SPC00646

CLOSURE NOTICE – queries on unidentified bank receipts unanswered – whether closure notice should be issued – no – enquiry opened into subsequent return but no enquiries made – whether closure notice should be issued – no 

THE SPECIAL COMMISSIONERS

	KENNETH CHARLES FLOYD	Applicant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Special Commissioner:	DR JOHN F AVERY JONES CBE

Sitting in public in London on 12 November 2007

Kevin Wilson, Sanderson Wilson & Company Limited, Chartered Certified Accountants, for the Applicant

Ewan Marland, HM Inspector of Taxes, HMRC Appeals Unit Eastern England, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Mr Kenneth Charles Floyd applied on 18 July 2007 for a direction for the closure of the enquiry into his tax returns for 2004 and 2005.  The Applicant was represented by Mr Kevin Wilson, and the Revenue by Mr Ewan Marland.
2.	Section 28A of the Taxes Management Act 1970 provides:
“(1) An enquiry under section 9A(1) of this Act is completed when an officer of the Board by notice (a “closure notice”) informs the taxpayer that he has completed his enquiries and states his conclusions.
In this section “the taxpayer” means the person to whom notice of enquiry was given.
(2) A closure notice must either—
(a) state that in the officer's opinion no amendment of the return is required, or
(b) make the amendments of the return required to give effect to his conclusions.
(3) A closure notice takes effect when it is issued.
(4) The taxpayer may apply to the Commissioners for a direction requiring an officer of the Board to issue a closure notice within a specified period.
(5) Any such application shall be heard and determined in the same way as an appeal.
(6) The Commissioners hearing the application shall give the direction applied for unless they are satisfied that there are reasonable grounds for not issuing a closure notice within a specified period.”
3.	There was an agreed statement of facts not in dispute as follows:
(1)	The Applicant trades as a self-employed roofing contractor.  His agents are Sanderson, Wilson & Company Limited (“the Agents”).
(2)	His self-assessment tax return for the year ended 5 April 2004 (2003-04) was filed via the Internet and received by the Revenue on 6 October 2004.  The tax return included details of profits from the roofing business for the year to 31 October 2003 and income from property and interest received for the year to 5 April 2004.  An enquiry under the provisions of s 9A TMA 1970 was opened by the Revenue by letter issued to the Applicant and copied to his agent on 5 October 2005.
(3)	In a letter dated 3 November 2005 the Agents disclosed omissions from the Applicant’s 2004 tax return in respect of rental income from two properties and a capital gains from the disposal of one property.
(4)	The Applicant’s self-assessment tax return for the year ended 5 April 2005 (2004-05) was filed via the Internet and received by the Revenue on 11 January 2006.  The tax return included details of profits from the roofing business for the year to 31 October 2004 and income from property and interest received for the year to 5 April 2005.  An enquiry under the provisions of s 9A TMA 1970 was opened by the Revenue by letter issued to the Applicant and copied to his agent on 2 January 2007.
(5)	On 18 July 2007 an application under s 28A(4) TMA 1970 was made by the Agents to the Special Commissioners requesting that the Revenue be directed to close their enquiries into 2003-04 and 2004-05.
(6)	On 23 August 2007 the Revenue served on the Special Commissioners and copied to the Agents a statement of grounds for not issuing a closure notice in respect of the enquiries into the tax returns for the years 2003-04 and 2004-05.
(7)	The Applicant ceased to trade as a roofing contractor on 30 September 2006 and has retired. 
4.	I heard evidence from Mrs Gillian Scott, the Inspector of Taxes concerned (“the Inspector”), and I find the following facts:
(1)	In response to a request for full disclosure, further investment income was disclosed.  A payment on account has been made.  The Applicant has declined to have a meeting with the Inspector (as he is fully entitled to do).
(2)	Mrs Floyd, the Applicant’s wife, has provided some information about deposits into her bank accounts but has declined to provide any further information (as she is fully entitled to do), in particular about the source of three deposits into her Halifax account.
(3)	The Inspector gave notice on 21 June 2007 that she was considering applying for a Notice under s 20 TMA 1970 if Mrs Floyd did not provide the information requested.  Before the Inspector could follow this up, the Applicant applied for a closure notice on 18 July 2007, and the Inspector decided not to pursue the s 20 Notice while this application was pending.
(4)	The Inspector does not intend to raise any separate enquiries in relation to the 2005 return and had opened the enquiry as a protective measure.
5.	The Inspector gave as reasons for not closing the enquiries that she had concerns about the sales and purchases of the Applicant’s roofing business, and some unidentified deposits into the Applicant or Mrs Floyd’s bank or building society accounts.
6.	Mr Kevin Wilson, for the Applicant, contends:
(1)	No enquiries had been made of the 2005 return and the Inspector agreed that she did not intend to do so.  Accordingly there is no reason for not issuing a closure notice within 30 days.  The Inspector would still be able to make a discovery assessment.
(2)	The Inspector has made no further requests for information about either purchases or sales of the roofing business since her letter of 6 October 2006 which was replied to on 20 October 2006.
(3)	There is no enquiry into Mrs Floyd’s return and there is no obligation on her to provide any information.
(4)	As the Special Commissioner said in Jade Palace Ltd v HMRC [2006] STC (SCD) 419 at [43] the longer the period of the enquiry, the greater the burden on the Revenue to show reasonable grounds as to why a time for closure should not be specified; also at [46] that the Revenue do not have to be satisfied in order to state their conclusions and they can make a judgment about the correct figure.
(5)	There has been lengthy correspondence and, as the Inspector accepts, a lot of information has been provided.  The Applicant is unable to provide any further information.  Mrs Floyd has provided some information but is unwilling to prove any further information.  The Inspector could have applied earlier for a s 20 Notice.
7.	Mr Ewan Marland, for the Revenue, contends:
(1)	The Inspector is still concerned about business sales and purchases.  She has evidence in the form of a telephone conversation with someone for whom the Applicant’s diary shows he did work that the person paid £300-£400 in cash which is not recorded in the accounts.  A purchase invoice has been provided which does not apparently relate to recorded work done.
(2)	The Inspector has raised queries about the source of a number of deposits into three bank accounts, which in eight cases have not been answered, and in one further case there is no evidence of the explanation that the sum is a loan from the Applicant’s father.  The Inspector’s concern is that these items could represent undeclared sales.
(3)	There have been two separate disclosures by the Applicant and there may be other omissions.  The situation is similar to that in Gould (T/A Garry’s Private Hire) v HMRC [2007] STC (SCD) 502 and Doyle v HMRC [2005] STC (SCD) 775 that the Inspector is not at the moment in a position to put a figure on what she considers are understatements of profits.
(4)	The Inspector was entitled to open an enquiry into the 2005 return as a protective measure so that the Applicant was aware of the Revenue’s position.
The 2004 return
8.	In relation to the 2004 return the Applicant has provided all the information he says he can; Mrs Floyd is unwilling to provide any further information; and the Inspector still has concerns about purchases and sales in relation to which there are unanswered queries relating to deposits into three bank accounts (a total of eight items and evidence of the explanation that one further item is a loan from the Applicant’s father).
9.	The test is s 28A(4) is whether I am satisfied that there are reasonable grounds for not issuing the closure notice within a specified period, which the Applicant has put at 30 days.  One item is the proposed s 20 Notice that would have been applied for if the Applicant had not applied for the closure notice.  I am satisfied that since Mrs Floyd has declined to provide further information, the Inspector is justified in pursuing a s 20 Notice.  I would in any case allow time for this before directing the issue of a closure notice and since this might show other accounts I would not be able to put a time on the closure at this stage.  
10.	The more difficult item is the Inspector’s concerns about the business accounts.  These have shown to be possibly justified in relation to the cash payment of £300 to £400 from a customer, and the purchase invoice that does not apparently relate to any recorded work.  These seem to me to be reasonable concerns. Until the Applicant deals with the Inspector’s queries about deposits into bank accounts (including deposits into Mrs Floyd’s account because it is obviously possible that unrecorded sales might have been deposited there) the Inspector is in my view not in a position to put a figure on her view of any under-declaration.  That figure is not the amount for which there is no information about the particular deposits because the answers to the source of those deposits may disclose further accounts which in turn might contain business receipts.  If the Applicant wants to put a stop to the enquiry he will have to meet the Inspector’s concerns in a way that goes beyond what he and his wife have already done.
11.	Accordingly, in relation to the 2004 return, I am satisfied that there are reasonable grounds for not issuing the closure notice within a period that can sensibly be specified today.
The 2005 return
12.	So far as the enquiry into the 2005 return is concerned, while I can understand that at first sight it seems to follow that, if the Inspector does not intend to ask any questions, there are no grounds for not issuing a closure notice, I do not consider that this is the correct approach.  The situation is not unique.  I have seen a case where the quantum of losses in one year were disputed and an enquiry was opened into a number of successive years which will be affected if the losses of the first year turn out to be less than claimed, without any enquiries being made into the successive years.  Here the connection between the years is more tenuous but if the Inspector’s concerns about the business accounts relevant to the 2004 return turn out to be well-founded, she will have the same concerns about the accounts relevant to the 2005 return.  It might even be argued that, since she knew she had concerns about the 2004 accounts when the time limit for enquiring into the 2005 return passed, she could not in future make a discovery about the 2005 accounts.  In my view the two years are related and if a closure should not be issued for the 2004 return, the same will follow for the 2005 return.
13.	Accordingly I dismiss the application.   

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 15 November 2007

SC 3156/07

Authorities referred to and not referred to in the decision:
Kempton v Special Commissioners and IRC  [1992] STC 823
HMRC v Vodafone 2 [2005] STC (SCD) 549