[2010] UKFTT 387(TC)

TC00669

Appeal number TC/2009/14077 

Self assessment – under-declaration of takings - question of fact – taxi driver – whether takings and profit were understated – no - appeal granted  

FIRST-TIER TRIBUNAL

TAX 

	STEPHEN HO	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Income Tax)	Respondents

				TRIBUNAL: 	Andrew Long (Tribunal Judge)
                                    			Professor Anne Redston

Sitting in public in London on 17 June 2010

Michael Corrigan, Accountant, for the Appellant

Bruce Robinson of the Appeals and Review Unit of HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction
1.	The Appellant, Mr Stephen Ho (‘Mr Ho’) is a taxi driver who plies his trade to and from Heathrow. Mr Ho appeals against decisions issued on 14 August 2009 by the Respondents Her Majesty’s Revenue and Customs (‘HMRC’), following an internal review. At the hearing we announced our decision to allow the appeals. We now give our written reasons.
2.	The decisions appealed against are:
(a)	an amendment to Mr Ho’s self assessment under Section 28A (1) and (2) of the Taxes Management Act 1970 (‘TMA’) for the tax year ended 5 April 2004. Mr Ho’s self assessment return had shown turnover of £19,279 and taxable profit of £11,428, resulting in tax due of £1,807.90. 
	The effect of the amendment was an increase in turnover, resulting in profits of £11,975. The revised  assessment (including Class 4 NICs) was £5,400.40, an increase of £3,592.50.
(b)	discovery assessments under Section 29 TMA for years ended 5 April 2003, 2005, 2006 and 2007. The additional tax and Class 4 NIC assessed was respectively £3,388.36; £3,706.50; £3,801.30 and £3,973.50. HMRC had previously made discovery assessments in respect of years ended 5 April 2001 and 2002. These were however abandoned by HMRC pursuant to the review.
3.	There are two issues. First, did Mr Ho understate his takings for the accounting year ended 30 April 2003 (tax year ended 5 April 2004)? Secondly, has an Officer of the Board of HMRC discovered a loss of tax for the tax years ended 5 April 2003, 2005, 2006 and 2007?
The law 
4.	Section 9A TMA states that HMRC may enquire into a self-assessment return within certain defined time limits. Time limits are not at issue in this case.
5.	Section 28A TMA states that:
	‘(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.
(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.
6.	For all the years at issue in this case section 29 TMA read (so far as relevant to this case) as follows: 
‘(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… have not been assessed, or
(b)	that an assessment to tax is or has become insufficient
(c)	…
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 is attributed to fraudulent or negligent conduct of the part of the taxpayer or a person acting on his behalf…
7.	Section 49F TMA applies where HMRC give notice of the conclusions of an internal review:
	(1) 	…
	(2) 	The conclusions are to be treated as if they were an agreement in writing under section 54(1) for the settlement of the matter in question.
	(3) 	Subsection (2) does not apply to the matter in question if, or to the extent that, the appellant notifies the appeal to the tribunal under section 49G.
8.	Section 49G TMA reads as follows:
(1)	This section applies if—
(a)	HMRC have given notice of the conclusions of a review in accordance with section 49E, or
(b)	the period specified in section 49E(6) has ended and HMRC have not given notice of the conclusions of the review.
(2)	The appellant may notify the appeal to the tribunal within the post-review period.
(3)	If the post-review period has ended, the appellant may notify the appeal to the tribunal only if the tribunal gives permission.
(4)	If the appellant notifies the appeal to the tribunal, the tribunal is to determine the matter in question.
9.	Section 50 TMA, as amended, provides (so far as is relevant to this case) as follows:
“(6) If, on an appeal notified to the tribunal, the tribunal decides…that the appellant is overcharged by 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…
the assessment or amounts shall be increased accordingly…’
(10)	Where an appeal is notified to the tribunal, the decision of the tribunal on the appeal is final and conclusive.
(11)	But subsection (10) is subject to—
(a)	sections 9 to 14 of the TCEA 2007,
(b)	Tribunal Procedure Rules, and
(c)	the Taxes Acts.’
10.	In the case of Jonas v Bamford (1973) 51 TC 1, Walton J said, at page 26:
	‘once the Inspector comes to the conclusion that, on the facts which he has discovered, Mr Jonas 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 on the taxpayer.’
The issues in dispute
11.	HMRC say that Mr Ho understated his takings and taxable earnings, based on:
(a)	inconsistencies in Mr Ho’s evidence as to his takings and expenses; and 
(b)	inconsistencies between the records of takings and expenses kept by Mr Ho and:
(i)	 his declared pattern of working as a taxi driver; and
(ii)	 information given by Mr Ho regarding his personal expenditure. 
12.	They further say that profits for other years had been understated, based on the similarity of the pattern of working in those years to the year which had been the subject of enquiry.
13.	Mr Ho contends that the profits as returned have not been understated, with the exception of two specific days, as set out below. He rejects HMRC’s assertions concerning his working pattern and personal expenditure.
14.	The factual issues in dispute at the hearing, helpfully summarised by Mr Robinson, thus related to working pattern and personal expenditure. 
The background
15.	The documentary evidence was contained in the Joint Bundle, principally containing the correspondence and material exchanged between the parties. The Bundle A-F ran to over 500 pages. It was supplemented at the hearing by an updated cash flow test.
16.	There was oral evidence from Tommaso Lisi, HMRC officer, who had provided a witness statement dated 26 May 2010. Mr Ho also gave oral evidence. He had not provided a witness statement but confirmed the substance of the correspondence written on his behalf by Mr Corrigan. Both witnesses were on oath and both were cross-examined. Mr Ho had also issued a witness summons against a Mr Noel, another HMRC officer, but it did not prove necessary for him to give evidence. Both parties provided skeleton arguments; Mr Robinson’s skeleton was helpfully clear and thorough, yet concise.
17.	The following basic facts are agreed. Mr Ho commenced self employment as a taxi driver on 5 October 1988. An enquiry was opened on 21 November 2005 into Mr Ho’s self assessment return for the year ended 5 April 2004, which included income from self employment as a taxi driver for the accounting year ended 30 April 2003. Mr Ho submitted his business records for examination on 16 December 2005. There was a meeting and interview on 16 March 2006. Much correspondence and debate ensued between HMRC and Mr Corrigan on behalf of Mr Ho. 
18.	A Closure Notice was issued on 25 April 2008 amending the return by including increased turnover for year ended 5 April 2004 of £11,226 and additional tax due of £3,367.80. Discovery assessments were also made for other years under s 29 TMA. An appeal against the assessments was made by Mr Corrigan in a letter dated 9 May 2008. 
19.	Mr Ho accepted HMRC’s offer of a statutory review. The Reviewing Officer issued the decisions of 14 August 2009. The principal changes were to withdraw the discovery assessments for 2001 and 2002, and to adjust the basis for calculating the later years so that they were based on the Retail Prices Index rather than using Mr Lisi’s method.
The cab tags
20.	Throughout the period Mr Ho lived in Bexleyheath, Kent. Each day that he worked he would purchase fuel at the start of the day and write the fares received on the back of the fuel receipt. He worked principally out of Heathrow Airport. There is a system there of ‘cab tags’. Cab tags are purchased in batches and have to be handed over before the taxi driver can make his cab available for hire at Heathrow Airport. 
21.	A listing of the cab tags purchased by Mr Ho, and showing thedates on which they were used, was provided to HMRC by British Airports Authority. From the meeting notes it appears that this information was in the possession of HMRC before 16 March 2006, as they were referred to by Mr Lisi at that meeting; copies of the schedules were subsequently requested by Mr Corrigan and sent to him on 21 June 2006. 
The two days
22.	In the year to April 2003 Mr Ho is recorded as using 441 cab tags and working on 233 days. There were two days, 12 February 2003 and 3 April 2003 when the cab tag system showed him entering Heathrow available for hire, but his own records did not show him as working. When asked by HMRC at the meeting 3 years later about this, he first said there may have been an error with the cab tags, he could have been dropping a friend off at the airport or that he might have felt unwell and gone home without a fare. In 2009 Mr Corrigan conceded on behalf of Mr Ho that he had probably worked on those days but had then lost the fuel receipts.
23.	It was accepted by both sides that there was thus a small error in the records in that the income for these days had been omitted, but as the journeys were recorded on the back of the fuel receipts, also missing from the computations was the cost of fuel used for the journeys. 
24.	This omission was relied on by HMRC as evidence of negligence by Mr Ho; for Mr Ho, Mr Corrigan contended in his letter to Mr Lisi of 1 July 2009 that they had:
	‘arisen solely as a result of human error which is statistically insignificant and is too low to indicate negligence.’

Working pattern
25.	At the hearing it was agreed (from the cab tag evidence) that Mr Ho worked 233 days in the relevant year (2002-3) and that the average fare from Heathrow was £30. It was also agreed that there were also some (minor in this context) local fares in Central London. The competing contentions were as to the Heathrow fares. Mr Ho consistently stated that there were, on average, 2 Heathrow fares per day. 
Number of fares from Heathrow
26.	It is clear both from the correspondence provided to us, and from Mr Lisi’s witness statement submitted shortly before the hearing, that HMRC’s case had, until the day of the hearing, rested on Mr Ho making an average of four trips out of Heathrow. 
27.	In his letter of 22 January 2008, which concluded the enquiry into Mr Ho’s return, Mr Lisi wrote:
	‘I have assumed Mr Ho on average undertakes 5 fares a day, four out of Heathrow and one out of London first thing in the afternoon’. 
28.	In his witness statement he says, at paragraph 13.9:
	‘Mr Ho said he would have on average 2 fares a day from Heathrow earning an average of £30 to £35 each one. I disagreed, noting that I had information suggesting the minimum fare was £46. However, in later correspondence I accepted Mr Ho’s lower estimate of £30 in my calculations but estimated 4 fares a day from Heathrow.’
29.	Mr Lisi stated before us that when he said ‘four out of Heathrow’ and ‘four fares a day from Heathrow’ he meant ‘two out of Heathrow and two back to Heathrow from Central London.’ HMRC presented their case to us on this revised basis.
30.	Mr Ho described his working pattern in his oral evidence to the Tribunal. as starting work at about 2pm, finishing at 10.30-11pm. He would head for the Tower of London where he would put on his ‘for hire’ light. He would try to get a fare out west, though he could not guarantee success. There was a waiting time at Heathrow of up to three hours before getting a fare. His journey out of Heathrow would vary. If he had a fare to London he would usually return back to Heathrow empty. This evidence mirrored that provided to Mr Lisi at the meeting in March 2006. Both before us and at the 2006 meeting with Mr Lisi, Mr Ho maintained his position under challenge.
31.	As stated above, the cab tag evidence (which was not disputed) was that Mr Ho used 441 cab tags which were used on 233 days. That is 1.89 journeys per day from Heathrow. 
32.	HMRC’s case at the hearing was that an experienced taxi driver such as Mr Ho would know where in Central London he could pick up fares back to Heathrow, and thus the average number of daily trips to and from the airport with fare-paying passengers was four. 
33.	Mr Ho stated that once he stopped for a passenger, the regulations which applied to London taxis required him to take that passenger to his destination, unless that destination was outside a defined perimeter. He said that it would have been impossible for him to identify passengers who only wanted to return to Heathrow and that most of those who travelled to Heathrow by taxi used minicabs which they called in advance, as this was more convenient than waiting on a pavement with luggage in the hope that an empty black cab would pass by. 
Health 
34.	At the meeting on 16 March 2006 Mr Lisi suggested Mr Ho’s declared working pattern resulted in lower earnings than were achievable by, for example, working more in Central London. Mr Ho’s response was summarised by HMRC in the meeting note as:
	‘it was less stressful working out of Heathrow. He also said he could stretch his back more as he suffered from a bad back’.
35.	This comment was amplified in Mr Corrigan’s letter of 1 July 2009 enclosing Mr Ho’s osteopath’s notes for July 1997 to March 2007. The notes show an extensive and longstanding problem dating back to 1998, along with a multitude of consultations with a variety of treatments and rest from work. Mr Corrigan says in his letter that they:
	‘relate to periods when his back problems have become “acute” but there are other periods when his back problem is “chronic” ie sufficiently bad for him to rest, but not bad enough for him to see the osteopath’. 
The cash flow test
36.	HMRC rely also on a cash flow test, helpfully revised just before the hearing to take into account a number of amendments suggested by Mr Corrigan. HMRC argued that the result of the cash flow test is that, based on the information available and incorporated into the test, Mr Ho would have run out of cash and indeed have had negative cash at various points during the period used for the test. As ‘negative cash’ is impossible it is said that Mr Ho must have had an additional source of cash, namely undeclared takings.
37.	The test was applied to the period 2 May 2002 to 30 April 2003. As presented, it shows Mr Ho’s cash outflow exceeded his cash inflow by £2,655.79, and that on many dates during the year there would have been a cash deficit. 
38.	The inflow comprises cash business receipts of £19,525.50. The outflows are cash banked of £6,910, cash business expenses of £5,786.79 and private cash expenditure of £9,784.50.
39.	The ‘private cash expenditure’ is based on estimates and extrapolations from what Mr Hois recorded as saying at interview about his lifestyle during the interview in March 2006. That included in the test was explained as follows:
(a)	£30 per week said by Mr Ho to have been spent out of cash takings, and thus totalling £1,560 for the period;
(b)	a sandwich and drink per day when working - estimated by HMRC at £5 per day, and so totalling £1,165;
(c)	an electricity bill said by Mr Ho to be £200 per quarter, and totalling £800 for the period; 
(d)	mortgage payments stated by Mr Ho to be £400 per month, totalling £4,800 for the period; 
(e)	personal spending out of his cash for lottery and some gambling etc. Mr Ho did not state an amount but HMRC estimated £50 per week, totalling £2,600.
40.	It was accepted before us that HMRC’s working assumption was that Mr Ho paid the mortgage and electricity solely by himself without any contribution from his partner. In evidence Mr Ho told us that he and his partner paid the bills jointly, save for the television licence and phone which were paid by her alone.
41.	So far as relevant to this issue, the note of the meeting in March 2006 on which HMRC’s assumption is based reads:
‘6.5... Ho said that he did not bank all of his earnings because he had to pay for his mortgage and bills out of the cash earnings. His mortgage at the time was with Abbey National and was £400 per month, which he paid in cash every month...
7.4 Lisi ran through the utility bills and asked Ho how he paid for them and the amounts. Ho said the mortgage was £400 per month and paid by cash...the electric was about £200 per quarter and was paid for by cash...His girlfriend paid the phone bill...The TV licence was paid for by the girlfriend at £10 per month.... 
 7.5 Lisi asked if anyone else contributed to Ho’s lifestyle, he said only his partner.’
42.	Mr Ho’s evidence before us was that he did not gamble other than spending £7 per week on the lottery. The note of the meeting records:
‘7.11 In his spare time he likes to play computer games, gamble on the lottery and play cards with his friends, however it was not for large amounts of money and only a couple of pounds. He would go out to a restaurant with his girlfriend a few times over the year.’
43.	Mr Ho was asked by the Tribunal if the payments for electricity and other utility bills accrued evenly over the year. Mr Ho said that they varied with the seasons. It was accepted before us by HMRC that the cash-flow statement assumed that admitted outgoings accrued evenly over the period and that if this were not thecase, some of the ‘negative cash flow’ amounts would disappear. 
44.	It was noted by the Tribunal, and accepted by HMRC, that the entire cash-flow statement depended not only the points set out above, but also on assuming that Mr Ho began the period in question with an opening cash balance of £300. The notes of the March meeting record as follows:
	‘Ho said that at most he would have £300 to £400 in the home before he banked it.”
45.	Mr Corrigan contested this in his letter of 1 July 2009, saying:
	‘although Mr Ho stated during the interview that the maximum amount he would have at any one time would be £300 to £400, our meeting notes have a question mark after the amount indicating Mr Ho’s tone of voice. It is possible that, when he was saving for his tax, he could have had a larger amount of money at home at those times.’
46.	It was accepted by HMRC before us that the actual cash available to Mr Ho at the start of the period could have been more or less than this. 
47.	There was no evidence beyond the cash flow test that Mr Ho had a lifestyle inconsistent with his declared takings or of any hidden assets. 
Credibility of witnesses
48.	We observed Mr Ho giving evidence. He struck us as an honest, straightforward and truthful witness. Moreover his demeanour and responses were entirely consistent with the submissions made on his behalf by Mr Corrigan. He seemed to be someone who would not be comfortable with the hurly-burly of life as a Central London taxi driver. He came across as a man who might well prefer a less than maximum income so as to avoid the conflict and other tribulations of being a Central London taxi driver. He might well prefer to drive back empty to Heathrow. His back problems, recorded so extensively in the osteopath’s notes, reinforce that impression.
49.	In contrast, we were troubled by Mr Lisi’s statement that he had always meant that ‘four journeys out of Heathrow’ meant ‘two journeys in and two journeys out.’ On this, one of two fundamental issues in the appeal, we did not find him to be a credible witness. 

Conclusions on the issues in dispute
The two days
50.	We find on the balance of probabilities that Mr Ho failed to declare 2 days receipts and expenditure in 2002-3, and we accept Mr Ho’s submission that this was due to the accidental loss of the receipts. We find that this was insufficient to amount to the negligence required by TMA s 29(4) and thus, in relation to this issue, we find that there should be no amendment to the return.

The working pattern 
51.	We reject HMRC’s contention before us that Mr Ho was obtaining four fares per day into and out of Heathrow. Ultimately that contention rested on the assertion that ‘an experienced taxi driver’, instead of returning empty to Heathrow, would know where to go to obtain a fare out to Heathrow. It was not explained, despite questions, exactly how ‘an experienced taxi driver’ would achieve this; particularly as a London cab driver indicating availability for hire has limitations on his ability to reject local or shorter fares. We prefer Mr Ho’s evidence on this issue.
The cash flow test
52.	We reject the conclusion of the cash flow test for the reasons set out below.
The mortgage and electricity
53.	The cash flow test assumes that the mortgage was paid for solely by Mr Ho without contribution from his partner. Mr Lisi explained in evidence that this assumption was made because of the interview note, but the note is silent as to whether Mr Ho alone pays the mortgage and other bills. There is no direct question and answer. Instead Mr Ho was being asked why he kept back cash from takings; the explanation includes topay such bills. The only direct mention is of the bills paid solely by his partner; it leaves open the possibility that either he pays the mortgage and electricity bills 100%, that they are shared either equally or that she contributes when necessary. Support for Mr Ho’s statement that the costs are shared is found in the note at 7.1 where Mr Ho says that she contributes to his lifestyle and also at 6.1 where it is recorded that they have other joint accounts.
54.	We thus accept Mr Ho’s evidence that his partner contributed to the cash payments.
The gambling
55.	HMRC have estimated a large sum of £50 per week for ‘personal spending out of his cash for the lottery and some gambling’. There does not appear to be any basis for this sum. Indeed, where the note mentions a figure, it is ‘a couple of pounds per week.’ We therefore reject this estimate. 
Timing of payments 
56.	We find that the test took no account of the timing of outgoings. This is fundamental to a cash flow test, the aim of which is to see whether, at a particular point in time, there was a negative cash balance. As a result, the test was fundamentally flawed.
Opening balance
57.	The opening balance was taken to be £300, the lower of the two figures recorded in the March meeting. If the higher figure had been taken, a number of apparent ‘negative cash-flow’ days would have disappeared. Furthermore, no account was taken of Mr Corrigan’s statement that the range given by Mr Ho was likely to fluctuate during the year. 
58.	The opening balance makes a fundamental difference to the available cash through the period. We find that the failure to establish the cash in hand held by Mr Ho at the inception of the period is another flaw in the test. 
In summary
59.	Mr Ho has satisfied us on the balance of probabilities that his takings, turnover and profit were not under-declared for the tax year ended 5 April 2004. Accordingly the appeal in relation to that year is allowed.
60.	The amendments to the assessments for other years were discovery assessments based on the HMRC conclusions for the year ended 5 April 2004 and applying the principle of continuity. Accordingly, in the light of our conclusions for the year to 5 April 2004, those assessments fall away. The appeal in relation to those years is also allowed.
Costs
61.	The final sentence of Mr Corrigan’s skeleton argument reads:
	‘The Appellant also asks the Tribunal to award costs against the Revenue and to consider an award towards the Appellant’s pain and suffering and loss of earnings since the enquiry started in November 2005’.
The law
62.	The Tribunal’s power in relation to costs is contained in Rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. 
63.	Rule 10(1) states that costs can be awarded:
	‘if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings’. 
64.	Rule 10(2) states that the Tribunal may make an order under paragraph (1) on an application or of its own initiative
65.	It is to be noted that costs are not awarded simply because the appeal has succeeded.
66.	Rule 10(3) requires a party seeking costs to submit a written application and schedule of costs to the Tribunal. 
67.	Rule 10(5) states that the Tribunal may not make an order for costs without giving the paying person an opportunity to make representations.
Reasonableness
68.	 We conclude that there has been unreasonable conduct by HMRC. Neither of the two arguments relied on by HMRC had a sufficient evidential foundation. The working pattern alleged of four Heathrow trips was clearly unsustainable. Four fares from Heathrow to Central London (an argument not pursued before us) was inconsistent with the agreed cab tag evidence and impossible in a normal working day. Four Heathrow fares (two out, two in) rested on an assumption that an experienced taxi driver could on almost every occasion ensure a fare to Heathrow from Central London, but HMRC could not explain how an experienced taxi driver would achieve this.
69.	 The cash flow test was flawed. It rested on assumptions that were not justified by the evidence, relied on averages rather than making any reasonable attempt to flex outgoings and failed to establish the opening balance.

Our direction
70.	.No schedule of costs has yet been sent to the Tribunal. HMRC have not had an opportunity to make representations as to whether an order for costs should be made. We direct that:
	HMRC shall, within twenty-eight days of the issue of this decision, confirm in writing to the Tribunal and the Appellant whether it opposes the application for costs. The Appellant shall deliver to HMRC a schedule of costs, also within twenty-eight days from the issue of this decision.   If the parties are not agreed as to costs either party may by letter to the Tribunal and to the other party ask the Tribunal to determine the application for costs. Within 28 days of such letter each party shall make written submissions to the Tribunal. 
Appeal rights
71.	This is a full reasoned decision. The Respondents have 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

TRIBUNAL JUDGE

RELEASE DATE: 19 August 2010