[2010] UKFTT 92 (TC)

			

TC00403

Appeal number: SC/3007/2008

Income tax-Sch D-computation of profits-section 42 FA 1998-generally accepted accounting practice-whether accounts prepared in accordance with accounting standards
Income tax–section 29 TMA 1970-discovery-whether negligent conduct if accounts not prepared in accordance with generally accepted accounting practice

LONDON TRIBUNAL CENTRE

Appellant

LESLIE SMITH

	- and -

Respondents

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	

			Tribunal:	CHARLES HELLIER (Chairman)
					JOHN CHERRY

Sitting in public in London on 30 November, and 1, 2 and 3 December 2009

David Southern, for the Appellant 

Barry Williams of Local Compliance, Appeals and Review Unit, for the Respondents

© CROWN COPYRIGHT 2010

DECISION
1. Introduction
1.	These appeals relate to the accounting practice adopted in drawing up the appellant’s trading accounts. HMRC say that it was wrong. As a result they say that the taxable profits of the business were misstated for a number of years.
2.	HMRC say that, in adopting this practice, the appellant's accountants were negligent and accordingly that they are entitled to raise assessments outside the usual limits.
3.	Terminology: throughout this decision we refer to the year ending on 5 April 2001 as the "2001" year rather than the 2000/2001 year, and similarly for other years.
4.	On 14 January 2003 HMRC opened an enquiry into the appellant's 2001 tax return. This enquiry was opened within the time limits in section 9A TMA.
5.	On 21 October 2004 HMRC wrote to the appellant indicating that they intended to enquire into the 2002 return. This was not an enquiry which could be pursued under section 9A TMA because under section 9A(2) such an enquiry had to be opened before 1 February 2004.
6.	On 13 December 2005 HMRC issued an assessment for 2002 in reliance on section 29 TMA assessing additional profits of £200,000.
7.	On 2 February 2006 HMRC issued a closure notice in respect of 2001. This amended the 2001 return to reduce the assessable profits of that year by £105,483.
8.	Also on 2 February 2006 HMRC issued assessments in respect of the years 1998, 1999, and 2000. These assessments were made in reliance on section 29 TMA, and, for 1998 and 1999 HMRC say they could be made outside the six-year time limit imposed by section 34 TMA by reason of section 36 TMA. The operation of section 29 and section 36 was dependent upon there having been negligent conduct of the taxpayer or a person acting on his behalf. HMRC’s contention is that the actions of the appellant's accountants constituted negligent conduct.
9.	On 26 February 2008 further assessments were made in respect of the 1994 1995 and 1996 years, again in reliance upon sections 29 and 36. In those years the appellant's accountants were different from those who had acted for him in the later years.
10.	On 30 April 2007 HMRC also issued a penalty determination in reliance on section 95 TMA for each of the years 1998 to 2002, on the basis that Mr Smith had negligently delivered incorrect returns. These determinations were withdrawn at the start of the hearing before us. Mr Williams said that the respondents accepted that even if Mr Smith's accountants had been negligent, as they alleged, such negligence did not translate into the negligence of the taxpayer which was necessary for such a penalty and negligence by Mr Smith himself was not alleged.
2. The Law
11.	Section 42 FA 1998 provides in relation to the years 1998 to 2002 that:
"(1) For the purposes of Case I or II of Schedule D, the profits of a trade, profession or vocation must be computed on an accounting basis which gives a true and fair view subject to any adjustment required or authorised by law in computing profits for those purposes."
12.	Subsection (3) provided that section 42 applied to periods of account beginning after 6 April 1999. By section 45 FA 1998 a period of account was any period for which accounts were drawn up. Mr Smith's accounts were drawn up to 5 April from 31 March 1998 onwards. Section 42 therefore applied to the computation of Mr Smith's profits in respect of the years ending 5 April 2001 onwards (his year to 5 April 2000 having begun on, and not after 6 April 1999).
13.	After 2002 section 42 was amended so that it required computation in accordance with "generally accepted accounting practice" rather than to give a true and fair view. Dr Southern accepted that for present purposes there was little difference between the tests given the definition of generally accepted accounting practice in section 836A TA 1988.
14.	Before FA 1998 the case law made it clear that profits and losses of a business for tax purposes were those determined on "the correct principles of the prevailing system of commercial accounting" (see Pennycuick V-C in Odeon Associated Theatres v Jones 48 TC 257 at 273, and Bingham MR in Gallagher v Jones 1990 3S TC 537 at 554). In most cases it seems to us that there will be little or no difference between profits ascertained in accordance with the FA 1998 standard and that previously applicable. That is because (as we later find) accounts will not show a true and fair view unless they are prepared on the principles of the prevailing system of commercial accountancy. There may, however, have been cases where there were two or more ways in which a particular item could properly be accounted for in accordance with such a system: in such cases the courts might, before FA 1998, have been able to determine which was the "correct" principle to be applied. But it seems to us that the scope for such interference by the courts after FA 1998 is more restricted. After FA 1998 if “an accounting basis” has been used which produces accounts which give a true and fair view, such a basis may be thrown out only by an "adjustment required or authorised by law", and such words do not in our minds encompass judicial selection of one of a number of properly applicable bases each of which are found to produce a true and fair view.
15.	Although, for reasons which will follow, it seems to us that in Mr Smith's case the "correct principles of prevailing commercial accountancy" relevant to the determination of his true profits in the years up to 2001 were the same as those which were required to be applied to produce accounts which gave a true and fair view in the years after 2001, we set out briefly below our conclusions on the cases cited to as. If we are wrong in our appreciation of the effect of section 42 FA 1998, and the principles of those cases are applicable to the computation of Mr Smith’s taxable profits after the coming into effect of section 42, this summary also guides our steps in relation to that later period:
a.	there is no judge-made rule which overrides the application of a generally accepted rule of commercial accounting which (a) applies to the situation in question (b) is not one of two or more rules applicable to the situation in question, and (c) is not shown to be inconsistent with the true facts or otherwise inapt to determine the true profits of the business (see Bingham MR in Gallagher at 556);
b.	where there are two or more accepted rules or methods applicable to the situation, the courts (or tribunal) may determine which is the best, correct or proper method (Johnstone v Britannia Airways Ltd [ 1994] STC 763 -- see in particular page 783, and Odeon at 273G). This principle seems to us to explain the judgement of the House of Lords in Willingdale v International Commercial Bank Ltd 52 TC 242 in which the method on which the bank’s accounts were drawn up was not the only method which was in accordance with sound principles of commercial accountancy (see Lord Fraser at 272B, and Lord Keith at 280B) with the result that the Courts were able to chose the alternative, and in their view, better method;
c.	adjustments must be made to those profits as specifically required by statute.
16.	Dr Southern drew our attention to the following cases.
17.	In Johnson v WS Try Ltd 27 TC 167, Lord Greene said in 1946 at page 181:
"a trader is not entitled to say: you must not tax me on these debts because I have not yet received payment. You can only tax me when I have received payment. The Legislature says: no, it is ordinary commercial practice in calculating your profits to bring in debts which are owing to you in connection with the business: therefore you are bound to bring in debts which are owed to you on the same basis as if they were receipts, ... but I venture to think in one sense that it is an anomaly, because it is a departure from what I have always understood to be the fundamental conception of income tax legislation -- that you should ascertain your profits in reference to your receipts. The reason why that exception is broadly in is that it is in accordance with ordinary commercial practice to treat debts in that way."
And at page 182: “ in the case of items which are broadly analogous to debts, it no doubt would be better finance not to bring them into account as if they were trade debts, but I can see nothing to prevent a Board of Directors making a fair estimate of what they are going to receive under an undoubted right which has accrued. That would be brought in as an estimate, though I do not suppose wise directors would bring it into account unless there was some compelling reason”
and at page 185: "...  money must not be taken as being, so to speak, in hand until all the conditions necessary to earn it have been fulfilled. Delivery was a necessary condition for the appellant company to … be paid. It was not until the gear was delivered by the subcontractors that  the right to payment became fixed, and, therefore a matter which could be treated in the ordinary way as a trade book debt.
18.	JP Hall & Co. Ltd V Commissioners of Inland Revenue 12 TC 382 concerned whether profit should be taken on the delivery of gear or in the period in which the contracts were made for its delivery. Lord Sterndale MR said:  “... the short and simple answer ... is that his profits were neither ascertained nor made at the time  that these two contracts were concluded. There are any number of contingencies that might have happened, by which the profit would not have turned out what it appeared on the face of it when the contracts were made. Any number of complications might have occurred that might have caused quite a different result to have accrued from these two contracts. I think that the Respondents did what was right in the way they carried his profits into their account: it is the ordinary commercial way of making up accounts, and in my opinion it is the right way, and the other would be the wrong way because the other would be carrying into the accounts as profits of one year the estimated profits  which would accrue in subsequent years that might perhaps never be made at all."
19.	It seems to us that these judgements evince no principle relevant to the recognition of revenue or assets in Mr Smith's business which overrode the principles of prevailing commercial accountancy. Indeed in each case the court was applying the principles of commercial accountancy prevailing at the relevant time.
20.	In the remainder of this decision we used the phrase "generally accepted accounting practice" or GAAP to mean the generally accepted rules of prevailing commercial accountancy practice. 
21.	Section 29 TMA 1970 provides so far as is relevant:
“(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 ...[ has] not been assessed or
(b) that an assessment to tax is or has become insufficient ...
the officer...may, subject to (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his opinion to be charged in order to make good to the Crown the loss of tax.
“…(3) where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above --
(a) in respect of the year of assessment mentioned in that subsection; and
(b) in the same capacity as that in which he made and delivers the return,
unless one of the two conditions mentioned below is fulfilled.

“(4) The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf.”
The second condition is not relevant to this appeal.
22.	Section 34 TMA provides that no assessment may be made later than five years after 31 January next following the year of assessment to which it relates. But that section is subject to later provisions of the Act. Included in those provisions is section 36 which provides 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 31 January next following the year of assessment to which it relates.”
negligent conduct
23.	No direct authority was offered to us on the meaning of these words in the context of ss 29 or 36. Before 1989 the statute permitted extended assessment where there was fraud, wilful default or neglect. The change from "neglect" to "negligent conduct" may be significant. Neglect may be taken to refer only to     an act of omission; negligent conduct may  also embrace an undesired action.
24.	Normally “negligent conduct” may be abbreviated to "negligence". But the draughtsman has not used the word "negligence”. That suggests to us that the concept is not limited to tortious negligence and is not intended to be a term of art. Instead the words should be taken to have their ordinary meaning. The Shorter Oxford Dictionary defines negligent as "inattentive to what ought to be done; failing to take proper necessary or reasonable care".
25.	We were referred to the dictum of Alderson B in Blyth v Birmingham Water Works Co (1856) 11Ex 781: "negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do."
26.	It seems to us that a person who acts for another person as an accountant and tax adviser should reasonably be expected to show the normal competence associated with the proper discharge of the duties of an accountant and tax adviser. The failure to do what an ordinarily competent adviser would do is failure to do what ought to be done. The failure to do those things which a reasonable man guided by the considerations which would ordinarily be expected to arise from such a relationship would do, would fall within Alderson B’s dictum. Such a failure seems to us to be  a failure to take proper or reasonable care. It would thus be negligent conduct on either of the formulations above. This is not the same as saying that because a person is a qualified accountant he is to be expected to display by virtue of his training and qualification a greater standard of care; it is saying that because of the role he occupies he should reasonably be expected to display the kind of care which a person in that role would ordinarily display.
27.	If a taxpayer asks his teenage son quickly to run up some accounts from the cash book in return for extra pocket money of £20, it would not be reasonable to expect compliance with GAAP (and the failure to submit proper accounts would be down to the negligent conduct of the taxpayer in selecting and instructing the preparer). But a professional accountant  engaged to prepare accounts and submit tax computations would in our view reasonably be expected, because of the circumstances of his engagement, to prepare and submit accounts which complied with section 42 FA 1998 -- accounts which showed a true and fair view. A failure to submit such accounts would therefore be negligent conduct in the absence of facts which took that relationship out of the ordinary.
28.	It seemed to us that there might be another way of putting this. We had no evidence about the contract between Mr Smith and his accountants Maynard Heady, but it is likely that contract contained express or implied terms obliging his accountants to take reasonable care to ensure that Mr Smith's accounts as submitted to HMRC were such as to comply with section 42 -- in other words to ensure that they showed a true and fair view. The breach of a contractual duty so to do would in our view be properly termed negligent conduct whether or not it was a breach of any wider duty. That is because it will be the failure to do something which a reasonable man in the circumstances of that contract would do.
29.	Dr Southern says that the standard against which conduct must be judged is that of the reasonable man, not that of the reasonable chartered accountant. Negligence, he says, in this context is not adopting an accounting practice on which opinions may differ, but making an obvious and significant arithmetical error in the accounts or adopting an accounting policy wholly outside the realm of commercially acceptable accounting practice. It seems to us that, attractively as this submission is put, it elides two separate questions: the first is what is the nature of what a reasonable man in these circumstances would have done, and the second is whether it was done. The answer to the first is governed by the circumstances in which the activity is performed. In our view where a professional firm is formally engaged then unless there are special circumstances (such perhaps as an instruction to do it quickly and on the cheap) the reasonable man would have taken care to submit accounts prepared under GAAP which showed a true and fair view, and the answer to the second depends upon whether or not they did show such a view: if they contained a significant arithmetical error or if they were prepared on the basis of accounting policies or practice which were outside the realm of commercially accepted accounting practice they would not  show a true and fair view. If they were prepared on the basis of an unusual accounting practice but one within the realm of what was generally accepted they would show a true and fair view. 
discover
30.	We were referred to Lord Denning's dictum in Parkin v Cattell (1971) 48 TC 462 at 474D:
a.	"the word "discover" simply means "find out". ... an Inspector of taxes "discovers" (that income has not been assessed when it should have been), not only when he finds out new facts which were not known to him or his predecessor, but also when he finds out that he or his predecessor drew a wrong inference from the facts which were then known to him: and further, when he finds out that he or his predecessor got the law wrong and did not assess the income when it ought to have been."
31.	In Hankinson v HMRC TC00319, the tribunal approved the test for discovery propounded by the Special Commissioner  in Corbally-Stourton v HMRC  [2008] UKSPC SPC00692, saying: “Thus we consider the relevant test to be that the officer must have evidential basis beyond mere suspicion in order to arrive honestly at the conclusion that, on balance, there is an insufficiency. The test is subjective, in that the officer must have satisfied himself that this is the appropriate conclusion.” The cases show that that conclusion must be one which newly arises. 

3. The Evidence And Our Findings of Fact
32.	We heard oral evidence from Mr Smith, Gary Tidbury FCA, of Maynard Heady, Mr Smith's accountants  for the years 1998 to 2002, Lee Elsworth FCCA, a partner in the accountants Tiffin Green, who gave expert accounting evidence for the appellant, Robert Cotton, the officer from HMRC who dealt with Mr Smith and had made the assessments, Mark Crawford from HMRC who gave evidence in relation to the operation of VAT self billing schemes, and Anil Mathew FCCA who gave expert accounting evidence on behalf of HMRC.
33.	We deal with the evidence in relation to whether Mr Cotton made a discovery separately in the section relating to that issue.
(A) Mr Smith's business
34.	In all the relevant years Mr Smith traded as a contractor undertaking ground works for builders and construction companies. This work included: clearing a site, digging trenches with drainage services and foundations, laying foundations, putting in ducts, laying flagging and kerbstones. He employed workers directly, used equipment within his own control, and also used the services of subcontractors.
35.	The main costs of his business were labour (employees and subcontractors), materials, and plant and equipment. He worked mainly for the following companies: McLean Homes, McCarthy and Stone, Mowlem, Haynes and Smith, Chelsteen Homes, and Denne Group.
36.	The contracts were generally fixed price contracts for carrying out works over a period of between a month and a year. The typical length of a contract was 2 to 3 months. If the contract was for a longer period it would consist of a number of phases.
37.	Mr Smith and his staff prepared the relevant paperwork which was then given to his accountants to prepare annual accounts and tax returns. Mr Smith used Maynard Heady from 1997 onwards for this work. Mr Tidbury was the partner at that firm responsible for Mr Smith. 
38.	Mr Smith has a good compliance record on matters relating to PAYE, VAT, the construction industry scheme, the construction industry training board levy and health and safety. He has always had public liability insurance. No complaint has been made as to his general compliance.
39.	Accounts for his business were drawn up to 5 April in each year from 5 April 1998 onwards (but up to 31 March in the years prior to 1998). The turnover shown in his accounts  for the years ending 1998 to 2002 varied between £770,000 and £1,407,000.
40.	The normal progress of a contract from initial agreement to payment was as follows:
a.	a framework or master contract would be agreed with the customer contractor. We discuss an example of such a contract in the following section;
b.	there would be a tender for particular works;
c.	an order would be placed by the contractor. Mr Smith employed his own quantity surveyor who would agree the terms of the tender at the outset;
d.	work would be performed;
e.	at intervals, or at the end of the contract, an application for payment would be made. The application would be prepared on the basis of Mr Smith's quantity surveyor’s assessment. The quantity surveyor would visit the site every month. He would provide details which were incorporated into a detailed application for payment made by Mr Smith's staff;
f.	the contractor's quantity surveyor would then make a visit to the site within a week or so of the request for payment;
g.	the contractor would then issue a valuation certificate based upon measurements made by its quantity surveyor. In some cases there would be differences between the value of work determined in that valuation certificate and that in Mr Smith's application  for payment. We discuss the extent of those differences below;
h.	payment would generally be made some 30 days after the application for payment or perhaps two weeks or so after the valuation certificate was issued.
(B) Contract Terms
41.	Mr Smith provided us with copies of two subcontract agreements with McCarthy and Stone (of October 2001 and February 2002) which he described as being typical. Clause 15 of those contracts dealt with payment. Relevantly that clause provided:
"15.1 Applications for payment shall be submitted by the Subcontractor at the end of the period of time stated in Appendix A ["period of time for interim applications payment: monthly interim valuations with payment being due 30 days thereafter...”]...The value of work done shall be calculated in accordance with the rates and prices, if any, specified in this subcontract or if there are no such rates by reference to [a fixed sum specified in the contract]
"15.2.1 payments for the work carried out in accordance with this contract shall be made to the Subcontractor as soon as possible but in any event the final day  for payment shall not be later than 28 days after the receipt of any application for payment submitted in accordance with clause 15.1. Interim payments on account are subject to any adjustment in accordance with the terms of this contract ...
“15.2.2 The application  for payment will be assessed by the Contractor within 7 days of receipt of the application. Within 5 days thereafter the Subcontractor will be notified by the Contractor of the amount due for payment.
“15.2.3 Details of the amount (if any) of the payment made or proposed to be made together with the basis upon which the amount was calculated will be given by notice within the period specified in clause 15.2.2. ..."
42.	The contracts provided for a retention generally of 5% for a period of 12 months. Mr Smith told us that the amount retained was generally paid in full within the next 12 months.
(C) Payment and Application for Payment
43.	Mr Smith told us that when an application for payment was made they generally knew what they would be paid. He said that they would expect to get what they had put in their application. He qualified that by saying that the amount was of course subject to what the contractor’s quantity surveyor agreed. But the general impression he gave us was that they would expect little or no difference between the amount of the application and the amount assessed by the contractor’s quantity surveyor.
44.	We saw an example in relation to a Haynes and Smith contract in which there had been some adjustment made to the amount applied for. But the adjustments were small. They amounted to less than 2% of the total applied for.
45.	We were shown a statement of reconciliation from McLean Homes. This showed a reconciliation between the amount which Mr Smith had claimed (in what were described as “invoices") and the amount which was to be paid by McLean. It showed  four invoices which were under query. The records before us showed that one of these was paid in full. We were not persuaded that the other three had not been paid substantially in full.
46.	Overall we conclude that the sums requested in applications for payment were generally paid in full or in amounts which varied by only a few percent from the amounts claimed.

(D) VAT invoices
47.	Usually when a trader makes a VATable supply  he is required to issue a VAT invoice. Regulation 13 (3) of the VAT regulations 1995 also provides a mechanism under which the recipient of a VAT supply may provide to himself a VAT invoice. In order for such a document to be so treated it must have been provided pursuant to an agreement with the supplier which inter alia specifies that the supplier will not itself issue VAT invoices. Self billing arrangements of this form are common in the construction industry and are often used where the customer is in the best position to determine the quantity and value of the supply. Some of the agreements which Mr Smith had with his contractors (including the McCarthy and Stone agreement referred to above) applied these self billing rules. It also appeared that self billing invoices had been sent to Mr Smith by Mowlem.
48.	Regulation 13(4) also provides for an authenticated receipt procedure which is commonly used in the construction industry. Under this procedure a customer prepares a receipt containing all the information normally found in a VAT invoice. This is sent to the supplier, signed by the supplier and returned to the customer. The authenticated receipt becomes a VAT invoice when signed. Some of Mr Smith's contractors appeared to have operated this procedure.
49.	The self billing procedure played a role in the correspondence between the parties, and was suggested as support for ensuring consistency between the VAT records and the accounting/income tax records. However the VAT rules and procedures appear to us to have no relevance to the determination of the issues before us because we do not accept that VAT administrative treatment influenced generally accepted accounting practice.
(E) The accounting practice adopted. 
50.	The accounts before us contained no statement that they had been prepared otherwise than in accordance with the fundamental accounting concepts of SSAP2. 
(i) recognition of sales
51.	In preparing Mr Smith's accounts Mr Tidbury took the view that valuations made by Mr Smith's own quantity surveyors and incorporated into the  applications for payment could not be used as a basis  for recognising an asset  and income of the amount of such a valuation, because the amounts were not realised until they had been agreed by the customer’s quantity surveyors. Once a valuation certificate had been issued by the customer the income, and asset, were recognised.
52.	Mr Tidbury adopted this practice both where the contract was subject to the VAT self billing rules and where it was not. That was because in each case the customer or its quantity surveyor had to agree the valuations before any amount became due.
53.	We find that the accounts for the years 1998 to 2002 were prepared on this basis save in relation to the matters discussed in (iii) below.
(ii) stock and work in progress
54.	For the years 1999 to 2002 with the exception of 2000, the figure included in the accounts was an estimate. This figure was £2,000, £2,500 or £3,000 depending upon the year. There was no evidence that it was carefully estimated so as to include the value of work in progress under contracts which had not been billed and it was clear that no comparison had been made between the costs incurred at the balance sheet date and the net realisable value of the work at that date. We discuss the position in relation to the year 2000 in the following section.
(iii) the year 2000: Stock and work in progress: £60,600.
55.	In the 2000 accounts the stock and work in progress is stated at £60,600. Mr Tidbury gave the following explanation of that figure:
"I did include work in progress for the year [2000] because prudence dictated it. A [customer’s] valuation certificate was issued on 11 April 2000 £177,600 with the previous certificate being £67,000. However I had been advised by Mr [Darren] Smith [Mr Smith’s son] that problems had arisen with this contract resulting in a £50,000 loss on the next valuation. The prudence concept means that losses should be recognised as soon as they become apparent. I took the view that in order to recognise this loss in the accounts of the [2000 year] we should reflect the fair value of the work done based on the next certificate by deducting the loss. Thus the calculation was:
valuation certificate		177,600
less previous certificate	 67,000
				110,600
less loss adjustment		(50,000)
				£60,600”
56.	Accordingly in the 2000 accounts the stock and work in progress figure represents work in progress  in respect of one contract only and represents the realisable value of the work done under that contract before the year-end determined by reference to post balance sheet events.
4. Discussion -- accounting policies
(A) general -- the proper approach.		
57.	Both members of the tribunal were chartered accountants. Mr Hellier had ceased to practice as such in the 1980s. Mr Cherry was still in practice. Although our experience and training illuminated the evidence before us, we relied on the evidence of the witnesses and the terms of the accounting standards in reaching our conclusions. We did not substitute our own understanding for that provided in the evidence before us.
58.	Each of the accountants who appeared before us accepted that it was mandatory to follow applicable published accounting standards in the preparation of accounts designed to give a true and fair view. It was clear to us that the accounting standards which were in force at any time formed the basis for generally accepted accounting practice at that time, and if the actual accounts prepared for an enterprise differed materially from accounts which had been prepared on the basis of those standards, then those actual accounts would not show a true and fair view unless there were exceptional circumstances justifying a departure from the standards in order to ensure the presentation of a true and fair view
59.	In relation to periods before the application of FA 1998, we find that it was generally accepted accounting practice to follow applicable published accounting standards unless there were exceptional circumstances justifying departure therefrom.
60.	We therefore start by considering the applicable accounting standards.
61.	SSAP 2 was in force from 1972 until it was withdrawn and replaced by FRS 18 from June 2001. To some extent also, as we shall explain, it was superseded by FRS 5 in September 1994. This SSAP set out four fundamental accounting concepts. But it did not require the use of those concepts; instead, if the accounts had been prepared on a basis which differed from those concepts, it required a clear statement to that effect (see para 17 of the standard). The two concepts particularly relevant to this appeal are these:
a.	the accruals concept, namely that revenue and costs are (i) recognised as they are earned or incurred not as money is received or paid, (ii) matched with one another so far as their relationship can be established, and (iii) dealt with in the profit and loss account of the period to which they relate. The implication of the accruals concept is that the profit and loss account reflects changes in the amount of net assets which arise out of transactions in the period. Thus revenue and profits are matched with the costs incurred in earning them.
b.	The prudence concept. This has two limbs:
i.	revenue and profits are not anticipated but are recognised by inclusion only when realised in the form either of cash or of other assets the cash realisation of which can be assessed with reasonable certainty; and
ii.	provision is made for all known liabilities.
62.	In addition we should note the consistency concept: that there is consistency in the treatment of like items within each accounting period and from one period to the next.
63.	FRS 5 applied from 22 September 1994. It applies to all transactions of an entity whose financial statements are intended to give a true and fair view (para 11). It requires that financial statements report the substance of transactions into which an entity is entered (para 14). Paragraph 40 indicates that the FRS extends to all kinds of transactions. Paragraph 16 provides that to determine the substance of a transaction it is necessary to identify whether it has given rise to new assets or liabilities. Paragraph 17 provides that evidence that an entity has rights or other access to benefits (and hence has an asset) is given if the entity is exposed to the risks inherent in the benefits taking into account the likelihood of those risks having a commercial affect in practice. Paragraph 20 provides that an item which meets the definition of an asset should be recognised in the balance sheet if there is sufficient evidence of the existence of the item and it can be measured with reasonable reliability. In this context we note in paragraph e of the Summary that "assets are, broadly, rights or other access to future economic benefits controlled by an entity ...". Paragraph 2 of the standard defines assets as "rights or other access to future economic benefits controlled by an entity as a result of past transactions or events".
64.	Appendix IV to FRS 18 deals with its development. In paragraph 8 it is explained that two of the concepts of SSAP 2 had a particularly prominent role in the FRS because they were part of the bedrock of accounting and hence critical to the selection of accounting policies. Those were the accruals concept and the going concern concept. It says "the accruals concept lies at the heart of the definition of assets, liabilities, gains, losses and changes to shareholders’ funds". Then in paragraph 9 it is said that "SSAP 2 explained that revenues and costs should be matched with one another so far as their relationship can be established or justifiably assumed and dealt with in the profit and loss account of the period to which they relate. The FRS takes a slightly different approach to the accruals concept. Rather than focusing on when a relationship can be established or justifiably assumed, it emphasises instead that the non-cash effects of transactions and other events should be reflected, as far as possible, in the financial statements for the accounting period in which they occur, and not, for example in the period in which any cash involved is received or paid. Together with the definitions of assets and liabilities ... this provides a discipline within which the matching process can operate while resulting in the simultaneous recognition of revenues and costs that result from the same transactions or events” (our italics). It then explains that  SSAP 2 did not require that financial statements be prepared in accordance with the going concern and accruals concepts whereas FRS 18 requires the use of the accruals basis (para 11).
65.	It is clear to us therefore that, save in exceptional circumstances, after 1994 accounts which were to show a true and fair view had to be prepared upon the accruals basis and that that basis required the recognition of assets (as access to future economic benefits controlled by the entity) where there was sufficient evidence of the existence of those assets and  they could be measured as  monetary amounts with sufficient reliability.
66.	In December 2003 an application note -- application note G (“AN G”) -- was added to FRS 5. It dealt with the recognition of revenue from the supply of goods or services. Paragraph G4 provided that a seller recognises revenue under an exchange transaction with a customer when it obtained the rights to consideration in exchange for its performance; at the same time it typically recognised a new asset, usually a debtor. Paragraph G6 dealt with the situation where a seller obtained the right to consideration when some but not all of its contractual obligations had been fulfilled. In those circumstances it was to recognise revenue to the extent that it had obtained the right to consideration through performance.
67.	We discuss below the reference the AN G makes to IAS 18 in relation to the recognition of income. 
68.	Dr Southern argues that until the publication of FRS 5, AN G there was a choice available in setting accounting policies in relation to these matters.
69.	SSAP 9 -- "Stocks and long-term contracts" applied to accounting periods beginning after 1 July 1988. It required the amount at which stocks were stated to be the lower of cost and net realisable value. Stocks for these purposes included "products and services in intermediate stages of completion" (para 16). It thus included work in progress. In determining cost, expenditure incurred in bringing the product or service to its present location and condition was required to be included in addition to direct labour, direct costs and subcontract costs and overheads. The standard also contained specific provision for long-term contracts. It provided that attributable profit should be recognised in the value of work in progress on such contracts. But the point we wish to emphasise here is that its provisions in relation to long-term contracts were in addition to the provision specifying the proper treatment of work in progress which was required to be accounted for at the lower of cost and net realisable value. 
70.	SSAP 17 applied from 1 September 1990. It dealt with events which occurred after the balance sheet date and before accounts were signed. It provided that accounts should be prepared on the basis of the conditions existing at the balance sheet date (para 21) but that certain post-balance sheet events could require changes in the amounts in the accounts. It distinguished between events which required the accounts to be adjusted and those which did not. An adjusting event was one which provided additional evidence of conditions existing at the balance sheet date (para 19). Two examples of adjusting events were given in the standard: the renegotiation of amounts owing by debtors or the insolvency of a debtor, and the receipt of proceeds of sales which gave evidence concerning the net realisable value of stocks. 
71.	FRS 18 was published in December 2000 and took effect for accounting periods ending after June 2001. It was thus applicable only to Mr Smith’s 2002 accounts. It replaced SSAP 2 from June 2001. Paragraph 14 required accounting policies to be consistent with the requirements of accounting standards. Paragraph 17 provided that "where it is necessary to choose between accounting policies that satisfy the conditions in paragraph 14, an entity should select whichever of those accounting policies is judged by the entity to be most appropriate to its particular circumstances of the purpose of giving a true and fair view". (Dr Southern notes that this leaves scope for informed accounting judgement, and we accept that scope for such judgement in appropriate circumstances was available before 2000 as well as afterwards.) Paragraphs 26 and 27 require the use of the accruals basis of accounting requiring the "non-cash effects of transactions ... to be reflected so far as possible in the financial statements for the accounting period in which they occur and not, for example, in the period in which any cash involved is received or paid ... the use of [the definitions in FRS 5] to determine items to be recognised in an entity's balance sheet is consistent with the accruals concept.”
72.	In March 2005 UITF abstract 40 was published. It dealt with revenue recognition and service contracts. Paragraph 6 explains that application note G of FRS 5 stated that a seller may obtain the rights to consideration when some but not all of its contractual obligations had been fulfilled. Paragraph 16 of the UITF abstract took the view that such contracts should be accounted for in accordance with the general principles. In that context the overriding consideration was whether the seller had performed or partially performed its contractual obligations. If it had performed some but not all it was required to recognise revenue to the extent that it had obtained a right to consideration through its performance. Revenue was thus to be recognised according to the substance of the seller's obligations under the contract. Paragraph 19 noted that where the substance of the contract was such that the right to consideration did not arise until the occurrence of a critical event, revenue was not to be recognised until that event occurs. But this only applied where the right to consideration was conditional or contingent on specified future events the outcome or occurrence of which was outside the control of the seller.
73.	There was nothing in the accounting standards before us which indicated that VAT billing procedure affected the recognition of assets or revenue, and we conclude that it did not. 
(B) The evidence from Mr Tidbury
74.	Mr Tidbury is a chartered accountant. He has some 50 clients in the construction industry and 30 years experience. He told us that there were special features of accounting in the construction industry.
75.	In essence Mr Tidbury told us that it was generally accepted within the accountancy profession that turnover in the construction industry should be based upon valuation certificates. A problem in this industry was the valuation of work done. In practice the only reliable basis was to use valuation certificates. Some businesses had good procedures and records: Mr Smith was unusual in that he used his own quantity surveyor to trigger his application for payment. But other businesses had less good records and procedures and simply sent unquantified requests for payment. The only reliable accounting basis across the industry was to recognise income on the basis of the customer’s valuation certificates. This practice was commonly used in the construction industry, and was applied consistently from year to year in preparing Mr Smith's accounts. Mr Tidbury said that the use of applications for payment would be a dangerous method to follow. The eventual payments might not follow the applications.
76.	We were not impressed by Mr Tidbury's evidence:
a.	in his witness statement Mr Tidbury speaks of SSAP 2 thus: "SSAP 2 deals with accounting policies and states that only profits realised at the balance sheet date should be recognised in the profit and loss account. A fundamental accounting concept is that prudence should be exercised when considering any items to be included in the accounts."
This is in our view an inadequate and somewhat misleading summary of the standard. First SSAP 2 does not itself prescribe the use of the fundamental concepts, merely that departures from them should be clearly stated. Second he gives no proper account of the accruals concept -- the need to recognise revenue and costs as earned or incurred, not as money is received. Third his description of prudence omits the provision that profits be recognised "only when realised in the form of cash or other assets the ultimate realisation of which can be assessed with reasonable certainty”.
b.	Mr Tidbury effectively asserts that the policy he describes of recognising profits only on valuation certificates must be applied to any business in the construction industry, 
That seems to us to fail to address the principles in FRS 5. The accounting standards contain no indication that a particular accounting policy or practice is applicable merely because of the business sector of an enterprise. They are concerned instead with the particular position of a particular enterprise. If Mr Smith's business is different from other businesses then it may need different accounting policies. There is no requirement that accounting policies be consistent across any particular sector. Instead what is required is the consistent application of the principles and standards to the particular circumstances of a particular business.
c.	In relation to work in progress Mr Tidbury says in his witness statement: "I have in general not included work in progress in the accounts. That is because it would have been incorrect to take out expenses which had actually been incurred.". 
That seems to us completely to ignore: the provisions of SSAP 9 which required work in progress to be disclosed at the lower of cost of net realisable value and the provisions of FRS 5 which require the recognition of an asset where there is sufficient evidence of the rights to access future economic benefits controlled by the business. To the extent that matching is a relevant principle, it is also inconsistent with matching because the costs would have been taken in one period but the benefits in  a future period.
d.	We have described above Mr Tidbury’s explanation of the £60,600 work in progress in the 2000 accounts.  
We find that explanation inconsistent and incredible. First it seems to us inconsistent (in the  SSAP 2 sense) to recognise work in progress in one year and not in another. Second it seems inconsistent (in the same sense)  to recognise work in progress in relation to one contract  but not in relation to all. Third we do not see why it is necessary to reflect the fair value of work in progress "in order to recognise this loss": the loss could have been recognised without recognising the work in progress. Fourth, in his oral evidence Mr Tidbury said that the procedure he had adopted helped to ensure a consistent gross profit margin from year to year. There was nothing in the standards before us or in any other accountant’s evidence which indicated that the maintenance of a consistent gross profit margin was a principle properly to be followed in the preparation of accounts.
77.	The inaccuracies in Mr Tidbury's recognition and rendition of accounting standards indicated to us that his view of proper accounting policy was not one which we could rely upon as being in accordance with the principles recognised by accounting standards. Accordingly we were unable to accept his evidence that the method adopted for the recognition of income and work in progress in Mr Smith's accounts could, on the basis of his evidence, properly be described as generally accepted or proper accounting practice. Further even if the method was used for other construction Companies, and even if its use  for them was generally accepted accounting practice, we do not see why that meant that it should apply in Mr Smith's circumstances.
(C) The evidence of Mr Elsworth
78.	Mr Elsworth dealt with the issue of income recognition and also touched on SSAP 9 and work in progress.
79.	Mr Elsworth emphasised the prudence concept in SSAP 2 -- that revenue should be recognised only when realised in the form either of cash or other assets the ultimate case realisation of which could be assessed with reasonable certainty. He then referred to FRS 5, AN G and the passage in G4 indicating that a seller recognises revenue when it "obtains the right to consideration" and at the same time recognises the debtor. That he said indicated that revenue should not be recognised until the supplier was in a position to sue for payment.
80.	He told us that FRS 5, AN G was introduced to remove uncertainty about when revenue should be recognised. Appendix III stated:
"the absence of the UK standards dealing explicitly with revenue recognition has been a source of muted but continuing criticism  for some time ... there are different views of what revenue is or represents, and of how financial statements should portray a business’s operating activities."
81.	Although FRS 5, AN G was issued in November 2003 it indicated that there were differing opinions and before its issue there was more left to the judgement of accountants.
82.	He noted that FRS 5, AN G indicated that in practice guidance on revenue recognition had been obtained from International Accounting Standard 18. He said that IAS 18 was conservative in terms of revenue recognition and dealt with valuation certificates in paragraph 24 thus:
a.	"the stage of completion of the transaction may be determined by a variety of methods ... the methods may include: (a) surveys of work performed; ..."
83.	He told us that accountants would bear in mind the prudence concept of SSAP    2 set out above. In an industry with well-known problems over the accuracy of valuations that pointed to the use of customer’s valuation certificates.
84.	He said that  his experience in the construction industry (and  he told us that he has worked for a large number of such entities) was that a policy of recognising income only on valuation certificates was prevalent. It was so because of the problem with valuation which existed in that industry. He would not have expected Mr Smith's business to be fundamentally different.
85.	Although in his witness statement Mr Elsworth says that SSAP 9 had no application because Mr Smith did not meet the definition of long-term contracts in SSAP 9, in his oral evidence he accepted that SSAP 9 does apply to stock and that term includes work in progress. He accepted that the principles of SSAP 9 should be applied in recognising the value of stock and work in progress.
86.	We accept Mr Elsworth’s evidence that other contractors have adopted a policy under which income has been recognised only when valuation certificates have been issued by the contractor’s customer.
87.	We do not however accept his suggestion that this is the only method which is consistent with FRS 5 appendix III. It seems to us that the words of FRS 5 indicate that what is to be recognised as an asset is "rights or access to  future economic benefits controlled by the entity", and these words, and the emphasis in FRS 5 on substance rather than legal form, do not indicate that such rights or access arise only when a debt can be sued for.
88.	We found Mr Elsworth's reference to IAS 18 helpful although we did not reach the same conclusions on reading it as those drawn by him. Paragraph 20 IAS 18 indicates that when the outcome of a transaction involving the rendering of services can be estimated reliably, the revenue associated with it should be recognised by reference to the stage of completion of the transaction at the balance sheet date. It then says that the outcome of a transaction can be estimated reliably when all the following conditions are satisfied:
a.	the amount of the revenue can be measured reliably
b.	it is probable that the economic benefits associated with the transaction will flow to the entity
c.	the stage of completion of the transaction at the balance sheet date can be measured reliably and
d.	the costs incurred the transaction and the costs to complete the transaction can be measured reliably.
89.	The quote provided by Mr Elsworth deals with the third of these conditions. Paragraph 24 indicates that an entity should use the method which measures reliably the services performed, and that depending upon the nature of the transaction methods may include: --
a.	surveys of work performed;
b.	services performed to date as a percentage of the total services to be performed; or
c.	the proportion that costs incurred to date bear to the estimated total cost of the transaction ...
90.	There is no indication in the standard that "surveys of work performed" relates only to surveys performed by the customer: indeed the other two headings suggest that a wider interpretation is intended.
91.	However paragraph 23 does introduce a relevant element of caution. It indicates that an entity is generally able to make reliable estimates after it  has agreed "to the following with the other parties to the transaction:
a.	each party  has enforceable rights regarding the service to be provided and received by the parties
b.	the consideration to be exchanged and
c.	the manner and terms of settlement.”
 “It is also usually necessary for the entity to have an effective internal budgeting and reporting system…” These are conditions which the particular enterprise needs to meet before it can start the process of the quantification of the asset to be recognised. They were in our view met by the terms of Mr Smith’s contracts with his customers..
(D) The evidence of Mr Mathew
92.	Mr Mathew said:
a.	for the last 20 years the principles of income recognition had been fairly well defined. There were problems in complex situations, for example problems with long-term contracts, but in the majority of cases the existing standards were sufficient and the AN G dealt only with these special difficult areas unlike those relevant in this case.
b.	 there was room for judgement at the margin: when standards were unclear there was scope  for divergent views.
c.	however an accounting policy could comply with GAAP only if it entails the recognition  of income (and asset) when it was realised in the form of cash or other assets the ultimate cash realisation of which could be assessed with reasonable certainty.
d.	if part of the contract was complete at the year end then the question was whether as a matter of fact the income could be assessed with reasonable certainty.
e.	in making such an assessment an accountant would use all the evidence available. Third-party evidence was best but internal evidence was relevant as well. Only if there was no other reliable evidence would it be appropriate to rely only upon customers’ valuation certificates. An event such as the payment of an application for payment after the year end and before the date the balance sheet is signed  would be an adjusting event for the purposes of SSAP 17 because it would  remove any uncertainty in relation to the recognition of the relevant income.
f.	only accounting policies which valued stock and work in progress at the year end  at the lower of cost or net realisable value could comply with generally accepted accounting practice.
g.	the failure of Mr Smith's accounts to recognise properly valued work in progress at the year end, and a failure to recognise income on contracts which had been fully or partly completed meant that the accounts did not comply with generally accepted accounting practice.
       (E) Our conclusions
       (i) Income recognition
93.	It seems to us that FRS 5, AN G and UITF 40 addressed issues in the penumbra of the accounting practice required by FRS  5 in relation to the recognition of assets. At the margin there were uncertainties and various policies were capable of being applied: if the contract was not complete when should the work done be regarded as an asset? SSAP  9 had provided guidance on recognising profit in long-term contracts, but what about short-term ones: should profit be recognised only when all stages of the contract had been completed? when only one stage had been completed? when that stage was substantially complete? or by reference to the proportion of work completed? But it was clear that when the contract had been completed an asset should be recognised because then the entity had access to the economic benefit of expected payment under the contract.
94.	In relation to issues in the penumbra there was, prior to AN G and UITF 40, scope  for judgement in determining the policy to be applied. But in relation to routine issues, the requirements of the standard were clear and there was no scope for judgement. We accept Mr Mathew’s evidence on this issue which is consistent with the accounting pronouncements we have related.
95.	It seems to us that Mr Elsworth's reference to IAS 18 and the history recorded in FRS 5, AN G that it had been used for guidance, indicates an acceptance of its principles as an authoritative way in which judgement at the margin could be exercised. The thrust of IAS 18 is that revenue may be recognised before a transaction was complete if there is reliable evidence. It was therefore implicit that the revenue and asset would be recognised when the transaction was complete. We accept Mr Elsworth’s evidence that the recognition of assets and revenue in relation to the work done by a business such as that of Mr Smith was not at the margin of the application of the standards. 
96.	It seems to us that a policy not to recognise an asset until the customer had issued its valuation certificate would not accord with the requirements of FRS  5 unless there were exceptional circumstances justifying departure. Such a policy would thus not be generally accepted accounting policy. The only circumstance offered  justifying departure from FRS  5 was the nature of the industry in which Mr Smith did business. But the issue in each case is whether an entity's accounts present a true and fair view, not whether they are prepared consistently with the policies adopted by other entities in the same industry. We conclude that there were no circumstances justifying departure.
97.	It seems to us that the practice used in Mr Smith's accounts could be described in two ways:
a.	that as a matter of accounting policy assets representing work done  were not recognised until the  customer issued its certificate; or
b.	assets would be recognised when access to economic benefits controlled by Mr Smith arose but only when they could be determined reliably.
98.	If it was the first  for the reasons we have set out it would not be generally accepted accounting policy.
99.	On the alternative basis one says that, although the accounts  applied GAAP policies they were prepared on the basis that there was insufficient evidence to recognise the access to future benefits represented by the application  for payment made before the year-end but not reflected in customers’ valuation certificates.
100.	It seems to us that this approach does not in the circumstances comply with generally accepted accounting practice. That is because SSAP 17 forms part of generally accepted accounting practice and should have been followed. The application of SSAP 17 required the consideration of whether there were events after the balance sheet date which gave additional evidence of circumstances existing at that date. Such evidence was available in the form of the receipt of payments relating to the future benefits represented by the applications for payment. Those receipts were adjusting events indicating that the applications  for payment should be valued at their full amount. Thus there was a failure to comply with SSAP 17.
(ii)Stock and work in progress
101.	It is clear to us that the policy adopted in relation to stock and work in progress was not in accordance with SSAP 9. Mr Mathew said so, Mr Elsworth admitted as much and SSAP 9 is clear. No arguments were advanced that there were exceptional circumstances justifying this departure. 
5. Discovery
102.	After Mr Cotton opened his enquiry into Mr Smith's 2001 tax return he received copies of invoices and applications for payment for the 2001 year. He  found  the application  for payment to McLean Homes of £81,234 dated 31 March 2001 had been certified by McLean on 30 April 2001 and had not been included in Mr Smith's 2001 accounts. He was told that the figure of work in progress was Maynard Heady’s client’s estimate of the year-end balance.
103.	After a visit to the accountants with a Revenue Accountant, Mr Cotton concluded that the accounts did not reflect these invoices whilst the cost of the work done had been included, and that the figures for stock and work in progress were not representative of the costs of work in progress. He concluded that the accounts did not properly state Mr Smith's profit in 2001.
104.	He discussed this  with Mr Tidbury who explained that a sale was not recognised until the customer's surveyor had approved the payment. Mr Tidbury also told Mr Cotton that this was a practice he had adopted in relation to earlier years.
105.	Mr Cotton also realised that applications  for payment made in March 2000 of £177,209 had been included in the 2001 accounts as income rather than as income of the 2000 accounts. He also asked for an explanation of the figures  of stock in the 2000 accounts of £60,600. Mr Tidbury replied that it reflected the valuation carried out by a surveyor on 2 April 2000.
106.	Mr Cotton was told that in 2002 Mr  Smith had transferred his business to a limited company. He made enquiries of the Inspector dealing with that company's returns and discovered that there were a number of receipts after 5 April 2002 by that company which reflected work done by Mr Smith before that date. We find that:
a.	in relation to 2002, Mr Cotton honestly and newly came to the conclusion that it was likely that the sales income and stock and work in progress, and thus the profits of that year had been under assessed: he made a discovery to that effect;
b.	likewise in relation to 2000 Mr Cotton made a discovery that the profits were understated;
c.	in relation to 1998 and 1999 Mr Tidbury had told Mr Cotton that he had adopted the same practice in relation to the recognition of income. That, and  low and similar values  for stock and work in progress in those years, gave adequate cause to conclude that the profits  were understated. Mr Cotton’s estimates for those years gave him, in our view, adequate grounds to conclude that there was an understatement of the profit. We therefore find that he made a discovery to that effect; and
d. in relation to the years 1994 to 1997, Mr Smith had used different accountants. Mr Cotton had no information on the accounting practice adopted by those accountants. The only factor which gave him cause of concern in relation to those years was the low figure  of closing stock in three out of four of them. In these circumstances we cannot see how it can be said that Mr Cotton could have come to the conclusion that it was more likely than not the profits were understated . We find that no discovery was made of an under assessment in those years. 
6. Negligence
107.	We have concluded that:
a.	a person engaged as a professional accountant and tax adviser to submit  tax returns to HMRC based on  accounts he had prepared, would, in the absence of special circumstances, reasonably be  expected, in relation to years to which section 42 FA 1998 applied to prepare accounts which showed a true and fair view, and in relation to prior years, to submit tax computations on the basis of accounts which were prepared on the basis of generally accepted accountancy practice. There was nothing in the relationship between Mr Smith and Maynard Heady which indicated otherwise;
b.	the failure so to do would therefore be negligent conduct 
c.	accounts will show a true and fair view only if they are computed in accordance with generally accepted accounting practice.
d.	that practice requires accounting standards to be followed unless there are exceptional circumstances;
e.	in the case of Mr Smith's business there were no circumstances which justified  a departure from such standards. In particular in the light of the particular circumstances of his business there was no generally accepted practice which would permit departure from the standards;
f.	the accounts prepared for 1998 to 2002 did not comply with accounting standards because (A) they do not include a value for stock and work in progress determined in accordance with SSAP  9, and (B) they do not reflect the assets (and the resultant income) represented by  applications for payment made before each year end but not received until after the year end.
We therefore conclude that in relation to each of the years 1998 to 2002 there was negligent conduct on the part of a person acting on Mr Smith's behalf to which was attributable the under assessment of income in the years 1998 to 2000, and 2002. We thus find the condition in section 29 (4) satisfied in relation to those years. 
7.Adjustments to profits 1998 to 2002
(a) recognition of assets/income
108.	On the evidence before us the following items should, on the basis of GAAP, have given rise to the need to recognise an asset in Mr Smith’s accounts and the corresponding need to recognise income of an equivalent amount.
109.	In each case a person applying GAAP would in our view have concluded in the circumstances of Mr Smith's business that there was sufficient evidence of the existence of access to future economic benefits controlled by Mr Smith at the balance sheet date in the amount of these sums :
a.	2000
£22,053 in respect of work done for Chelsteen Homes  for which application  for payment was made on 31 March 2000. Payment was received on 26 April 2000 before the accounts were approved on 5 June 2000.
£177,209 in respect of work done for McLean Homes for which application  for payment was made in March 2000, and payment was received on 16 May 2000 .
b.	2001
£81,235 in respect of work done for McLean Homes for which  application  for payment was made on 31 March 2001 and which was paid in full on 10 April 2001 before the approval of the accounts on 22 June 2001.
c.	2002
£104,437 in respect of work done for McLean Homes for which  application  for payment was made on 31 March 2002, and payment was made on 30 April 2002 before the signing of the accounts on 10 October 2002.
£29,292 in respect of work done for Haynes and Smith up to 18 March 2002  for which payment was banked on 23 April 2002.
£3461, £8915, and £5691, in respect of work done for John Mowlem and  Co in relation to which the documents showed that the customer’s surveyor had measured the work on 1 March, 10 March and 28 March respectively.
£63,940 in respect of work done  for McCarthy and Stone for which payment was made on 17 May 2002. The payment was made in respect of  a contract of 6 February 2002. On the basis of McCarthy and Stone's description of the timing of work -- a description which is consistent with that of Mr Smith -- we conclude that this work was completed before 5 April 2002.
110.	HMRC  has estimated  additional sales income of £75,000 in 1999 and £50,000 in 1998. In relation to the question of the quantum of the assessment the burden is upon the appellant to produce evidence to displace the assessment. We  found that it was likely that there  were assets which should have been recognised in relation to work done close to the year end and that those  assets were not recognised in Mr Smith's accounts. The appellant produced no evidence to displace the quantum contended for by the respondents. We therefore confirm  those additional amounts.

(b)  Stock and work in progress
111.	It was clear to us that the accounts for the years 1998 to 2002 did not contain a figure of  stock and work in progress computed in accordance with generally accepted accounting practice. It was clear that work had been done on contracts close to the year end which was not complete and had not been billed. This was work in progress. SSAP 9 clearly requires stock and work in progress to be valued at the lower of cost  or net realisable value. There was no evidence of exceptional circumstances which made a different policy necessary  for the accounts to show a true and fair view. Some valuation should have been made  of work in progress.
112.	HMRC’s estimates for stock and work in progress in their  evidence before us differed from those used in the assessments.   The estimates put forward to us were based upon five days divided by 365 days and multiplied by the  annual direct costs of the business (to represent the cost of work done between 31 March and 5 April each year) . In addition a further amount was added in respect of a Haynes and Smith contract in relation to 2002. The evidence of the frequency of applications  for payment did not suggest that  these were unreasonable estimates. None of the evidence produced by the appellant indicated that they were excessive. These estimates seemed to us better than those in the assessments. We therefore  accepted  these estimates.  
(c) Our calculations of adjustments to profits in 1998 to 2002
	We therefore conclude that the assessable profits and the amounts in       which amended assessments are accordingly determined in relation to these years are  as follows:

			
							
		2001/2002	2000/2001	1999/2000	1998/1999	1997/1998	
		£	£	£	£	£	
Taxpayer self assessments	92,533	132,650	51,427	62,590	5,777	
		 	 	 	 	 	
Adjust for additional income debtors:	 	 	 	 	 	
	add closing debtors (see Note 1)	215,736	81,235	199,272	75,000	50,000	
	deduct opening debtors	(81,235)	(199,272)	(75,000)	(50,000)	0	
		 	 	 	 	 	
Adjust stock/work in progress:	 	 	 	 	 	
	remove values in accounts	 	 	 	 	 	
	      closing	(2,000)	(2,000)	(60,600)	(3,000)	(2,500)	
	      opening	2,000	60,600	3,000	2,500	2,210	
	insert revised values	 	 	 	 	 	
	      closing (see Note 2)	20,184	16,591	12,738	13,000	10,000	
	      opening	(16,591)	(12,738)	(13,000)	(10,000)	(2,210)	
		 	 	 	 	 	
Revised taxable profits	230,627	77,066	117,837	90,090	63,277	
		 	 	 	 	 	
Deduct taxpayer self assessments	92,533	132,650	51,427	62,590	5,777	
		 	 	 	 	 	
Tribunal determinations	138,094	(55,584)	66,410	27,500	57,500	
		 	 	 	 	 	
Notes:	 	 	 	 	 	
1. Additional closing income debtors:	 	 	 	 	 	
	Chelsteen Homes	 	 	22,063	 	 	
	Haynes & Smith	29,292	 	 	 	 	
	John Mowlem	3,461	 	 	 	 	
	John Mowlem	8,915	 	 	 	 	
	John Mowlem	5,691	 	 	 	 	
	McCarthy & Stone	63,940	 	 	 	 	
	McLean Homes	104,437	81,235	177,209	 	 	
	HM Revenue & Customs estimates	 	 	 	75,000	50,000	
		215,736	81,235	199,272	75,000	50,000	
2. Revised closing stock/work in progress:	 	 	 	 	 	
	HM Revenue & Customs estimates:	 	 	 	 	 	
	direct costs X 5 / 365 days	16,184	16,591	12,738	 	 	
	Haynes & Smith: 19 to 31/3/2002	4,000	 	 	 	 	
	estimates	 	 	 	13,000	10,000	
		20,184	16,591	12,738	13,000	10,000	

8. Conclusions.
113.	We allow the appeals in relation to 1995 1996 and 1997. We determine the appeals in relation to 1998 to 2002 in the amounts set out above.

CHARLES HELLIER
CHAIRMAN
RELEASE DATE: 24 February 2010