Spc00667

NOTICE requiring production of documents and the furnishing of accounts and particulars; whether reasonably required for the purpose of determining whether taxpayer’s return is incorrect or incomplete; Taxes Management Act section 19A(2)

THE SPECIAL COMMISSIONERS

	(i) ZEKI UYAR (ii) HULYA UYAR & (iii) SAMSUN RESTAURANT  	Appellants

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

		

				Special Commissioner:  J GORDON REID QC

Sitting in public in Edinburgh on 9 January 2008

James Paterson, C.A. of Paterson Reid, Berwick–upon-Tweed for the Appellants 

Ros Shields and Brendan Hone, Inspectors of Taxes on behalf of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

INTRODUCTION

1.	These are three appeals under section 19A(6) of the Taxes Management Act 1970 (the “TMA”) by two individuals, Zeki and Hulya Uyar (who are brother and sister) and a partnership of which they were the partners and which traded under the name Samsun Restaurant from premise in Edinburgh.  The appeals are against three Notices, served respectively on Zeki, Hulya and the partnership under section 19A(2) of TMA.  They all relate to the appellants’ 2005 returns and the Respondents’ (“HMRC”) enquires into the completeness and correctness of these returns.

2.	A Hearing took place at Edinburgh on 9th January 2008.  The Appellants did not attend the hearing but were represented by James L Paterson CA, C.T.A.(Fellow), who carries on business as a chartered accountant under the name Paterson Reid from Berwick-upon-Tweed and Kelso.  He gave evidence on oath.  HMRC were represented by Miss Ros. Shields and Brendan Hone, both inspectors of taxes.  They led no evidence.  Both parties produced bundles of documents which contained substantially the same material.  For convenience I shall refer only to the Appellants’ bundles.  HMRC produced a skeleton argument in relation to each appeal.  Mr Paterson indicated that his argument was the mirror image of the HMRC skeletons and there was therefore no point in producing a formal skeleton on behalf of his clients.  That strikes me as a flouting of the Tribunal’s Directions; such conduct would not be tolerated in court proceedings.  There are no pleadings in these proceedings and the Tribunal is usually greatly assisted by a carefully prepared and concise Note of Argument. The explanation proffered is unacceptable.  Any appellant behaving in such a way in the future may find the scope of his proposed arguments severely restricted.

3.	It was agreed that the three appeals be heard together.  Mr Paterson’s evidence covered all three appeals.  The general issues discussed at the appeal were (i) the reasonableness of the requirements of those parts of the Notices which were still in dispute, (ii) and whether the terms of the Notices had been satisfied.

The Legislation

4.	There is a statutory obligation on a person who is bound to make a return (such as the appellants) to keep such records as may be requisite for the purpose of enabling him to make and deliver a correct and complete return (TMA section 12B).  HMRC are entitled to open an enquiry into a taxpayer’s return (TMA section 9A).  To that end the TMA gives them various powers of investigation.  Usually, HMRC make an informal request for specified documents, accounts and/or particulars i.e. information.  When they consider they have not been provided with sufficient material, they usually require the material by specifying what they seek in a notice served on the taxpayer under section 19A of the TMA.  Further powers are given by section 20 of TMA and elsewhere but these appeals are not concerned with these additional powers.

5.	The relevant parts of section 19A of TMA provide as follows:-

19A(2)	For the purposes of the enquiry, the officer may..... by notice in writing require the taxpayer, within such time which shall not be less than 30 days as may be specified in the notice-

(a) to produce to the officer such documents as are in the taxpayer’s possession or power and as the officer may reasonably require for the purposes of determining whether and, if so, the extent to which-

(i) the return is incorrect or incomplete......

(b) to furnish the officer with such accounts or particulars as he may reasonably require for that purpose.

6.	Section 19A(6) provides for an appeal against any requirement imposed by a notice under section 19A(2) to produce any document or to furnish any accounts or particulars.  It is clear from section 19A(9) that a notice may be confirmed, or set aside in whole or in part.  Section 19A(11) provides that my determination is to be final and conclusive.

The Notices

7.	The relevant parts of the Notice dated 16/4/07 [BZ/6] served on Zeki Uyar provide as follows:-

“Property Income and expenditure for the year ended 5 April 2005
1 Documents
•	The expenditure vouchers/receipts for the deduction of £7289 claimed.  Should any of the expenditure be unvouched please say what evidence is available to support the expenditure claimed.
•	A copy of all the rental agreements with each tenant
•	The bank statements for the year ended 5 April which will show me the declared income and claimed expenditure
2 Information
•	An analysis of the items of expenditure relevant to each of the let properties
•	Should any of the income in the year be received in cash and not banked, please identify such amounts 
•	Should any of the expenditure be incurred in cash please identify and advise the source of the cash used.”

8.	The relevant parts of the Notice dated 16/4/07 [BH/6] served on Hulya Uyar provide as follows:-

“Property Income and expenditure for the year ended 5 April 2005
1 Documents
•	The expenditure vouchers/receipts for the deduction of £5276 claimed.  Should any of the expenditure be unvouched please say what evidence is available to support the expenditure claimed.
•	In respect of the properties let in the year I require to see a copy of all the rental agreements with each tenant
•	The bank statements for the year ended 5 April which will show me the declared income and claimed expenditure
2 Information
•	Should any of the properties let have been acquired in the year please state the date of acquisitions, the cost and how financed.
•	Should any of the properties let be leased to you throughout the year identify that property and the lessor by name and address
•	Should any of the properties let be the subject of a new lease in the year identify that property and the lessor by name and address
•	An analysis of the items of expenditure relevant to each of the let properties
•	Should any of the income in the year be received in cash and not banked, please identify such amounts 
•	Should any of the expenditure be incurred in cash please identify and advise the source of the cash used.”

9.	The relevant parts of the Notice dated 27/4/07 [BS/77] served on the partnership provide as follows:-
“The following refers to the period 1 May 2003 to 12 October 2004.
1 Documents
a     A copy of the trial balance prepared for the company together with copies of all adjustment journals prepared to reconcile the trial with the final account.
......................
e     Please let me have an explanation as to the source of the Capital introduced of £17,270 along with documentary evidence to substantiate that explanation
...........................
2 Information
a     Who maintains the business records, where are they kept and for what period are they held.
..............................
f     Will you please supply the following analysis:
•	Premises Costs £51,128-listing the date, name, nature of the expense and amount of all items
•	Repair costs £5678-listing the date, name, nature of the expense and the amount for all items
•	General Administration costs £12741-listing the date, name, nature of the expense and amount for all items
•	Legal and professional costs £6,908-listing the date, name, nature of the expense and the amount for all items
•	Others £1600-listing the date, name, nature of the expense and amount for all items
•	Trade Creditors £17388-listing the date, name, nature of the expense and amount for all items”

Factual Background
10.	In January 2007, enquiries were opened into the Appellants’ returns and a variety of documents and information sought.  Correspondence with the Appellants’ accountants Paterson Reid ensued.  HMRC proposed a meeting.  The Appellants declined.  In March 2007, Paterson & Reid sent HMRC certain books and records.  On receipt of the above notices served on Zeki and Hulya Uyar, the appellants appealed.  The grounds of appeal set forth in Paterson & Reid’s letters dated 18/4/07 are “(a) The Information requested has already been supplied, and (b) The balance of the information such as rental agreements, bank statements etc. are not reasonably necessary in examining our Client’s Tax Return” [BS/93&92].  The partnership notice was appealed by letter dated 22/5/07 [BS/72] on the ground that “the information not supplied is not reasonably required by you for the examination of our clients records”.

11.	Notwithstanding the marking of these appeals, correspondence continued.  HMRC renewed the invitation to have a meeting.  The appellants again declined.  By letter to HMRC dated 11/5/07 [BS/74] Paterson & Reid sent certain wages details and informed HMRC that their clients had given to them in “two plastic bags filled with till rolls etc” and invited HMRC to uplift these.  HMRC must have done so because on 27/6/07 they wrote to Paterson &Reid listing the contents of the plastic bags [BS/69].  By July 2007 the appeals had reached the Office of the Special Commissioners and Directions were issued.  Further correspondence passed between HMRC and Paterson & Reid.  On 3rd September 2007, the date for Hearing was fixed.  A further section 19A notice was served on the partnership on 19/10/07.  This has also been appealed [letter 16/11/07 BS/12].  However, it is not part of these proceedings.

ORAL EVIDENCE
12.	Mr Paterson was the only witness.  He is an experienced chartered accountant.  He has been a sole practitioner for some twenty seven years.  He has a particular interest in taxation and “looks after” mainly sole traders and partnerships, and a few companies.

13.	With reference to the requirement to produce a trial balance in the partnership notice [see paragraph 9 above]. He explained that he did not produce one but produced instead a document called a “Birdcage”).  This was a peculiarly Scottish practice and was used by some accountants in Scotland.  He handed up a sample sheet.  In summary, it contained four columns, headed Opening Balance, Cash and Bank Account, Debtors and creditor and VAT queries, and Closing Balances. Within each column were sub-columns for debits and credits.  The last column, he said was the equivalent of the trial balance.  He described it as part of his working papers.  He had not thought it necessary to provide this explanation to HMRC at an earlier stage.  Accounts had been produced for the partnership ( they were not in the bundles and were not available at the Hearing).

14.	He explained how the partnership operated.  The premises were owned by the parents of Zeki and Hulya.  The parents let the restaurant premises to Zeki and Hulya who sub-let to the partnership.  There was no documentation to vouch this contractual arrangement.  The business year of the partnership ran from 1st May 2003.  The partnership was dissolved on or about 12th October 2004.  The restaurant business was then taken over by two other individuals.  According to Mr Paterson they paid rent to both Zeki and Hulya and to their parents.

15.	Mr Paterson made a number of comments on the correspondence with HMRC and the material which had or had not been produced and whether it was sufficient or reasonably required.  His general approach was that his clients had provided HMRC with sufficient books, records and vouchers.  It was up to HMRC to do the work needed to sort them out and come back to him with specific queries.

16.	I found Mr Paterson to be frank, reliable and credible.  I have little doubt that the evidence he gave accurately reflected information provided to him by his clients.  Whether the information provided by the clients is true, accurate and complete is an entirely separate matter.

Discussion
Issues and statutory criteria
17.	The issue in these appeals is the validity of the section 19A Notices.  What is not in issue is whether they have been complied with.  That issue may arise for determination on another occasion.  Unfortunately, Mr Paterson, in evidence and submissions dwelt on the question of compliance.  Accordingly, much of the evidence and material before me is irrelevant to the determination of the issue in these appeals. In particular, whether a document specified in a section 19A Notice exists is irrelevant to the question whether the Notice is valid.  When HMRC issue such a notice they may have no idea whether a particular document exists.  

18.	In summary, my task is to determine whether HMRC were entitled to issue the Notices in the terms in which they were framed.  Even if HMRC already had possession of a document called for in a Notice, that would not invalidate the Notice.  It would simply mean the taxpayer need do nothing in response to it and could resist any application for a penalty for non-compliance.  He cannot be required to produce the same document twice.  What is important therefore is the precise wording of the notices and the statutory criteria which validate their issue.  

19.	The statutory criteria are broad but they are clear.  First, the notice can only be directed at the taxpayer and not for example at a bank where he holds an account.  Other statutory provisions are available to recover documents from third parties.  Second, the taxpayer is obliged to produce documents in his possession and power.  Third, such documents must reasonably be required for the purpose of determining whether, and if so to what extent, the taxpayer’s return is incorrect or incomplete.  It may be incorrect, for example, if income is under-declared and expenditure over-declared.  It may be incomplete if income from a particular source is omitted altogether.  Fourth, the taxpayer is obliged to furnish HMRC with accounts or particulars reasonably required for the purpose of determining whether, and if so to what extent, the taxpayer’s return is incorrect or incomplete.  The obligation to furnish is in contrast to the obligation to produce.  It is implicit that the taxpayer may be required to prepare documents [not previously in existence] and provide information and explanation.  These notices are served for the purposes of an enquiry which has been opened into the taxpayer’s return.  The purpose of such an enquiry is the verification of the accuracy and completeness of the return.  I find support for the foregoing analysis in the two cases cited to me namely Accountant v HMIT SpC258 8/6/00 (chairman Dr Nuala Brice) paragraphs 5, 20-22, and 48; Paul Low v HMRC Spc510 15/11/05 (Chairman Michael Tildesley) paragraph 30. 

20.	In my view, therefore, the first ground of appeal, noted at paragraph 10 above [(a)] is therefore irrelevant.  With the foregoing considerations in mind I consider those parts of the Notices in issue.

Partnership Notice
a     A copy of the trial balance prepared for the company together with copies of all adjustment journals prepared to reconcile the trial with the final account.

21.	Mr Paterson argued that there was no trial balance as such or any adjustment journals.  That argument is irrelevant to the issue of validity of the notice.  As I understood his position, he accepted that if such documents existed they would have to be handed over.  In any event, I consider it to be reasonable to require the production of such documents.  They plainly have or could have a material bearing on the forensic exercise of verifying the accuracy and completeness of the partnership return.  On the same basis I consider it reasonable to require production of adjustment journals.  Whether they exist is not relevant to the question of the validity of this part of the notice.

22.	The real dispute between the parties is whether the Bird Cage document Mr Paterson spoke to in evidence falls within the scope of the Notice.  That is not an issue for me to determine in these proceedings.  However, from what I have heard about it, I incline to the view that it is the equivalent of a trial balance; at least one column of it, according to Mr Paterson, constitutes a trial balance and is therefore recoverable.

e     Please let me have an explanation as to the source of the Capital introduced of £17,270 along with documentary evidence to substantiate that explanation

23.	Although this part of the Notice appears under the heading “Productions” it plainly requires the furnishing of particulars as well as the production of vouching ie existing documents.  In my view, it is eminently reasonable for the purposes of an enquiry into the accuracy and completeness of a taxpayer’s return to require the documents and information specified.  Vouching or the lack of it is part of the process of checking accuracy and completeness.  The sum of £17,270 appears in Box 3.113 of the partnership return.  It seems to me to be entirely reasonable to request, in essence, a breakdown for this figure.  If the taxpayer considers he has already provided such a breakdown, he will not provide any further material and will resist any penalty proceedings.  Whether such a stance would be justified remains to be seen.  In these circumstances, the appeal against this part of the notice also fails.

2 Information
a     Who maintains the business records, where are they kept and for what period are they held.

24.	I find it difficult to understand how this information will enable HMRC to verify the accuracy and completeness of the return.  As Mr Paterson submitted what is important is the quality of the business records.  An HMRC should very quickly be able to form a view on this from a brief examination of the business records.  I agree that for present purposes the identity of the record keeper, and where and for how long the records are kept does not assist in determining whether the returns are accurate or complete.  I therefore uphold  the appeal in relation to paragraph 2a

2 Information
f     Will you please supply the following analysis:
•	Premises Costs £51,128-listing the date, name, nature of the expense and amount of all items
•	Repair costs £5678-listing the date, name, nature of the expense and the amount for all items
•	General Administration costs £12741-listing the date, name, nature of the expense and amount for all items
•	Legal and professional costs £6,908-listing the date, name, nature of the expense and the amount for all items
•	Others £1600-listing the date, name, nature of the expense and amount for all items
•	Trade Creditors £17388-listing the date, name, nature of the expense and amount for all items”

25.	This part of the notice requires particulars, namely an itemised breakdown of sums which appear in Boxes 3.52, 3.53, 3.54, 3.58, 3.63 and 3.106 of the partnership return.  It seems to me to be obvious that it is reasonable, in order to check the accuracy and completeness of these figures to require that details of the make-up of each figure be provided.  How else can the figures be verified in any meaningful way?  It is nothing to the point that no documents exist or that the information has already been furnished.  The appeal relating to this part of the Notice must also fail.

Zeki Uyar Notice
“Property Income and expenditure for the year ended 5 April 2005
1 Documents
•	The expenditure vouchers/receipts for the deduction of £7289 claimed.  Should any of the expenditure be unvouched please say what evidence is available to support the expenditure claimed.

26.	The first part seeks vouching for the figure which appears in Box 5.30.  That figure is the total of the four figures which appear in the return in Boxes 5.24 (Rent, rates, insurance, ground rents etc), 5.25 (Repairs, maintenance and renewals), 5.26 (Finance Charges including interest), and 5.27 (Legal and professional costs).  Such a requirement is plainly reasonable to enable the correctness and completeness of this part of the return to be verified.  It was argued that all the information HMRC needed had been produced.  The factors for the properties were solicitors and they had produced adequate statements which had been delivered to HMRC.  In my view that is irrelevant for present purposes.  I therefore need not examine the various vouchers that have been produced in the bundles.

27.	The requirement to say what evidence is available to support the expenditure claimed seems to me to be neither a requirement to produce documents nor a requirement to furnish accounts or particulars.  It could be answered by saying that Hulya has a good memory and recollects the details.  However, that would not be furnishing particulars.  In these circumstances I do not see how HMRC can validly require Zeki to say what evidence is available.  To that limited extent the appeal is therefore allowed.

A copy of all the rental agreements with each tenant
28.	This seems to me to be part of the verification process.  The rental agreement might for example contain provisions for payment for service charges which might be made in cash or for other payments which might be taxable.  As such the requirement is reasonable for verification purposes.  The appeal in relation to this matter therefore fails.

The bank statements for the year ended 5 April which will show me the declared income and claimed expenditure

29.	The argument was that it was unreasonable to require bank statements in the light of the quality of the solicitor/factor’s statements.  However, it is too plain for words that the production of bank statements will or at least may form part of the verification process.  The requirement is entirely reasonable.  It is reasonable to require documents to enable a cross checking exercise to be performed so as to verify from several sources the accuracy and/or completeness of figures in the return.  The appeal in relation this part of the Notice must therefore fail.

2 Information
•	An analysis of the items of expenditure relevant to each of the let properties
•	Should any of the income in the year be received in cash and not banked, please identify such amounts 
•	Should any of the expenditure be incurred in cash please identify and advise the source of the cash used.”

30.	The purpose of the first item is to allocate the items of expenditure to a particular property.  The allocation of an item of expenditure to a particular property is relevant to the genuineness of the expenditure and thus to the accuracy and completeness of the return.  It therefore seems to me to be reasonable to require such a breakdown.  The second and third items are presumably included to verify the completeness and accuracy of the return.  It is quite conceivable that some payments may be made in cash.  This part of the appeal must also fail

Hulya Uyar Notice
31.	The first part of the Notice raises the same points discussed in paragraphs 25-28.  The result is the same.  The only difference is that sum in Box 5.30 of this Appellant’s return is £5276 and the sums making up that total in Boxes 5.26, 5.27 and 5.29 are different ; boxes 5.24 and 5,25 are blank. 

2 Information
•	Should any of the properties let have been acquired in the year please state the date of acquisitions, the cost and how financed.
•	Should any of the properties let be leased to you throughout the year identify that property and the lessor by name and address
•	Should any of the properties let be the subject of a new lease in the year identify that property and the lessor by name and address

32.	These items require particulars of heritable property owned by this Appellant, their acquisition, financing and letting arrangements.  Where, as here, the return discloses income from let property, it seems to me to be reasonable to require the production of information about them.  The second bullet point seems to contemplate some sort of lease-back arrangement.  While this may be unusual it seems to me to be reasonable to check the position by requiring the provision of the relative particulars.  Mr Paterson informed me that the properties in question had not changed hands for many years so nothing fell to be produced.  While that may be so it is not relevant to the validity of the Notice.  Ultimately, I understood him to accept that this part of the Notice was reasonably required. This part of the appeal also fails

Summary and Disposal
33.	With the exception of those matters specified in paragraphs 24, 27 and 31 above, it appears to me that the production of the documents and the furnishing of the accounts and particulars specified in the three Notices are reasonably required by the relevant officer of HMRC for the purposes mentioned in section 19A(2) of the Taxes Management Act 1970 (as amended).

34.	I therefore 
(i) set aside the Notice dated 27/4/07 relating to the partnership but only to the extent of deleting the words a     Who maintains the business records, where are they kept and for what period are they held as discussed in paragraph 24 above; 
(ii) set aside the Notice dated 16/4/07 relating to Zeki Uyar but only to the extent of deleting the words Should any of the expenditure be unvouched please say what evidence is available to support the expenditure claimed as discussed in paragraph 27 above; and 
(iii) set aside the Notice dated 16/4/07 relating to Hulya Uyar but only to the extent of deleting the words Should any of the expenditure be unvouched please say what evidence is available to support the expenditure claimed as explained in paragraph 31 above.

35.	Quoad ultra, I confirm the notices and dismiss the appeal.

J GORDON REID QC
SPECIAL COMMISSIONER

RELEASED: 11 February 2008

SC 3151/2007