First-tier Tribunal (Tax)

[2010] UKFTT 41 (TC)

TC00355

Appeal number:  TC/2009/11964

INCOME TAX - adjustments to self assessment - discovery assessment - suppression of takings - fairness of estimates by HMRC - appeal dismissed

FIRST-TIER TRIBUNAL

TAX

                                 SUMANAN POOPALASINGHAM                 Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                       REVENUE AND CUSTOMS (Income Tax)    Respondents

                                                TRIBUNAL: Nicholas Aleksander (Tribunal Judge)

                                                                        MM Hossain

                                                                       

Sitting in public in London on 13 January 2010

Marcelli Oguh, accountant of Rochvilles & Co for the Appellant

Philip Rowe, Officer of HM Revenue & Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1. Mr Poopalasingham appeals against amendments made to his self assessments for the years ended 5 April 2005 and 5 April 2006 following enquiries made by an officer of HMRC.  He also appeals against assessments made for the years ended 5 April 2003 and 5 April 2004 under discovery provisions following those enquiries.

2. The Tribunal originally heard this appeal in the absence of the Appellant in October 2009.  However, following a successful application by the Appellant to set aside that decision, the appeal was re-heard today.

3. At the hearing the Appellant was represented by Mr Oguh and HMRC was represented by Mr Rowe.  The Tribunal had before it a bundle of documents, and heard evidence from the Appellant and from Ms Sue Dougal, an officer of HMRC who undertook the enquiry into Mr Poopalasingham's affairs.

4. The background to the disputed assessments follows a routine VAT assurance visit to Mr Poopalasingham's business, a take-away restaurant.  Till rolls had not been kept, and the officer was concerned that takings had been suppressed.  She also had problems reconciling the cash position of the business as more cash was spent and banked than the takings of the business.  The explanation for the discrepancy was that the additional cash came from rents received by Mr Poopalasingham.  A review of Mr Poopalasingham's income tax returns showed that no rental income had been declared, and also found that Mr Poopalasingham had also received undeclared employment income.

5. In consequence an enquiry was opened into Mr Poopalasingham's 2005 tax return and his business accounts were reviewed. There were indications in the accounts that undermined their credibility (for example, recorded takings were always exact multiples of £10, whereas amounts banked were mainly not round sums).  Test purchases were made by HMRC staff, and a subsequent review of till rolls showed that not all of the purchases were recorded.  As a consequence Mr Poopalasingham agreed to an invigilation period where he knew test purchases would be made by HMRC.  Two test purchase were made in this period, but the subsequent examination of till rolls showed that only one had been recorded.  It was also noted that the recorded takings had substantially increased when compared to the turnover shown in the tax returns (suitably apportioned).  The average gross weekly takings over the period covered by the tax return was £1885, whereas the average gross weekly takings over the invigilation period was £2898. 

6. In correspondence with HMRC and at the hearing Mr Oguh submitted that the reason for the increase was that a new menu had been introduced with higher prices, and due also to seasonal variations in the business takings.  However, this explanation is inconsistent with the evidence before the Tribunal.  The average increase in menu prices (the greatest individual item increase was 11.5%) could only account for £200 of the increase in weekly takings.  The records for weekly takings over the year ended 31 March 2008 were fairly constant and showed no seasonal variations.  Ms Dougal was therefore of the view that at least £700 of income had been suppressed each week.

7. Mr Poopalasingham explained in his evidence that the test purchases were omitted from takings because the till was set on “training mode”, and purchases recorded whilst in training mode were not included in the till’s records.  Mr Poopalasingham also stated that he had discovered that his employees had been stealing from the till - using the training mode to apparently ring up purchases without having them recorded in his takings.   As these explanations were only given at the hearing, and had never previously been advanced, we have some scepticism as to their truth.  But even assuming that these explanations are true, they do not assist us in determining the true profits of the business for the relevant periods.

8. A number of meetings were held between HMRC and Mr Poopalasingham and his accountant in an attempt to reach agreement on the amount of additional tax to be paid, but no agreement could be reached.  Assessments and adjustments to the self assessments were therefore made by Ms Dougal on the basis that £700 of income had been suppressed each week for each of the years under investigation.  Mr Rowe acknowledges that her figures are not precise, but submits that they are based on the available evidence, and are reasonable in all the circumstances. 

9. Mr Oguh acknowledges that the business has no records for the relevant periods, and therefore the business's profits have to be estimated.  However, he submits that the figure of suppressed takings of £700 per week is too high and that £150 per week would more appropriate.  However he could give no credible reasons nor produce any evidence as to why £150 per week would be a better estimate of the suppressed income.  Nor did Mr Oguh challenge in any meaningful way Ms Dougal’s analysis or her estimates of the business’s income.

10. In the case of Johnson v Scott (1977) 52 TC 383 at 393 in the High Court, Walton J observed:

The true facts are known, presumably, if known at all, to one person only - the Appellant himself. If once it is clear that he has not put before the tax authorities the full amount of his income, as on the quite clear inferences of fact to be made in the present case he has not, what can then be done? Of course all estimates are unsatisfactory; of course they will always be open to challenge in points of detail; and of course they may well be under-estimates rather than over-estimates as well. But what the Crown has to do in such a situation is, on the known facts, to make reasonable inferences. When, in para 7(b) of the Case Stated, the Commissioners state that (with certain exceptions) the Inspector's figures were 'fair", that is, in my judgment, precisely and exactly what they ought to be - fair. The fact that the onus is on the taxpayer to displace the assessment is not intended to give the Crown carte blanche to make wild or extravagant claims. Where an inference, of whatever nature, falls to be made, one invariably speaks of a "fair" inference. Where, as is the case in this matter, figures have to be inferred, what has to be made is a "fair" inference as to what such figures may have been. The figures themselves must be fair. So far from representing an inference that the Commissioners did not appreciate the Inspector's figures fully, this demonstrates that they did. I think the point can be put conversely in another way. At times during Mr. Hall's address to me it almost appeared as if what he was requiring by way of his "lawful proof" was a duly audited certificate as to the Appellant's undisclosed expenditure. Of course, this was not what he was seeking; but once it is clear that this is not, and in the nature of things cannot be, available, then it follows as night follows day that some form of estimate must be made.

11. We are of the view that the estimates of income made by HMRC in this case were fair and were reasonably based on the information before them.  The onus is on Mr Poopalasingham to show otherwise, and he has not done so.

12. This appeal is therefore dismissed.

13.   The Appellant has a right to apply for permission to appeal against this decision.  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.

Nicholas Aleksander

TRIBUNAL JUDGE

RELEASE DATE: 22 January 2010