[2010] UKFTT 18 (TC)

TC00333

Appeal number:  TC/2009/11680

Income Tax: undisclosed profits - finding of negligence - penalties – Appeal refused.

FIRST-TIER TRIBUNAL

TAX 

	SEAFIELD GENERAL STORE & POST OFFICE	Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (INCOME TAX)	Respondents

TRIBUNAL: 		John M Barton, WS (Judge)
			Warren Snowden (Member)		

Sitting in public in Edinburgh on Wednesday 23 September and Tuesday 17 November 2009

J G Jackson, CA of Messrs Khokhar, Moughal & Jackson, the Appellants

Jim Gormley, HM Inspector of Taxes, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	Seafield General Store & Post Office (“the Appellants”) had made returns resulting in the following taxable profit

For the year ended 5 April 1997                        £11,126 
For the year ended 5 April 1998                        £13,358 
For the year ended 5 April 1999                        £15,256 
For the year ended 5 April 2000                        £14,262 
For the year ended 5 April 2001                        £21,752 
For the year ended 5 April 2002                        £30,303 
For the year ended 5 April 2003                        £29,265 
For the year ended 5 April 2004                        £21,673 
For the year ended 5 April 2005                        £41,861
 
2.      On 6 October 2006, The Respondents (“HMRC”) 
         
     (a) made the following amendments to their partnership profits under the provisions of s 30B(1) and s 28B of the Taxes Management Act 1970 (“TMA”)

For the year ended 5 April 1997                        £28,995 
For the year ended 5 April 1998                        £36,358 
For the year ended 5 April 1999                        £40,256 
For the year ended 5 April 2000                        £41,262 
For the year ended 5 April 2001                        £50,752 
For the year ended 5 April 2002                        £61,303 
For the year ended 5 April 2003                        £62,265 
For the year ended 5 April 2004                        £54,673 
For the year ended 5 April 2005                        £74,861, and

(b)	determined the following penalties 
                                                                             A Nazir                        Mrs R Nazir   
         For the year ended 5 April 1997              £1,040                             £1,007
         For the year ended 5 April 1998              £1,951                             £1,308  
         For the year ended 5 April 1999              £2,065                             £1,439
         For the year ended 5 April 2000              £2,144                             £1,556
         For the year ended 5 April 2001              £2,624                             £1,682
         For the year ended 5 April 2002              £2,892                             £1,776
         For the year ended 5 April 2003              £3,082                             £1,894
         For the year ended 5 April 2004              £2,999                             £1,979
         For the year ended 5 April 2005              £3,008                             £1,912 
      
 The present appeal is against the foregoing amendments and penalties. 

3.   The appeal was heard in Riverside House, Edinburgh on Wednesday 23 September and Tuesday 17 November 2009.      J G Jackson, CA of Messrs Khokhar, Moughal & Jackson appeared on behalf of the Appellants and he was accompanied by K A Khokhar. Mr Nazir, one of the partners of the Appellants, was also present.   HMRC were represented by Jim Gormley, HM Inspector of Taxes.  It was agreed that HMRC should lead; and William Cunningham, HM Inspector of Taxes, and Mr Khokhar gave evidence.

4.   Productions initially before the Tribunal included the following –
       
A lodged by HMRC

(i)       Tax Returns for the years 1996-97 to 2004-05 inclusive.
(ii)       Letters dated 6 October 2006 with amendments for each of the said tax years and penalty determinations for each year.
(iii)	Letters of appeal dated 31 October 2006 and 29 October 2007.
(iv)	Correspondence.
(v)	Business Model prepared by HMRC.
 
 B  lodged by the Appellants

(i)        Background statement and submission.
(ii)       Statement of Mr Nazir.
(iii)	Response to HMRC Business Model.
(iv)	Capital Statement.
(v)	Correspondence.
       
At the continued hearing, both parties lodged revised computations and supporting papers.   In particular, HMRC submitted the following revised figures for profits –

For the year ended 5 April 1997                        £24,022 
For the year ended 5 April 1998                        £29,958 
For the year ended 5 April 1999                        £33,856 
For the year ended 5 April 2000                        £34,862 
For the year ended 5 April 2001                        £44,352 
For the year ended 5 April 2002                        £54,903 
For the year ended 5 April 2003                        £55,865 
For the year ended 5 April 2004                        £48,273 
          For the year ended 5 April 2005                        £68,461

The following revised aggregate figures for penalties were also submitted –
                                          Mr Nazir       £16,842
                                          Mrs Nazir     £11,302

Material Facts

5.    The material facts are as follows –

(1)   Since June 1996, Mr Nazir and his wife Mrs Nazir have been in   partnership, running the business known as Seafield General Store and Post Office at Redhouse Road, Seafield, West Lothian.

(2)  The business is open on seven days each week and the sales comprise cigarettes, alcohol and general grocery.   The Post Office is separately managed and was not the subject matter of any part of the present appeal. 

   (3)  The Appellants lodged tax returns in respect of each tax year from 1996-97 to 2004-05.   The Appellant’s agents, Messrs Letham & Co CA, Airdrie, assisted the Appellants in completing these returns.

(4)  On 16 November 2004, Mr Cunningham wrote on behalf of the Inland Revenue to Mr Nazir, as nominated partner, giving notice of his intention to enquire into the 2003 Partnership Return; and he called upon the Appellants to exhibit their whole business records for the relevant year.    

(5)  The accounts in that return were for the year to 30 June 2002.   The return had disclosed sales of £459,357 and the cost of sales £388,087.   Other direct costs amounted to £157; resulting in a gross profit of £71,113.    To this, there required to be added the Post Office income of £21,373 (making a total of £92,486).   Allowable expenses (including interest and other finance charges of £7,040) were £42,957, resulting in a taxable profit of £49,535.

(6)   In their letter to HMRC dated 17 February 2005, Letham & Co disclosed that they had not seen a written record of wages, sales, stock and trade creditors and that the relative information for the accounts had been provided verbally.   They explained that when preparing the accounts, they had been concerned about the apparently low figure for gross profit, and that they had added £22, 307 to the net sales with a provision of £2,456.55 for VAT, and a total of £24,763.55 being debited to private drawings.   They had no detailed record of private drawings.

(7)	 Mr Cunningham had a meeting with Mr and Mrs Nazir and Mr Letham of Letham & Co on 10 May 2005, initially at the shop, thereafter at Mr and Mrs Nazir’s home and then back at the shop.      At that meeting, it was acknowledged that “Business has been fairly steady over the last five years with no changes in pricing policy, profitability, goods/services provided or opening hours…………”  It was also recorded that “There were problems with thefts but not significant and wastage was no bigger problem than in other shops.”   It was ascertained by Mr Cunninham at that meeting that PAYE was not operated and forms P46 were not completed; also that no adjustment had been made in the accounts for “own goods”. 

(8)	Whilst at the shop on 10 May 2005, Mr Cunningham observed that few of the items for sale were individually marked and that there was no sign of any promotional discounts.   In the limited time available, he noted the sale price of 22 items.    

(9) Goods were purchased with cash from the following cash and carry stores –                        Booker Cash & Carry
                Bateleys plc
                Costco Wholesale UK Ltd
           United Wholesale Grocers Ltd 
  The Appellants provided HMRC with mandates which enabled them to approach each of these suppliers.     On the basis of the information obtained from suppliers, an analysis was prepared by HMRC and a summary of the same showed purchases totalling £62,560.71 which did not appear in the Appellants’ records for the relevant year.   This summary was sent to Letham & Co on 15 June 2005.

(10)  On 2 September 2005, Mr Cunningham wrote to Letham & Co requesting purchase invoices for April 2005 in connection with his review of selling prices which he had noted on his visit to the shop, and the source of various deposits to three bank accounts.   This information was not supplied and on 3 October 2005, HMRC issued a formal notice under Section 19A Taxes Management Act 1970.  A partial response was contained in a letter from Letham & Co dated 10 October 2005.

(11)   Mr Cunningham had a further meeting with Mr Nazir and Mr Letham of Letham & Co on 15 December 2005.   At that meeting, Mr Cunningham handed over a form “Statement of Assets and Liabilities” for completion.  Mr Nazir admitted that there had been a suppression of purchases but not at the level indicated by Mr Cunningham.   Mr Nazir also admitted that there had been suppressed sales of between £500 and £700 per week. 

(12)   Shipleys Tax Consulting (“Shipleys”) wrote to HMRC on 5 September 2006 intimating that they had been appointed by the Appellants to represent them in the continuing enquiry.

(13)   On 26 September 2006, Mr Cunningham wrote to Shipleys with a copy of HMRC working papers and a “business model” which was the basis for additional profits being added for the accounting year to 30 June 2002.   Mr Cunningham also sent to both Mr Nizar and Shipleys, a summary of intended revisions to the Appellants’ self assessments to each of the years of assessment 1996-97 to 2004-2005.   This summary showed an increase of £33,000 in each of the tax years 2002-03, 2003-04 and 2004-05.   An amount of £2,000 each year had been deducted to reach the proposed increase for earlier years.

(14)   On 6 October 2006, Mr Cunningham wrote to both the Appellants and Shipleys with intimation of amendments and penalties in the figures set out in paragraph 2 above.   Shipleys intimated a formal appeal.

(15)   The Appeal was set down for hearing before General Commissioners on 25 March 2009.  Written submissions were made on behalf of the Appellants.   The Commissioners adjourned the hearing to enable HMRC to consider these submissions.    The present Tribunal is the successor to these Commissioners.

(16)   K A Khokhar, sometime of K A Khokhar & Co Ltd, and now of Khokhar, Moughal & Jackson LLP succeeded Shipleys in representing the Appellants.

(17)   Having reviewed all the documents lodged for the Appellants and the submissions made on their behalf, Mr Cunningham wrote to Mr Khokhar on 2 September 2009 with details of a mark up exercise based upon both returned purchases and purchases which had apparently been omitted.  This exercise brought out an expected profit of £106,651.55, an increase of £35,453.55 compared to the corresponding figure as shown in the Appellants’ return for the year to 30 June 2002.     In response to Mr Khokhar’s previous representations, the figure of £35,453.55 was modified to £26,682.03 by the deduction of £2,000 for wastage goods, £1,300 for newspapers and magazines and £5481.52 for shrinkage.

(18)   The exercise was continued, rounding down to increase to £26,000, applying the same figure for the two successive years and making successive reductions of £2,000 in preceding years.    The following table sets out the complete figures, the apportionment between the respective partners and the relative tax liabilities, also the aggregate of the revised penalty applicable to each partner.  These figures represent HMRC’s final assessment of the Appellants’ profits for the years 1996-97 to 2004-05, based on the documents produced and the information provided by the Appellants and their successive accountants.

RETURN 	ADDITIONS	REVISED	MR NAZIR	MR NAZIR	MRS NAZIR	MRS NAZIR	TOTAL	ADDITIONAL	
YEAR		PROFITS	PROFITS	DUTY	PROFITS	DUTY	REVISED	DUTY	
							DUTY		
1996-67	£12,896	£24,022	£12,011	£1,864.76	£12,011	£2,132.10	£3,996.86	£3,629.08	
1997-98	£16,600	£29,958	£14,979	£3,614.97	£14,979	£2,869.96	£6,484.93	£5,749.70	
1998-99	£18,600	£33,856	£16,928	£4,086.00	£16,928	£3,376.67	£7,462.67	£6,362.13	
1999-2000	£20,600	£34,862	£17,431	£4,141.42	£17,431	£3,411.14	£7,552.56	£6,853.30	
2000-01	£22,600	£44,352	£22,176	£6,758.81	£22,176	£4,976.99	£11,735.80	£8,335.82	
2001-02	£24,600	£54,903	£27,452	£8,637.97	£27,452	£6,420.33	£15,058.30	£9,348.29	
2002-03	£26,600	£55,865	£27,933	£8,814.18	£27,933	£6,531.82	£15,346.00	£10,108.29	
2003-04	£26,600	£48,273	£24,137	£7,593.48	£24,137	£5,621.40	£13,214.88	£9,952.37	
2004-05	£26,600	£68,461	£34,231	£11,781.39	£34,231	£8,427.63	£20,209.02	£10,022.94	

Penalties
          Mr Nazir     £16,842
                   Mrs Nazir    £11,302

Submissions

6       Reference was made to the following authorities   
Haythornthwaite & Sons Ltd v Kelly 11 TC 657
Norman v Golder 26 TC 293
Regina v General Commissioners of Incom Tax for Havering 49 TC 161
Nicholson v Morris 51 TC 95
Jonas v Bamford 51 TC 1
Hurley v Taylor 71 TC 268
Rouf v Commissioners for HMRC Court of Session 10 February 2009    unreported

7.	In his submission to the Tribunal, Mr Gormley referred to s 36 of TMA which states that
“(1) An assessment on any person …… for the purpose of making
       good to the Crown a loss of income tax ……. attributable to his fraudulent or negligent conduct or the fraudulent or negligent conduct of a person acting on his behalf may be made at any time not later than 20 years after the 31st January next following the year of assessment to which it relates.”
Also to s 95A of TMA which provides that
“This section applies where, in the case of a trade, profession or business carried on by two or more persons in partnership -
(a) a partner (the representative partner) -
(i) delivers an incorrect partnership return, or
(ii) makes any incorrect statement or declaration in connection with a partnership return, or
(iii) submits to an officer of the Board any incorrect accounts in connection with such a return, and
(b) either he does so fraudulently or negligently, or his doing so is attributable to fraudulent or negligent conduct on the part of a relevant partner.
And the authority of Russell LJ in Regina v Havering Commissioners (ex parte Knight) 49 TC 161 at 175 to the effect that wilful default amounts to negligence.

8	The Tribunal was also referred to s 12B(1) of TMA which provides that
“Any person who may be required ……… to make and deliver a return for a year of assessment or other period shall -
(a)	keep all such records as may be requisite for the purpose of enabling him to make and deliver a correct and complete return for the year or period; and
(b) preserve those records until the end of the relevant day, that is to say, the day mentioned in subsection (2) below or, where a return is required by a notice given on or before that day. whichever of that day and the following is the latest, namely
(i) where enquiries into the return are made by an officer of the Board, the day on which, by virtue of section 28A(1) or 28B(1) of this Act, those enquiries are completed; and
(ii) where no enquiries into the return are so made, the day on which such an officer no longer has power to make such enquiries”.
Mr Gormley pointed out that the Appellants had failed to maintain any  record of sales, wages, creditors, stock, personal drawings, expenses and “own goods”.
He also observed that the Appellants had failed to operate PAYE, that they had not provided a P46 or deducted basic tax from any employee.     The Appellants on their own admission had suppressed sales of between £500 and £700 each week; and in the particular year, supplies amounting to £62,650 had been omitted from their records.    Mr Gormley contended that the Appellants’ failure to maintain complete and reliable records amounted to negligence.

9.       Founding on the provisions of s 50(6) of TMA and the dicta of Lord Hanworth M R in Haythornthwaite & Sons Ltd v Kelly 11 TC 657 at 667 and Walton J in Nicholson v Morris 51 TC 95 at 110, Mr Gormley submitted that the onus was on the Appellants.     He also added, on the authority of Park J in Hurley v Taylor 71 TC 268 at 286 that if the Tribunal is uncertain where the truth lies, the appeal should be dismissed.

10.     The onus is ordinarily discharged by the information in the taxpayer’s returns, but in this case, that evidence had been discredited and the business model prepared by HMRC had been used as the yardstick.   It was acknowledged that information from only two suppliers had been used, but it had been open to the Appellants to provide further evidence.

11      The business model had brought out a profit figure for the trading year to 30 June 2002 and Mr Gormley founded upon the dicta of Walton J in Jonas v Bamford 51 TC 1at 25 for the presumption of continuity, and that the onus was on the Appellants to establish any change.

12      Mr Nazir, who had been present throughout the hearing, had not given evidence to the Tribunal.   His previous accountant had to make estimates when preparing the accounts and it was acknowledged by Mr Nazir that drawings of £500 to £700 per week had not been recorded.   On the basis of these and other considerations, the Appellants had failed to discharge the onus which was upon them.

13      Mr Gormley also pointed out that where there has been an incorrect partnership return, s 95A(2) of TMA provides that HMRC are entitled to look to each partner for up to 100% of the tax undercharged as penalty.   In assessing the penalty for any particular case, it is the ordinary practice of HMRC to make a reduction of up to 30% in relation to Disclosure, 40% in regard to Co-operation and 40% depending on the Seriousness of the matter.     In this case, HMRC had noted a measure of disclosure and had allowed 10% for this element.   There had also been a considerable degree of co-operation except that HMRC had reason to resort to a Section 19 Notice, and therefore a rebate of 30% had been allowed for disclosure.   HMRC had taken into account that there had been suppression of both purchases and sales, and it was with this background that 20% had been allowed - a total rebate of 60% leaving a penalty of 40%.

14      In reply, Mr Jackson pointed to the inadequate sample selected by Mr Cunningham on which to base his mark-up exercise.   He claimed that there had been promotional items, that there were thefts from the shop, wastage and magazines out of date.       He submitted statements bringing out a mark up of 15.82% as contrasted with the figure of 22.48% brought out by HMRC and he produced a revised Trading and Profit and Loss for the year to 30 June 2002 showing an increase of £26,000 in Sales and a corresponding increase of £26,000 in the “Cost of Sales” and bringing out a net income of £49,525, almost identical to the net figure in the Appellants’ return for the year 2002-03.   Mr Jackson also referred to a capital statement which had been prepared by HMRC and he submitted that if the apparently missing cash for each of the years from 1997 to 2004 were aggregated, it would produce an absurd figure. 

Reasons

15     Under the provisions of s 30B(1) and and s 28B of TMA,  HMRC had made amendments to the Appellants’ self assessments for each of the tax years 1996-97 to 2004-05 inclusive.    These amendments had been the subject of appeal and the Tribunal was directed to s 50(7) of TMA which provides -
“If, on appeal, it appears to the [Tribunal]
……..
(b) that any amounts contained in a partnership statement which has been amended under section 28B(3) or 30B(1) of this Act  are insufficient; ……….
The assessment……..shall be increased accordingly.”
The initial question before the Tribunal was therefore whether the amounts contained in the Appellants’ partnership statements were insufficient.

16     HMRC’s enquiry was into the Appellants’ return for the year 2002-03, the information for which was taken from the Appellants’ accounts for the year to 30 June 2002.  At an early stage of the enquiry, it became evident that the Appellants were unable to produce any written record of wages, sales, stock and trade creditors, or personal drawings.    The Tribunal finds that the Appellants were accordingly in breach of s 12B(1) of TMA which requires a taxpayer to “keep all such records as may be requisite for the purpose of enabling him to make and deliver a correct and complete return”.

17     The primary documents before the Tribunal were limited to a number of invoices and bank statements.   The Tribunal also had the whole  correspondence between HMRC and the successive accountants employed by the Appellants, a record of the various meetings and HMRC’s working papers resulting in a business model in its final form.   The Tribunal also had working papers prepared for the Appellants with a revised Trading and Profit and Loss for the year to 30 June 2002.     Mr Cunningham, who had been involved throughout the period of the enquiry, gave evidence from which it was apparent that he had made a diligent effort to determine a fair figure for the Appellants’ profits, and had taken into account all the various representations which had been made on behalf of the Appellants. He also referred to a Capital Statement in support of his figures.   Mr Khokhar also gave evidence, but as he had only become involved at a later stage, his evidence was confined to criticising Mr Cunningham for only taking 22 items for the purpose of ascertaining sale prices, and in only using the records provided by two of the Appellants’ suppliers; also for certain apparent errors in the Capital statement and in overstating the overall profit margin. Significantly, Mr Nizar, who was present throughout the proceedings, did not give evidence; and although a Statement of Mr Nizar appeared among the documents produced, neither Mr Gormley or the members of the Tribunal had the opportunity of putting questions to Mr Nizar and testing the accuracy of this Statement or the other facts which were put forward on behalf of the Appellants.   

18     In an ideal world, Mr Cunningham might have obtained more background information when he visited the Appellants’ shop on 10 May 2005; but is accepted that time was limited on that day and Mr Cunningham wished to speak at length with Mr Nizar and his then accountant.   It was apparent to the Tribunal that Mr Cunningham used his best endeavours to ascertain a near accurate estimate of the Appellants’ profit for the year to 30 June 2002, when he wrote on 6 October with an amendment to the Appellants’ self assessment for the tax year 2002-03. That amendment would have resulted in an increase of £33,000.  The Tribunal has also noted that Mr Cunningham subsequently took into account all the additional information supplied on behalf of the Appellants, resulting in a profit for the year to 30 June 2002 of £55,865, an increase of £26,600.

19     At the meeting on 15 December 2005, Mr Nizar had admitted that there had been suppressed sales of between £500 and £700 each week.   Latterly, it was not disputed that there had been unrecorded purchases of around £62,500 in the relevant year.   The revised Trading and Profit and Loss for the year to 30 June 2002 which was latterly produced for the Appellants purported to show the unrecorded purchases of around £62,500 being offset by unrecorded sales of the same figure – leaving the net income in the same region of £49,500.   The Tribunal did not find this to be credible.    In addressing the Tribunal, Mr Jackson also made radical revisals to the Capital Statement, but in the absence of Mr Nizar’s own evidence, the Tribunal did not find any certainty in relation to the capital position.

20      The onus is on the Appellants to disprove the figures put forward by HMRC.     For the reasons set out in the preceding paragraph, the Tribunal finds that the Appellants have failed to discharge that onus and accordingly a revised profit of £55,865 for the year to 30 June 2002 is accepted.

21	The Appellants had commenced business in June 1996, and at an early stage of the enquiry, it was acknowledged by the Appellants that their business has been fairly steady over the last five years with no changes in pricing policy, profitability, goods/services provided or opening hours.   It was therefore reasonable for HMRC to adopt the revised profit for the year to 30 June 2002 as the profit for the two following accounting years; also to use the revised profit for the year to 30 June 2002 as a basis for the revised profit in earlier years.   Mr Gormley explained that rather than make an adjustment based on RPI, he had deducted £2,000 for each year prior to 2002, a calculation which was more favourable to the Appellants.   In addressing the Tribunal, Mr Jackson did not put forward any other basis for ascertaining a revised profit figure for the other years under review, and the Tribunal therefore accepts as reasonable the method by which HMRC have computed the revised profit for the years 1996-97 to 2001-02 and 2003-04 and 2004-05, and determines the revised profit for each year as follows – 
         For the year ended 5 April 1997                        £24,022 
For the year ended 5 April 1998                        £29,958 
For the year ended 5 April 1999                        £33,856 
For the year ended 5 April 2000                        £34,862 
For the year ended 5 April 2001                        £44,352 
For the year ended 5 April 2002                        £54,903 
For the year ended 5 April 2003                        £55,865 
For the year ended 5 April 2004                        £48,273 
For the year ended 5 April 2005                        £68,461

22      For the reasons given by Mr Gormley in his submission, the Tribunal accepts that the Appellants’ failure to maintain complete and reliable records amounted to negligence; and that each of the partners are accordingly liable to a penalty under the provisions of s 95A(2) of TMA.   Mr Jackson did not make any submission in regard to the level of penalty that might be appropriate.   Having regard to the whole circumstances, the Tribunal accepts that HMRC proceeded in a fair and reasonable manner, and that the overall penalty of £28,144 representing 40% of the additional tax of £70,361 is appropriate.   The partners’ liability to penalties is therefore as follows -
         Mr Nazir      £16,842.          
           Mrs Nazir     £11,302.     

MR JOHN M BARTON, WS
TRIBUNAL JUDGE

RELEASE DATE:  17 DECEMBER 2009