[2009] UKFTT 339 (TC)

TC00280                         

   Appeal number TC/2009/11629

Income tax—Taxes Management Act 1970 ss. 9A, 28A, 29 and 31—Appeal against amendment made by a closure notice and against amendment of a self-assessment—burden of proof—Appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	MR A OUERRADI	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL: 		Dr Christopher Staker (Tribunal Judge)
			Mr John Robinson (Tribunal Member)

Sitting in public in Brighton on 13 November 2009

Mr LJ Weller on behalf of the Appellant

Mr C McMeeken, HMRC presenting officer, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	This is an appeal by Mr A Ouerradi (the “Appellant”) against:
(1)	an amendment to his 2005/06 self-assessment dated 22 May 2008, under s.28A(1) and (2) of the Taxes Management Act 1970 (the “TMA”), increasing the amount of the self-assessment by £3,280.50;
(2)	a notice of assessment for the year ended 5 April 2005, dated 23 May 2008, charging the amount of £2,772.90; and
(3)	a notice of assessment for the year ended 5 April 2004, dated 23 May 2008, charging the amount of £1,867.20.
2.	The hearing was attended by the Appellant in person, and his agent Mr LJ Weller who was his representative at the hearing.  Both the Appellant and Mr Weller gave evidence at the hearing. HMRC were represented by Mr McMeeken who was accompanied by Mr M Hart, HMRC Inspector.  McMeeken produced a bundle of documents on behalf of HMRC.  The Appellant and Mr Weller were asked during the hearing if they needed more time to examine the documents, and they indicated that they were content to proceed.  Mr Hart adopted his witness statement at the hearing, and the Appellant did not wish to ask him any questions.  
3.	Based on the documents in the HMRC bundle and the witness statement of Mr Hart, the Tribunal finds the following background facts, which were not disputed by the Appellant or his representative.
4.	The Appellant was the proprietor of a takeaway fish and chip shop which he purchased in 2001 and subsequently sold in 2006.  On 25 July 2007, a notice under s.9A of the Taxes Management Act 1970 (the “TMA”) was issued to the Appellant in respect of his 2005/06 tax return.  By a letter of the same date to the Appellant’s agent, LJ Weller & Co, HMRC requested information and documentation in relation to that enquiry.  Initially, HMRC referred in this correspondence to the Appellant’s business as a “burger bar”, but this error was subsequently corrected in the correspondence and the parties agreed at the hearing that nothing turned on this initial misdescription.  
5.	In a subsequent letter to the Appellant dated 5 September 2007 (issued under s.19A of the TMA), HMRC stated that the requested information and documentation had not been received, and stated that the Appellant was required by law to produce them within 30 days.  A further letter from HMRC to the Appellant dated 12 October 2007 stated that the information had still not been received, and that if the notice was not complied with within 14 days, a penalty of £50 would be imposed.  By a letter from HMRC to the Appellant dated 5 November 2007, the Appellant was advised that a penalty of £50 had been imposed on him pursuant to ss.97AA and 100(1) of the TMA.  On 6 December 2007, Mr Hart of HMRC was advised by Mr Weller of LJ Weller & Co that the Appellant’s business had ceased in 2006 and that “records have since been lost”.  By a letter from HMRC to LJ Weller & Co dated 20 December 2007, HMRC requested any business records for the period up to cessation that were available, requested the Appellant to complete a private expenditure questionnaire and requested LJ Weller & Co to provide the link papers for 2005/06.  By a letter dated 28 January 2008, LJ Weller & Co provided a statement summarising the Appellant’s records.  By a letter from HMRC to LJ Weller & Co dated 3 April 2008, HMRC requested the Appellant to list all bank and building society accounts held during the year.  These details were however not provided.  On 22 and 23 May 2008 there were then issued the amendment and assessments referred to in paragraph 1 above, against which the Appellant now appeals.
6.	The witness statement of Mr Hart explains the methodology used by Mr Hart in arriving at the figures contained in the amendment and assessments appealed against.  Essentially, in the absence of evidence or information from the Appellant, Mr Hart accepted the purchases figures claimed by the Appellant, and calculated the takings based on a gross profit of 60 percent.  Mr Hart said that he found three advertisements for fish and chip shops that were for sale, which indicated that these businesses had gross profits of 60%, 65% and 66% respectively, and that he had taken the lowest of these figures.
7.	Subsequently, on 23 September 2008, a meeting was held between the Appellant and Mr Weller and Mr Hart and another HMRC officer.  The minutes of the meeting were included in the HMRC bundle of documents.  A number of objections were raised on behalf of the Appellant at the meeting to the gross profit figure of 60%.  The objections and Mr Hart’s responses to those objections are set out in the minutes of the meeting and in Mr Hart’s witness statement.
The relevant legislation
8.	Section 9A of the TMA relevantly provides:
(1)	An officer of the Board may enquire into a return under section 8 or 8A of this Act if he gives notice of his intention to do so (“notice of enquiry”)— 
(a)	to the person whose return it is (“the taxpayer”), 
(b)	within the time allowed.
(2) 	The time allowed is—
(a)	if the return was delivered on or before the filing date, up to the end of the period of twelve months after the day on which the return was delivered; 
...
9.	Section 19A of the TMA (since repealed with savings provisions) relevantly provided:
(1)	This section applies where an officer of the Board gives notice of enquiry under section 9A(1) or 12AC(1) of this Act to a person (“the taxpayer”).
(2)	For the purpose of the enquiry, the officer may at the same or any subsequent time by notice in writing require the taxpayer, within such time (which shall not be less than 30 days) as may be specified in the notice—
(a)	to produce to the officer such documents as are in the taxpayer's possession or power and as the officer may reasonably require for the purpose of determining whether and, if so, the extent to which —
(i)	the return is incorrect or incomplete, or
(ii)	in the case of an enquiry which is limited under section 9A(5) or 12AC(5) of this Act, the amendment to which the enquiry relates is incorrect, and
(b)	to furnish the officer with such accounts or particulars as he may reasonably require for that purpose.
...
10.	Section 28A of the TMA relevantly provides:
(1)	An enquiry under section 9A(1) of this Act is completed when an officer of the Board by notice (a “closure notice”) informs the taxpayer that he has completed his enquiries and states his conclusions. 
In this section “the taxpayer” means the person to whom notice of enquiry was given. 
(2)	A closure notice must either—
(a)	state that in the officer’s opinion no amendment of the return is required, or
(b)	make the amendments of the return required to give effect to his conclusions. 
(3)	A closure notice takes effect when it is issued. 
...
11.	Section 29 of the TMA relevantly 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. 
...
(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. 
(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; 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. 
(7) In subsection (6) above—
(a)	any reference to the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment includes—
(i)	a reference to any return of his under that section for either of the two immediately preceding chargeable periods; and
(ii)	where the return is under section 8 and the taxpayer carries on a trade, profession or business in partnership, a reference to any partnership return with respect to the partnership for the relevant year of assessment or either of those periods; and
(b)	any reference in paragraphs (b) to (d) to the taxpayer includes a reference to a person acting on his behalf. 
...
12.	Section 31 of the TMA relevantly provides:
(1) 	An appeal may be brought against—
(a)	any amendment of a self-assessment under section 9C of this Act (amendment by Revenue during enquiry to prevent loss of tax),
(b)	any conclusion stated or amendment made by a closure notice under section 28A or 28B of this Act (amendment by Revenue on completion of enquiry into return),
...
13.	Section 34 of the TMA relevantly provides:
(1) 	Subject to the following provisions of this Act, and to any other provisions of the Taxes Acts allowing a longer period in any particular class of case, an assessment to income tax or capital gains tax may be made at any time not later than five years after the 31st January next following the year of assessment to which it relates.
...
14.	Section 50 of the TMA relevantly provides: 
(6) 	If, on an appeal notified to the tribunal, the tribunal decides—
(a)	that, the appellant is overcharged by a self-assessment; 
... or
(c)	that the appellant is overcharged by an assessment other than a self-assessment, 
the assessment or amounts shall be reduced accordingly, but otherwise the assessment or statement shall stand good. 
(7)	If, on an appeal notified to the tribunal, the tribunal decides—
(a)	that the appellant is undercharged to tax by a self-assessment …
... or
(c)	that the appellant is undercharged by an assessment other than a self-assessment, 
the assessment or amounts shall be increased accordingly. 
Other evidence and submissions of HMRC
15.	On behalf of HMRC there was produced evidence directed to establishing that there was not at the relevant time an increase in the price of fish as claimed by the Appellant.  Mr McMeeken submitted that while one of the three advertisements for fish and chip shops from which he obtained gross profit figures may have related to a business which had seating for customers, there was no evidence that this was the case for the other two.
16.	Mr Hart in his witness statement also stated that the Appellant had failed to declare rent received from the rent of two bedrooms in his flat during the assessment year.  He also said that the Appellant had not yet filed his 2006/07 self-assessment, and that it was unclear whether the sale of the fish and chip shop in that tax year would be declared for capital gains tax purposes.  Mr McMeeken accepted that neither of these issues was of direct relevance to the present appeal, but submitted that they were part of the general background picture.  The Tribunal finds that as neither issue is relevant to the present appeal, it is unnecessary to consider them.
17.	On behalf of HMRC, Mr McMeeken submitted that the HMRC Inspector had acted reasonably in determining the amendment and assessments appealed against.  He said that the Appellant was not new to the business of catering, having owned a burger bar prior to the purchase of the fish and chip shop, and would not have had such a high rate of wastage as claimed by him.  He submitted that evidence presented by HMRC suggested that there had not at the relevant time been an increase in the price of fish as claimed by the Appellant.  He submitted that many people of different cultural backgrounds ran businesses and the fact that the Appellant was of a particular cultural background should not affect his gross profit. He submitted that the gross profit figure of 60% was based on what evidence there was, and that the Appellant had not produced any evidence in support of a different figure despite having been asked to produce information and documents.
Evidence and submissions on behalf of the Appellant
18.	The Appellant and Mr Weller gave evidence and made submissions as follows. The figure of 60% for gross profit is excessive. The gross profits of the three fish and chip shops to which the advertisements related are not comparable because those businesses had seating for customers while the Appellant’s business was solely takeaway. The Appellant’s business was on the edge of an estate, trading was very poor, a pub next door to the business closed down leading to a loss of customers, and because the business was incapable of supporting the Appellant, the Appellant sold it. The evidence of fish prices produced by HMRC related to prices in Billingsgate market which was different to locally sourced fish. The Appellant had been away when the person who bought the business from him took possession of it; the new owner when taking possession threw away the Appellant’s records. The Appellant was short of money and it would have cost him a lot to obtain duplicate records. Originally when he had purchased the shop he was excited and enthusiastically worked hard, but then the business started to fare badly. The fryer was 40 years old and he could not afford to replace it. Because of this, food prepared in it was not of high quality leading to a further loss of customers. The Appellant is now a taxi driver who has to work all night for little income, and he would not have given up the fish and chip shop if it had been profitable. Furthermore, he would not have rented out two rooms in his flat and slept in the lounge unless he very much needed the money. The price of fish and potatoes did go up significantly during the year in question. The Appellant bought the fish and chip shop because it had a freehold title and he thought that he could change it into a flat if things did not work out.
Findings
19.	The Tribunal has considered all of the material before it and all of the arguments of the parties.
Appeal against the amendment to the Appellant’s 2005/06 self-assessment (paragraph 1(a) above)
20.	The amendment to the Appellant’s tax returns referred to in paragraph 1(1) above was made pursuant to s.28A(2) of the TMA, which states that at the end of an enquiry into a tax return, a closure notice must make the amendments to the tax return required to give effect to the officer’s conclusions.
21.	In relation to the tax year in question, the Appellant has provided neither HMRC nor the Tribunal with records to support the figures used in the calculation of his tax liability.  At the hearing, the Appellant and Mr Weller confirmed that the only documentary material provided to HMRC before the amendment was issued was the “statement” sent with the letter dated 28 January 2008 from LJ Weller & Co.  At the hearing, Mr McMeeken submitted, and the Tribunal agrees, that this “statement”, which is a single page of handwritten figures, effectively only reproduces the information already contained in the Appellant’s self-assessment.  The Tribunal does not accept the Appellant’s explanation for the loss of his records, namely that they were left in the shop when possession of the shop passed to the new owner. The Appellant must have been aware of his duty to retain business records for tax purposes.  The Tribunal further notes that HMRC requested information and documents in its letter dated 25 July 2007, and that it was only in December 2007, some five months later, after a £50 penalty had already been imposed on the Appellant for failure to comply with a s.19A notice, that HMRC were informed that the Appellant’s records had been lost.
22.	The Tribunal finds that in such circumstances, the officer conducting the enquiry is not required to accept the Appellant’s unsupported claims as to the amount of his takings or profit.  Rather, the Tribunal finds that in reaching “conclusions” at the end of an “enquiry” pursuant to ss.9A and 28A of the TMA, the officer must use his or her best judgement in determining the correct amount of tax.  
23.	The Tribunal finds that in an appeal against an amendment to a tax return giving effect to such best judgment “conclusions”, the burden of proof is on the taxpayer to establish the correct amount of tax due.  This is in accordance with the principles established (in different contexts) in Bi-Flex Caribbean Limited v. The Board of Inland Revenue (1990) 63 TC 515, 522 (“Bi-Flex Caribbean”); Pegasus Birds Ltd. v Customs and Excise [2004] EWCA Civ 1015; and Khan v Revenue and Customs [2006] EWCA Civ 89 (“Khan”) at [68]-[76], [78]-[83].  In such an appeal, the officer’s conclusions “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” (Khan at [69], quoting Bi-Flex Caribbean).
24.	The Tribunal finds that the amendment referred to in paragraph 1(1) above was arrived at by the officer through logical reasoning on the basis of what evidence he could reasonably obtain.  The mere fact that the Appellant claims that the officer was wrong is insufficient to discharge the Appellant’s burden of proof.  The Tribunal does not find the approach taken by HMRC in relation to 2005/06 to have been unreasonable.  
25.	The Tribunal therefore finds that the appeal against the amendment referred to in paragraph 1(1) above must be dismissed.
Appeal against the notices of assessment for the years ended 5 April 2005 and 5 April 2004 (paragraph 1(b) and (c) above)
26.	As to the assessments for the years 2004/05 and 2003/04, referred to in paragraph 1(b) and (c) above, the text of s.29 of the TMA is set out above.  By virtue of that section, the officer was required to make these assessments if the officer “discovered” that as regards the relevant years of assessment, any income which ought to have been assessed to income tax has not been assessed.
27.	As to the meaning of the word “discover” in this context, it was said in Corbally-Stourton v Revenue & Customs [2008] UKSPC SPC00692, [2008] STC (SCD) 907 (“Corbally-Stourton”), at [42] (citing earlier case law) that:
... the legislation do[es] not require the inspector to be certain beyond all doubt that there is an insufficiency; what is required is that he comes to the conclusion on the information available to him and the law as he understands it, that it is more likely than not that there is an insufficiency. I shall call this a conclusion that it is probable that there is an insufficiency”.  
It was added in that case at [43] that “mere suspicion, something short of a conclusion that it is probable that there is an insufficiency is not enough”.  It was further added at [44] that “a ‘discovery’ is something newly arising, not something stale and old” and that “The conclusion that it is probable that there is an insufficiency must be one which newly arises (from fresh facts or a new view of the law or otherwise)”.
28.	The Tribunal finds that the correct approach to an assessment under s.29 of the TMA is the same approach as in Bi-Flex Caribbean, the question being whether whether HMRC had a bona fide belief that there had been a loss of tax, and a bona fide belief in the amounts of the assessments: see Momin and others v Revenue and Customs Commissioners [2007] EWHC 1400 (Ch), [2008] STC 2456 (“Momin”), especially at [19]-[20].
29.	The Tribunal has found above that HMRC had a bona fide belief that the Appellant had understated his income in his 2005/06 tax return, and that the best judgement conclusion was that the Appellant had a gross profit of 60% in that year.  The Tribunal is also satisfied that the officer had a bona fide belief that the amount of the tax lost in previous years in his best judgement could be arrived at by applying the same gross profit figure of 60% to the previous two years (see Momin at [19]-[20]).
30.	However, despite this conclusion, by virtue of s.29(3) of the TMA, there being no suggestion that the Appellant did not file his returns on time for the years 2004/05 and 2003/04, he cannot be assessed under s.29 in respect of those two years unless two conditions are satisfied.
31.	The first condition is that the reason for the officer’s “discovery” of non-assessed income in these years must be attributable to fraudulent or negligent conduct on the part of the Appellant or a person acting on his behalf (s.29(4)).  The Tribunal finds that this condition is satisfied.  The amounts “discovered” by the officer were not assessed because they had not been included in the Appellant’s self-assessments, and the Tribunal is satisfied that the Appellant’s failure to include them must have been at the least negligent.
32.	The second condition is that the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware that income which ought to have been assessed to income tax had not been assessed (s.29(5)).  According to paragraph 4 of the witness statement of Mr Hart, after the Appellant’s 2005/06 tax return was filed, the Risk and Intelligence Analysis Team of HMRC identified the “risk of a low level and declining level of gross profit and net profit over the three years 2003/04 to 2005/06”.  It appears that this “risk” was identified merely from looking at the figures contained in the returns, in particular, the level of profit as compared to the amount of expenditure.  The Tribunal finds nothing to suggest that a similar “risk” would not already have been apparent from looking at the figures in the 2003/04 and 2004/05 returns at the time that they were filed.  Thus, at the time that each of the returns was filed, on the basis of that information contained in the return, an inspector could have been expected to have been aware that it was possible that there was an insufficiency.  However, this does not mean that an inspector could have been reasonably expected to conclude that it was probable that there was an insufficiency.  The Tribunal is satisfied that it was only after the enquiry into the 2005/06 return had been completed that it was possible for an inspector to be reasonably expected to have concluded that it was probable that there was an insufficiency in relation to the two earlier years.  
33.	Paragraphs [40] to [67] of Corbally-Stourton deal with the approach that should be taken in applying this requirement of s.29. Noting the approach there taken, in particular at [60], the Tribunal finds that for the reasons given in the previous paragraph the condition in s.29(5) is satisfied in this case.
34.	The Tribunal therefore finds that the appeal against the assessments referred to in paragraph 1(2) and (3) above must be dismissed.
The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules.  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. 

Christopher Staker

TRIBUNAL JUDGE
RELEASE DATE:  02 December 2009