[2012] UKFTT 255 (TC)
TC01948
Appeal number:TC/2010/07983
INCOME TAX – amendment to
self assessment – evidence of expenditure claimed – amendment confirmed –
penalty for negligent conduct confirmed – appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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GARY KAY
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE JONATHAN CANNAN
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HARVEY ADAMS
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Sitting in public at 45 Bedford Square London on 7 February 2012
Mr Lovemore Sisimayi and Dr
Elisha Mafunga of L Wilson & Co accountants for the Appellant
Mrs J Ballingall of HM Revenue
& Customs for the Respondents
© CROWN COPYRIGHT
2012
DECISION
Background
1.
The appellant, Mr Gary Kay, is a general tradesman who has worked in the
construction industry for some years. In the years relevant to this appeal he
was a sub-contractor working exclusively for a company called IAC Construction
Limited. His work involved him travelling to sites mainly in London but also on
occasion to the south coast, the midlands and the north west of England. On 22 August 2008 HMRC commenced an enquiry into Mr Kay’s self assessment tax
return for the tax year 2006-07. The enquiry was dealt with on his behalf by Mr
Kay’s accountants, L Wilson & Co (“Wilsons”).
2. At
the conclusion of the enquiry in January 2010 HMRC issued a closure notice
amending Mr Kay’s self-assessment return for 2006-07. At the same time HMRC
issued assessments for tax years 2003-04, 2004-05, 2005-06 and 2007-08. The
effect of these assessments was as follows:
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Tax Year
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Profits Returned
£
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Additional Profits Assessed
£
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2003-04
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5,189
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22,202
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2004-05
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14,119
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18,989
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2005-06
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5,467
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15,444
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2006-07
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10,389
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23,028
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2007-08
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14,711
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23,022
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3.
In each year, the reason for additional profits being assessed was what
HMRC considered to be excessive claims to relief for expenditure. In relation
to tax year 2003-04 there was also an understatement of income. Mr Kay, through
his representative has agreed part of the assessments relating to expenditure
claims. He has also agreed the assessment in relation to 2003-04 in so far as
it relates to an understatement of income. The issues between the parties which
fall for determination in this appeal relate to the following items of
expenditure summarised in a letter dated 10 August 2011 from Wilsons to HMRC.
The amounts in the following table represent the sums for which relief has been
given by HMRC with the amounts in brackets being the sums claimed by Mr Kay:
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2003-04
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2004-05
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2005-06
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2006-07
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2007-08
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General
Admin Expenses
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180
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180
(2,717)
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180
(1,908)
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180
(1,988)
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180
(1,664)
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Motor
Expenses
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1,000
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1,000
(3,873)
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1,000
(4,685)
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1,000
(6,647)
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1,000
(7,256)
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Travel
and Subsistence
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0
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0
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0
(105)
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0
(255)
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0
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Other
Costs
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1,000
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1,000
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1,000
(3,789)
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1,000
(5,992)
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1,000
(9,823)
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Other
Direct Costs
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0
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0
(8,869)
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0
(3,214)
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0
(6,392)
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0
(1,685)
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4.
We understand that the tax due as a result of the assessments totals
£30,135.11 for the 5 tax years, although the amount in respect of the items in
dispute will be less than that. In addition HMRC have assessed a penalty
totalling £10,544. Mr Kay appeals against the assessments in so far as they
relate to the expenditure claimed under the heads described above, and also
against the penalty.
Issues on the Appeal
5.
There is no issue between the parties as to any applicable law, certainly
none was raised at the hearing. The issue for us is therefore one of fact,
namely what expenditure has Mr Kay incurred so that he is entitled to relief in
calculating the profits of his trade. The burden is on Mr Kay to satisfy us
that the expenditure claimed was actually incurred by him (See generally Bi-Flex
Caribbean v The Board of Inland Revenue 63 TC 515). As far as the penalty
is concerned, the burden is on HMRC to satisfy us that the returns for the years
above were made by Mr Kay “negligently”, there being no allegation of
fraud.
6.
We must decide, on the balance of probabilities, what expenditure was
actually incurred by Mr Kay. Similarly, we must decide on the balance of
probabilities whether the returns were made negligently by Mr Kay. We do so on
the basis of the oral evidence we heard during the hearing, the documentary
evidence to which we were referred, and where relevant the inferences from that
evidence that we consider it appropriate to make.
7.
The correspondence between the parties reveals an area of disagreement
relating to the collection of tax said to be due and the treatment of certain
refunds said to be due. This was not addressed by either party at the hearing
and in any event does not fall within the jurisdiction of the tribunal.
The Respondent’s Case
8.
At the invitation of the Tribunal and Mr Sisimayi, HMRC opened the
appeal and presented their evidence. Mrs Ballingall outlined the issues as we
have set them out above and called Mr Nial Browne to give evidence. He is the
Inspector of Taxes who was responsible for making the assessments. He had made
a witness statement dated 18 April 2011 which he confirmed in his oral evidence.
Mrs Ballingall then proceeded to deal with a number of matters in chief. It
became apparent during the course of examination in chief that Mr Browne was
effectively reading from a script which contained a number of pre-prepared
questions and answers. We were surprised and concerned that evidence should be
dealt with in that way. Mrs Ballingall told us and we fully accept that this
was how she had been trained to deal with officers’ evidence in chief. In our
view however it is wholly inappropriate to do so. The evidence of a witness
should not be coached, still less should it be the subject of a pre-agreed
script. We make no criticism of the particular officers involved in this
appeal, but we do wish to make it clear that the practice should cease.
9.
Mr Browne outlined the progress of the enquiry. Initially it had been
commenced by another officer on 22 August 2008. Mr Browne took over in January
2009. Early in the enquiry there was correspondence from HMRC seeking to obtain
information and documents in relation to tax year 2006/07. In particular a full
breakdown and documentary evidence in relation to the expenditure claimed on
the tax return. No documents were provided. On 17 November 2008 Wilsons stated that Mr Kay had forwarded documents to HMRC comprising receipts and bank
statements. Mr Browne told Wilsons that they had not been received and
suggested that if they had been lost then invoices for an adjacent accounting
period should be obtained. Ultimately, on 26 January 2009 Wilsons stated that in
fact one of their employees had posted the documents without obtaining any proof
of postage. Again Mr Browne suggested Wilsons should provide receipts from an
earlier year. He also asked whether Wilsons had any working papers to support
the entries on Mr Kay’s tax return but was told that the computer they had been
prepared on had been infected by a virus and could not be retrieved.
10.
Mr Browne’s evidence, which we accept, was that there was nothing to
indicate that the documents were ever received by HMRC. Wilsons stated that
they would look for the records for the earlier year (2005-06), but again these
were never provided. A one page schedule prepared by Wilsons itemising expenditure
in 2006/07 was produced. Mr Browne sought further information in relation to
these items and was provided with very general descriptions but nothing to
substantiate the expenditure. As a result Mr Browne held a meeting with Mr Kay
and Wilsons on 25 June 2009. They discussed the general nature of Mr Kay’s
business and the specific items of expenditure claimed in 2006-07. We consider below
the various items of expenditure in so far as they remain in dispute in the
appeal.
11.
Following the meeting, on 14 October 2009 Mr Browne wrote to Wilsons setting out the basis on which he was proposing to amend the self assessment for 2006-07
and to make assessments for other years. A number of the amendments were agreed
by Wilsons. For example, the turnover figure for 2003-04 was increased from
£12,485 to £31,695 based on the CIS vouchers available from IAC Construction
Ltd. Premises costs and advertising costs in 2004-05 amounting to £996 and £465
respectively were disallowed. Interest claimed in 2004-05 and 2007-08 amounting
to £317 and £425 respectively was disallowed. There was no explanation as to
why these amounts had been claimed in the first place. There was no agreement
on the remaining items of expenditure and Mr Browne issued the assessments
described above.
12.
Penalties were also issued pursuant to section 95 Taxes Management Act
1970. The maximum penalty under that section was 100% of the tax found due as a
result of the return being incorrect. Based on HMRC policy, Mr Browne mitigated
the penalty by 10% for disclosure, 30% for co-operation and 25% for
seriousness. The penalties chargeable were therefore 35% of the tax due under
the assessments. The total penalty was £10,547.21, although we were not told
what proportion of this relates to the items in dispute in the appeal and what
proportion relates to items assessed which were agreed by Wilsons.
13.
As far as HMRC are concerned on this appeal, there is insufficient evidence
to justify relief for the amounts of expenditure claimed by Mr Kay. Further,
that the evidence supports a conclusion that Mr Kay negligently made an
incorrect return and that a penalty of 35% of the tax assessed is appropriate.
The Appellant’s Case
14.
Mr Kay’s grounds of appeal against the assessments are essentially that
HMRC has allowed too little by way of relief for the expenditure claimed and
has not taken into account the explanations given during the course of the
enquiry. In relation to the penalties, Mr Kay’s case is that he was not
negligent and that the penalties are excessive.
15.
Mr Kay did not give evidence in chief but at our invitation was tendered
for cross-examination. He stated that he had given a large bundle of receipts
to a Mrs Kirk of Wilsons. These are the records which it is said have gone
missing. When asked why he had no records for earlier years he stated that IAC
Construction Ltd had records. Wilsons did his tax returns and he would keep
every receipt in a folder and take it to Mr Wilson to go through them. He said
that the accountants never returned the records to him.
16.
Mr Sisimayi relied upon the explanations given in correspondence during
the course of the enquiry. We consider those explanations below in our decision
and in the context of each item of expenditure.
Decision
17.
The absence of receipts or other documentary evidence does not help Mr
Kay in satisfying us that he had incurred the expenditure claimed. We are
prepared to accept that records for the year 2006-07 somehow went missing in
the course of being sent to HMRC. However there is no explanation as to why no
records were available for the other years under appeal. Having said that, we
are not limited to deciding the issues solely by reference to documentary
evidence. We have therefore considered whether in the light of all the evidence
as to the circumstances of Mr Kay’s business, it is more likely than not that
he did incur the expenditure claimed, or indeed any sum greater than that for
which HMRC has given relief.
18.
The background matters stated in paragraph 1 above were not in dispute.
We have taken them into account in this decision. We also find the following
facts based on the evidence before us. Mr Kay worked from 8am to 5pm for 5 days
a week and took approximately 4-6 weeks holiday a year. He generally worked on
new build properties and all his work in the relevant periods came through IAC
Construction Ltd. He was responsible for providing his own tools and he
maintained a van for use in the business. He received a small contribution from
IAC towards petrol costs. Most materials would be provided by IAC but Mr Kay
was responsible for purchasing small consumable items and would generally pay
cash when purchasing items for the business.
General Administrative Expenses
19.
Mr Browne has allowed £180 per year under this heading. It is not clear
from the evidence what general expenses were claimed in 2003-04. In subsequent
years the expenditure claimed under this heading ranged between £1,664 and
£2,717. There is no analysis in the evidence as to what items are included in
the sums claimed. Wilsons claim that the sums relate to mobile phone calls,
postage and printing of leaflets and that the payments were made by cash. The
mobile phone used was a pay as you go handset. Wilsons suggested that at least
£20 per week was spent on work related calls. Based on what we have been told
about Mr Kay’s business we are not prepared to accept that evidence. We
consider that Mr Browne has made a reasonable estimate of the mobile phone usage.
His estimate was based on a bill of £30 per month with 50% business use. We are
satisfied that is the likely level of expenditure.
20.
Wilsons suggest that there ought to be some allowance for inflation. In
an exercise of this nature we do not consider that to be necessary or
appropriate. £15 per month business usage may reasonably be treated as an
average for the whole period of assessment. We are not satisfied on the
evidence we have heard and seen that any sums were spent on postage or printing
leaflets.
Motor Expenses
21.
Mr Browne has allowed £1,000 per year under this heading. It is not
clear from the evidence what motor expenses were claimed in 2003-04. In
subsequent years the expenditure claimed under this heading ranged between
£3,873 and £7,256. Wilsons claimed that these were the usual expenses of
running a car such as servicing, fuel, breakdown recovery, congestion charges
and replacement tyres. During the course of negotiations Wilsons suggested a
figure of £3,360 for 2006-07 which included petrol at £50 per week and £400 on
new tyres.
22.
We accept that Mr Kay’s working patterns involved him using his van to
travel across London and on occasion elsewhere in the country. Whilst £1,000 might
not be a generous allowance in the circumstances, we are not satisfied on the
balance of probabilities that it is wrong. We would have expected Mr Kay to
produce at least some evidence to establish for example his annual mileage and
the likely proportion of business miles. We would also have expected evidence
to be available to demonstrate the level of expenditure on motor expenses in
another comparable tax year. We have been provided with no such evidence, nor
is there sufficient material for us to make any proper inferences in this
regard. There is simply no evidence at all by which we can test Mr Kay’s
assertion that a higher figure should be allowed.
Travel and Subsistence
23.
Mr Browne has allowed no relief for expenditure under this heading. It
is not clear from the evidence what travel and subsistence was claimed in
2003-04 and 2004-05. In 2005-06 and 2006-07 the total claimed was £360. The
claim for travel and subsistence is said to relate to “travel between sites.
Not much for lunch or hotels except on a few occasions. These were paid for by
cash”. In correspondence Wilsons invited HMRC to use a round sum figure of
£30 per week for 5 weeks, presumably being the period of time when Mr Kay was
working away from London.
24.
It is not at all clear to us how the travel element relates to the motor
expenses or what the subsistence element is said to cover. In the absence of
any further evidence or explanations we are satisfied that Mr Browne was right to
exclude relief under this heading.
Other Costs
25.
Mr Browne has allowed £1,000 per year under this heading. It is not
clear from the evidence what other costs were claimed in 2004-05. In other
years the expenditure claimed under this heading ranged between £3,789 and
£9,823.
26.
In the year 2006-07, other costs were broken down as follows:
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£
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Gloves
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1,040
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Helmet
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320
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Goggles
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375
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Boots
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425
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Work
Clothes
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1,786
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PPEs
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1,682
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Laundry
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364
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Total
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5,992
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27.
Mr Kay described this expenditure in the meeting with Mr Browne. For
example he stated that he would purchase approximately 10 building site helmets
per year, 10 pairs of goggles per year and 2 pairs of boots. “PPEs”
appear to be some other type of protective equipment. Again, there is no
evidence by which we can test the reasonableness of the level of expenditure
claimed, either by reference to the number of items purchased in a year or the
likely cost of each item. In the course of negotiations Wilsons suggested a
figure of £1,250 for other costs in 2006-07. No explanation was given as to how
they arrived at that figure. It is not far away from the figure allowed by Mr
Browne but we do not have any material from which we can say that it is to be
preferred to Mr Browne’s figure. In the absence of any further evidence or
explanations we are satisfied that Mr Browne was right to limit relief under
this heading to £1,000 per year.
Other Direct Costs
28.
Mr Browne has allowed no relief for expenditure under this heading. The
expenditure claimed under this heading ranged between £1,685 and £8,869 over
the years in question. In the year 2006-07 the costs were broken down as
follows:
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£
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Small
Tools Replacement
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899
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Machine
and Tool Hire
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2,681
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Consumables
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2,113
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Materials
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699
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Total
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6,392
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29.
Wilsons stated in correspondence that the cost of small tools
replacement arose because Mr Kay’s van was broken into 3 times in 2006-07. Mr
Kay produced in evidence a document from Autoglass indicating they had charged
£99.16 for replacement glass in a vehicle. The document is addressed to IAC
Construction. Even accepting, which we are prepared to, that Mr Kay’s vehicle
was broken into, there is no evidence as to what was stolen nor, if it was
tools, the replacement cost of the tools.
30.
Wilsons stated that machine and tool hire would arise where Mr Kay had
to do the job but didn’t have the right equipment. Consumables were small items
such as glue, varnish and fillers. Mr Browne explained that the CIS vouchers
evidencing payments by IAC Construction Ltd to Mr Kay identified the cost of
materials reimbursed to Mr Kay as £699. Given that sum was not treated as
taxable income, Mr Kay would not be entitled to relief for that amount.
31.
There is simply insufficient evidence available to us from which we can
be satisfied that the expenditure claimed under this heading was incurred by Mr
Kay. That applies not only in relation to the year 2006-07 when records appear
to have been lost in transit, but also to the other years which are the subject
of assessment. In the circumstances we are not satisfied that Mr Browne was
wrong to refuse relief under this heading.
The Penalty
32.
In broad terms, where a taxpayer negligently makes an incorrect return
he is, at the material times, liable to a penalty based on the amount of tax
understated by the return. In the present case the tax understated was
£30,135.11. For the reasons given above we are satisfied that Mr Kay was not entitled
to the reliefs claimed in his tax returns and had also understated his income
in 2003-04 to the extent identified by Mr Browne. We infer, from the
circumstances generally and in particular the absence of any records for any of
the periods assessed, that Mr Kay had no reasonable basis on which to make the
claims for relief. As such, we are satisfied that the incorrect returns were
made negligently. In our view, taking into account all the circumstances, 35%
of the tax due is a reasonable and proportionate amount and we confirm the
penalty assessed.
Generally
33.
In the circumstances the appeals against the assessments and the penalty
are dismissed.
34.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. 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.
TRIBUNAL JUDGE
RELEASE DATE: 10 April 2012
