[2011] UKFTT 137 (TC)

TC001011

Appeal number: TC/2010/03835

Income tax – drawings and unrecorded expenditure claimed as wages/sub-contractor payments - not allowed in computing profits of a trade – section 74 ICTA 1988

FIRST-TIER TRIBUNAL

TAX 

	J A DRAPER JOINERY	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	MICHAEL S CONNELL (TRIBUNAL JUDGE)						MARYVONNE HANDS (MEMBER)			

Sitting in public at 4th floor, Byron House, 2A Maid Marian Way, Nottingham on 21st January 2011

Mr Robinson for the Appellant

Mr Birke, Senior Officer of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	This is an appeal against a disputed decision of HMRC to the effect that the Appellant’s self-assessment tax return for 2002/03 should be amended to disallow drawings which had been included in the Appellant’s ‘cost of sales’. The Appellant also appeals a decision of HMRC to adjust his return for 2004/05 because claimed employee costs have not been fully substantiated.
2.	The Appellant’s self-assessment tax return for the year ended 5 April 2003 was selected for enquiry on 5 January 2005. The Appellant objected to enquiry on the grounds that his returns for 2000/01 and 2001/02 had also been subject to an enquiry. The objection was treated as an application for a closure notice under s 28A (4) Taxes Management Act 1970 and listed for hearing by HMRC Scunthorpe. The application was heard on 20 April 2005 and refused.
3.	The Appellant’s accounts year runs from 1 August to 31 July and therefore the 2002/03 return covers the accounts to 31 July 2002, the 2004/05 return covering the accounts to 31 July 2004.
4.	The Appellant’s accounts for the year 2002/03 included a debit for drawings of £5,200 in ‘cost of sales’. Drawings are not an expense of a business. In the absence of evidence of wages paid, HMRC disallowed the £5,200 claimed. 
5.	Section 74 of the Income Corporation Taxes Act 1988 says :
“Subject to the provisions of the Tax Acts, in computing the amount of the profits or gains to be charged in case one or case two of Schedule D, no sum shall be deducted in respect of – 
(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation.”
Drawings are not expended for the purpose of the trade, but capital withdrawn and therefore is not allowable as a deduction under s 74.
6.	The Appellant’s accounts for 200/03 also showed a wages debit of £41,600 but following a review of the payroll records only £39,478 had been recorded. HMRC therefore adjusted the accounts in the sum of £2,122.
7.	As a result of the adjustments of £5,200 and £2,122 the Appellant’s revised yearly net profit was £13381 and the additional tax and class four national insurance contributions amounted to £730.35.
8.	The HMRC assessment in respect of 2004/05 was a discovery assessment under the provisions of s 29 TMA 1970. The Appellant had not substantiated ‘employee costs’ claimed at £70,400. The total recorded employee costs taken from the payroll records were £46,391 resulting in a difference of unrecorded costs of £24,009.
9.	The Appellant said that the discrepancy may have been because payments had been made to subcontractors. There was however no evidence that the Appellant was contracting within the CIS scheme and no records to indicate that payments had been made to subcontractors. In the absence of any evidence that the sum of £24,009 represented wages or payments to subcontractors that sum was disallowed by HMRC.
10.	As a result of the adjustment of £24,009 the additional tax and class four national insurance contributions amounted to £4,093.90.
11.	The onus of proof lies with the Appellant under s 15 (6) Taxes Management Act 1970 and at common law with the person making the assertion, that is the Appellant who has appealed against the amendment.
12.	At the hearing the Appellant gave evidence in person and was represented by his accountant Mr Robinson but was unable to provide any evidence or persuasive argument as to why the adjustments should not be made to the 2002/03 and 2004/05 accounts.
13.	The Tribunal dismissed the appeal and determined the self-assessment for 2002/03 at £750.35 and for 2004/05 at £4,093.90.
14.	This decision contains full findings of fact and reasons for the decision. A party wishing to appeal must apply within 28 days of the date of release of this decision. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

Michael S Connell

TRIBUNAL JUDGE
RELEASE DATE: 23 FEBRUARY 2011