[2011] UKFTT 272 (TC)

TC01134

Appeal number TC/2010/01248

Appeal against Assessments and Closure Notices – Whether sufficient evidence to displace these – Yes between 1989-90 to 1991-92 and 1993-94 to 1995-96 – No for subsequent years – Appeal allowed in part

FIRST-TIER TRIBUNAL

TAX 

	CHRISTOPHER REID	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL: JOHN BROOKS (TRIBUNAL JUDGE)
						GARETH JONES MBE JP (MEMBER)

Sitting in public at Holborn Bars, 138-142 Holborn, London EC1 on 16 February 2011 with subsequent written closing submissions from the parties.

Stephen Harvey of Diverse Management Limited for the Appellant

Peter Massey of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	Mr Christopher Reid appeals against assessments issued by HM Revenue and Customs (“HMRC”) on 24 July 2007 under s 29 Taxes Management Act 1970 (“TMA”) for the years 1989-90 to 1991-92 and 1993-94 to 1995-96 and Closure Notices issued on 23 July 2007 under s 28A TMA amending his self-assessment tax  returns for 1996-97 to 2003-04. No income was assessed for 1992-93 as, in that year, Mr Reid was in Canada. The total amount of Tax and Class 4 National Insurance Contributions (“NIC”) originally charged by these assessments and amendments was £33,064.13. However, following negotiations HMRC, in a letter dated 25 March 2008, proposed that these should be revised as follows:
Year		     £
1989-90	   850.00
1990-91	   850.00
1991-92	1,450.00
1993-94	   471.00
1994-95	   865.38
1995-96	   825.68
1996-97	   733.40
1997-98	   784.60
1998-99	6,330.61
1999-00	3,081.41
2000-01	1,669.25
2001-02	3,997.30
2002-03	3,218.10
2003-04	1,370.40
 		_______
	            26,497.13
It is these reduced amounts with which this appeal is concerned.
2.	On 23 October 2009 HMRC issued penalty determinations for the years 1996-97 to 2003-04. The total sum payable under the determinations was £9,533.26. Mr Reid appealed against these penalties on 6 November 2009.
Law 
3.	An enquiry may be made into a return delivered after the filing date, as in this case, by an officer of HMRC under s 9A TMA “up to and including the quarter day next following the first anniversary of the day on which the return was filed.” The quarter days are 31 January, 30 April, 31 July and 31 October (s 9A(2) TMA). 
4.	Section 28A TMA provides that an enquiry under s 9A TMA is completed when an officer of HMRC “by a notice (a “closure notice”) informs the taxpayer that he has completed his enquiries and states his conclusions.” A closure notice takes effect when it is issued and must state either that no amendment to the return is required or make the amendments required to give effect to the officer’s conclusions (s 28A(2) TMA).
5.	An assessment may be made under s 29 TMA if HMRC discover that any income which ought to have been assessed for income tax has not been assessed.
6.	With regard to assessments, in Johnson v Scott (HM Inspector of Taxes) (1978) 52 TC 383, Walton J, in a passage approved by the Court of Appeal (at 403) in that case, said at 394:
“Of course all estimates are unsatisfactory; of course they will always be open to challenge in points of detail; and of course they may well be under-estimates rather than over-estimates as well. But what the Crown has to do in such a situation is, on the known facts, to make reasonable inferences. When, in paragraph 7(b) of the case stated, the commissioners state that (with certain exceptions) the inspector's figures were 'fair' that is, in my judgment, precisely and exactly what they ought to be, fair. The fact that the onus is on the taxpayer to displace the assessment is not intended to give the Crown carte blanche to make wild or extravagant claims. Where an inference of whatever nature falls to be made, one invariably speaks of a 'fair' inference. Where, as is the case in this matter, figures have to be inferred, what has to be made is a 'fair' inference as to what such figures may have been. The figures themselves must be fair.” 
7.	In Jonas v Bamford (HM Inspector of Taxes) (1973) 51 TC 1 Walton J said (at 24):
“once the inspector comes to the conclusion that, on the facts which he has discovered, Mr Jonas  has additional income beyond which he has so far declared to the Inspector, then the usual presumption on continuity will apply. The situation will be presumed to go on until there is some change in the situation,  the onus of proof of which is clearly on the taxpayer.”   
8.	Section 50(6) TMA provides that if, on an appeal, it appears to the Tribunal that an appellant is overcharged by an assessment the assessment shall be reduced accordingly but “otherwise the assessment … shall stand good.” In the decision of the Court of Appeal in T Haythornwaite  & Sons v Kelly (HM Inspector of Taxes) (1927) 11 TC 657 Lord Hanworth MR, referring to a previous incarnation of this enactment, said, at 667:
“Now it is to be remembered that under the law as it stands the duty of the Commissioners [and from 1 April 2009 the Tribunal] who hear the appeal is this: Parties are entitled to produce any lawful evidence, and if on appeal it appears to a majority of the Commissioners by examination of the Appellant on oath or affirmation, or by other lawful evidence, that the Appellant is over-charged by any assessment, the Commissioners shall abate or reduce the assessment accordingly; but otherwise every assessment or surcharge shall stand good. Hence it is quite plain that the Commissioners are to hold the assessment as standing goods unless the subject – the Appellant – establishes before the Commissioners, by evidence satisfactory to them, that the assessment ought to be reduced or set aside.” 
9.	A liability to a penalty arises under s 95 TMA where a person “fraudulently or negligently” delivers an incorrect return with the penalty being the difference between the tax shown the on return and the amount of tax that would have been payable if the return had been correct. The amount of the penalty is determined under s 100 TMA by an officer of HMRC setting it “at such amount as, in his opinion, is correct or appropriate.”  
Evidence
10.	Mr Reid gave oral evidence before us. In addition we heard from his accountant, Mr Stephen Harvey and Mr John Gannon, an Inspector of Taxes who specialises in compliance cases concerning DJs and the music business. We were also provided with a several bundles of documents which included copies of correspondence between the parties; bank statements; accounts; notes of meetings; and notes of telephone conversations.
Facts
11.	From this evidence we find the following facts.
12.	After leaving college in 1989 Mr Reid worked for British Telecom. About this time, when he was 19 or 20, he started to become interested in acid house music and going to raves. In 1992 he went to live with his father in Canada for a year and whilst there started writing lyrics. On his return to the UK in 1993 he discovered ‘House’ and ‘Garage’ music. He continued to go to clubs and raves spending the weekends partying and, as UK Garage increased in popularity he was asked to perform as MC rapping over the latest rave music. Although he did not receive any money for this, Mr Reid was given free admission to the clubs and provided with free bottles of champagne.
13.	As his reputation increased Mr Reid, who was known when performing as “MC Creed”, began to work abroad in places such as Cyprus, South Africa, Holland and the Greek Islands. As before he received no monetary payment for his work but the cost of his flights, accommodation and food and drink was met by the promoters, in what Mr Reid described as a “free holiday”. 
14.	Mr Reid became known as the “Godfather of Garage” as he was the first MC to “break through” in what had previously been the preserve of DJs. However, it was not until 1997 that he started to be paid for being an MC charging between £200 and £400 for a one to two hour set performing mainly on weekends. He realised about this time that in order to emulate the success of DJs, whose names were used to promote events, it was necessary to create a similar structure for MCs and established Vocal Fusion Limited (the “Company”) as an agency for MCs in 1999. Payment would be received by way of a cheque deposit and the balance paid in cash on the night. Mr Reid would deduct cash expenses from any money received and deposit the balance in the Company bank account which had been opened in 1999.
15.	In 1999 Mr Reid had had a two top 40 hits with Da' Click 'Good Rhymes' which he performed live on “Top of the Pops”, and 'We are da Click' for which he received an advance of £8,000 and further royalties of £8,000. These receipts were paid into the Company’s bank account. Also, as the “Godfather of Garage” he was chosen by Channel 4 as the professional expert for the “Lawyer to Garage MC” episode of their ‘Faking it’ series which was first broadcast on 16 October 2002. However, the popularity of UK Garage music had begun to wane by 2002 causing the cancellation of that year’s UK Garage awards which had in previous years been held venues such as the Brixton Academy and Hammersmith Apollo. 
16.	These awards had been organised by UK Garage Concerts Limited, a company in which Mr Reid had invested £35,000. Mr Reid has continued to MC at an “underground level” but has, in addition, taken up employment doing delivery work and youth work with the London Borough of Redbridge.  
17.	Throughout the period with which we are concerned Mr Reid lived with mother, Fay Small, who had worked as a nurse in Saudi Arabia before returning to the UK to work for the National Health Service. She supported him financially giving him, on his estimate, over £20,000 over the years on top of assisting with day to day his living expenses. In September 2000 she transferred the family home to Mr Reid.
18.	On 5 April 2001 HMRC wrote to Mr Reid requesting that he complete self-assessment tax returns for the six years to 5 April 2001. In his reply, dated 10 October 2001 which was drafted by Mr Harvey his accountant, Mr Reid wrote that he did not feel he could submit an accurate return for each year individually as “the distinction between tax years has become blurred in [his] attempts to pass [his] financial records between various accountants” but that he could provide an ‘overview’ of his finances during the period. 
19.	Following submission of the returns Mr Gannon (of HMRC) wrote to Mr Reid on 13 and 16 January 2003 stating that he intended to make enquiries into the returns (under s 9A TMA) and requested Mr Reid’s books and records in addition to further information for the year ended 6 April 2001. On 23 April 2003 a meeting was held at the Company’s offices attended by Mr Reid, Mr Harvey and Mr Reid’s brother and Mr Gannon and a Mr G Atkins, an executive with HMRC. During a discussion about Mr Reid’s MC activities and the establishment of the Company Mr Reid told Mr Gannon that a diary, appointments book and invoices relating to the first set of accounts had been stolen.  
20.	Information was provided to HMRC which was analysed by Mr Gannon who did not accept that Mr Reid had received £20,000 from his mother. Although Mr Gannon was concerned by the lack of business records he accepted that Mr Reid had provided all available records. On 13 June 2006 a meeting was held between Mr Gannon and Mr Harvey during which they discussed a methodology to formulate the level of Mr Reid’s income. The notes of the meeting were accepted as accurate by Mr Harvey subject to a single amendment to refer to Mr Reid being one of three “equal shareholders” in UK Garage Concerts Ltd rather than “one of three directors.” 
21.	Despite two years of negotiations between HMRC and Mr Harvey, a settlement was not possible and Mr Gannon wrote to Mr Reid on 19 July 2007 stating that it was proposed to make assessments for the years 1989-90 to 1995-96 and issue Closure Notices with Revenue amendments for 1996-97 to 2003-04 at the same time. The Closure Notices were issued on 23 July 2007 and the assessments were made on 24 July 2007. These were not based on Mr Reid’s income from actual performances as there was no record of these but on the basis of the information provided to Mr Gannon, such as, for example, the number of weeks that Mr Reid was engaged as an MC during the tax year, how many sets he would perform and the amount he would be paid for each set. 
22.	In making the assessments Mr Gannon also drew on his experience of the music business and the trends relating to MCs and DJs during the 1980s, 1990s up to 2004-05 in relation to a number of venues which would promote the genre of music where MCs and DJs would perform.
23.	We have previously referred (in paragraph 1, above) to the assessments being reduced on 25 March 2008. This was to take account of further proposals put forward by Mr Harvey to reduce the number of weeks during which Mr Reid was engaged as an MC in the tax year concerned. This reduced the overall amount of the assessments and amendments from £33,064.13 to £26,497.13.
Direction and Summary of Submissions
24.	As there was not time for oral closing submissions on the day of the hearing we directed, with the agreement of the parties, that Mr Massey would provide written closing submissions on behalf of HMRC within seven days of the hearing to be followed by Mr Harvey’s submissions, on behalf of Mr Reid, 28 days later. 
25.	Having carefully considered the detailed submissions provided by the parties it would appear that, in essence, HMRC’s case is that with the exception of the assessments in respect of the years before Mr Reid went to Canada and for those made in the three years after his return, which we consider in more detail below, Mr Reid has failed to discharge the burden of proof in respect of the assessments and amendments and, as such, these should be confirmed in the amounts stated in, paragraph 1 above. Mr Massey also contends that by failing to maintain the records necessary to enable him to submit accurate accounts and tax returns Mr Reid has been negligent and therefore liable to penalties from 1996-97 to 2003-04 under s 95 TMA . Although the penalties could have been equal to 100% of the underpaid tax, Mr Massey explains that, having regard to the disclosure, co-operation and the size of the liability and gravity of the failure that the penalties have been abated by 55% meaning that the £9,533 sought by HMRC is equal to 45% of the unpaid tax for 1996-97 to 2003-04.
26.	Mr Harvey accepts that the burden of proof does lie with Mr Reid who, he reminds us, did keep business records which he could not produce as they were stolen, but complains that Mr Gannon could have obtained further information which would have assisted Mr Reid but did not do so. He also emphasised that the peak of the genre of Mr Reid’s music was short lived, its decline was rapid and that Mr Reid had  invested heavily developing what he “thought was going to be a long term business but it was not to be.”
27.	Mr Harvey submits that, even though the self-assessment tax returns were not correct, we should allow Mr Reid’s appeal against the penalties on the basis that there has been no wilful attempt to mislead or deceive and that all existing information has been made available.
Discussion and Conclusion
28.	Although in his written submissions, on behalf of Mr Reid, Mr Harvey found it surprising that HMRC could not find better “case precedents” or authorities to support their case, pointing out that that those cited are not recent and do not involve businesses or individuals active in the music or entertainment industries it is clear that the principles to be derived from these, which are still very much applicable as can be seen from our outline of the law (in paragraphs 3 to 9, above) is that, providing the figures in the assessments and amendments are “fair”, the onus is on the taxpayer to displace them. As the assessments and amendments in this case were based on information that had been provided to Mr Gannon by Mr Reid and Mr Harvey we find that, subject to our comments below, he drew reasonable inferences in making the assessments and amendments and, as such unless it can be shown that Mr Reid is over-charged by any particular assessment or amendment it “shall stand good.”
29.	Mr Massey, in his written submissions, referred to Mr Reid’s evidence which suggested that over the periods covered by the assessments and amendments his life and work had fallen into identifiable segments and suggested that we consider each of these in turn to determine whether Mr Reid has discharged the burden of proof. 
30.	The first of the “segments” concerns the period before 1992 when Mr Reid went to Canada. It is apparent from Mr Massey’s submissions that HMRC now acknowledge that there was a change in Mr Reid’s situation after his return from Canada and, in our view, properly accepts that the presumption of continuity prior to 1993-94 is unjustified. 
31.	In the circumstances, as Mr Massey anticipates, we allow the appeals against the assessments for 1989-90, 1990-91 and 1991-92. 
32.	The second “segment” to which Mr Massey referred concerns the period following Mr Reid’s return from Canada in 1993 until 1997 and the years 1993-94 to 1995-96. 
33.	During this time Mr Reid was establishing himself as an MC. Mr Massey refers to Mr Reid’s evidence that he was working during these years but for lower levels of reward than he subsequently achieved. Although Mr Massey submits that the burden of proof has not been discharged he invites us to consider whether, in the light of Mr Reid’s evidence of a lower level or work, a reduction in the assessments may be appropriate for these years. 
34.	Mr Harvey contends that as there was no evidence of the number of gigs performed by Mr Reid between 1989 and 1999 rather than reduce the figure as assessed for the years 1993-94 to 1995-96 as suggested by HMRC they should be excluded completely reminding us that Mr Reid’s evidence was that he was not paid during this period as the UK Garage scene was in its infancy without any structure. 
35.	As Mr Harvey submits, Mr Reid’s evidence was that he was not paid for performing during the years 1993-94, 1994-95 and 1995-96 and not, as Mr Massey contends, that it was for lower levels of reward than he achieved subsequently. In these circumstances it seems that we should either accept Mr Reid’s evidence and allow the appeals for these years or reject it and dismiss the appeals. 
36.	Although we found Mr Reid to be a credible and truthful witness it was apparent, and hardly surprising in view of the passage of time and the nature of his work and lack of business records, that he was unable to provide us with a more detailed account of these years. However, we accept his evidence and on balance consider that it is just about sufficient to discharge the burden of proof for the years concerned. 
37.	We therefore allow his appeals against the assessments for 1993-94, 1994-95 and 1995-96.
38.	The final “segment” was from 1997 when, as Mr Reid put it, the UK Garage scene “blew up” (was at its peak) and he was “a big fish in a big pond”.  
39.	Mr Massey contends that from 1997 it was clear that Mr Reid’s income was understated in his tax returns and that as there is not sufficient evidence to demonstrate any alternative level of profits we should dismiss the appeals and confirm the amendments in the amounts stated in, paragraph 1 above for the years 1996-97, 1997-98. 1998-99 and 1999-2000. For subsequent years, during which Mr Gannon’s computations included identified sources of income, Mr Massey submits that, as HMRC had first made contact with him in April 2001, Mr Reid could be expected to have been significantly more aware of his tax responsibilities and should have been able to prepare and present accurate and demonstrable accounts for his tax returns and, as such, it would have been easier for Mr Reid to discharge the burden of proof. However, Mr Massey contends that as Mr Reid has not done so we should dismiss the appeals and confirm the amendments for 2000-01 to 2003-04 in the figures set out in paragraph 1, above.
40.	For these years Mr Harvey submits that evidence has been submitted to displace the amendments and refers to the financial assistance that Mr Reid received from his mother and the Company or the fact that Mr Reid did not earn monies from work abroad. In addition HMRC have not taken into account that Mr Reid must have incurred business expenditure and business development costs during the period of the assessments and closure notices. 
41.	Although we accept that Mr Reid was given some financial assistance from his mother the period from 1997 was, as he described in his evidence, one in which “money came in and out quick”. 
42.	Having carefully considered the evidence advanced by and on behalf of Mr Reid in relation to this period we do not find it to be sufficient to displace the amendments which therefore “stand good”. 
43.	As such we dismiss the appeals against the amendments for 1996-97 to 2003-04. 
44.	Turning to the penalties we accept, as Mr Harvey submits, that there has been no wilful attempt to mislead or deceive by Mr Reid. However, for the years in which a penalty has been imposed the question for us is whether Mr Reid has “negligently” delivered any incorrect self-assessment tax return. If so, he will be liable to a penalty under s 95 TMA. 
45.	HMRC relies on the definition of negligence given by Alderson B in Blyth v Birmingham Waterworks [1843-60] All ER Rep 478 that it 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.” 
46.	Although, despite its age, this definition remains applicable, noting Mr Harvey’s concerns about the citation of old authorities (to which we referred in paragraph 29, above) a more recent view of “negligence” can be taken from the comments of the Tribunal Judge (Roger Berner) in Anderson (Deceased) v HMRC [2009] UKFTT 258 (TC) where he said at [22]: 
“The test to be applied, in my view, is to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done.”
We accept Mr Massey’s submission that a reasonable taxpayer would, unlike Mr Reid, have paid greater attention to his tax affairs and maintained records to enable the submission of accurate self-assessment returns on time. As such we find that Mr Reid has negligently delivered incorrect returns and is therefore liable to the penalties. 
47.	Having carefully considered the factors taken into account by Mr Gannon, as set out in the attachment to his letter of 10 October 2009, when deciding to abate the penalties by 55% we find that the amount determined appears to be correct. Therefore, in accordance with s 100B TMA we confirm the penalty determinations in the amounts stated.
Summary of Conclusions
48.	We allow the appeals against the 1989-90, 1990-91, 1991-92, 1993-1994, 1994-94 and 1995-96 assessments. 
49.	The appeals against the 1996-97, 1997-98, 1998-99, 1999-00, 2000-01, 2001-02, 2002-03 and 2003-04 are dismissed and the penalty determinations for these years are confirmed.  
50.	As a result of this decision the tax, NIC and penalties now due are as follows: 
Year	         Tax & NIC (£)	Penalty (£)
1996-97	   733.40	   330.03			
1997-98	   784.60	   353.07
1998-99	6,330.61	2,848.77
1999-00	3,081.41	1,386.63
2000-01	1,669.25	   751.16
2001-02	3,997.30	1,798.78
2002-03	3,218.10	1,448.14
2003-04	1,370.40	   616.68
 		_______	________
		     	                     £21,185.07       £9,533.26
51.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN BROOKS

TRIBUNAL JUDGE
RELEASE DATE: 26 APRIL 2011