Voong v Revenue & Customs [2010] UKFTT 317 (TC)

FTT-Tax
Voong v Revenue & Customs
[2010] UKFTT 317 (TC) · 2010-07-08
[1]The Appellant (Mr Voong) is self-employed and operates the Golden Dragon takeaway meals business in Camberwell, London. The Respondents (“HMRC”) allege that he suppressed his takings for several years, resulting in an underdeclaration of income for the purposes of his self-assessment income tax returns. The assessments and the appeals[2]Mr Voong submitted his self-assessment income tax return for the tax year 2002-03 on 20 October 2003. This included the results of his business for the accounting year ended 31 July 2002. On 24 November 2004 HMRC opened an enquiry into that return, pursuant to s 9A Taxes Management Act 1970 (“TMA”). There followed meetings and correspondence, which are discussed below, during which period HMRC extended their s 9A enquiries to the tax years 2003-04, 2004-05, and 2006-07. HMRC on 14 July 2008 closed their enquiries and issued notices under s 28A TMA in respect of each of those years. HMRC also concluded that discovery assessments under s 29 TMA were necessary in respect of the tax years 1998-99, 1999-2000, 2000-01, 2001-02 and 2005-06; these were issued on various days in July 2008.[3]The closure notices and discovery assessments amended the returns and assessed further profits in three respects. First, Mr Voong admitted that he had not declared property rental income in several tax years. Second, he accepted that the figures in his accounts for goods taken for own use should be adjusted. Third, HMRC made significant adjustments to the profits of the takeaway business to reflect alleged undisclosed takings. It was only the third item that was disputed before the Tribunal.[4]HMRC accepted that valid appeals had been made against all the assessments and closure notices.[5]The revised assessment amounts contended for by HMRC were: Tax year Revised amount 1998-99 £7,207.84 1999-2000 £12,693.40 2000-01 £13,996.45 2001-02 £10,288.75 2002-03 £10,436.15 2003-04 £11,680.74 2004-05 £12,059.77 2005-06 £12,334.30 2006-07 £12,990.31 The hearing[6]The Tribunal received helpful written summaries of their presentations from both Mr Woo and Mrs Parslow. Mr Paul Clarke, an Inspector of Taxes involved in the enquiry, adopted a witness statement dated 7 May 2010 and gave oral evidence under oath.[7]Mr Voong declined to give oral evidence. The Tribunal explained to Mr Voong and Mr Woo that while Mr Voong was under no obligation to give formal evidence, that might affect the weight that the Tribunal felt it was appropriate to attach to such of Mr Voong’s assertions as conflicted with evidence advanced by HMRC. Mrs Parslow gave notice that she would refer in her closing submissions to the fact that she had been unable to question Mr Voong.[8]The Tribunal permitted Mr Woo to make occasional informal interpretations to Mr Voong. The Tribunal was satisfied that Mr Voong had sufficient understanding of the nature and progress of the hearing. The enquiry[9]On 22 March 2005 a meeting was attended by Mr Voong, Mr Woo, a colleague of Mr Woo, and the then HMRC case officer Miss Fitzgerald. A copy of the notes of that meeting was sent to Mr Woo who acknowledged receipt without any comment on the notes. HMRC expressed serious concerns with the adequacy and accuracy of the business records: there was no primary record of sales; no daily record of expenses; no record of cash drawings; an unusual takings pattern; gaps in recorded purchases; and negative cash shown the cash account of the business.[10]HMRC continued their enquiries, including the use of formal information powers pursuant to s 19A TMA. They uncovered the undeclared rental income referred to above. They obtained copies of bank documentation including account statements, and a loan application made by Mr Voong to Bank of China in February 1992 in which he certified the gross takings of his business as £2,000 per week.[11]In particular, HMRC commenced a business economics exercise (“BEE”). Mr Clarke explained to the Tribunal that this is commonly employed in enquiry work and uses data compiled by HMRC’s business intelligence unit on taxpayers engaged in various business sectors. One such sector was businesses selling takeaway Chinese meals. HMRC had a model that enabled the estimation of various margins from the data available from a cross-section of taxpayers’ accounts. HMRC concluded that Mr Voong’s accounts significantly understated the turnover of the business.[12]On 6 May 2008 there was a further meeting, attended by Mr Voong, Mr Woo, Mr Clarke (who had now taken over the enquiry), and a colleague of Mr Clarke. A copy of the notes of that meeting was sent to Mr Woo who acknowledged receipt. Agreement was reached in relation to the property income and own-use goods, but not on the alleged additional sales. In July 2008 the assessments and closure notices were issued.[13]Mr Clarke summarised to the Tribunal his conclusions in relation to the business in the relevant years:(1) There were no records of individual sales, only a daily total. No till rolls could be produced, nor order pads. Sales slips, constituting prime records, had not been retained. Those records were incomplete and could not be relied upon.(2) There was an unusual takings pattern, which was contrived. HMRC had been presented with a hand-written exercise book which purported to show daily takings over a period of several months but which appeared to have been all written up at the same time with very little variation in takings from day-to-day. He concluded that the record of takings was not a contemporaneous record. He had never seen any records to support the entries in the notebook.(3) There was no daily record of expenditure and there were gaps in the purchases made. There were no records of wages paid, nor purchase invoices, nor stock records, nor record of personal use.(4) There was no record of cash drawings, the figure in the accounts being a balancing figure. He concluded the accounts figure was unreliable. More cash had been spent than was reportedly available. Accordingly, he concluded that cash sales had been omitted. He had been told, and the notebook of takings showed, the business was closed in August 2001. However, scrutiny of the bank statements showed three cash bankings in that month.(5) Further support for suspicion about the accuracy of the business accounts came from the taxpayer’s admitted omission of rental income from his tax records. The BEE[14]Mr Clarke explained that a BEE had been carried out on two bases. First, profits were recalculated using the amounts of chicken purchased shown in the 2002 accounts. This covered both fresh and frozen purchases, and made allowance for wastage (including defrosting, skinning and de-boning). The number of chicken meals sold was calculated, and sales revenue calculated using the average price of chicken based dishes. This revealed an underdeclaration of turnover by Mr Voong. The expected profit margin was calculated using the BEE estimate and the resulting figure was significantly higher than that declared by Mr Voong.[15]Mr Woo had challenged this exercise in several respects and Mr Clarke had produced another iteration of the BEE which, although producing a lower estimated profit figure, still revealed significant understatement of both turnover and profit.[16]The other basis for the BEE was recomputation of profits based on the number of takeaway containers purchased. Allowance was made for wastage and the average price of a meal was applied. Menu items not involving containers (eg prawn crackers and drinks) were ignored. Again, this revealed significant understatement of both turnover and profit.[17]Although Mr Woo on behalf of Mr Voong had suggested corrections to the BEE, which were taken on board, he had not produced any alternative proposal, just an assertion that the BEE was wrong. Submissions on behalf of the taxpayer[18]Mr Woo for Mr Voong submitted as follows:(1) A review of the correspondence revealed that HMRC were desperate to get money from Mr Voong. The aggregate figures were large and beyond Mr Voong’s means. This was in conflict with HMRC’s stated policy to collect the right amount of tax – no more, no less.(2) HMRC’s enquiry had been incompetent. Calculation mistakes by HMRC had inflated the amount of tax claimed. Mr Woo’s firm had attempted to be helpful to HMRC and had represented their client for the last 12 years.(3) If Mr Voong had really earned such significant extra profits then this would be revealed in his lifestyle; but Mr Voong was not extravagant and, as examination of his passport would reveal, he did not take holidays. HMRC had not examined Mr Voong’s personal bank account details. This was a small family business operated by Mr Voong and his wife with one casual employee. The alleged profits were not possible for such a small business. Mr Voong was an honest man and was adamant that his accounts were correct. He had never claimed state benefits. He registered for VAT even though his turnover was below the registration threshold.(4) The notes of the second meeting with HMRC were incorrect and had not been signed by either HMRC or the taxpayer. The enquiry had been unfair, unsubstantiated and prejudicial. Mr Woo also made an allegation of racism which is dealt with fully later in this decision notice.(5) The business had ceased to sell fish and chip meals after Christmas 2000, and that was a change in the nature of the business that affected the presumption of continuity followed by HMRC in raising the discovery assessments.(6) The shop had been closed on and off for major refurbishment in the period July 2001 to September 2001. Part of the cost of those works was met by a grant from Southwark Council, which was further evidence of Mr Voong’s lack of financial means.(7) Some prime records had been destroyed by Mr Voong’s children. However, customer bills had been kept carefully since 2005.(8) The amounts of any cash overdrawings were not significant. Over the years Mr Voong had received financial assistance from his sister.(9) The non-declaration of rental income was because Mr Voong expected the rents to be equivalent to the mortgage payments and thus result in no taxable surplus.(10) The Bank of China mortgage was a self-certification mortgage and the figure for weekly takings was inserted by a bank employee at a time when banks were very relaxed about such matters. The figure on the form had no bearing on the actual results of the business. It was accepted that Mr Voong had signed the form.(11) Mr Voong had made a number of challenges to the BEE, including: (a) Mr Voong’s portions of chicken were heavier than the 4 ounce figure used. (b) The wastage allowance was too small. (c) The typical price used for a chicken dish was too high. (d) Closing stocks had been ignored. (e) Figures had been incorrectly calculated inclusive of VAT. (f) The exercises conducted separately by Miss Fitzgerald and by Mr Clarke arrived at markedly different results. The work was clearly very subjective. Weights of chicken, numbers of containers, wastage, numbers of portions, and projected sales figures were all different – that cast serious doubt on the results arrived at. (g) The BEE was a classroom exercise devoid of commercial reality and carried out by people with no experience of running a takeaway business in the real world.(12) HMRC were not justified in raising the discovery assessments. HMRC’s own guidance stated that mere suspicion was not adequate to justify the raising of discovery assessments. HMRC had never carried out any investigation of the records for those tax years and had no evidence to suggest any errors or omissions in those years. HMRC had failed to answer legitimate queries raised in correspondence on behalf of the taxpayer. HMRC had no good faith basis for raising the discovery assessments.(13) Despite the business having been registered for VAT since 1998, HMRC had never conducted a VAT control visit or inspection. Mr Woo submitted that this indicated that HMRC were satisfied with the trading of the business. Mr Voong had invited Mr Clarke to conduct a VAT inspection but Mr Clarke had declined this. Evidence and submissions on behalf of HMRC[19]Mrs Parslow for HMRC submitted that the taxpayer had been invited to submit complete records, which would be welcomed by HMRC, but had never done so. Mr Woo had submitted that proper records had been kept since 2005 but those had never been provided to HMRC despite the appeals covering the tax years 2005-06 and 2006-07. HMRC had had to deal with the records that were available; these were unsatisfactory for the reasons given by Mr Clarke and described above. The 2002 accounts showed weekly turnover of around £956 including VAT – that was far from the £2,000 certified to Bank of China. The taxpayer had provided to the Tribunal his explanation of the loan application, but not how he had managed to service a loan of an amount provided by the bank on the basis of such higher turnover.[20]During the enquiry there were two meetings. These had resulted in admissions in relation to the rental income and other agreed adjustments but, Mrs Parslow submitted, no credible explanations had been given in response to the serious concerns expressed by the Inspectors in relation to the turnover and profits of the business.[21]In the absence of adequate records or explanations HMRC had used the established methodology of a BEE to arrive at revised figures for profits. Mrs Parslow accepted that the BEEs performed by Miss Fitzgerald and Mr Clarke had shown different figures of profit. Also, errors had been made but later corrected: Miss Fitzgerald had made mistakes in converting quantities between metric and imperial measurements, and Mr Clarke had erred in taking sales gross rather than net of VAT. However, she submitted, both sets of calculations (after accepted necessary corrections) showed that additions to the stated profits were required. Further, even when adjustments proposed by Mr Woo on behalf of Mr Voong were made by Mr Clarke – for example, a higher wastage of containers – there was still a significant discrepancy between the submitted accounts and the prediction of the BEE. The starting point of the BEE had been Mr Voong’s own figures for purchases. To the extent that information had been provided by Mr Voong or his advisers then this had been taken into account in the BEE. Further, the BEE did not include any sales in respect of fish and chip meals (which Mr Voong denied were made during most of the period), pies (which Mr Voong said were all for personal consumption) or drinks – despite the accounts showing expenditure on such items and ingredients.[22]Mrs Parslow submitted that the Appellant’s objections in relation to the inclusion of VAT in the calculations were misguided. In one iteration of the BEE Mr Clarke had mistakenly taken figures gross of VAT instead of net of VAT – that had been corrected on being pointed out by Mr Woo. However, in calculating the estimated underdeclaration of turnover of the business, it was correct to include VAT in that figure as the cash takings that HMRC alleged had been received by Mr Voong but not declared would be the menu price, which was a VAT-inclusive figure.[23]Mrs Parslow submitted that, being satisfied that the submitted accounts were incorrect and thus negligent, HMRC were required to consider whether there could also be a tax loss in other tax years. Mr Voong had maintained that the business was run in the same way throughout, so HMRC considered the presumption of continuity was justified unless there was some alternative explanation which, again, had not been provided. Figures for other tax years had been calculated using the same methodology as in the year under enquiry, adjusting prices by RPI (which HMRC considered worked to the taxpayer’s advantage). Again, some corrections proposed by Mr Woo had been taken into account. Findings and conclusions The 2002-03 closure notice and the BEE[24]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 has been overcharged by the assessment. The applicable standard of proof is the usual civil standard, of balance of probabilities.[25]During their enquiry HMRC were hampered by Mr Voong’s inability or unwillingness to produce records. 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.”
[26]HMRC accept that the BEE provides only estimated figures, but in the circumstances of the Inspectors pursuing this enquiry those figures were the best available to them and were reached using reasonable assumptions – in several instances making adjustments for points raised on behalf of Mr Voong.[27]Even before the Tribunal, and despite encouragement from the Tribunal, Mr Voong provided no credible explanation as to why his accounts reported turnover and profits so different from HMRC’s BEE estimates. To quote again Walton J (above, at 279):
“… since the taxpayer gave no shred of evidence in front of the commissioners, by his own neglect he placed the commissioners in a situation which was really an impossible one so far as they were concerned.”
[28]For those reasons we find that HMRC’s figures were reached on a reasonable basis and that Mr Voong has not discharged the burden of proof laid upon him by s 50 TMA. Accordingly we find that the 2002-03 self-assessment tax return must be adjusted. The closure notices for the other tax years and the discovery assessments[29]Mr Woo challenged whether HMRC were entitled to issue discovery assessments. Section 29 TMA (so far as relevant) provides:
“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.”
[30]The time limits for making assessments under section 29 are set out in sections 34 to 41 TMA. Section 36 TMA (so far as relevant) provides:
“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.”
[31]In R v Kensington Income Tax Comrs, ex p Aramayo (1913) 6 TC 279 (not cited to the Tribunal) 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.”
[32]The Tribunal considers that the results of the BEE and the absence of any credible explanation from Mr Voong 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. From our finding that the 2002-03 return was incorrect by reason of understatement of profits (paragraph 28 above), we further find that there was neglect by Mr Voong. Thus the discovery assessments were validly raised.[33]For both the discovery assessments and the other closure notices Mr Woo also challenges HMRC’s assumption of continuity of profit. The application of the presumption of continuity was explained by Walton J in Jonas v Bamford [1973] STC 519 (at 540):
“… so far as the discovery point is concerned once the inspector comes to the conclusion that, on the facts which he has discovered, the taxpayer 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.”
[34]As already stated, Mr Voong presented no cogent evidence to contradict the conclusions that HMRC were entitled to draw from the BEE. Accordingly, HMRC were entitled to make the usual presumption of continuity for all the relevant tax years. On a point of detail, the assertions made in relation to fish and chip meals are irrelevant as those did not feature in the BEE. Allegation of Racism[35]At the hearing Mr Woo put forward his client’s case in strong terms. He referred to HMRC’s assessments as “robbery”. He originally alleged that HMRC had “purposely inflated” the income tax liability, although he later at the invitation of the Tribunal withdrew those words. He stated that at the second meeting, on 6 May 2008, Mr Voong had been interrogated as a criminal. Mr Woo had represented his client during the enquiry, which lasted several years, as well as at the hearing, and it is clear from the correspondence that there was some tension between himself and HMRC.[36]Mr Woo alleged that HMRC’s conduct of the enquiry involved racism. Quoting from his skeleton argument, he states that at the 6 May 2008 meeting Mr Clarke made “racist and prejudicial comments” and that “We and Mr Voong found these comments are disgusting, full of racial discrimination and prejudicial … It just betrays that Mr Clarke had let his personal feeling to impair his duty to exercise fair and just assessment.”[37]That is a most serious allegation. It had already been aired in correspondence between the parties. (1) Mr Clarke’s notes of the meeting record:
“Mr Clarke said Mr Woo would be aware of the turnover of Chinese takeaways and Mr Woo said he was but anything he knew from his own knowledge was confidential. Clarke said he understood that but from his experience the turnover of Mr Voong’s business was far lower than that with the least that he had seen, and the business economics exercises came some way to meeting the deficit.” (2) Those notes were sent to Mr Woo on 22 May 2008; he acknowledged receipt and did not propose any amendments to them. On 5 August 2008 Mr Woo wrote to Mr Clarke: “Towards the end of our last meeting of 6 May 2008, you have raised a question to us whether most clients of our firm are Chinese origin. You also commented that from your statistics, 8 out of 10 owners of Chinese takeaway have under-declared their takings. We and our client find these comments are discriminative and prejudiced. We are therefore inclined to conclude that “Your discriminative comments betray a certain amount of prejudice in your judgement of raising assessments and certainly do not accord with the instructions to adopt a neutral approach.”
Can we have your view on this.” (3) Mr Clarke replied on 30 September 2008:
“Other takeaway businesses – The notes of the meeting record what was said. No mention was made of your client base, nor that eight out of ten Chinese takeaways under-declare income. What was said is that you would be aware of the turnover of Chinese takeaways and that from my experience the turnover of Mr Voong’s business was far lower than any Chinese takeaway business that I had ever seen and that the business economics exercise came some way to meeting the deficit. I apologise if you perceive such a comment to be discriminative or prejudiced because it was certainly not the intention to offend. The assessments raised are based on the business economics exercise.”
[38]In his sworn oral testimony Mr Clarke stated:(1) He did not treat Mr Voong as a criminal.(2) He is not a racist and there was no racial discrimination towards Mr Voong.(3) He did not say that eight out of ten Chinese takeaways under-declare income. What he did say is recorded in the notes of the meeting. He had asked Mr Woo as a professional whether he had ever seen a Chinese takeaway with such low turnover.(4) He had had no intention to offend.(5) In response to a question in cross-examination by Mr Woo, Mr Clarke reiterated that he did not say that eight out of ten Chinese takeaways under-declare income. That was the only question put by Mr Woo on this topic. As already stated, Mr Voong chose not to give evidence to the Tribunal.[39]From the evidence before the Tribunal we find that there was no racism or prejudice in the conduct of the enquiry. The word “Chinese” was a description of the type of takeaway food – just as it was used on the business’s own menu – and not intended to convey any racial significance. If there was any misunderstanding by Mr Voong and/or Mr Woo then that was adequately corrected by Mr Clarke’s letter dated 30 September 2008, which also apologised for any unintentional offence. Decision[40]The Tribunal’s decision, which was communicated to the parties at the conclusion of the hearing, is that Mr Voong has not discharged the burden of proof that is laid upon him to explain why HMRC’s revised figures should be displaced. Accordingly, all the appeals are dismissed and the revised figures of the assessments and closure notices set out at paragraph 5 above are upheld. Rights concerning appeal[41]Mr Voong has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. 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. This document contains the full written reasons for the Decision. Peter Kempster TRIBUNAL JUDGE RELEASE DATE: 8 July 2010