SPC00507
PROCEEDS OF CRIME ACT – Assessment to income tax and NIC – Whether excessive – PoCA 2002 Pt 6

THE SPECIAL COMMISSIONERS

	HARPER (Gary)	Appellant

	- and -

           
	THE DIRECTOR OF THE ASSETS RECOVERY AGENCY     	Respondent

				Special Commissioners:     STEPHEN OLIVER QC
							         BRIAN O’BRIEN 							

Sitting in Belfast on 5 July 2005

Mr Thompson Gilmore, friend, for the Appellant

Jason Mansell, counsel , instructed by the Solicitor for the Respondent

© CROWN COPYRIGHT 2005

DECISION

1.	Mr Gary Harper appeals against assessments to income tax and national insurance tax made by the Director of the Assets Recovery Agency (“the Director”) for the eight years 1995/6 to 2002/3.  

2.	The assessments were made on 29 January 2004.  They were subsequently revised downwards.  As revised the amounts of tax and national insurance contributions are as follows:

	1995/1996  :	income tax £1,828 and national insurance £444.71
	1996/1997  :	income tax £4,856.46 and national insurance £1,008
	1997/1998  :	income tax £7,634.64 and national insurance £837.78
	1998/1999  :	income tax £12,702.43 and national insurance £735.96
	1999/2000  :	income tax £8,751.80 and national insurance £897.90
	2000/2001  :	income tax £1,761.32 and national insurance £560.42
	2001/2002  :	income tax £14,995.20 and national insurance £1,775.55
	2002/2003  :	income tax £12,750.80 and national insurance £1,806.00

3.	Mr Harper lives in Northern Ireland.  The appeal was heard in Belfast and we heard evidence from Mr Ian Kaye, an officer with the Assets Recovery Agency (“the Agency”), and from Mr Harper.  

The statutory framework

4.	We start by explaining the background by reference to the statutory framework.

5.	At all material times the Respondent was and is the Director of the Agency, both having been established under section 1 of Part 1 of the Proceeds of Crime Act 2002 (referred to as “PoCA”).

6.	Under Part 6 of PoCA, providing that the qualifying condition contained in section 317 of that Act is satisfied, the Director is able to assume the general functions of the Inland Revenue.  

7.	The terms of the qualifying conditions are, among others, that:

“For the purposes of this section the qualifying condition is that the Director has reasonable grounds to suspect that –

(a)	income arising or a gain accruing to a person in respect of a chargeable period is chargeable to income tax or is a chargeable gain (as the case may be) and arises or accrues as a result of the person’s or another’s criminal conduct (whether wholly or partly and whether directly or indirectly), … .”

8.	By section 326(1) criminal conduct is defined as conduct which:

“(a)	constitutes an offence in any part of the United Kingdom, or
 (b)	would constitute an offence in any part of the United Kingdom if it occurred there.”

9.	By section 317(2) if the qualifying condition is satisfied, the Director may serve on the Commissioners of Inland Revenue a notice specifying the person and the period and stating that the Director intends to carry out, in relation to that person and in respect of that period, such of the general Revenue functions as are specified in the notice.  

10.	Under section 317(3) service of the notice vests in the Director such of the general functions of the Revenue as are specified in the notice.

11.	By section 323 the general functions of the Revenue are: “such of the functions vested in the Board or in an officer of the Board as relate to any of the following matters:

(a)	income tax; … 
(d)	national insurance contributions … .”

12.	On or about 27 January 2004 the Director served a notice under section 317(2) of PoCA on the Commissioners of Inland Revenue in relation to Mr Harper for the chargeable periods 1995/96 to 2002/03 stating an intention to carry out any such of the general functions of the Revenue as were vested in the Board or in an officer of the Board and as related to income tax and national insurance contributions.

13.	The notice was served as a result of the Director having been satisfied that the qualifying condition under section 317(1) was satisfied.  As a result of matters brought to the Director’s attention under section 436 in Part 10 of PoCA (“Disclosure of Information to Director”), the Director had and has reasonable grounds to suspect that income was arising to Mr Harper and was chargeable to income tax and was a result of criminal conduct either wholly or partly, directly or indirectly.  In particular the Director held and holds the belief that Mr Harper failed to include, in such income tax returns as he had submitted to the Inland Revenue for tax years 1995/96 to 2002/03 inclusive, details of income derived from his involvement in dealing in counterfeit goods, illegally imported tobacco and alcohol and proceeds of others’ criminal activity.  The Director relied upon information made available to her by the Police Service of Northern Ireland about Mr Harper’s criminal convictions, his involvement with counterfeit  goods and with illegally imported cigarettes and alcohol between 1994 and the end of 2002. 

14.	As a result of those matters, by reason of section 317(3) of PoCA the Director was vested with such general functions of the Revenue as relate to those functions specified in section 323 of PoCA, namely income tax and national insurance contributions.

The investigations

15.	In the course of its investigation, the Agency made certain discoveries:

(i)	During the eight years under review, three houses had been successively acquired, each with the assistance of a substantial mortgage  There was a site in addition.  We refer to these as “the property purchases”.

(ii)	Several vehicles had been purchased, and a share in a boat.  We refer to these as “the asset purchases”.

(iii)	There were unidentified lodgments into two current accounts with the Bank of Ireland and a Credit Union account. These are referred to as “the lodgments”.  (The latter and one of the current accounts were in the name of Mr Harper’s wife; but it is common ground that the funds were derived from him.)

(iv)	There had been certain other significant items of exceptional expenditure, including the purchase of jewellery; these also are part of the “asset purchases”.

(v)	“Market trading accounts” had been drawn up for the years 1999-00 to 2002-03.

The assessments

16.	The assessments were made on 29 January 2004 by the Director.  These were estimated “discovery” assessments made under section 29 of Taxes Management Act 1970 for the years 1995/96 to 2002/03.  The additional income assessed totalled £451,150.  The total amount of  income tax and NIC due thereunder was £145,299.53.  

17.	Appeals and postponement applications were lodged on 16 February 2004.

18.	Communications took place between Mr Harper and the Agency.  On 24 May the Agency revised its estimate of undisclosed taxable income downwards to £310,919.  A further downwards revision was made in July showing an estimate of understated income as £238,953.  The revised sum of tax due was £73,346.97 (see paragraph 2 above) of which Mr Harper has paid £4,000.  The amount for which Mr Harper is currently liable (subject to the outcome of this appeal) is £69,346.97.  The downward revisions, we were told by Mr Ian Kaye, the officer of  the Agency who gave evidence, were made to take into consideration, among other things, cash withdrawals from the bank accounts referred to below.

These proceedings

19.	The matter came before this Tribunal in November 2004 and, again in March 2005.  On both occasions directions were given requiring Mr Harper who had been served with the Director’s case and supporting documentation, to state his case as to why he contended that the assessed amounts (as revised) were excessive and to provide a summary of the supporting evidence that he proposed to adduce at the full hearing.  It was explained in the latter direction that, unless he provided such material by 19 April, he would be prevented from adducing it as evidence at the hearing unless the Special Commissioners specifically directed otherwise.  At no point did Mr Harper provide the Tribunal with any such  information.

20.	When the full hearing started Mr Jason Mansell for the Director contended that Mr Harper should not be allowed to adduce any evidence and the consequence must be that his appeal should be dismissed.  Mr Harper, through his friend Mr Thompson Gilmore, explained that he had been suffering from the aftermath of a nervous breakdown aggravated by the death of his father in March 2005; consequently he had given the case no attention.  At 12.15pm we broke off and, in the light of what we had heard about Mr Harper’s health problems, gave him until 2.00pm to consult with Mr Thompson Gilmore and decide how he should proceed.  At 2.00pm Mr Harper told us that he would give evidence and in the course of that would give the Tribunal his account.  We gave him leave to do so.

The Issue

21.	The issue in this appeal is whether Mr Harper, upon whom the burden of discharging the assessment lies, can satisfy us on the strength of the evidence adduced by him that the assessments (as revised downwards) are excessive.  In this connection we mention that the Director’s case is that the assessed income has been derived from trading in counterfeit goods, tobacco and smuggled alcohol or from illegal distribution and is accordingly chargeable to tax under Case I of Schedule D.  Alternatively the Director relies upon section 319 of PoCA, the effect of which, she contends, is to validate any assessment made by her in the event that she shall have specified no source, or an incorrect source, of income, so that the assessments under appeal should in any event stand good.

22.	We start with the methodology adopted by the Agency.  This was explained in evidence by Mr Ian Kaye.

The assessment and its methodology

23.	The Agency’s enquiries identified lodgments entering into accounts controlled by Mr Harper.  Enquiries had shown that Mr Harper had contributed money to accounts held in the name of his wife, Lynda Harper.  The Director, having grounds to believe that these lodgments represented undeclared income which was properly chargeable to tax, brought those lodgments into account as positive amounts in her calculations of income for each year (“the income calculators”).  We now explain the methodology with reference to the income calculator figures for 1998/1999.  

24.	At Stage 1 the lodgments to the three bank and Credit Union accounts (already stated) were reduced by inter-account transfers and the net figures were £5,756, £4,147 and £1,300.  Those amounts were added to the purchase prices of two houses (£96,950 and £75,000) and a share in a boat (£10,000).  The aggregate came to £193,153.

25.	Stage 2 involved subtracting from the £193,153 the amounts borrowed on mortgage to finance the purchase of the two houses (£70,000 and £68,000) and a cash withdrawal of £500 (said to have been used to pay a deposit on the purchase of a site).  The aggregate of these deductions came to £138,500.  This stage of the calculation brought the total income down to £54,653 for the year.  

26.	Stage 3 involved an adjustment to the total income figure of £54,653 to take account of income known to the Agency.  £12,954 had been declared by Mr Harper in his tax return as net profits as an ice cream vendor, £1,448 related to “benefits” banked and £700 came from an army pension.  The net figure, taken by the Director in her income calculation as undeclared income, was £39,551.  

27.	At Stage 1 the income calculator for other years showed the asset purchases, i.e. cars,, the boat and other high value consumer goods, brought into the calculation at cost.

28.	Added to the Stage 1 figure had been an amount representing the average family expenditure based on the Office of National Statistics figures for the year.  A subsequent review of information had led the Agency to exclude from the amounts for family expenditure payments out of the bank accounts that were available to cover, in part at least, private family expenditure; the source of that expenditure was, in consequence, not treated as undeclared chargeable income.  

29.	Added to the Stage 1 figures of unreturned amount for the years 1999/2000 to 2002/03 were further amounts taken from the market trading accounts for those years.  The statements had apparently been prepared by an accountant.  They were supplied to the Agency by Mr Harper’s representatives in the course of the investigation.  They described themselves as financial statements relating to a “market trading business”.  In the course of an interview Mr Harper had stated that those had been drawn up for the purpose of obtaining a mortgage on a property purchased on 3 April 2003.  

30.	Finally, following further analysis of information made available, amendments were made on 20 July 2004 to the Agency’s estimates.  These were to take account of inter-bank account transfers, cash withdrawals from bank accounts, pension payments received and allocations into tax years of deposits to one of those bank accounts.  

31.	Mr Kaye’s evidence included the result of enquiries that he had made with the Inland Revenue.  These showed that :

(i)	for 1991 until April 1997 Mr Harper had been unemployed and in receipt of benefits and that his United Kingdom pension income had been £1,680 in 1997/98 and £3,600 in 2001/02;

(ii)	no tax return had been made for 2002/03 and 

(iii)	from August 2001 Mr Harper had been in receipt of disability allowance and incapacity benefit.

The evidence of Mr William Baxter, an officer of the Asset Recovery Agency recorded that, following Mr Harper’s heart attack in mid 2001, his wife had taken responsibility until late that year for his business enterprise.

Mr Harper’s case

32.	There was no dispute about the figures in the income calculators, as figures.  Nor did Mr Harper appear to question the propriety of including, for the purpose of estimating gross income, the figures for property purchases and asset purchases. At the hearing, Mr Harper did, however, challenge the treatment of the lodgments as trading profits.

33.	By his own account, Mr Harper commonly kept substantial sums of cash at home and the burden lay on him to satisfy us, on the balance of probabilities, that the lodgments did not represent trading profits. He offered two explanations.  The first was that the sums represented savings from monies received from the Ministry of Defence – the largest part of which had been received before the period under review.  The second was that many of the lodgments were not new lodgments, but were re-lodgments of money which had been banked at an earlier date, then withdrawn (and subsequently returned to the account) – ‘in and out money’, as he put it.  Such re-bankings could not be taken into consideration twice.

Conclusions

34.	The methodology seems to us to have been sound and based on a proper approach to the assessment of undeclared income.  It reflects what, we agree with the Agency, is an underlying principle that in all calculations of undisclosed chargeable income, only two things can happen to amounts identified as income, whatever the source of that income might be.  Either it is spent or it is saved.  Thus, to arrive at a total for undeclared income, amounts spent (such as purchases of assets) and amounts saved (such as bank deposits) are first identified and then reduced by amounts from known sources.  The income calculator appears to do that. 

35.	What credit can we give to Mr Harper’s claim that a significant part of the lodgments represents earnings from Mr Harper’s pension?  Mr Harper on whom the burden of proof lies has produced no evidence of the amounts of the pensions or for how long they have been accruing.  We only know from the tax returns that £1,680 had been received for 1997/98 and £3,600 in 2001/02.  Mr Harper said that these had been drawn out from the Post Office in cash.  He also said in interview that he kept no money at the bank.  Also in the course of interview Mr Harper had indicated that the money he saved from his Army pension had been spent on buying cars and holidays.  Moreover, as already indicated, from 1991 to 1997 Mr Harper was registered as unemployed and was in receipt of benefits.  

36.	We heard no evidence to show that £5,000 had come from compensation or, if it had been compensation, when it had been paid to Mr Harper. 

37.	With all those factors in mind we are unable to believe Mr Harper had net savings from an earlier period, if only because he was recorded as unemployed during the first two years under review, and living expenses had to be met.  Put another way, if it could be shown (as it was not) that lodgments made in those years were specifically monies received from the MoD, those living expenses must have been met else-how – presumably by means of concealed profits.  That does not further Mr Harper’s cause.

38.	Nor do we find Mr Harper’s second explanation sufficient.  It is clear that he is essentially a cash operator and the bank accounts play a limited role in his affairs.  An examination of the bank statements shows that funds were not accumulated there (indeed, Mr Harper’s own account was occasionally overdrawn to a small extent) and it appears that the accounts were used principally for two purposes : to convert cheque receipts into cash, and to meet certain regular payments (e.g. for television services and in respect of mortgages) by direct debit.  The accounts had to be fed from time to time, out of cash from home, to fund those debits.  While it may be true that such lodgments may be said to be traceable, in a manner of speaking, to cash withdrawn from the account following a cheque lodgment, the money withdrawn had, in the meantime, been used in trading; and it was surpluses from the trading – i.e. profits – which came back to the bank to keep the account in credit.

39.	If there were no more to the case we would accept Mr Mansell’s contention that Mr Harper had failed to show that the revised figures at the end of the income calculator were excessive, and we would determine the assessments accordingly.  However, since the hearing we have had the opportunity to review not only the oral evidence but also the bundle of documents, including a transcript of a lengthy interview with Mr Harper which took place on 18 November 2003; and we have formed a view – adverse to the Agency’s position – about one item in the build-up of the gross figures in the income calculator.  That concerns the figures in the market trading accounts.

40.	Little is known about these four unaudited financial statements (the market trading accounts) beyond the fact that they were probably drawn up for the purpose of supporting the application for a mortgage when 21 Woodburn Avenue was acquired.  The income calculator states that the profits shown therein were not banked. It is perfectly true that the bank statements do not include lodgments clearly identifiable as referable to this ‘market trading’ : but that is not how the bank accounts were operated. The inclusion of this item in the income calculator must mean that the Agency regarded the trading in question as distinct from and (we emphasize) additional to the trading generating the profits represented by the bank lodgments.  In the result, the combined trading was seen as having improved dramatically during those four years, just at the time of the onset of Mr Harper’s mental problems, for which he was for a short time hospitalised. We regard this as improbable in the extreme.  Furthermore it seems inconsistent with the evident reduction in Mr Harper’s standard of living from that period on – a smaller house, a more modest car, and no boat.
41.	The Director confirmed that the market trading income was regarded as additional to other income (trading or otherwise).  Referring to Mr Harper’s admissions, in the course of interview on 18 November 2003, that he did not keep money at the bank and that he had cash of around £30,000 in his house and that the market trading business traded for cash, the Director invited us to infer that a sum of that size would have been the cash accumulation of the business.  The Director reminded us that, following Mr Harper’s heart attack in July 2001, his wife had taken over responsibility for his business interests; consequently there was no reason to expect a reduction in income during the three years in question.
42.	We have taken those factors into account.  It seems to us that the other features referred to in paragraph 40 are more persuasive.  We cannot therefore infer either that the £30,000 was the cash accumulation of profit from the market trading business or that Mr Harper’s wife’s activities sustained a profitable business of that scale.
42.	We accordingly determine the assessments, in terms of income/profits, as follows:
1995-96:	£12,732		1999-2000:	£24,675
1996-97:	£25,769		2000-2001:	    NIL
1997-98:	£26,848		2001-2002:	£27,376
1998-99:	£39,551		2002-2003:	£29,647

In the light of these figures, Mr Harper must have known that his returns (for years in which returns were submitted) were incorrect and we find that the conditions authorizing the raising of the assessments are satisfied.

STEPHEN OLIVER QC

BRIAN O’BRIEN

SPECIAL COMMISSIONERS
Release Date: 11 October 2005

SC 3114/04