[2010] UKFTT 161 (TC)

TC00466                

   Appeal number:  TC/2009/10953 

Corporation tax – whether profits under-declared – whether liability to penalty 

FIRST-TIER TRIBUNAL

TAX 

	SOKA BLACKMORE LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

                                             TRIBUNAL: 	Barbara Mosedale
	Anne Redston

Sitting in public in London on 3 March 2010

Mr Andrew Adeyeye, Director, for the Appellant

Mrs Nicola Parslow, officer of HMRC,  for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	The Appellant’s trade is that of a pharmacy from premises in Erith.  It filed  its Corporation Tax return for the accounting period ended 31 July 2004 on 12 September 2005.  HMRC gave notice opening an enquiry under FA 1998 Sch 18 para 24(1) on 11 September 2006.  The enquiries were concluded  on 1 October 2008 and a closure notice issued on 17 October 2008. The Appellant made no amendment to its return under paragraph 34(1) but an amendment to the return was made by HMRC on 3 December 2008 under paragraph 34(2).  The Appellant appeals against the amendment which increased its tax liability for the year in question by £10,141.82 and against a penalty imposed on 23 February 2009 for £2,535 in respect of the same accounting year.
2.	HMRC carried out a review of the assessment which was completed on 21 May 2009.  This resulted in a reduction in the amount of unpaid tax claimed by HMRC of £5,307.41 and a reduction in the penalty to £1,326.
The law
Amendment
3.	Section 50 Taxes Management Act (which applies by virtue of s48 TMA 70 to appeals under paragraph 34 of Schedule 18 of the Finance Act 1998) provides as follows:
“(6)  If, on an appeal notified to the tribunal, the tribunal decides –
(a)	…
(b)	….
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)…
	(b)…
	(c)  that the appellant is undercharged by an assessment other than a self-assessment,
the assessment or amounts shall be increased accordingly.
(7A)…
(8)	Where, on an appeal notified to the tribunal against an assessment (other than a self-assessment) which – 
(a)	Assesses an amount which is chargeable to tax, and 
(b)	Charges tax on the amount assessed,
	The tribunal decides as mentioned in subsection (6) or (7) above, the tribunal may, unless the circumstances of the case otherwise require, reduce or, as the case may be, increase only the amount assessed and where any appeal notified to the tribunal is so determined the tax charged by the assessment shall be taken to have been reduced or increased accordingly.”
Penalty
4.	Finance Act 1998 Sch 18 paragraph 20 provides:
“(1) A company which – 
(a)	fraudulently or negligently delivers a company tax return which is incorrect, or…
(b)	….
is liable to a tax-related penalty.

(2)  The penalty is an amount not exceeding the amount of tax understated, that is, the difference between – 
(a)	the amount of tax payable by the company for the period for which the return is made, and 
(b)	the amount which would have been so payable on the basis of the return delivered…”
5.	S100B Taxes Management Act which sets out the powers of this Tribunal on appeal states in respect of a penalty which is not required to be of any particular amount (such as the penealty in this case):
“(2)(b) in the case of any other penalty, the First-tier Tribunal may – 
(i)	if it appears that no penalty has been incurred, set the determination aside, 
(ii)	if the amount determined appears to be appropriate, confirm the determination, 
(iii)	if the amount determined appears to be excessive, reduce it to such other amount (including nil) as it considers appropriate, or
(iv)	if the amount determined appears to be insufficient, increase it to such amount not exceeding the permitted maximum as it considers appropriate.”
The facts
6.	A large proportion of the company’s income is from NHS receipts for supplying medicine on prescription.  Some of this is paid by customers in the form of prescription charges.  In addition to the NHS income, the company receives other income from over the counter sales of goods sold in the shop.
7.	The Appellant appealed on 27 November 2008 against the closure notice which was before the amendment against which an appeal lay had been made.  Another notice of appeal against both the amendment and the penalty was filed just after 23 February 2009 when the penalty was assessed.  HMRC took no point on the fact that technically the appeal against the amendment was late and we think they were right not to do so:  it was clear from the earlier ineffective appeal that the Appellant intended to appeal.
8.	The assessment of 3 December 2009 was based on a calculation by Mr Skehan, an officer of HMRC,  of a total of profits of £53,378.  Following HMRC’s internal review process, the Review Officer reduced this to £32,347.  These figures included the declared profit of £9,969.  So Mr Skehan had originally considered the under-declaration to be of some £43,000 and the Review Officer reduced this to approximately £23,000.
9.	The HMRC amendment altered the profits on 3 grounds:
•	To reverse the double counting of some £5,632 for expired drugs.  The Company accepted that this adjustment needed to be made and was not maintaining an appeal in respect of it.
•	A minor adjustment of £1065 in the Company’s favour to ensure assessment covered the correct 12 months.  Mr Adeyeye accepted this and it was not in dispute.
•	Increase for under-declared over the counter sales.  This was in dispute.
10.	There were two reasons why HMRC considered that the sales figures were under-declared.  Firstly, an analysis of the till rolls for 9 weeks of the year (20 August 2003 to 16 October 2003) on the assumption that they were representative implied that actual takings were higher than declared.  Secondly, there were large sums paid into the Director’s personal bank account for which (in HMRC’s view) a credible explanation was lacking and which they inferred were undeclared till takings.
11.	The assessment was based on the unidentified money in the Director’s personal bank account and not the Z-readings.  In the year in question there were deposits of about £415,000.  Some £114,000 of this was cash and £37,000 in cheques from un-identified sources.  After some explanations provided by Mr Adeyeye the total of unexplained deposits was reduced to some £79,751.  Those explanations related to transfers he was able to identify as being from numerous sources including rent payments, bank loans, payments from his brother, rents from his mother’s estate in Nigeria, numerous small loan repayments from named individuals, and money from an uncle to be passed to his father.
12.	This amount of £79,751 was then reduced further by HMRC to allow for rental and self employment income.  Mr Adeyeye had rental income from properties he owned. These included the shop premises which were leased to the Appellant company.  This amounted to some £21,000 in the year in question:  this figure was taken from Mr Adeyeye’s two personal tax returns covering the period in question.  He also had earned some £27,840 as a locum pharmacist.  Mr Skehan allowed a deduction of the full amount as he could not see that the money (much of it according to Mr Adeyeye paid in cash) had been paid into any other account held by Mr Adeyeye.
13.	On HMRC’s figures, this left £30,911 unaccounted for.  Mr Skehan added back in:
•	£4,660 of which £3,700 was identified as rent payments in Mr Adeyeye’s personal bank account and paid by bank transfer.  These therefore could not be part of the unexplained cash payments into the account and should not have been deducted.  The sum included  one cash payment of £960 but this was (we presume) added back in to prevent double counting:  it had already been deducted under the deductions made as outlined in paragraph 11.  We accept these changes and indeed it did not seem that Mr Adeyeye challenged these particular add backs.
•	£2,206 which was paid into another account.  We deal with this below.
•	£5,632 which was the second identical amount deducted for expired drugs.  As stated above this was not in dispute.
This left an increase in profits of £43,409.  Original profits declared were £9,969 so this led to an amendment based on profits of £53,378.
14.	On review, further deductions proposed by Mr Skehan in order to settle the case were accepted by the Review Officer.  He set them out in his letter of 21 May 2009 but they were not reflected in a revised amendment:
•	£12,771 for unidentified cheques paid into the account on the grounds that, whatever their origin was, they did not come from the business as customers rarely paid by cheque.  Mr Adeyeye’s evidence was that 1 in 3 customers paid by debit or credit card and the rest mostly in cash.  HMRC did not dispute this as they allowed the cheques to be deducted.  We also accept it.
•	The addition of £2,206 (above) was removed on the basis HMRC accepted that its source was not the business.  As the payments seem to be of small amounts going into the account we consider that HMRC may have been generous here but we accept it as neither side suggested to us it was wrong.
•	The review officer then assumed that the total declared takings less paying staff in cash went into Mr Adeyeye’s account and allowed a deduction of £4,988.  
Here we think HMRC’s arithmetic has led to error.  Firstly, the £4,988 was arrived at by deducting staff wages of £6,500 from £11,488 (declared takings).  As explained below in paragraph 26, HMRC throughout the enquiry operated on the mistaken belief that declared takings were £11,488 when they were actually £19,837.  This would suggest that HMRC have not been sufficiently generous in allowing this deduction.
However, the Tribunal does not consider that this adjustment should be made at all.  It was not just staff wages which were paid in cash.  Mr Adeyeye’s own evidence is that the rent (approximately £8,000) and the locums (£28,984) were paid in cash. It is unlikely much was left to be banked.  In so far as most of the payment to locums was to Mr Adeyeye himself (as this is how he treated his remuneration in the accounts), a deduction has been allowed as explained in paragraph 12.  We also do not consider it right to assume that declared takings (in so far as there were any left to bank) would have been paid in the director’s own account rather than the company’s.
•	£1,065 to adjust the figures for the correct 12 month period (this is not in dispute).
15.	According to HMRC’s figures this left additional profit of just £22,379 (a total of £32,348 including the profit declared in the tax return).  
16.	This figure is £30,911 from paragraph 13 plus £4660 from paragraph 13 and minus £12,771 and £4988 from paragraph 14.  This leaves cash from unexplained sources of £17,812.  The additional profit figure was calculated to be £22,379 by adding the undisputed amounts of £5,632 and subtracting the undisputed adjustment of £1,065 from paragraph 9. 
17.	We heard evidence from:
•	Mr Adeyeye, Director and shareholder in the Appellant.  There was another Director but it seems he had little to do with the company.
•	Mr Skehan, an Inspector of Taxes.  He took over the enquiry into the Appellant from a Mr Puri on 30 November 2007, which was almost a year before the closure notice was issued.   
Mr Adeyeye’s evidence
18.	The reliability of Mr Adeyeye’s evidence was a matter for the Tribunal as he was asking us to accept that he had had large payments made to him from friends, family etc although he was unable to back this up with corroborative evidence.  We found that his evidence should be treated with caution.
19.	His oral evidence was vague and in most areas of dispute unsupported by any other evidence.  It was not entirely consistent with what he had said in letters to HMRC (for instance, he told the Tribunal the rent was £12,000 but had in letters to HMRC explained that only about £8,000 was actually paid.)  He admitted (without accepting that he was in error) that his only records were Z readings and till rolls and slips of paper on which he recorded rent and wages payments but then destroyed once the accountant had made up the accounts.  
20.	He said that he paid all the money that he earned (mostly in cash) into his bank account and spent it by using his credit card.  At the same time he told us that the company (of which he was to all extents the sole owner, the other director not being involved in the company) was very much a cash based operation.  All staff and rent was paid in cash.  We do not find it probable that he would have run his personal finances on a different basis and find, on the contrary to his oral evidence, that he would not have paid all cash earned into his account.
21.	We did accept his evidence, however, that he had had Z-readings for the entire year in dispute.  Mr Skehan’s evidence was that when he took over the enquiry all he found on the file was the 9 consecutive weeks’ of Z-readings which Mr Puri had already analysed.  His evidence was that he believed that these were all that Mr Adeyeye had given to Mr Puri.  He checked internally at HMRC that these were all the records which were held.
22.	Mr Adeyeye said, on the contrary, that he had handed over a complete set of till readings for the year to Mr Puri but that Mr Puri had only handed back the ones relating to the 9 weeks.  Although not drawn to our attention at the hearing, HMRC’s notes of a meeting on 13 September 2007 at which Mr Puri, Mr Adeyeye and another HMRC officer Mr Barnes were present, record that “AP [Mr Puri] said he selected a random sample of 10 x consecutive weekly z-readings and summarised the data recorded in order to see what the average weekly, monthly and annual cash sales should be.”
23.	We therefore find that  Mr Adeyeye’s evidence that he did originally have all the year’s Z-readings and that HMRC had just chosen a sample to test to be correct.  We also accept Mr Skehan’s evidence that he did not know this:  he thought that the 9 weeks were all that were available.  Certainly by the time he took over the case it does seem that only those 9 weeks were available.  It is not clear what happened to the rest of the Z-readings.  
Return and accounts
24.	There had been some doubt as to how much the company had declared as over-the-counter sales. The accounts prepared for the company for the period to 31st July 2004 showed total receipts as £250,061.  £167,507 of this were NHS prescription charges.  The balance was £82,096.  Of this £70,608.17 was a VAT inclusive payment by Merck Sharpe  & Dohme to the company.  
25.	The explanation given for this, which HMRC accepted, was that the company had had the opportunity to buy a large quantity of pharmacy supplies for a drugs company that wanted to test its products against its competitors and was unable to purchase directly in its own name.  It was a one-off transaction and reflected in the accounts and therefore HMRC sought no further tax in respect of it.  However, throughout most of the correspondence with HMRC up to and including the review letter of 21 May 2009 all parties it appears overlooked the fact that the £70,608.17 included VAT.
26.	So up until Mr Adeyeye pointed this out in his letter, undated but written shortly thereafter, HMRC and Mr Adeyeye were proceeding on the assumption that declared over the counter sales for the year were £11,488 (ie £82, 096 less £70, 608.17).  However, Mr Adeyeye pointed out that the VAT return showed total output tax for the period which included this large one-off sale as £8349.60.  No explanation of this figure was given to us:  both parties accepted it was correct.  The supply was of a cholesterol reducing drug made by Pfizer:  it was not explained to the Tribunal why the entire supply was not subject to VAT at 17.5% giving a liability of £10.516.11.  Nevertheless, Mr Adeyeye’s evidence was that only £8349.60 was accounted for in VAT on the sale (in fact less than that as that would have included the VAT on over the counter sales), and so £8349.60 is the amount at most which should be excluded.  This means we find (as all parties have accepted) that the company actually declared over the counter sales of £19,837.60 in the year in question.  
Sources of the money in Director’s bank account
27.	As stated above, the allowances accepted by HMRC set out in paragraphs 13-15 above left £17,812 in Mr Adeyeye’s account with an unidentified source.  Indeed allowing for the Tribunal’s caveat at paragraph 14 there is an unexplained amount of £22,800 (ie £17,812 plus £4,988).
28.	Mr Adeyeye gave a large number of explanations for this:
•	His earnings as a security guard;
•	Rent from the shop;
•	His father makes gifts to him.  
•	His brother gives him money to transmit to his father in Nigeria
•	He receives sums of money from the estate in Nigeria of his later mother.  He said he brought this money into the UK in cash
•	Repayments of loans he had made to members of his community.
•	Money from his wife entrusted to him to pay bills such as nursery fees.  No reason was given when we asked why his wife was not present to give evidence on this.
•	Money he had borrowed to pay off other loans.
Security guard work
29.	HMRC accept that Mr Adeyeye worked as a security guard although he did not declare this on his personal returns.  His explanation for this was that tax on his earnings was deducted at source and there was therefore no reason to include it on the return.  In the hearing he said this amounted to £19,000.  According to HMRC this is not right, his security guard earnings for 2003-04 were £3,200 and £19,643 for 2004-5.  The company’s tax year overlaps these two personal tax years, so his earnings in the corporate tax year would have been rather less than £19,000, approximately £8,466.  HMRC have not allowed a deduction for any of it because they could not tie in any payments into receipts into his personal account.
30.	We consider that it is highly unlikely that Mr Adeyeye’s rent and locum earnings, paid in cash, would have been paid in to Mr Adeyeye’s personal account in full as HMRC have accepted (paragraph 12).  As noted above we did not accept Mr Adeyeye’s evidence that he only spent money on cards and did not keep cash.  Although it may seem unjust not to allow any deduction at all for the security guard earnings of £8,466, bearing in mind the over-generous deduction for rent and other earnings in full we think the result is more than fair to the Appellant company.  We are therefore content to leave this deduction as it is.
The shop rent
31.	Mr Adeyeye claimed that he had not been given the proper deduction for the rent paid by the shop.  We have already mentioned this.  As landlord, he only declared rent in his personal return consistent with the deduction shown in the company’s accounts of £8,612.  The rental agreement was for £12,000 pa.  He explained the discrepancy on the grounds that the company could not afford to pay more than £6,000-£8,000.  He cannot explain cash in his personal account as payment of rent due but not paid.  
Money from friends and family etc
32.	No documentary evidence or indeed any evidence other than Mr Adeyeye’s testimony was forthcoming to verify these claims.  When asked why he brought no witnesses his reply was that his father was elderly and resident in Nigeria.  No explanation was given why his wife and brother were not called.
33.	Where some evidence was produced HMRC had accepted that some £71,000 of the unaccounted for monies in the account originated from sources such as friends and family and repayments of loan – see paragraph 18 above.  No evidence other than Mr Adeyeye’s vague oral testimony was produced to us suggesting that the remaining unaccounted for money was from the same or other similar sources.  When asked by Ms Redston to identify the source of a particular credit in the account he went away over the lunch break to think about it and came back to say he thought is was probably from his mother’s estate.  He gave no reason for this.  It is for Mr Adeyeye to show us that HMRC’s amendment is wrong.  
34.	Mr Adeyeye could have not been under any misapprehension of what he would be required to show to this Tribunal.  He had been repeatedly asked by HMRC for evidence of the source of the money.  In his own notice of appeal in November 2008 he wrote “I will make my comprehensive side of my appeal to the Judges.  Thanks for your help in this matter.  I intend to be able to identify the different funds in my account that it had nothing to do with the chemist business…..”  Yet following that no further attempt was made either in letters to HMRC nor at the hearing to identify the source of any particular payment into his account.
35.	The question is whether we think that undeclared takings from the shop were paid into Mr Adeyeye’s account and if so how much?  We found Mr Adeyeye to be vague and unable to substantiate his claims.  We believe it is more likely than not that he did suppress takings from the shop and that under-declared takings were a source of money in his account.
36.	The problem both for HMRC and this Tribunal is how much?  All we have are the z-readings and the personal bank account.  There is no reason that the former are necessarily accurate (although we consider they are unlikely to understate takings) nor any reason to believe that a business operated largely on cash would necessarily pay all suppressed takings into its director’s account (and indeed unlikely to do so).
Till rolls and “Z” readings
37.	The amendment to the self-assessment return was based on the unidentified deposits in the director’s private account.  To this extent the “Z” readings and till rolls from the shop are not relevant:  however they are corroborative evidence of whether there was suppression of sales.  There was therefore some dispute over the extent if any to which they showed suppression.  We bear in mind that Z readings on not independent:  they depend on the takings actually being rung in.
38.	Mr Adeyeye said he printed off from the till each week the “Z” reading which is the total of sales during the previous week.  HMRC based their amendment on 9 weeks of these from 20 August 2003 to 16 October 2003.  The total of the “Z” readings for these 9 weeks was £7,535.81.  This gave a weekly average of £837.31 and an annual takings figure of approximately £43,000.  Declared takings were, as stated above, calculated to be £19,837.
Unrepresentative?
39.	 Mr Adeyeye said that those nine weeks were unrepresentative of the year and gave an inflated picture of the takings.  At the hearing he said he thought Mr Puri (the inspector at the time) had chosen the 9 busiest weeks.
40.	We considered whether they were unrepresentative.  We note that the first time that Mr Adeyeye suggested that the sample was unrepresentative was at the hearing.  He has attacked HMRC’s amendment on a number of grounds but the allegation that the z readings were unrepresentative was not made before the hearing.  It seems to us that if there was any real basis to this the allegation would have been made all along (eg in the way he has consistently maintained until recently that the Z readings were wrong due to over-ringing). 
41.	Our conclusion is that we do not accept that HMRC selected the nine consecutive weeks of Z readings on the grounds that they were the company’s busiest  We also conclude that those nine weeks have not been shown to be unrepresentative.  We agree with Mr Adeyeye that takings are likely to fluctuate but his own evidence is that his busiest time is the summer and just before Christmas. No reason was given to us by Mr Adeyeye why August to October would be especially busy.  He said to us at the hearing that there were no bank holidays in that period but even this does not appear to be correct as there would have been the late summer bank holiday at the end of August.
42.	Mr Adeyeye has not produced any other evidence to show that HMRC’s sampling exercise overestimated the tax due.  All he has done is made unsubstantiated statements that he took £600-£650 in a good week, or in reply to the review letter  that   “we take between £70-£100 daily over six days.  Thursdays and Saturdays even less because we open half days.”  This is not only unsubstantiated but vague in extreme.  
43.	Mr Adeyeye says that 1 in 3 sales are credit card which cannot be suppressed as the money goes into the corporate bank account.  HMRC agrees – but of course some sales were declared.  This does not mean that some cash sales were not suppressed.  
44.	Mr Adeyeye denies that there was suppression and gave a number of explanations for the discrepancies:
Over-rings
45.	Mr Adeyeye claimed in his letters and at the hearing that some of the discrepancy would be due to staff over-ringing items.  Mr Skehan examined the till rolls for the period he had and said that there was no evidence of over-ringing.  In particular there were no improbably large amounts shown on the till roll where staff had added an extra digit to the total.  In particular, most sales seemed to be for under £10.
46.	At the hearing Mr Adeyeye conceded that over-ringing would not have amounted to very much and we find no evidence that z-readings were unreliable due to over-ringing.
VAT
47.	Mr Adeyeye said that VAT was not taken into account.  The z-readings would be gross as they record the amount charged to the customer.  However, the company’s VAT return showed only £100-£130 a month output tax so we agree with HMRC that only an adjustment to the figure of about £1500 p.a. is due to reflect the VAT.
48.	The low output tax figure also suggests that takings were low.  HMRC’s view was that this was not the case because the sales would be zero rated as the business was that of a chemist.  The Tribunal cannot agree.  There is no reason why over the counter sales by a pharmacy would be zero rated:  only the supply of prescribed drugs and other prescribed goods are zero rated under VATA 1994 Schedule 8 Group 12 Item 1.  Prescription charges are not an issue in this case: HMRC accepts that they have been declared by the company.  It is likely that a chemist might sell a few other goods zero rated (eg nappies) and some reduced rate (eg contraceptives) but our view is that the low output tax figure if correct reflects a low turnover.  
49.	This is no answer:  It does not tell us whether that low turnover was because there were few sales or because there were more sales but only a few sales were declared.  So, other than noting that a £1,500 deduction is called for from the Z-readings, we are unable to derive any assistance from the VAT returns.
50.	This leaves projected takings of £41,500 (ie £43,000 less the £1,500 VAT).
Prescription levies
51.	Mr Adeyeye said that the figures did not take prescription levies into account.    It seems that whatever the NHS pays for the prescribed drugs, they deduct the fee that the patient has to pay to the chemist – the prescription levy. The prescription levy is paid direct to the chemist by the customer.  Mr Adeyeye said this caused discrepancy on Z readings and till takings, implying that the levies were rung into the till but of course did not form part of the over the counter sales.  
52.	Again Mr Adeyeye was unable to produce proper records of what the levies were.  HMRC estimated that there were approximately £8,400 for the year.  This estimation was based on evidence of  levies of £786.50 for June 2005 and Mr Adeyeye’s own estimate of approximately £700 per month.  
53.	HMRC did not accept that the levies were paid into the till.  In their review letter, they rejected it as unrealistic because (working on a figure of declared sales of £11,488) this resulted in till takings of about £10 a day which they considered to be unrealistically low.  In fact, as noted above, declared takings were £19,837 and till readings projected takings of £43,000 so HMRC’s logic for rejecting this is flawed.  
54.	In any event it seems to the Tribunal highly probable that the levies, as Mr Adeyeye has always maintained, as cash paid over the counter by customers, would be rung into the till.  If it were not, it would be impossible to keep track of the cash received.  Admittedly, Mr Adeyeye appears not to have had any form of cash control but we do accept his evidence that the prescription levies were paid into the till.  The amount of £8,400 should be deducted from the Z-readings.
55.	This leaves projected takings of £33,100 (£41,500 less £8,400).
Colorama levy
56.	Mr Adeyeye has consistently maintained – and repeated at the hearing - that HMRC’s figures did not take the  colorama levy into account.  This is where the company collected monies on behalf of a film processing company in return for a small amount of commission.  When pressed for detail, however, Mr Adeyeye’s reply in his letter of 28/3/8 was “this amount is insignificant as we did very little business”.  We find therefore in the absence of evidence of any figures put forward by Mr Adeyeye that the figure was insignificant.
Purchase figures
57.	Mr Adeyeye also said that HMRC’s figures were wrong because they could see from his purchase invoices that he could not make the sort of over the counter sales that he claims.  He said nothing further than this.  
58.	We do not accept this point.  It is possible for declared purchases as well as sales to be suppressed.  Mr Adeyeye did not give us any evidence on what would be a normal profit margin, or what was his actual profit margin.  He shows a cost of sales in his accounts of £181,883.  Clearly this relates to more than the over the counter sales but it was not explained how this was calculated and what his actual purchases for over the counter sales were.  He appears not to have kept complete records.  So we are unable to determine his profit margin on the level of sales as projected by HMRC from the Z-readings.  In any event, it is possible for declared purchases as well as sales to be suppressed so we do not think we would gain much help from such evidence.   
Takings of other pharmacies
59.	Another complaint of Mr Adeyeye was that HMRC should have compared the company’s declared takings and/or their estimate of his actual takings with takings declared by the previous owner of this chemist and with other chemists in the country.  He believed that this would show that his declared takings were in line with other chemists and  would show HMRC’s estimates to be excessive.
60.	This seems completely misconceived.  The company is not liable to tax based on some average of the liability of other chemists in the country or even of the previous owners.  He is liable to tax on his actual profits.  
Conclusions
61.	The Tribunal’s problem is the lack of records or other reliable evidence kept by Mr Adeyeye.  The Z-readings project in our view expected over the counter sales of £33,100.  Declared takings were £19,837.  The difference is £13,263.  We find they are evidence of suppression taking place but (as explained below) not the level of suppression.
62.	Z-readings are not independent evidence:  to be accurate they rely on every sale being rung in.  The figure is only a projected figure.  More importantly, we find Mr Adeyeye was very poor at keeping records and we do not find that he would necessarily have rung in every sale.  Like HMRC, we prefer to look at the more verifiable bank records.  These show unidentified payments in the order of £22,800 (see paragraph 27).  This is higher than the projected figure from the Z-readings but as stated we consider the bank evidence to be more reliable guide to the amount of suppression.  
63.	It is for the Appellant to satisfy us that HMRC has overcharged it by the assessment.  Under s50 Taxes Management Act (set out above) we have the power to reduce, confirm or increase an assessment.  We have accepted that most but not all (as stated above) of the reductions in the assessment made by HMRC in the review letter.   We therefore find that the amendment which restates the profits to be £53,378  should be reduced to £37,336.  This is higher than the figure found by the Review Officer.  It comprises the declared profit of £9,969, plus the agreed alterations of plus £5,632 and minus £1,065, plus the suppressed takings which we have found to be £22,800.  
64.	Under s50(8) Taxes Management Act we leave it to HMRC to calculate the extra tax due on this sum.
Penalty
65.	HMRC imposed a penalty of 25%.  At the hearing they said they considered it should be reduced to 20% as the size & gravity abatement allowed of 30% should be increased to 35% as the amount of the overall assessment had decreased following the review.
66.	Apart from the size & gravity abatement, HMRC allowed a 15% abatement for disclosure because the Company accepted its error on the double counting for expired drugs and 30% abatement for cooperation.  Mr Adeyeye did engage with HMRC and write and attend meetings.  
67.	We have also found that the Company understated its profits and that it did this by keeping inadequate records and paying cash into the Director’s personal bank account.  We find that this was at least negligent and do not accept Mr Adeyeye’s view that it was mere carelessness.  A penalty should be imposed.
68.	We also find that the Appellant kept no proper records.  It kept no record of cash reconciliation.  It kept no books recording sales and purchases and payments of bills.  It seems it only kept till rolls, Z readings and some invoices.  Mr Adeyeye is a qualified pharmacist and must know about the importance of keeping records:  we find the Company’s failure to keep proper records to be at the least negligent and not mere carelessness.
69.	We agree with HMRC that a reduction should be made as Mr Adeyeye was prepared to meet and correspond with them and offered some cooperation.
70.	In all the circumstances we consider that a 25% penalty is appropriate.  We note that under S100B Taxes Management Act set out above we have the power to confirm reduce or increase the penalty.  The effect of our decision is that the penalty is less than originally assessed by HMRC but somewhat more than assessed in the review letter and as revised by HMRC at the hearing.
71.	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.

Barbara Mosedale

TRIBUNAL JUDGE
RELEASE DATE: 13 April 2010