[2011] UKFTT 322 (TC)

TC01182

Appeal number TC/2009/10649,    TC/2010/00036, 00039 and 00040

Income Tax - profits - taxi rental business - alleged under-declaration - discovery assessments - extended time assessments - whether method of calculation of turnover used by HMRC appropriate

Value Added Tax – alleged failure to register -  alleged under-declaration of turnover – whether method adopted by HMRC appropriate  

FIRST-TIER TRIBUNAL

TAX 

	         KULVINDER SINGH DUHRA,	Appellants
                                       PARMJIT KAUR DUHRA, 
                                    KULVINDER SINGH DUHRA 
                                                      and
                                       PARMJIT KAUR DUHRA 
                                                  (as partners)

	- and -

                              THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

                                                 TRIBUNAL: JUDGE GUY BRANNAN
						     WILL SILSBY

Sitting in public at St Katherine’s House, Northampton on 5 April 2011

Charles Hall of Hall Tax Service for the Appellant
Maurice Chapman and Gloria Orimoloye, Presenting Officers, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

Introduction
1.	Mr Duhra hired out cars to drivers who worked with a local Northampton taxi company. Since 1 April, 2004 Mr Duhra carried on this business in partnership with his wife, Mrs Duhra.  
2.	The question in issue in this appeal is whether Mr and Mrs Duhra have correctly stated their income on their self-assessment income tax returns. The expenses of the business are not in dispute and, therefore, the real dispute between the parties is whether the turnover from the taxi hire business has been correctly calculated. The income tax assessments and penalty determinations are described below. In addition, if HMRC's view on the turnover of the taxi rental business in the relevant years is accepted, the VAT registration threshold would have been exceeded and, consequently, VAT assessments have been raised and penalties imposed for the relevant years.
3.	During the course of  the hearing, Mr Hall, appearing for Mr and Mrs Duhra, invited the Tribunal simply to determine the amount of the turnover of the business in the relevant years, leaving it to the parties then to agree the various assessments to be made, altered or withdrawn and the imposition of penalties (if appropriate). Mr Chapman, appearing for HMRC in relation to income tax, was content with this approach. Ms Orimoloye, appearing for HMRC in relation to VAT, did not object to this proposal. We are also content with this approach, subject to two provisos. First, the parties would, of course, be at liberty to reapply to the Tribunal if agreement could not be reached, for a final determination of the assessments and penalties. Secondly, we were asked to determine the appropriate level of discount to be applied to any income tax (but not VAT) penalties.
Assessments and penalties
Mr Duhra
4.	Income tax assessments have been raised for the income tax years ended 5 April, 1999 to 5 April, 2006. The assessments for the years ended 5 April, 1999 to 5 April, 2003 were issued under section 29 Taxes Management Act 1970 ("TMA"). The assessments for the years ended 5 April, 2004 to 5 April, 2006 were issued under section 28A TMA. Penalty determinations were issued against Mr Duhra for the eight years ended 5 April, 2006 under section 95 TMA because HMRC considered he had negligently submitted incorrect tax returns for those years. Penalty determinations were also issued against Mr Duhra for the two income tax years ended 5 April, 2006 under section 95A TMA because HMRC considered that he had negligently submitted incorrect partnership returns for those years. All the assessments and penalty determinations have been appealed within the relevant time limits.
5.	As regards VAT, assessments in respect of the periods 1 October, 1998 to 5 April, 2004 have been made on Mr Duhra on a "best judgement" basis by HMRC pursuant to section 73 Value Added Tax Act 1994. In addition, penalties have been levied at the rate of 15% of the net tax liability (or £50, if greater or where there is no relevant tax) for the same periods. These assessments and penalties have also, we understand, been appealed within the relevant time limits.
Mrs Duhra
6.	Income tax assessments have been made for the two years ended 5 April, 2005 and 5 April, 2006. Partnership income tax assessments were also raised against Mrs Durha in respect of those two years under section 28B TMA. Penalty determinations were made in respect of these two years under section 95 TMA (as regards Mrs Duhra's personal income tax returns) and section 95A TMA (as regards Mrs Duhra's partnership income tax returns) on the basis that Mrs Duhra had negligently submitted incorrect returns.
The facts
7.	HMRC prepared three bundles of documents relevant to the appeal which were admitted into evidence. In addition, Mr and Mrs Duhra and Mrs Jill Woodward of HMRC gave evidence.
8.	We find the following facts.
9.	Mr Duhra began his taxi rental business in partnership with his father. From some stage in the 1990s (most probably 1996) Mr Duhra ran the business on his own.
10.	The nature of the business was simple. Mr Duhra would buy second-hand petrol engined cars. He would insure the cars and he would license them as taxis with Northampton Borough Council. He was responsible for the repair and maintenance of the cars. He was also responsible for installing taxi meters in the cars. 
11.	Taxi drivers who needed a car would ask Mr Duhra to rent them a car. Mr Duhra's evidence, which we accept, was that all the drivers who rented cars from him (with one isolated exception) worked exclusively with a local taxi company called Bounds Taxis ("Bounds"). The meters that Mr Duhra installed in the cars were set for Bounds' rates. In addition, Mr Duhra would install a "bubble" on the roof of the car bearing the name "Bounds". The drivers were responsible for paying for petrol.
12.	The drivers paid Mr Duhra £120 per week for the rental of a car. This allowed them to use the car for a 12 hour period each day. Typically, a driver would work on either a 12 hour day shift or a 12 hour night shift. A driver working one shift would then be responsible for delivering the car to the driver working the other shift. The maximum weekly rental per car which Mr Duhra could receive was, therefore, £240.
13.	 Not all rentals covered a full week. Sometimes drivers would rent a car for a few days. This could sometimes be because their usual car was off the road and they needed one of Mr Duhra's cars as a temporary replacement. In addition, a number of drivers only worked a few days a week: typically this would be at the weekends (particularly Friday night and Saturday) when there was a greater demand for taxi services. 
14.	The drivers always paid Mr Duhra in cash. Mr Duhra did not deal with the general public and received no taxi fares from passengers.
15.	Mr Duhra submitted his tax return for the year ended 5 April, 2004 on 27 January, 2005 (shortly before the deadline of 31 January, 2005). On that return, Mr Duhra entered a taxable profit in respect of his self-employed taxi services business as £20,000. The relevant box was ticked to indicate that this was a provisional figure. No business accounts were provided.
16.	On 25 October, 2005, HMRC issued to Mr Duhra a notice under section 9A TMA notifying him of their intention to enquire into his tax return for the year ended 6 April, 2004. A copy of that notice was issued to Mr Duhra's accountant, R Garratt & Co.
17.	In response to HMRC's requests for business accounts and supporting information in relation to the year ended 5 April, 2004, Mr Garratt submitted an amended 2003/04 self-employment page showing turnover of £53,527 and total business expenses of £39,343 resulting in a taxable profit of £14,184.
18.	On 17 March, 2006 Mrs Jill Woodward, an HMRC compliance caseworker based in Northampton, advised Mr Garratt that she was now dealing with the enquiry into Mr Duhra's 2003/04 return. She asked Mr Garratt to provide the business records of the taxi rental business to support the figures declared on the amended return and also to advise how the declared turnover figure of £53,527 had been calculated.
19.	Mr Duhra's new adviser, Mr Pereira, telephoned Mrs Woodward on 24 March, 2006 informing her that he was now representing Mr Duhra. He told Mrs Woodward that Mr Duhra had said that the declared figures in the amended return were not correct. Mr Pereira promised to submit the requested records shortly.
20.	Mrs Woodward wrote to Mr Pereira on 21 April, 2006 and requested that a disclosure of omitted income and details of the period involved should accompany the business records which Mr Pereira had already promised to supply.
21.	Mrs Woodward, in her evidence to the Tribunal, said that she reviewed the business records. She noted the following points:
(1)	There were no prime records of money received each week from the drivers to whom Mr Duhra rented his taxis.
(2)	The takings had been written up in a small blue Centurion ring binder ("the Blue Book"), with loose weekly sheets, showing the money received each week and the individual drivers’ names comprising the weekly total. The total recorded takings for the year ended 5 April, 2004 came to £77,365.
(3)	The records did not contain the full names and addresses of the drivers, just an initial and a surname.
(4)	The records did not include the vehicle registration details of the vehicles used in the business in the year 2003/04.
22.	There was then a meeting on 19 October, 2006 attended by Mr Duhra, Mr Pereira and Mrs Woodward. Notes of the meeting were taken by HMRC and were subsequently signed by Mr Duhra with a few small amendments made by Mr Pereira.
23.	In addition to the nature of the business described above, Mr Duhra confirmed at the meeting that the drivers did not receive written receipts from him for their cash payments in respect of the weekly car rental. 
24.	Mr Duhra also confirmed that he recorded the money received in the Blue Book on a weekly basis. Subsequently, and in evidence before the Tribunal, Mr Duhra acknowledged that he did not complete the Blue Book records on a weekly basis. He recorded the cash payments from drivers on pieces of paper kept in his wallet. He transferred these pieces of paper to a locked desk draw in a small room in his house. Mrs Duhra, in her evidence, confirmed this procedure. These pieces of paper were then used at a later stage to write up the Blue Book. At the hearing, Mr Duhra said that the Blue Book entries for the year ended 6 April, 2004 were compiled in approximately February/March 2006. Nonetheless, he maintained that the Blue Book entries for that year were correct because they were compiled from the contemporaneous pieces of paper on which he recorded his cash receipts. We find Mr Duhra's evidence of how he completed the Blue Book to be correct, at least in relation to the year-end and 6 April, 2004.
25.	At the first meeting with Mrs Woodward, Mr Duhra also confirmed that he kept no record of what happened to the cash takings he received. In evidence before the Tribunal, which we accept, Mr Duhra testified that some of the cash was used to pay business expenses, such as repairs and maintenance, some was used to pay personal expenses and some was banked.
26.	Importantly, Mr Duhra also confirmed at the meeting that the previously declared turnover of £53,527 was incorrect because he had not given Mr Garratt all his records. In evidence before the Tribunal, Mr Duhra said that when HMRC had started the enquiry he had panicked. He had worked out the takings for four random weeks and annualised the resultant figures giving a turnover of £53,527. He acknowledged that he had been wrong to do to do this but attributed it to the personal difficulties which he was experiencing at that time.
27.	Those personal difficulties were discussed at the meeting in October 2006. Mr Duhra's mother had died in July 2006 after an illness and he has spent a considerable amount of time looking after his father. At the same time, he had expanded his business and bought more cars. Consequently, he had allowed his record keeping to slip.
28.	Mr Duhra, at the first meeting with Mrs Woodward, confirmed that he had expanded his business during the tax year ended 6 April, 2004 from four or five cars to about ten cars. 
29.	The following points also emerged from the meeting:
(1)	Mr Duhra said that his aim was to rent out all the cars 24 hours a day but he sometimes could not get enough drivers to achieve this.
(2)	He had kept no records of which driver used what particular car during the year.
(3)	Mr Duhra was asked to provide a list of the names and addresses of the drivers to whom he rented his cars in the tax year ended 6 April, 2004. Mr Duhra confirmed that he photocopied the drivers' driving licences when they first started to rent a car from him.
(4)	Mr Duhra maintained that his records were only incorrect for the year ended 5 April, 2004 and that the figures for all previous years were correct. 
(5)	Mr Duhra signed a mandate permitting Mrs Woodward to approach the Taxicab Licensing Department at Northampton Borough Council to ask them what records they held for vehicles licensed to him.
30.	When Mr Duhra left the first meeting with Mrs Woodward, Mr Pereira stayed on. He presented to Mrs Woodward further revised figures indicating that the turnover of the car rental business was £77,486 based on the Blue Book figures with adjusted business expenses totalling £56,872 leaving a net profit of £20,614.
31.	Mrs Woodward approached Northampton Borough Council to ask them for details of all cars licensed under Mr Duhra's name. They confirmed that they had records of vehicles licensed under both Mr and Mrs Duhra's names and they supplied details for a number of years in respect of vehicles on their current database. Mrs Woodward sent copies of the printouts from the council's database to Mr Pereira on 26 March, 2007.
32.	The database contain the following information:
(1)	for the year ended 6 April, 2004, twenty different cars were licensed in the year (some replacing others). On average, ten cars were licensed at any one time.
(2)	For the year ended 6 April, 2003, ten different cars were licensed in the year and, on average, eight cars were licensed at any one time.
33.	A second meeting took place on 22 August, 2007. The meeting was attended by Mr Duhra, Mr Pereira, Mrs Woodward and Mrs Woodward's then manager, Mrs Ward. Again, notes of the meeting were taken and were subsequently signed by Mr Duhra as correct. The following points emerged from that meeting:
(1)	As already noted, Mr Duhra, at the earlier meeting, had said that he wrote up the Blue Book on a weekly basis. At this meeting, however, he admitted that he had written down the cash received from drivers on bits of paper and had written up the figures in the Blue Book at a later date from those bits of paper. He then threw the bits of paper away.
(2)	When asked what records he had given to his former accountant to arrive at the previously declared turnover figure of £53,527, Mr Duhra said that he must have given his accountant  some of these bits of paper.
(3)	Mr Duhra did not supply the full names and addresses of any of the drivers for the photocopied driving licence details.
(4)	Mrs Woodward pointed out to Mr Duhra that the Northampton Borough Council licensing information showed roughly seven or eight cars in use in 2002-03, not four or five cars as Mr Duhra had indicated at the first meeting.
34.	As regards paragraph 33 (1) above, as already noted, in his oral evidence Mr Duhra testified that he had written up the Blue Book from receipts written on bits of paper which he kept in a locked desk drawer at his home. The Blue Book was written up from these pieces of paper in February/March 2006. This was essentially consistent with his version of events at the second meeting and, as we have indicated above, we accept his oral evidence on this point in relation to the tax year ended 5 April, 2004.
35.	As regards paragraph 33 (2), Mr Duhra testified that he had given Mr Garratt annualised figures based on four weeks taken from the Blue Book. As we have indicated above, we accept Mr Duhra's oral evidence on this point in relation to the tax year ended 5 April, 2004.
36.	Subsequently, two colleagues of Mrs Woodward visited Mr Pereira's office and inspected the business records for the partnership for the year ended 5 April, 2005. The records consisted only of the takings book, similar to the Blue Book for 2003-04. There was no primary record of cash received or drivers' names and addresses. 
37.	Mrs Woodward recalculated the business income for the two years ended 5 April, 2004 using the car rental rates as declared by Mr Duhra, multiplied by the average number of Council licensed cars. Her initial calculation assumed that all the available vehicles were fully rented out. Although Mr Duhra could not supply specific information on how many cars were not fully rented out (e.g. because of repairs or lack of drivers), Mrs Woodward subsequently made an allowance for this in her calculations. She treated two cars being off the road full-time to account for both repairs and driver absences. Mrs Woodward then calculated the turnover for the two years ended 5 April, 2006 using an RPI adjustment based on the figures for the year ended 5 April, 2004. For the four years ended 5 April, 2002 she used an RPI adjustment based on a calculation of the turnover for the year ended 5 April, 2003. The proposed amended turnover figures were significantly higher than the figures declared by Mr Duhra in each year. The figures were as follows:

Year	Declared turnover
       £	Number of cars	Max turnover*
       £	Proposed amended turnover
       £	Method -- Proposed amended turnover ("PTA")	
2003-04	77,485	10-11	124,800	99,840	£240 × 8 cars × 52 weeks	
2002-03	49,866	7-8	93,600	74,880	£240 × 6 cars × 52 weeks	
2001-02	48,484	Unknown		72,607	Use RPI on 2002-03 PTA	
2000-01	47,021	Unknown		71,532	Use RPI on 2002-03 PTA	
1999-00	45,073	Unknown		70,292	Use RPI on 2002-03 PTA	
1998-99	40,518	Unknown		68,268	Use RPI on 2002-03 PTA	
2004-05	81,821	Unknown		103,012	Use RPI on 2003-04
PTA	
2005-06	78,967	Unknown		105,646	Use RPI on 2003-04
PTA	

*£240 pw × number of cars × 52 weeks

38.	Formal income tax were made on the basis of these figures for all years under sections 28A, 28B and 29 TMA on 20 January, 2009 and 22 April, 2009 and VAT assessments were made under section 73 Value Added Tax Act 1994. Mrs Woodward concluded that Mr and Mrs Duhra had been negligent in making and submitting incomplete self-assessment income tax returns for all the years in question and accordingly issued formal penalty determinations under sections 95 and 95A TMA on 7 July, 2009. VAT penalties were assessed under sections 67 and 76 Value Added Tax Act 1994.
39.	In his evidence, Mr Duhra stated that his cars were not rented out all the time. Apart from repairs, maintenance and MOT's, his vehicles had petrol engines and were older and were therefore less popular with drivers than those available from other suppliers.
40.	In support of this, Mr Duhra referred to a letter dated 4 March, 2008 from the South Northamptonshire Council. The letter concerned complaints about the use of Mr and Mrs Duhra's drive for non-domestic purposes viz the parking of taxis. The letter read as follows:
"As I explained, Mr Patrick Burke, Enforcement Manager, commenced investigations some 12 months ago. I understand that Mr Burke spoke to you and a note on file states that you confirmed that "the vehicles are ex-taxis to be disposed of at auction". The file has now been handed over to me to continue the investigation. This is necessary for two reasons:
i) Complaints continue to be received alleging non--domestic activity
ii) During my frequent site visits to Grange Park I note on every occasion that the courtyard is always full of cars."
41.	Mr Hall in his submissions argued that this letter supported the contention that not all of Mr Duhra's cars were rented out and, indeed, the reference to "the courtyard is always full of cars" suggested that several cars were unused. Mr Hall produced recent photographs of the driveway of Mr and Mrs Duhra's home which indicated that up to nine cars could be parked on the driveway.
42.	However, we were not persuaded of the relevance of the letter or the photographs. The council’s investigation, according to the letter, commenced twelve months before 4 March, 2008 ie around March, 2007. This is outside the periods under appeal. All that the photographs demonstrated was that the driveway was capable of accommodating up to nine cars. The photographs were recent and did not provide contemporaneous evidence.
43.	Mr Duhra was confident that the Blue Book contained accurate figures for the year ended 5 April, 2004. He did not accept that Mrs Woodward's recalculation of the turnover figures, as summarised in paragraph 37 above, was accurate. He maintained that fewer cars were regularly rented out for the two years ended 5 April, 2004 than the figure allowed for by Mrs Woodward. Where there was a breakdown at the weekend, the car would not go on the road again until Monday morning at the earliest or in some cases Monday afternoon. In reality, many drivers only wanted to work on Friday and Saturday (the busiest days of the week) and he had to keep enough cars to cater for these busy periods, even though some cars would remain under-used for the rest of the week. It was not expensive to license cars with the Council.
44.	Mr Duhra said that for the year ended 5 April, 2004 he estimated that on average he had the equivalent of about six cars on the road continuously. He said that his turnover figure of £77,485 supported this (£77,485 ÷ £240 ÷ 52 weeks = 6.2 cars).
45.	Mr Hall referred Mr Duhra to records which Mr and Mrs Duhra had obtained from Bounds. The records related to amounts paid to Bounds in 2003-04 for radio rentals by drivers who used Mr Duhra's taxis. These records had only recently been provided to Mr Duhra by Bounds and Mr Hall had sent them to HMRC on 4 March, 2011.
46.	Mr Duhra confirmed the following background information. Although drivers rented cars from Mr Duhra (and for the last two years in dispute from the partnership comprising Mr and Mrs Duhra) they worked only with Bounds. The drivers had to pay Bounds for the hire of the radiolink. In 2003-04 the amount that the drivers had to pay was £55 + VAT for a week of twelve hour shifts.
47.	The Bounds records, indicating the amounts paid by drivers of Mr Duhra's taxis, contained columns of figures for the weeks of all months in 2003-04, except October 2003 and March 2004. For most of these weeks, the total figure per week was exactly divisible by £55 (i.e. the amount charged for a week of half days). On average, the amounts paid indicated that roughly six cars were on the road for the whole week. Sometimes there were seven or eight cars, but in most cases approximately six cars paid radio rental for a full week.
48.	A figure of £4400 was recorded on 31 March, 2004. Its timing suggested that this may have been a catch up figure that the missing months of October and March, referred to above.
49.	Mr Hall compared the figures in the Bounds records with the photocopied extracts of the Blue Book contained in the bundles prepared by HMRC. The bundle contained entries in respect of twelve weeks in the year ended 5 April, 2004.
50.	Three out of the twelve weeks photocopied from the Blue Book contained no corresponding entry in the Bounds records (two weeks related to October and March, which were possibly covered by thecatch up payment on 31 March, 2004). Of the remaining nine weeks, seven weeks correlated exactly. Of the two remaining weeks, for one week the Blue Book records indicated that 5.6 cars were engaged and the Bounds records recorded that five cars were engaged. For the other week the Blue Book records six cars engaged and the Bounds records indicated that 8.5 cars were engaged.
51.	Mr Hall cross-examined Mrs Woodward on her schedule of cars licensed by the Northampton Borough Council in the year ended 5 April, 2004. In particular, in relation to October 2003, Mrs Woodward accepted that the total number of vehicles licensed for the month was not in eleven as shown in the table but nearer ten (9.87).
HMRC's submissions
52.	Mr Chapman drew attention to the licensing information obtained from Northampton Borough Council. This indicated that Mr Duhra operated, at any one time, eight cars in the year ended 5 April, 2003 and ten cars in the year ended 5 April, 2004.
53.	Mr Chapman referred to the calculations summarised in the table in paragraph 37 above. He drew attention to the significant increase in the turnover figures declared by Mr Duhra from £49,866 (year ended 5 April, 2003) to £77,485. Mr Duhra's turnover therefore increased by 55% even though the number of taxis only rose by approximately 26%. Mr Chapman submitted that on the balance of probabilities it was unlikely that the turnover declared by Mr Duhra for the year ended 5 April, 2003 was correct.
54.	Mr Chapman referred to the decision of Vinelott J in Brittain v Gibb (HM Inspector of Taxes) 59 TC 374. In that case, the Inspector was not satisfied with the accuracy of the taxpayer's accounts. The Inspector therefore raised additional estimated assessments. The General Commissioners determined the estimated assessments for some years in an increased amount and found the taxpayer guilty of wilful default. The taxpayer appealed contending that the General Commissioners should have considered his accounts not just for one year but for all years. Vinelott J dismissed the appeal on the basis that the General Commissioners were not satisfied with the accuracy of the taxpayer's accounts and they were, therefore, entitled to make their own estimate of what they thought was his probable income from his trade for each year under appeal. It was impossible to say that in so doing they erred as a matter of law.
55.	Mr Chapman submitted that the present appeal was a similar case. Mrs Woodward had not been satisfied with Mr Duhra's accounts. She had made enquiries with a third-party (the Council) and came to the conclusion that Mr Duhra had understated his turnover. It was reasonable for her to go back to earlier years if she was not satisfied that the figures for those years provided by the taxpayer were correct. Equally, Mrs Woodward was, in Mr Chapman's submission, entitled to estimate the correct turnover figure of the two years ended 5 April, 2006 for the same reason.
56.	Mrs Woodward's estimate of the revised turnover for the year ended 5 April, 2004 was based on usage of eight out of ten cars. Mr Duhra's figures suggested the usage of only 62% of the cars that were licensed by the council for that year. Mr Chapman suggested that it was more probable that the proportion of engaged cars would be higher.
57.	Mr Chapman submitted that the photographic evidence of the number of cars assembled in Mr Duhra's driveway was irrelevant because it was not taken during the periods under appeal.
58.	As regards the records from Bounds, Mr Chapman suggested that it was not clear whether all the drivers who rented cars from Mr Duhra were contained in those records.
59.	In Mr Chapman's submission, the question before the Tribunal was whether the taxpayer had accurately and completely reflected his trading results. In this case, the Blue Book was written up almost two years after the end of the tax year to which it related. There was no evidence as to when cars were off the road. The burden of proof was on the Appellant. 
60.	The letter of 4 March, 2008 from South Northamptonshire Council relating to the unauthorised use of the driveway for non-domestic purposes, was, in Mr Chapman's submission, of no value. The Council's investigation commenced in March 2007. This was one year after the latest period covered by the assessments. It simply did not relate to the same time period. Mr Chapman also drew attention to the wording in the letter which referred to "the vehicles are ex-taxis to be disposed of at auction." These were not cars that were parked outside Mr and Mrs Duhra's home which were part of the fleet of working cars. The letter simply did not establish that these were cars available to rent that were off the road.
61.	Mr Chapman submitted that the assessments were reasonable and were raised after exercising due care and attention. As regards the penalty determinations, a reasonable person would have ensured that his tax returns were correct. The Appellants had been negligent. 
Submissions for the Appellants
62.	Mr Hall accepted that Mr Duhra had not handled his past tax returns well. He had panicked and filed incorrect returns without properly assimilating the records. He accepted that the return for the year ended 5 April, 2004 was incorrect.
63.	In the first meeting with HMRC, Mr Duhra had indicated that he had expanded his business from four or five cars to ten cars. Mr Hall emphasised that in the year ended 5 April, 2004 Mr Duhra had in fact expanded his business to ten cars and had expanded it from an earlier figure of four or five cars. The fact that he had misremembered the number of cars operating in the year ended 5 April, 2003 was understandable and excusable.
64.	As regards the manner in which Mr Duhra wrote up the Blue Book, Mr Hall submitted that the only question that was relevant was whether the Blue Book was accurate. Mr Hall argued that the third-party evidence from the Bounds records indicated that the Blue Book was accurate. In seven of the nine weeks where there were corresponding records, there was an exact match between the Blue Book and the Bounds records. This was too much of a coincidence. The Bounds records proved the accuracy of the Blue Book. As regards Mr Chapman's suggestion that not all drivers who rented cars from Mr Duhra were recorded in the Bounds records, Mr Hall submitted that it would have been extraordinary for the Blue Book to have recorded the exact number of drivers who paid radio rentals for the same week as recorded in the Bounds records.
65.	Mr Duhra had given oral evidence that all the drivers who rented his taxis worked with Bounds (with one isolated exception). His evidence on this point had not been challenged by Mr Chapman in cross-examination.
66.	As regards Mrs Woodward's calculations for the year ended 5 April, 2004, summarised in the table in paragraph 37 above, Mr Hall submitted that her figures were not realistic. The figures assumed eight out of ten cars were in use day and night for 52 weeks. The cars that Mr Duhra operated were old cars bought cheaply at auction and it was not expensive to license. Mr Duhra's evidence was that he needed to gear up for the busiest times of the week (Friday and Saturday) otherwise he would have had to turn drivers away.
67.	The Bounds records suggested, according to Mr Hall, an average number of cars in use over the year to be 5.615 in respect of the year ended 5 April, 2004. This suggested that the number of cars in use was nearer six than eight (Mrs Woodward's estimate). Mr Hall submitted that the actual average number of cars in use for the year was approximately six.
68.	The Bounds records were independent third-party evidence which reliably indicated that the figures used for the year ended 5 April, 2004 in the Blue Book were accurate. Mr Hall submitted that if we concluded that the Blue Book accurately reflected its Mr Duhra's turnover for the year, the turnover assessed by Mrs Woodward in relation to the two subsequent years (the two years ended 5 April, 2006) was incorrect and that those assessments could not stand.
69.	In addition, as regards the year ended 5 April, 2003, if it was accepted that for the year ended 5 April, 2004 Mr Duhra had rented out six out of ten cars, then a similar ratio should be applied for the earlier year. Therefore, if eight cars were licensed to Mr Duhra by the Council for that earlier year the average number that would be in continuous use would be 4.8 cars.
70.	As regards the four years ended 5 April, 2002, Mr Hall submitted that scaling back Mrs Woodward's amended figures using the RPI was a flawed method since it took no account of a gradual increase in the size of the business and the number of cars rented out. Mr Hall maintained that Mr and Mrs Duhra did not have seven or eight cars in those early years.They could not therefore have rented out six cars.
71.	Mr Hall submitted that the presumption of continuity should work in favour of his clients. If we found that the Blue Book figures for the year ended 5 April, 2004 were correct, the presumption should be that figures for earlier years returned by Mr Duhra were also correct.
72.	As regards the penalty determinations, Mr Hall submitted primarily that no penalties should arise but that if any penalty was appropriate in respect of the Income Tax liabilities, it should certainly not be at a rate anywhere near the 40% level which HMRC had imposed.  
Our decision
73.	There is no doubt that Mr Duhra failed to pay adequate attention to the completion of his tax return for the year ended 5 April, 2004. It was only after the enquiry was started by HMRC and Mrs Woodward’s persistence that he returned a turnover figure of £77,485 (having first returned an incorrect amount of £ 53,527). There was no excuse, in our view, for either the original provisional figure or the incorrect amending figure of £53,527 which was put forward after the beginning of HMRC's enquiry. This figure was, however, amended to £77,485 at the meeting on 19 October 2006 following Mr Pereira’s prompt notification to HMRC in March 2006 that the £53,527 figure was incorrect  The issue before the Tribunal is whether this declared turnover figure of £77,485 is correct.
74.	In cases such as this, where inadequate primary records are kept, HMRC are faced with the difficult task of estimating the correct turnover for the years in dispute. No criticism can be made of Mrs Woodward for adopting the course of action that she did. Mr Duhra had plainly been neglectful in attending to his tax affairs for the year ended 5 April, 2004 and had given inconsistent answers on a number of issues in the two meetings which he attended. It was only through HMRC's persistence that the figure of £77,485 as the turnover for the year was eventually proffered on behalf of Mr Duhra.
75.	We consider, however, that the Blue Book figures which produced a turnover of £77,485 for the year ended 5 April, 2004 were substantially correct. In our view, the records produced from Bounds plainly indicated that the Blue Book figures were substantially correct. It is true that those records still contained some discrepancies and some months were missing (but were probably reflected in the "catch up" figure recorded for 31 March, 2004). There was no suggestion that the Bounds records were not genuine and, indeed, the discrepancies to which we have referred suggested to us that these records were indeed genuine. Mr Chapman suggested that these records may not have covered all the drivers who rented taxis from Mr Duhra. However, we accept Mr Duhra's evidence that all the drivers who rented taxis from him worked with Bounds (with one isolated exception).
76.	We therefore conclude that for the year ended 5 April, 2004, Mr Duhra's turnover was £77,485.
77.	As regards the year ended 5 April, 2003 we have more concerns. We have little confidence, given the way that Mr Durha initially disclosed his profit figures for the year ended 5 April, 2004, that the profit figure disclosed for the year ended 5 April, 2003 was correct. It seems to us, on the balance of probabilities, very unlikely that Mr Duhra managed to achieve a 55% increase in turnover with only a 26% increase in available taxis. We therefore do not consider that the turnover figure he declared for the year ended 5 April, 2003 (£49,866) was correct. In our view, a more realistic estimate of Mr Duhra's turnover can be derived from applying the same utilisation rate prevailing in the year ended 5 April, 2004, viz 62% and taking account of the fact that according to the Council's records eight cars were licensed in Mr Duhra's name. On this basis, Mr Duhra's turnover was £61,900 (ie 8 cars × 62% × 52 weeks × £240). Accordingly, we find that Mr Duhra's turnover for the year ended 5 April, 2003 was £61,900..
78.	For the earlier years (ie the four years ended 5 April, 2002) there are no figures available for the number of cars employed by Mr Duhra in his business. Accordingly, another method of calculation is appropriate. We accept Mr Hall's argument that using an RPI calculation does not reflect the gradual growth in the business as Mr Duhra bought more cars. It seems to us, therefore, that the most realistic method of calculation involves taking the year ended 5 April, 2003 and taking the ratio between the declared turnover of £49,866 to the turnover as found in paragraph 76 above (i.e. £61,900) and applying this ratio to the four years ended 5 April, 2002. This produces the following turnover figures which we find as the turnover of the business in those years:
Year	Declared turnover	Amended turnover (× 1.241)	
2001-02	£48,484	£60,168	
2000-01	£47,021	£58,353	
1999-00	£45,073	£55,935	
1998-99	£40,518	£50,282	

79.	As regards the two later years (the two years ended 5 April, 2006) we considered the possible application of an RPI adjustment to the declared turnover figure of £77,485 for the year to 5 April, 2004 but concluded that this would make no significant difference to the declared turnover referred to in paragraph 57. We accordingly determine the turnover figures for those two years in the amounts previously declared, namely £81,821 for the year to 5 April, 2005 and £78,967 for the year to 5 April, 2006. 
80.	As regards any penalty for failure to register the business for VAT, Mr Hall pointed out, correctly in our view, that the obligation to register arises when the turnover of the prior twelve months (on a rolling basis) exceeds the registration limit (see paragraphs 1 and 5 Schedule 1 to the Value Added Tax Act 1994). The point is that VAT is not retrospectively charged for the twelve months which resulted in the registration threshold being exceeded. The obligation to register runs from the month following the twelfth of the twelve months.  
81.	In accordance with the agreed basis of approach referred to in paragraph 3 above, it is for the parties to determine the actual Income Tax and any VAT liabilities that result from our decisions in respect of turnover.
82.	In respect of the Income Tax penalty determinations, we concluded in all the circumstances (taking into account disclosure, cooperation and the size and gravity of the default) that the appropriate penalty ‘loading’ in respect of the year ended 5 April, 2004 was 20%, that is to say a discount of 80% from the 100% maximum. We note that different considerations might apply in respect of the earlier (and if appropriate, later) years but in the absence of distinguishing evidence, we concluded that the same 20% loading should be applied if any penalty is appropriate.
83.	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.

GUY BRANNAN

TRIBUNAL JUDGE
RELEASE DATE: 13 MAY 2011