[2010] UKFTT 428 (TC)

TC00697
Appeal number: TC/2009/11968

INCOME TAX - adjustments to self assessment - discovery assessment - fairness of estimates by HMRC – appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	P NINEHAM	Appellant

	- and -

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

		TRIBUNAL: 	NICHOLAS ALEKSANDER (TRIBUNAL JUDGE)					ROSALIND YOUNG JP				

Sitting in public in London on 29 July 2010

F Williams of 21st Century Accounting Services Ltd, accountants, for the Appellant

C McMeeken, Officer of HM Revenue & Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	Mr Nineham appeals against an amendment made to his self assessments for the year ended 5 April 2004 and "discovery" assessments for the three years 2000/1 to 2002/3 following enquiries made by an officer of HMRC.  
2.	At the hearing Mr Nineham was represented by Mrs Williams and HMRC was represented by Mr McMeeken.  The Tribunal had before it bundles of documents, and we also heard evidence from Mr Nineham.  Mr Nineham was accompanied by his friend Ms Newman, who had assisted Mr Nineham in the preparation of some of the bundles.
Background Fact
3.	We find the background facts to be as follows:
4.	Mr Nineham is in business on his own account as a DJ.  In addition he is a director and shareholder of Next Generation Ltd which publishes CDs of his music.  This appeal relates solely to his income from self-employment as a DJ, and not to any income he receives from the company.
5.	HMRC opened an enquiry into Mr Nineham's personal tax return for 2003/4.  The enquiry arose because the deposits into Mr Nineham's bank account exceeded £15,000, yet his declared income was just under £10,000.  Mr Nineham attended a meeting (accompanied  by Mrs Williams) with HMRC in March 2006 to discuss his tax affairs.  Comprehensive notes of the meeting were prepared by HMRC and were circulated with a request for any corrections – but no response was ever received.  The content of the notes was not challenged before us, and we find the notes to be an accurate reflection of the meeting. 
6.	Mr Nineham maintained little in the way of business records.  His main accounting records were his diaries, in which he noted his bookings and the agreed fee, and an informal file of receipts for cash expenditure.  During the periods in question, his mother maintained monthly ledgers of his income and expenses, which were written-up every couple of months.  These ledgers were used by Mrs Williams to prepare Mr Nineham's accounts and tax returns.
7.	Some of Mr Nineham's bookings ("gigs") came through agencies, but most were made directly with him.  Mr Nineham tried to obtain deposits for his bookings, but was not always successful.  Mr Nineham was paid both by cheque and in cash.  Mr Nineham did not maintain separate bank accounts for his DJ business and his personal affairs, and he paid his DJ fees into his personal bank account.
8.	Following the meeting, Mr Nineham sent HMRC his diaries and bank and credit card statements.  HMRC analysed two months in detail (November 2002 and March 2003) and for those two months identified discrepancies between the bank and credit card statements, the diaries and the accounting ledgers.  In particular:
(1)	The Diaries:  the diary showed ten worked gigs for November 2002, but the ledgers (from which the tax return was prepared) only showed five, and for March 2003 the diary shows five worked gigs, but the ledgers show three.  
(2)	Petrol costs:  there were discrepancies between the locations and dates of Mr Nineham's gigs and the locations and dates shown on receipts given by petrol filling stations.
(3)	Trips abroad:  Mr Nineham was abroad in Australia and Japan for approximately 8 weeks during the year, and had explained that he had played no gigs whilst abroad.  However a search on the internet showed that Mr Nineham had played gigs whilst in Australia and Japan.
(4)	Telephone costs:  HMRC considered that claimed telephone costs of £2696 appeared high relative to turnover.  Itemised bills had been requested, but had not been supplied.  Ms Williams claimed in correspondence that 10% of the telephone bill had been disallowed, but the disallowance was not apparent from the ledgers.  
(5)	Subsistence:  the amounts claimed for subsistence appeared to be excessive and were disallowed.
9.	In view of these discrepancies, HMRC proposed in a letter dated 1 September 2008 to adjust Mr Nineham's income for 2004.  They estimated that five extra gigs were played in November and two extra gigs were played in March at £350 each, and that the fee paid for one of the March gigs was £350 rather than the £100 declared.  This would give rise to additional income of £2700 for the two months.  This was then extrapolated over ten months (recognising that two months were spent out of the UK) to give rise to a figure of £13,500 additional income.  As regards the overseas trips, it was assumed that ten gigs were played at £350 each, giving additional income of £3500.  In addition, 40% of telephone costs were disallowed and subsistence expenditure was disallowed.  
10.	The net effect was to increase Mr Nineham's taxable income by £18,810, resulting in additional tax of £6,990.  Given the size of the increase, HMRC proposed to make discovery assessments for 2001, 2002 and 2003 using £18,810 (adjusted for RPI).  In total the additional tax payable was £27,029 and £6,573 of interest.
11.	HMRC also identified discrepancies relating to bank deposits in excess of turnover, spending by Mr Nineham from cash which was not apparently available, and high levels of premises costs.  However in the light of the other adjustments proposed, HMRC did not propose further adjustments in respect of these discrepancies.  Nor did HMRC propose to levy penalties.
12.	In due course HMRC amended Mr Nineham's self assessments for the year ended 5 April 2004 and issued "discovery" assessments for the three years 2000/1 to 2002/3, against which Mr Nineham now appeals.
Mr Nineham's explanations
13.	Ms Williams presented two sets of schedules (and supporting documents) to us.  Both schedules related to the two sample months of November 2002 and March 2003 and sought to give accurate details of income and expenditure incurred in those two months.  The first set of schedules had been prepared by Ms Williams in 2006 and had been sent to HMRC following the March 2006 meeting.  The second set of schedules had been prepared by Mr Nineham (with the assistance of Ms Newman) probably in 2008, but had only been sent to HMRC as part of the hearing bundles.   Both sets of schedules were inconsistent with each other and with the ledgers upon which the tax return had been based.  Both sets of schedules showed that there was undeclared income for 2002/3. The first set of schedules shows undeclared gig income of £1500.  The second set of schedules shows undeclared income of £3123.78.  Ms Williams explained to us that the first set of schedules had been prepared following a two hour meeting with Mr Nineham, and were only intended to form the basis for a discussion with HMRC – whereas considerable time and effort had been taken in the preparation of the second set of schedules, upon which we should therefore place more reliance.
14.	The second set of schedules went through the diary and ledger entries for November 2002 and March 2003 line by line, and gave explanations (with supporting documents) to show the income and expenditure relating to each gig shown in the diary, or why it had been cancelled,  or had yielded no (or reduced) income.  
15.	Mr Nineham explained that he played a considerable number of the gigs for no fee as "promotions".  These gigs were played in order to promote sales of his CDs which were published by Next Generation Ltd.  All the gigs played in Japan and Australia were promotional gigs with no fee.  One of the gigs played in November 2002 (Heaven) was a charity event for which no fee was charged.  In addition, where gigs had low attendance, on the night he might be cancelled or offered only a reduced fee. Other than in respect of the charity gig at Heaven, we find his explanation unconvincing.  Although Mr Nineham produced letters from various gig promoters confirming his explanations, these letters were all dated 2008 (or undated) and were not contemporaneous.  Although they had been available for some time prior to the hearing, they were only produced to HMRC as part of the hearing bundles. There was one letter from XS Productions in stating that Mr Nineham played in Perth, Australia for no fee – but this letter relates to a gig in December 2004, and not to the period under appeal.  Similarly, a letter from Hard Kandy confirming that Mr Nineham played in Melbourne, Australia for expenses only (flights and accommodation), but the letter did not mention any specific gigs and only referred to the promotion of a CD published in 2004 – after the periods under appeal.   We therefore place little reliance upon them. We also note that the internet pages show gigs were played in Sidney, in respect of which no evidence of any kind was produced.  
16.	We also note that there are inconsistencies between the declared gigs and the associated petrol receipts.  One example is a claimed petrol expense of £15.01, incurred on 8 June 2003.  Mr Nineham explained that the petrol expense had been charged to Ms Newman's debit card, and he subsequently reimbursed her.  Included with the schedules was a copy of Ms Newman's bank statement showing a debit for £15.01 on 9 June 2003 as "Murco Service Stn, Didcot, Oxfordshire".  However the associated receipt was for £20 cash (not debit card), being £15.01 fuel and £4.99 tobacco,  and was for Moto,  Chieveley, Berkshire.  Neither Mr Nineham nor Ms Newman could explain the discrepancies.
17.	Mr Nineham also produced a letter from his father (dated 10 November 2008) confirming that the father had made a loan of £2000 to Mr Nineham in March 2003, a letter from his mother (dated 23 November 2008) confirming that she had paid £2000 in the summer of 2003 as full repayment of loans made in March 2000, and a letter dated 8 November 2008 from a friend confirming that he had purchased a watch from Mr Nineham for £800 in June 2003.  As with the letters from promoters relating to the gigs, none of these were contemporaneous, and although they had been available for some time prior to the hearing, they were only produced to HMRC as part of the hearing bundles, and we therefore place little reliance upon them.  We note that at the meeting with HMRC in March 2006, Mr Nineham stated that there had been no loan payments made in the relevant period, and that he had sold no valuable assets.  His explanations given therefore inconsistent with his statements at that meeting.  We find unconvincing Mr Nineham's statement in evidence to us that he did not appreciate that family loans and the sale of his watch might be relevant to the questions at the meeting.
18.	We further note that both sets of schedules sought to reconcile the diary entries with the amounts paid into Mr Nineham's personal bank account.  The schedules did not take account of cash receipts – and Mr Nineham admitted in the course of his evidence that he was paid in cash at gigs for his work.
19.	Mr Nineham explained that he incurred significant telephone costs because he increasingly managed his own bookings – which were done by telephone.  However, in the absence of any itemised bills, we had no evidence to support Mr Nineham's contention that 90% of his telephone costs related to business calls.
20.	During the course of the hearing Mr Nineham acknowledged that his subsistence expenditure claims related to meals with colleagues at which they discussed business matters – and it therefore became clear that the expenditure was not deductible as it amounted to business entertainment.
Conclusions
21.	The burden of proof lies on Mr Nineham to show that HMRC's figures are unreasonable.
22.	Mr Nineham's business records were inadequate and cannot be relied upon.  Both sets of schedules produced by or on behalf of Mr Nineham show undeclared income.   Yet we find that we can rely upon neither set of schedules.  The first set of schedules prepared by Ms Williams (showing undeclared income of £1500) was, we were told, prepared in a hurry and were only intended to form the basis for a discussion, and Ms Williams acknowledged that it contained errors.  More care was taken with the preparation of the second set of schedules by Mr Nineham and Ms Newman (which showed a greater amount of undeclared income of £3123.78), but we find that these also are not credible, as we have found the supporting documentation to be inconsistent with entries on the schedule.  We can place little reliance upon the supporting letters as they were all prepared many years after the events to which they relate (and some do not even relate to the periods in question).  In addition, the schedules reconcile the diaries to bank payments – and do not address cash receipts.
23.	Included in the bundles was an article from the Financial Times which described DJing in clubs and the problems DJs have.  Whilst this provided interesting background reading – it was not evidence upon which we can rely in determining the income of Mr Nineham.
24.	In the case of Johnson v Scott (1977) 52 TC 383 at 393 in the High Court, Walton J observed:
The true facts are known, presumably, if known at all, to one person only - the Appellant himself. If once it is clear that he has not put before the tax authorities the full amount of his income, as on the quite clear inferences of fact to be made in the present case he has not, what can then be done? Of course all estimates are unsatisfactory; of course they will always be open to challenge in points of detail; and of course they may well be under-estimates rather than over-estimates as well. But what the Crown has to do in such a situation is, on the known facts, to make reasonable inferences. When, in para 7(b) of the Case Stated, the Commissioners state that (with certain exceptions) the Inspector's figures were 'fair", that is, in my judgment, precisely and exactly what they ought to be - fair. The fact that the onus is on the taxpayer to displace the assessment is not intended to give the Crown carte blanche to make wild or extravagant claims. Where an inference, of whatever nature, falls to be made, one invariably speaks of a "fair" inference. Where, as is the case in this matter, figures have to be inferred, what has to be made is a "fair" inference as to what such figures may have been. The figures themselves must be fair. So far from representing an inference that the Commissioners did not appreciate the Inspector's figures fully, this demonstrates that they did. I think the point can be put conversely in another way. At times during Mr. Hall's address to me it almost appeared as if what he was requiring by way of his "lawful proof" was a duly audited certificate as to the Appellant's undisclosed expenditure. Of course, this was not what he was seeking; but once it is clear that this is not, and in the nature of things cannot be, available, then it follows as night follows day that some form of estimate must be made.
25.	The question before us is whether HMRC's determination of Mr Nineham's income was "fair".  HMRC's figures are estimates and approximations – but given the absence of any credible and reliable business documentation, that is all that can be expected.  The burden of proof is on Mr Nineham to show otherwise, and she has not satisfied this burden.
26.	We noted that in reaching their estimates, HMRC did not take account of the fact that the gig at Heaven in November 2002 was a charity event and no fee was charged.  We specifically asked Mr McMeeken whether the assessment should be adjusted to take account of this fact.  Mr McMeeken took the view that no adjustment was appropriate, as HMRC multiplied by five the estimated income from gigs undertaken in November 2002 and March 2003 to reach a figure for income from gigs undertaken over the whole year (ten months only – as two months were spent abroad).  As this was an estimate (and given that we had no evidence of charity events being undertaken regularly during the year), the fact that one gig was undertaken for charity did not undermine the estimate for the year as a whole.  We agree.
27.	We are satisfied that HMRC made a discovery for the purposes of section 29 TMA.
28.	We therefore uphold the amendment made by HMRC to Mr Nineham's self assessment for 2003/4 and the assessments made for the other years.
Conclusions
29.	For the reasons we have given above, we dismiss the appeal.
30.	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.

NICHOLAS ALEKSANDER

TRIBUNAL JUDGE
RELEASE DATE: 9 September 2010