Spc00680

INCOME TAX – ASSESSMENT – Inspector discovered unexplained deposits in the Appellant’s bank account and personal expenditure on employer’s credit card – deposits and credit card expenditure assessed as income subject to tax – Appellant no explanation for the sources of income – assessments made under discovery provisions except 1997/98 which was a jeopardy assessment – not satisfied that requirements met for jeopardy assessment – 1997/98 assessment, however, not invalid – assessments upheld – Appeal dismissed

SPECIAL COMMISSIONERS

	PETER MARTIN SMITH  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Special Commissioner: MICHAEL TILDESLEY OBE	 

Sitting in public in London on 14 February 2008

The Appellant did not appear

Barry Williams of the Appeals Unit London & Anglia HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant was appealing against the following Notices of Assessment issued on 10 January 2002:
TAX YEAR	AMOUNT CHARGED BY ASSESSMENT (£)	
1992/93	12,812.82	
1993/94	20,780.90	
1994/95	20,926.51	
1995/96	20,948.32	
1996/97	37,419.60	
1997/98	30,212.65	
1998/99	80,074.60	
2.	The Notices of Assessment for all years except 1997/98 were issued under the discovery provisions of section 29 of the Taxes Management Act 1970 (TMA 1970). The assessment for 1997/98 was a jeopardy assessment. A section 28 TMA 1970 closure notice for 1997/98 was issued on 8 January 2008.
The Dispute
3.	The dispute related to income tax purportedly due on benefits in kind received by the Appellant whilst a director of Paul Steiger Limited and on unexplained deposits to the Appellant’s private bank account. The Appellant denied that he received benefits in kind from Paul Steiger Limited. Further the unexplained deposits represented receipts from the sale of personal items rather than trading income.
4.	The onus was on the Appellant to demonstrate on the balance of probabilities that the said amounts of income tax were not due and thereby discharge the assessments against him (see Jonas v Bamford (H.M. Inspector of Taxes) [1973] STC 519 and Hurley v Taylor  (H.M. Inspector of Taxes) [1999] STC 1). The Respondents contended that the evidence adduced by the Appellant was insufficient to discharge the burden of proof and in consequence the assessments should be upheld.
5.	There were subsidiary matters regarding the Respondents’ powers to issue the assessments which concerned the requirements for issuing extended time limit assessments and the validity of the jeopardy assessment for 1997/98.  
The Hearing
6.	The Appellant did not attend the hearing. The Appellant considered that his attendance was not required because one of his creditors had obtained judgement against him. He had written to his known creditors advising them to petition for his bankruptcy.  The Appellant was of the view that his affairs would be in the hands of the Official Receiver, and in those circumstances he was not empowered to represent himself before the hearing. I decided that the Appellant had failed to put forward a good and sufficient reason for his absence. I, therefore, proceeded to hear the Appeal in his absence in accordance with regulation 16 of Special Commissioners Regulations 1994. In reaching my decision I took account of the following matters:
(1)	The Appellant had been duly notified of the time, date and place of the hearing by the Office of the Special Commissioners on 10 December 2007. The Appellant knew of the hearing because he responded to the Notice dated 10 December 2007 with the information about his potential bankruptcy. 
(2)	The Respondents enquired about whether a petition for bankruptcy had been issued but to their knowledge no such petition could be found.
(3)	The Appellant was fully aware of the details of the Respondents’ case and the evidence they intended to call.
(4)	The Appellant’s case was clearly set out in the bundle of documents presented by the Respondents
The Evidence 
7.	Mr Philip Worsley, Inspector of Taxes, gave evidence for the Respondents. Mr Worsley was originally involved in making enquiries into the tax affairs of Paul Steiger Limited, of which the Appellant was Chairman and Chief Executive. Those enquiries highlighted concerns with the Appellant’s tax returns. Mr Worsley was responsible for drawing up the assessments against the Appellant.  The Respondents submitted a bundle of documents in evidence.
The Facts
8.	The Appellant was Chairman and Chief Executive of Peter Steiger Limited between the 11 October 1991 and the voluntary liquidation of the company in September 2001.
9.	In 1996 Mr Worsley conducted an enquiry into the accounts of Peter Steiger Limited from the commencement of trading 11 October 1991 to 31 December 1995. As part of the enquiry Mr Worsley requested production of the Appellant’s private bank, building society and credit card statements for the same period. 
10.	On 14 October 1997 Mr Worsley met with the Appellant’s accountants which had been authorised by the Appellant to prepare a report by 31 March 1998 on the company’s tax affairs including double entry capital statements for the Appellant and his wife.  Mr Worsley did not receive a copy of the report by the due date. 
11.	On 14 July 1998 he requested the Appellant’s accountants to supply him with the work done to date on the report. The accountants provided an analysis of the Appellant’s bank and building society statements which revealed substantial monetary deposits in each tax year recorded as unknown cash or cheques. 
12.	 The Appellant or his accountant supplied no further information. On 8 July 1999 Mr Worsley made applications to the General Commissioners for orders under sections 20(1) and 20(3) of the TMA 1970 to obtain all the company’s records for the period ended 31 December 1992 and any remaining private bank and credit card statements of the Appellant and his wife.
13.	On 23 August 1999 the Appellant’s accountants informed Mr Worsley that the  records of Peter Steiger Limited for the year ended December 1992 had been completely destroyed by a malfunction of the company’s sprinkler system. On receipt of this information Mr Worsley decided to extend his enquiry to cover the company’s accounting periods from December 1996 to December 1998 and made formal requests of the Appellant and his accountants for documents covering the new period, which were not provided voluntarily.
14.	On 15 June 2000 Mr Worsley sought orders under sections 20(1) and 20(3) of the TMA 1970 requiring Peter Steiger Limited and the Appellant to produce company records for the three years ended 31 December 1998 and personal bank statements  from 6 April 1996 to 31 December 1998. The General Commissioners granted the orders sought.
15.	In July 2000 Peter Steiger Limited provided 50 boxes of the company’s records which did not include the nominal ledgers, stock sheets, petty cash books and records of factory shop sales. The company’s credit card statements for the two years ended 31 December 1997 were also not produced.
16.	On 16 November 2000 Mr Worsley held a meeting with the Appellant’s accountants advising them of the results of his reviews. Mr Worsley pointed out that he had not been able to complete a full review of the business records for any of the company’s accounting periods  covering the period of trading from 11 October 1991 to 31 December 1998 because:
(1)	A full set of the company’s prime records was not available for any of the accounting periods up to 31 December 1995 because they had apparently been destroyed in a sprinkler accident at the business premises in 1996.
(2)	The nominal ledgers, stock records and computer back up discs were not available for any of the three years ended 31 December 1996, 1997 and 1998.
17.	Mr Worsley informed the accountants that as the majority of the company’s records were missing his review was principally concerned with the private financial affairs of the Appellant and his wife. Mr Worsley provided the accountants with written details of his review into the Appellant’s financial affairs with a request for additional information and or explanation of which none was forthcoming from the Appellant and his accountants. 
18.	 Mr Worsley findings into the Appellant’s financial affairs were as follows:
(1)	Expenditure totalling £54,251.63 was incurred on the American Express credit card for Peter Steiger Limited in the period 30 December 1997 to 20 December 1998. Mr Worsley concluded that at least £46,000 of this expenditure was  spent by the Appellant on his personal needs.
(2)	The Appellant’s bank account for the period 6 April 1991 to 31 December 1998 revealed unexplained monetary deposits to the total sum of £682,000. Mr Worsley accepted that £272,000 of the £682,000 related to the sale of personal assets. Mr Worsley concluded that the balance of £410,000 was either cash extractions from Peter Steiger Limited or undeclared income from an undisclosed taxable source. In an earlier enquiry of another of the Appellant’s companies, similar unexplained monetary deposits were found in the Appellant’s personal bank account. On this occasion the Appellant accepted that the deposits represented receipts by way of trade arising from the sale of wines.
19.	Mr Worsley’s findings formed the basis of the disputed assessments. The unexplained monetary deposits, totalling £410,000, were broken down and allocated to the particular tax year when they arose. The deposits were assessed under schedule D(1) as self employed earnings.  The Appellant’s purchases on the credit card of Paul Steiger Limited had not been debited to a director’s loan account or recorded on a P11D as a benefit in kind. Mr Worsley assessed the value of the Appellant’s purchases under schedule E as employee benefits. The amount assessed for the tax year ended 5 April 1999 was £47,500. In addition, Mr Worsley invoked the principle of continuity and assessed the Appellant for the same employee benefits under schedule E for the previous three tax years. The amounts assessed were £37,500, £40,000 and £45,000.
20.	 The Appellant has supplied Mr Worsley with no tangible information which would challenge the assessments. The Appellant did not co-operate with Mr Worsley’s enquiries into his tax affairs.
Reasons for Decision
21.	I intend to deal with the quantum of the assessments and the Respondents’ powers to issue assessments as two separate issues.
22.	On the matter of quantum the Respondents considered that the Appellant had failed to account for income tax on two specific sources of income. The first source was the unexplained monetary deposits in the Appellant’s private bank account. The Respondents derived the information on the unexplained deposits direct from the Appellant and his accountants. The Respondents accepted the Appellant’s explanations for some of the deposits which had the effect of reducing the initial sum of £682,000 under enquiry to £410,000.  The Appellant, however, has supplied no information regarding the origins of the £410,000.  Further the Appellant accepted on a previous enquiry that unexplained monetary deposits in his bank account represented receipts from a trade of selling wines. The Appellant adduced no evidence to undermine the Respondents’ conclusion that the unexplained deposits were either cash extractions from Peter Steiger Limited or undeclared income from another taxable source. I am, therefore, satisfied that the Respondents were correct to assess the Appellant for income tax on the unexplained deposits totalling £410,000.
23.	The second source of income was the transactions recorded on the American Express credit card statement of Paul Steiger Limited for the year ended 31 December 1998. Mr Worsley’s analysis of the transactions revealed that the overwhelming majority of them were for purchases of personal items, such as clothes, jewellery and foreign travel. Some of the items were specifically marked as the Appellant’s personal expenditure. Mr Worsley concluded that transactions to the value of £47,500 constituted taxable benefits of the Appellant. Mr Worsley was unable to obtain copies of the company’s American Express card statements for previous years despite an order for production under section 20 of TMA 1970. Mr Worsley applied the principle of continuity and made estimated assessments of the benefits to the Appellant for the three preceding tax years.
24.	The Appellant and his accountant gave no explanation for the transactions recorded on the American Express credit card statement of Paul Steiger Limited for the year ended 31 December 1998.  The onus was upon the Appellant to provide a satisfactory explanation, which he failed to do. In those circumstances I am satisfied that transactions to the value of £47,500 constituted taxable benefits of the Appellant in the year ended 31 December 1998.
25.	Mr Worsley applied the principle of continuity and assessed the Appellant for employee benefits in respect of the three preceding tax years. The principle of continuity was explained by Walton J in Jonas v Bamford (HM Inspector of Taxes) [1973] STC 519 as:
“It is convenient at this stage to notice that Mr Jonas said that a fortiori in connection with the three financial years 1962-63, 1963-64 and 1964-65 (being the years in relation to which Mr Jonas has, on advice, refused to give the Inspector of Taxes any information) there was (a) no discovery by the Inspector and (b) no evidence of any unexplained intake of moneys by Mr Jonas. But, so far as the discovery point is concerned, once the Inspector comes to the conclusion that on the facts which he has discovered, Mr Jonas has additional income beyond that which he has so far declared to the Inspector, then the usual presumption of continuity will apply. This situation will be presumed to go on until there is some change in the situation, the onus of proof of which is clearly on the taxpayer”.
26.	Mr Worsley discovered that the Appellant was using the American Express credit card of Paul Steiger Limited to pay for items of personal expenditure. There was no evidence that the Appellant repaid the sums expended on the credit card to Paul Steiger Limited or that the sums were credited to a director’s loan account. The Appellant did not declare the expenditure as taxable income. The credit card expenditure called for an explanation from the Appellant. No explanation was given. Further Paul Steiger Limited, a company controlled by the Appellant, failed to produce credit card statements for the years preceding 1998. Having regard to the above facts I am satisfied that Mr Worsley was entitled to assume that the Appellant used the company’s credit card for items of personal expenditure in previous years  and thereby  raise the estimated assessments of  the tax due on that expenditure which he categorised as employee benefits. I am also satisfied that Mr Worsley exercised his powers reasonably. He decided to go back three years to tax year 1994/1995 not the opening year, 1992/93, of his enquiry into the company’s tax affairs. Further the estimated amounts assessed for the earlier years were less than that assessed for 1998/99 and calculated on a rising continuum of £37,500, £40,000 and £45,000 with £47,500 for 1998/99.
27.	The assessments against the Appellant except for tax year 1997/98 were made under the discovery provisions of section 29 of the TMA 1970, and issued on 10 January 2002. The Respondents considered that the conditions for raising discovery assessments were met. First, there was a loss of tax to the Crown, in that the Appellant did not pay tax on the income derived from the unexplained monetary deposits and his personal expenditure on the company’s credit card. Second, the loss of tax was attributable to the Appellant’s negligent conduct in that he failed to make personal return of the profits on the unexplained deposits and declare the benefits of the credit card payments. The Appellant has not made a substantive challenge to the making of the assessments in accordance with section 29(8) of the TMA 1970. I, therefore, find that the conditions of section 29(1)(a) and section 29(4) of the TMA 1970 were met when the Respondents issued the assessments on 10 January 2002.
28.	The normal time limit of six years applied to the assessments except those for tax years 1992/93, 1993/94 and 1994/95 which were outside the six year limit.  In respect of the latter assessments the Respondents contended that the 20 year limit under section 36(1) of the TMA 1970 applied. Under section 36(1) the Respondents have the evidential burden of establishing that there was fraudulent or negligent conduct by the Appellant; and that there was a loss of tax attributable to the conduct. The Respondents asserted that the Appellant was negligent in failing to make a return of the benefits in kind and of the profits arising from the unexplained deposits, and in consequence of his failure the Crown suffered a loss of tax. The Appellant has given no satisfactory explanation for his failure to make returns. I am, therefore, satisfied that the Respondents have discharged their burden under section 36 of TMA 1970, in which case the provisions of section 50(6) of TMA 1970 take over with the burden resting on the Appellant to establish that the assessments were wrong.
29.	The 1997/98 assessment was a jeopardy assessment. At the hearing the Respondents addressed me on the provisions of paragraph 30, schedule 18 of the Finance Act 1998. These provisions deal with jeopardy assessments against companies rather than individuals. The power to make a jeopardy assessment against an individual arises under section 9C of the TMA 1970. Essentially under section 9C an HMRC officer during the course of an enquiry into a return may consider that the assessment is insufficient and that, unless it is immediately increased, there may be a loss of tax to the Crown. In such circumstances the officer may amend the assessment and must give notice to the taxpayer of the amendment. The increase in the amount of the tax is payable within 30 days of that notice. Such assessments are known informally as jeopardy assessments. A right of appeal exists against a jeopardy assessment but the appeal shall not be heard or determined until the enquiry has been completed. In this case the Respondents made the jeopardy amendment on the 9 January 2002 and closed the enquiry on 8 January 2008 when the closure notice was issued to the Appellant.
30.	 On my reading of the provisions of section 9C of TMA 1970 a jeopardy assessment can only be made if an enquiry into the Appellant’s self assessment return was in progress  under section 9(1)(A). There was no evidence before me that such an enquiry had been started. Mr Worsley indicated that his enquiries into the Appellant’s tax returns arose from a formal enquiry into the tax affairs of Paul Steiger Limited which explained why he made discovery assessments against the Appellant in respect of the other tax years. Further the Respondents offered no explanation as to why they resorted to a jeopardy assessment for 1997/98 rather than a discovery assessment as with the other tax years. I conclude on the information before me that the conditions for a jeopardy assessment were not met for the tax year 1997/98.
31.	The fact that the conditions have not been met for a jeopardy assessment does not as a matter of course render the assessment for 1997/98 invalid. The amount assessed under the jeopardy assessment of £30,212.65 was effectively the same amount of £30,212.98 as recorded in Mr Worsley’s assessment schedule (exhibit M1 in the bundle). The Appellant through his representative accepted the validity of the jeopardy amendment when it specifically appealed against it in its letter of 25 February 2002.  The Appellant has not been misled by the assessment being made under the jeopardy provisions rather than the discovery provisions. I am satisfied on the facts that the Respondents were entitled to make a discovery assessment under section 29 of the TMA 1970 for the tax year 1997/98.
32.	In Vickerman (Inspector of Taxes) v Mason's Personal Representative [1984] STC 231 Scott J considered the validity of an assessment incorrectly made under section 29(3)(c)a, instead of section 29(3)(b), of the Taxes Management Act 1970. He decided that
“The first question is whether the Crown must fail because, in the correspondence leading up to the further assessment, the Revenue relied on and sought to justify the further assessment by reference to a statutory provision on which reliance could not, for the purpose of this particular assessment, be placed.  In my judgment, the validity of this assessment once made is a matter of law and it is a point of irrelevance what justification prior to the assessment may or may not have been given by the Revenue in order to explain the assessment they were proposing to make”. 
33.	The decision in Vickerman is authority for the proposition that an assessment is not invalidated as a matter of course simply because it has been made under the wrong statutory provision of the TMA 1970.  Having regard to facts that the Appellant has not been misled by the assessment, and that the jeopardy assessment was in the same amount as discovered by Mr Worsley, I am satisfied that the 1997/98 assessment was valid despite it being made incorrectly under section 9C of the TMA 1970.
Decision
34.	I find that
(1)	The assessments for 1992/1993, 1993/1994, 1994/1995, 1995/1996, 1996/1997, and 1998/99 fulfilled the conditions for discovery assessments under section 29 TMA 1970.
(2)	The requirements of section 36(1) TMA 1970 were met in respect of the assessments for 1992/1993, 1993/94 and 1994/1995.
(3)	The assessment for 1997/98 was valid despite it being made incorrectly under section 9C of the TMA 1970.
(4)	The unexplained monetary deposits in the Appellant’s bank account and the Appellant’s personal expenditure incurred on the employer’s credit  card constituted taxable income upon which the Appellant had not declared and paid income tax for the years under assessment.
35.	 I, therefore, dismiss the Appeal and uphold the assessments for the years in question. 

  	                           

MICHAEL TILDESLEY OBE
             SPECIAL COMMISSIONER
         RELEASE DATE: 16 April 2008

SC 2004/3067