Brown v Revenue & Customs [2014] UKFTT 302 (TC)

FTT-Tax
Brown v Revenue & Customs
[2014] UKFTT 302 (TC) · 2014-03-25
[26]Under s 9A TMA HMRC may, on giving notice to the person who has submitted a tax return, open an enquiry into that return provided that notice has been given within the statutory time limit, which for 2006-07 return was 12 months after the filing date for a return delivered on or before that date and for subsequent returns is 12 months from the date the return was filed. 27. Section 28A TMA provides that an enquiry under s 9A TMA is completed when an officer of HMRC “ by a notice (a “closure notice”) informs the taxpayer that he has completed his enquiries and states his conclusions. ” A closure notice takes effect when it is issued and must state either that no amendment to the return is required or make the amendments required (as in the present case) to give effect to the officer’s conclusions (see s 28A(2) TMA). 28. Insofar as it applies to this appeal, s 29 TMA provides:(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.(2) …(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 was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf. 5) The second condition is that at the time when an officer of the Board— (a) ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment; or (b) informed the taxpayer that he had completed his enquiries into that return, the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above. (6) For the purposes of subsection (5) above, information is made available to an officer of the Board if— (a) it is contained in the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return; (b) it is contained in any claim made as regards the relevant [year of assessment] by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim; (c) it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer, whether in pursuance of a notice under section 19A of this Act or otherwise; or (d) it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above – (i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or (ii) are notified in writing by the taxpayer to an officer of the Board.[29]Therefore, if HMRC “discover” income, which ought to have, but has not been assessed for income tax they make an assessment in that amount to make good the loss of tax. If a return has been submitted HMRC may only make an assessment for this purpose if the loss of tax has been brought about as a result of the careless or deliberate action of the taxpayer or a person acting on his or its behalf or at the time the enquiry window had closed, or an enquiry was completed, the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the insufficiency of tax. Information is made available to an officer only if it is of a type specified in s 29(6) TMA. It is clear from Langham v Veltema that s 29(6) TMA constitutes an exhaustive list of the sources of information available and not merely an inclusive definition.[30]Unlike a discovery, which depends on an individual inspector reaching a conclusion that there has been an insufficiency, as Auld LJ said in Langham v Veltema , at [44]: “… the subsection provides an objective test of awareness of insufficiency, expressed as a negative condition in the form that an officer "could not have been reasonably expected … to be aware of the" insufficiency. It also allows, as section 29(6) expressly does, for constructive awareness of insufficiency, that is, for something less than an awareness of an insufficiency, in the form of an inference of insufficiency.” 31. The approach of the Tribunal to assessments has been considered by the Court of Appeal, albeit in a VAT context in Khan (trading as Greyhound Dry Cleaners) v Customs and Excise Commissioners [2006] STC 1167 in which Carnwath LJ (as he then was), said, at [69]:[69]“The position on an appeal against a "best of judgment" assessment is well-established. The burden lies on the taxpayer to establish the correct amount of tax due:
"The element of guess-work and the almost unavoidable inaccuracy in a properly made best of judgment assessment, as the cases have established, do not serve to displace the validity of the assessments, which are prima facie right and remain right until the taxpayer shows that they are wrong and also shows positively what corrections should be made in order to make the assessments right or more nearly right." ( Bi-Flex Caribbean Ltd v Board of Inland Revenue (1990) 63 TC 515, 522-3 PC per Lord Lowry). That was confirmed by this court, after a detailed review of the authorities, in Customs and Excise Commissioners v Pegasus Birds Ltd [2004] STC 1509 ; [2004] EWCA Civ 1015 . We also cautioned against allowing such an appeal routinely to become an investigation of the bona fides or rationality of the "best of judgment" assessment made by Customs: "
The tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer. In all but very exceptional cases, that should be the focus of the hearing, and the Tribunal should not allow it to be diverted into an attack on the Commissioners' exercise of judgment at the time of the assessment." (para 38(i)). It should be noted that this burden of proof does not change merely because allegations of fraud may be involved (see e.g. Brady v Group Lotus Car Companies plc [1987] STC 635, 642 per Mustill LJ).” 32. With regard to the presumption of continuity in Jonas v Bamford (HM Inspector of Taxes) (1973) 51 TC 1 Walton J said (at 24):
“… once the inspector comes to the conclusion that, on the facts which he has discovered, Mr Jonas has additional income beyond which he has so far declared to the Inspector, then the usual presumption on 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.”
[37]However, as the Tribunal noted in Guide Dogs for the Blind Association v HMRC [2012] UKFTT 687 (TC) and Aeroassistance Logistics Ltd v HMRC [2013] UKFTT 214 (TC) the presumption of continuity is only a presumption which may be rebutted. 33. Section 50(6) TMA provides that if, on an appeal, it appears to the Tribunal that an appellant is overcharged by an assessment the assessment shall be reduced accordingly but “ otherwise the assessment … shall stand good .”[34]A liability to a penalty arises under s 95 TMA where a person “ fraudulently or negligently ” delivers an incorrect return with the penalty being the difference between the tax shown on return and the amount of tax that would have been payable if the return had been correct. 35. In the present case there is no suggestion of fraud on the part of Mr Brown, rather HMRC’s case was that he had negligently delivered incorrect returns. In such circumstances, as

Judge Berner said in Anderson (Deceased) v HMRC [2009] UKFTT 258 (TC) at [22]:

“The test to be applied, in my view, is to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done.” 36. The decision of Tax and Chancery Chamber of the Upper Tribunal in Colin Moore v HMRC [2011] UKUTT 239 (TCC) confirmed that the application of this test is a question of fact for the Tribunal. It is accepted that it is for HMRC to establish that Mr Brown was negligent in order for the penalties to be upheld. 37. The amount of the penalty is determined under s 100 TMA by an officer of HMRC setting it “ at such amount as, in his opinion, is correct or appropriate .”
Although the Tribunal does not have the power to mitigate a penalty under s 102 TMA, s 100B TMA provides that if a penalty appears to be excessive the Tribunal may “ reduce it to such other amount … as it considers appropriate .” Discussion 38. It is accepted that HMRC have made a “discovery” and were entitled to issue assessments under s 29 TMA. It is also accepted that HMRC were entitled to make the amendments to Mr Brown’s 2005-06 and 2006-07 self-assessment tax returns. Also, it is not disputed that the underlying business records were not wholly reliable, arithmetical mistakes were made and the summary of Mr Brown’s income from which the returns were completed was not accurate resulting in a loss of tax. As such, as is clear from Khan (trading as Greyhound Dry Cleaners) v Customs and Excise Commissioners and the cases cited in that decision, our primary task is to find the correct amount of tax, so far as possible on the material properly available to us. Furthermore, until Mr Brown shows that they are wrong and shows positively what corrections should be made in order to make them right, or more nearly right, the assessments and amendments shall “stand good”. 39. Also, given there has been no material change in the way that Mr Brown has operated over the years concerned, we consider that it was appropriate for HMRC to apply the presumption of continuity when making the assessments and amendments in this case and that nothing has been advanced on behalf of Mr Brown to rebut that presumption. 40. HMRC’s case was based on unexplained bankings of £139,414 made by Mr Brown, which, it is contended, should be treated as additional business income and hence profit. 41. However, Mr Brown was insistent that on the margins at which he operated, some 5% or 6% on 2005-06, it would not have been possible for him to generate enough revenue to have achieved such a profit and that to do so, if expenses were taken into account, he would need to have had a turnover of over £4 million. 42. Although Mr Brown’s evidence appeared to be credible, and we do not doubt its sincerity or honesty, it was not supported or corroborated by any independent or documentary evidence despite his statement in the Notice of Appeal that: ... any Bookmaker will tell you that it is a mathematical impossibility for an on-course Bookmaker such as me to achieve [such] sustained profits … It is impossible because of the combinations of the volumes of business that would be necessary and the mathematics of the odds involved. In the absence of any such independent or documentary evidence in relation to the betting industry in general and on-course bookmaking in particular we are unable to find that Mr Brown has adduced sufficient evidence to completely displace the assessments and amendments, although it does not follow that these should stand without any alteration given that there is relevant evidence contained in the “Cash Account and Availability of Funds Statement” prepared by Mr Hancock to enable the correct amount of tax to be ascertained. 43. HMRC dispute the opening balance to the Cash Account of Mr Hancock’s document and also whether Mr Brown did, in fact, receive a loan from his father Mr Brown Senior. 44. Unlike Mrs Stevens we have had the benefit of having heard from and seen Mr Brown Senior who gave his evidence on oath. We accept his evidence of how he often “lent” money to his children, usually without expecting it to be repaid, and find that he did make the loans to Mr Brown that he said he did. As such these sums cannot therefore be attributed to the business income of Mr Brown and should not be taken into account in relation to the assessments and amendments. 45. The other matter raised by HMRC, the increase of £12,000 in the cash held by Mr Brown as shown in the Cash Account in April 2005 compared to that shown in Statement of Assets on 21 February 2005 was explained by Mr Brown as cash he held in relation to “sleepers”, ie money owed to those who had not collected their winnings to which he was not legally entitled. He said that as it was not his money to use it could not be treated as an asset of his although it still formed part of his cash flow. 46. HMRC contended that Mr Brown is seeking to “have it both ways” and that Mr Brown’s claim was contradictory. We do not agree. Clearly it would be incorrect to include “sleepers” in a Statement of Assets as the cash does not belong to him and therefore cannot be an asset of Mr Brown. However, it is cash held by him and as such does form part of the analysis of his cash movements as shown in Mr Hancock’s Cash Flow document 47. Turning to the penalties, we have already noted that there were errors in the returns, arithmetical mistakes were made and the summary of Mr Brown’s income from which the returns were completed was not accurate. In our view this is not what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done. Therefore, in the circumstances we find that the returns were negligently prepared and that Mr Brown is liable to penalties. 48. Mrs Stevens explained that HMRC have a system of abatement for penalties of 20% for disclosure; 40% for co-operation and 40% for “seriousness” which is based on the size of omissions and seriousness of the “offence”. 49. In this case in the absence of a positive, voluntary and useful contribution to HMRC’s knowledge of irregularities HMRC gave Mr Brown 10% abatement for disclosure, an abatement of 20% for Mr Brown’s co-operation and 20% for seriousness, a total abatement of 50% reducing the penalties for each year. 50. Adopting the same basis on abatement as HMRC we consider, having regard to the circumstances of the case, that there should be greater abatement for co-operation, given that Mr Brown attended a meeting with HMRC and taking into account the work undertaken by Mr Hancock. We would therefore increase this from 20% to 30%. However, we accept the view of HMRC with regard to disclosure and seriousness. As such the total abatement of the penalties should be increased from 50% to 60%. Decision and Direction 51. Having regard to the circumstances of the case we allow the appeals in part and direct that the parties use their best endeavours to determine the figures in respect of the assessments, amendments and penalty determinations in the light of our findings, in particular in relation to the loan from Mr Brown Senior and opening balance on the Cash Account prepared by Mr Hancock (see paragraphs 43-46, above). However, should this not prove possible an application may be made to the Tribunal for this purpose, with any such application to be made within 90 days of the release of this decision. Right to Apply for Permission to Appeal 52. 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. JOHN BROOKS TRIBUNAL JUDGE RELEASE DATE: 25 March 2014