 countries. It is a system based on personal trust and is often conducted in conjunction with another business such as that of a shopkeeper. In return for his services a person such as the Appellant would receive a small commission on each transaction. In his undated witness statement produced at the hearing the Appellant said that he had tried to charge a commission of 0.50% on moneys received. In his evidence in chief the Appellant said that he charged a commission of 0.50%. The assessments under appeal are based on a commission rate of 0.50% and we are satisfied and find that the Appellant throughout charged a commission of 0.50% on moneys received by him.[8]A summary of faxes for the period from 12 September 2003 to 14 February 2004 which appears at pages D80 to 87 in the bundle records instructions to the Appellant to transfer monies totalling £2,332,598 to the persons named in the summary. In calculating the amount of the under-declared commission in the 2003/4 assessment the inspector of taxes has proceeded on the footing that the total commissions received should be assessed at the rate of 0.50% on a total of £4,673,200 money transferred during the tax year 2003/4 giving a figure of £23,366 under-declared commission income. The figure of £4,673,200 is effectively just over double the amount revealed in the faxes for the 5 month period they cover. Reduced figures of £22,000 and £15,000 for under-declared commissions have been assessed by the inspector of taxes for the 2 earlier tax years to allow for the likelihood that the hawala business may have been building up during the 2 earlier years and not have been as substantial as it had become in the period covered by the faxes.[9]The methodology followed by the inspector of taxes in calculating the under-declared income in 2003/4 is in our view sound. The only documentary evidence which has been produced showing the extent of the Appellant’s hawala business are the summaries of the faxes in the bundle showing instructions to transfer funds totalling £2,322,598. It is in our view reasonable in the absence of satisfactory evidence to the contrary to infer that the funds transferred during the period covered by the summary of the faxes were a fair indication of the level of the Appellant’s hawala business for those months and that it is reasonable to proceed on the footing that the business existed at the same level during the other months of that tax year. In his evidence to the Tribunal, the Appellant suggested that there had been duplication in the summary of the faxes and also that the faxes were only instructions to transfer monies and that it did not follow that all the instructions had actually been carried out. We cannot accept either of these contentions. First, no evidence has been produced to show which if any of the faxed instructions were not carried out. Secondly no duplication has been identified by the Appellant in relation to the faxes. On their face, the instructions all relate to separate transactions for differing amounts for the benefit of different persons or companies. The Appellant has said that he has had difficulty in checking the summary of the faxes because he did not have the original faxes or other records as they had been taken away by other officers of HM Customs and Excise. Some paperwork he said had been returned but not what he needed. The representative of the Respondents confirmed to the Tribunal that the investigating officer had visited the appropriate Customs office re the documents seized and was satisfied that there were no documents retained other than as copied to the Tribunal.[10]In the course of his enquiry into the Appellant’s tax affairs the inspector of taxes examined a number of bank accounts maintained by the Appellant and his businesses. These bank accounts were revealed pursuant to requests for information as to the sources from which the Appellant had purchased various properties. The accounts do disclose substantial payments into and out of the accounts which were not fully explained during the course of the enquiry. The Appellant has in his evidence suggested that there has been duplication between the transactions recorded in the faxes and monies passing through the accounts. An examination of the amounts borrowed by the Appellant from various banks however shows that some £285,000 was borrowed but that some £287,000 was spent on the purchase of property. A loan of £170,000 from the Royal Bank of Scotland was used to purchase a warehouse at 101 Frisby Road. (See the Appellant’s statement dated 8 March 2004 at page D90 of the bundle). It is clear in our view that no money borrowed from the banks was used to finance the Appellant’s hawala business and we are satisfied that as the Appellant implied at paragraph 6 of his statement dated 4 November 2004 in substance the hawala business was self financing. The substance of the business was that the Appellant would only pay out monies which he had already received. At a very late stage in the enquiry the Appellant through his then accountants said in a letter dated 25 September 2007 (page C60 in the bundle) that he had borrowed £500,000 from different sources when he had started his hawala business and that significant interest had been paid on these monies. (Reference was made elsewhere to £650,000). It was suggested that this interest would be claimable against any profits assessed in respect of the hawala business. In a subsequent letter dated 15 October 2007 it was stated that a loan from Lombard Direct had been used for the hawala business. However in the Appellant’s statement of assets as at 5 April 2002 this loan was shown as being for the purchase of the Appellant’s private residence at 2 Fairford Road. We are wholly unpersuaded that any such loans were made in relation to the hawala business and we reject these suggestions. The Appellant in his evidence has stated that his main business was foodstuffs constituting 99% of his trading as against 1% in hawala (though he did also put these figures at 90% and 10%). Indeed there is no evidence apart from the claim itself to establish that a loan of £500,000 was ever made to the Appellant nor of the source of any such loan nor the payment of any interest. At the hearing the Appellant for the first time produced a copy of a loan agreement dated 28 November 2002 recording a loan from relatives in Pakistan of 15m rupees but this was a business loan agreement replacing earlier loans and we are satisfied did not relate to any hawala business.[11]The assessments under appeal made in respect of the Appellant’s hawala business are, we are satisfied, made only in respect of cash transactions and they do not include any sums which may have passed through bank accounts operated by the Appellant. It does not appear to be in dispute that some of the sums passing through the bank accounts were moneys used to make hawala payments but the inspector of taxes accepted the Appellant’s contention that the commission charged by the banks on the transfers of funds involved cancelled out any benefit he might have received by way of commission on the payments. At the hearing the Respondents produced a sheet showing calculations of the amounts earned by the Appellant based on a commission of 0.50% on monies deposited in the bank accounts. The deposits involved are substantial, amounting to £565,940 for the year ending 5 April 2002, £349,028 for the year ending 5 April 2003 and £555,552 for the year ending 5 April 2004 but as we have already said the inspector accepted that any commission earned was offset by the bank charges incurred. The sheet shows a small balancing amount for each of the years which has the effect of reducing any profit from commission in relation to the bank transactions to nil. There is no evidence that the Appellant actually incurred losses on the bank transactions and we are satisfied that no deductions fall to be made from the assessments under appeal in respect of the banking transactions.[12]It was as we have already indicated the Appellant’s evidence that he only started the hawala business in 2003 and it was submitted that the 2001/2 assessments should be discharged so far as it included commission for that year. We cannot accept that submission. The Appellant’s claim that he only started the hawala business in 2003 is inconsistent with what he told the inspector of taxes at the meeting on 7 March 2005. On that occasion he said that the business had started in 2000. It was also part of the Appellant’s evidence that it would take some time to build up a significant hawala business. While we can accept that evidence, it is perfectly clear that by 2004 his turnover for the period from September 2003 to February 2004 as evidenced by the summary faxes was £2,332,598. It is in our view unlikely that the Appellant could have built up such a large cash turnover if he had only started the business in 2003. The probability in our view is that the business had been in operation for several years before 2003 and the year 2000 stated by the Appellant as the commencement at the meeting in March 2005 is far more likely. That the business started before 2003 is also consistent with the substantial bank deposits noted in the sheet produced at the hearing albeit that the Appellant had not made a profit. Accordingly we find that the Appellant had commenced his cash hawala business and was trading as such in the years 2001/2 and in 2002/3.[13]The next issue is that of the quantification of the Appellant’s profits for the years the subject of the appeal. The burden is upon the Appellant to show that the profit figures assessed by the inspector of taxes are incorrect. The Appellant has in our view failed to show that the profits assessed are excessive. He has claimed that some £50 per week was incurred in the expenses of running the hawala business or that an apportionment of his general office expenses at 10% to 15% should be attributed to it. These are simply unsubstantiated estimates and we are not persuaded that they can be related to the hawala operation. The Appellant did say that he incurred costs in driving to car parks to make or receive hawala payments but any such costs are not supported by any receipts and there is no record of any journeys. Again the claim is unsubstantiated and we reject it.[14]The Appellant gave evidence that 99.9% of the hawala business consisted of bank transfers and that only .1% consisted of cash transactions. We reject that evidence. It is clear from the summary faxes for the period from September 2003 to February 2004 that £2,232,598 was transferred but these payments cannot be reconciled with any bank statements produced by the Appellant.[15]As we have already observed the methodology adopted by the inspector of taxes was in our view sound and we consider that his assessment of the amount of the profits for 2003/4 was reasonable. The appeal for 2003/4 is thus dismissed. In relation to 2002/3 we are satisfied that the Appellant was carrying on a substantial cash hawala business and the estimate made by the inspector of taxes of the likely amount of commission earned by the Appellant again was in our view reasonable. An allowance has been made for the possibility that the business had not developed as much as it had done in the next year. The Appellant has not produced any evidence to show that the estimate made by the inspector of taxes was excessive. The appeal for 2002/3 is thus dismissed. In relation to 2001/2, we do not accept the Appellant’s claim that the commission earned from the cash hawala business was “not much”. We are satisfied that the Appellant was in 2001/2 carrying on a cash hawala business which was earning significant commission. It was the Appellant’s evidence that he developed the cash hawala business because the commission charged by the banks made it unprofitable to transfer funds through the banks. The estimated commission of £15,000 for 2001/2 has not been shown to be excessive and the appeal against the 2001/2 assessment is dismissed.[16]The remaining appeal is against the penalties totalling £5881.00 for the 3 years in question. The burden is upon the Respondents to establish that the Appellant was negligent in not returning the full amount of income for the 3 years of assessment. No explanation has been provided to explain the failure to disclose the commission earned in any of those years and we can only conclude that the Appellant was negligent in not making a correct return for any of the years. No explanation has been provided as to why the capital gain was omitted from the 2001/2 return and that again was in our view negligent. The failure to return the full amount of the rental income was according to the Appellant’s then accountant due to a mistake or misunderstanding on his part but the obligation is upon the Appellant to check his return prior to signing it as being correct. The Appellant in our view should have realised that the figure entered by the accountant in the return for his rental income was incorrect and was only half the correct amount. We are satisfied that the Appellant was negligent in failing to check that the amount of rental income was correct. The Appellant knew the amount of the rental and also that he had received it for a full year.[17]The final question is the amount of the penalty imposed. The penalties amount to 35% of the tax under-declared for each of the years. In his letter dated 30 January 2008 at pages C67 and 68 in the bundle the inspector of taxes explained the basis on which he proposed that a penalty of 35% of the tax in question should be imposed. His reasoning cannot in our view be challenged and we dismiss the appeals against the 3 penalties totalling £5,881.[18]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. ELSIE GILLILAND TRIBUNAL JUDGE RELEASE DATE: 20 May 2010