[2012] UKFTT 432 (TC)
TC02114
Appeal number:
TC/2011/07159
TC/2012/03092
CORPORATION TAX – amendment of tax returns to reflect undeclared
income of company – whether deposits into bank account evidence of income not
declared – held no – whether assessments excessive – held yes - appeal allowed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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ROMARK JEWELLERS
LIMITED
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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 AND
CUSTOMS
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TRIBUNAL:
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JUDGE GREG SINFIELD
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HELEN MYERSCOUGH ACA
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Sitting in public in Cambridge on 3 May 2012
Mr Mark Krempel, director of
Romark Jewellers Limited, for the Appellant
Miss Karen Weare of HM Revenue
and Customs for the Respondents
© CROWN COPYRIGHT
2012
DECISION
Introduction
1.
Romark Jewellers Limited ("Romark") carries on a retail
jewellery business in Bury St Edmunds, Suffolk. The company was incorporated
in September 2002. The sole director and shareholder of Romark is Mr Mark
Krempel. As part of an investigation into UK taxpayers who had offshore bank
accounts, HM Revenue and Customs ("HMRC") became aware that Mr
Krempel had made cash deposits of £114,250 into a savings account with Barclays
in Guernsey in 2003 and 2004. The account was a joint account in the names of Mr
Krempel and his mother, Mrs Ingrid Petterson. When questioned about this by
HMRC, Mr Krempel stated that the deposits were the proceeds of sales of
jewellery that his mother had given him to sell so that he could buy a flat in France. Mr Krempel produced a hand written list of items of jewellery with values which
amounted to £146,000.
2.
HMRC opened an enquiry into Romark's tax return for 2006 by issue of a
notice under Paragraph 24 Finance Act 1998 on 1 October 2008 and thereafter
further enquiries were commenced into the other tax years. HMRC issued
assessments to corporation tax on 9 March 2011 in relation to tax years ended
31 December 2003, 2004, 2005, 2006 and 2007 as follows:
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3. Year
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Declared profits
£
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Additional profits
£
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Additional tax assessed
£
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2003
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53,157
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72,000
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13680
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2004
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76,812
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72,000
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13680
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2005
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65,852
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15,000
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2850
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2006
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75,393
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15,000
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2850
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2007
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141,188
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15,000
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2963.01
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HM Revenue and Customs ("HMRC") also imposed a
penalty of £10,807 which is the subject of a separate appeal. Romark appeals
against the five assessments for additional corporation tax and the penalty.
4.
In broad terms, HMRC contended that an admitted failure to include all
tax in the return for 2002-2003 and unexplained amounts paid into the offshore
bank account by Mr Krempel indicated that there was undeclared income of the
business in the amounts in the table above. Mr Krempel contended that the
amounts were proceeds of sales of jewellery given to him by his mother to sell
on her behalf and that the company had declared all the proceeds of sales by
the business in the years under appeal.
Issues and burden of proof
5.
The principal issue for the Tribunal to determine was whether cash
deposits paid into the bank account in Guernsey in 2003 and 2004 and other
amounts not so banked were, as claimed by Mr Krempel, proceeds of sales of his
mother's jewellery or were profits that Romark had failed to declare on its tax
returns for those years. A related issue is whether the assessments of tax on
undeclared profits of £15,000 a year for 2005, 2006 and 2007, made by HMRC on
the basis that Romark had failed to declare all its profits for prior years,
are excessive. There are subsidiary issues that only arise if we find that there
are undeclared profits as alleged by HMRC, namely:
(1)
whether assessments for years ended 31 December 2003, 2004, 2005, and
2007 were properly made as discovery assessments;
(2)
whether assessments for years ended 31 December 2003, 2004 and 2005 were
properly made within the extended time limits; and
(3)
whether Romark is liable to a penalty and, if so, whether the amount is
correct.
6.
The burden is on the appellant to satisfy us that the sums charged to
tax by the amendments are excessive - see section 50(6) Taxes Management Act
1970 and Brady v Group Lotus Car Companies plc [1987] STC 635 for that
proposition. The question for us therefore is whether we are satisfied on the
evidence we have heard and seen that the assessments of additional profits are
excessive. We answer that question and make our factual findings on the basis
of the balance of probabilities.
Facts
7.
We heard oral evidence from Mr Krempel. We also received a witness
statement and heard oral evidence from Mr David King, one of the HMRC officers
who conducted the enquiry. In addition, the bundles contained a comprehensive
collection of correspondence and other documentation generated by the enquiries
which we have taken into account in this decision. On the basis of that
evidence we find the facts to be as follows.
8.
In 1982, Mr Krempel's father retired and, together with Mr Krempel's
mother, went abroad to live. At that time, they bought Mr Krempel's younger
brother a flat in London, worth approximately £500,000 today. Around the same
time, Mr Krempel's mother closed all her UK bank accounts and opened some off-shore
ones. She arranged that Mr Krempel was a signatory to the accounts as a
contingency measure in case anything should happen to her. Mr Krempel said
that he had never used any of his mother's offshore accounts personally
(subject to the events discussed below), had never received any bank statements
in relation to the accounts or had any knowledge of the details of those
accounts.
9.
In 2001, Mr Krempel was on holiday in France when he saw that some property
developers were about to release the next stage of a development of apartments.
He decided to buy one of the apartments for holidays and because he thought it
would be a good investment. He returned to the UK with the intention of borrowing
funds in order to buy one of the apartments.
10.
Mr Krempel said in evidence that, when he told his mother (who was a
widow and had returned to live in the UK by this time) of his plans, she offered
to help him with the purchase of the flat by giving him some of her jewellery
to sell. She had in mind an equalising gift to put him in the same position as
his brother 20 years earlier. She also thought that she could reduce the value
of her estate by passing on some of her assets at that time rather than them
passing on her death. Mr Krempel said that his mother gave him certain items
of jewellery which he valued at an amount approximately equal to the price of
the apartment. The price of the apartment in 2001 in euros was £150,000
(although the subsequent decline of the euro against the pound brought that
down by the time of completion) and the value of his mother's jewellery was
just over £140,000.
11.
Mr Krempel produced a statement in the form of a sworn affidavit by his
mother, Mrs Ingrid Petterson. In it, she confirmed that 43 items of jewellery
listed in an attachment to the affidavit were given by her to Mr Krempel to
sell on her behalf. She said that she had acquired the jewellery over many
years and no longer needed it. The proceeds of the sale amounted to £140,950
which her son was to use to purchase a flat in France. In addition, Mr Krempel
produced a number of photographs of his mother at different stages of her life
wearing certain items of jewellery. Mr Krempel accepted that it was not
possible to prove that any item of jewellery shown on the photographs
corresponded exactly to the items listed in the schedule of jewellery attached
his mother statement. He also accepted there was no corroborating evidence of
the sale of any specific items of his mother's jewellery which corresponded to
that list. As explained more fully below, we accept Mrs Petterson's evidence.
12.
Romark sold jewellery on behalf of third parties. Such sales were
called "Appro" sales. Only Mr Krempel dealt with a customer wishing
to sell an item as an Appro sale because only Mr Krempel could agree the
value. The Appro items and sales were recorded in a file of loose leaf
sheets. When the value has been agreed with the customer, the item would be
added to the sheet in the Appro file, given a stock number and a description
and then displayed with a label among the other stock. Any member of staff in
the shop could sell such items. Such sales were recorded separately and did
not form part of Romark's normal sales because the items of jewellery did not
become part of Romark's stock when they were sold on behalf of third parties. When
an Appro item was sold, the purchaser would not receive a normal shop receipt
from Romark because the sale was made on behalf and as agent of the owner of
the item of jewellery. If the purchaser asked for a receipt then he might be
given a hand written receipt or insurance valuation but, quite often, people
did not ask for such a receipt even when buying quite high value goods. Copies
of the hand receipts were not kept but insurance valuations were generated on
the computer so copies are still on the hard drive. Once the Appro item had
been sold, Romark would account to the third party for the proceeds less an
amount by way of commission. The Appro sales represented only a small part of
Romark's business, generally less than one sale per month or about 2% of sales.
Mr Krempel admitted that, at that time, the bookkeeping in relation to on Appro
sales was inadequate and the commission had not always been correctly recorded.
He said that he had changed the system since that time and now kept better
records in relation to such sales. There were four shop staff who handled the
sales. Each day they cash up and reconcile till rolls and, once a week, write
up the cash books from daily taking sheets from the tills.
13.
Mr Krempel said that his mother's jewellery was sold as Appro items which
is why he did not have any receipts. The only difference between sales of his
mother's jewellery and other Appro items was that he did not account for any
commission on the sales on behalf of his mother but sent her all the proceeds.
Mr Krempel thought that he had some insurance valuations for his mother's
jewellery, as they were retained in the shop on the computer, but he had not
produced such records for the appeal because he had not been asked to do so or
realised that he should do so.
14.
We were shown a handwritten list of 43 items of jewellery from the Appro
folder. The lists had separate columns showing a number, description, retail
price, whether sold (all were marked as sold), whether paid for (only some were
marked as paid) and the name (shown as "Ingrid", Mrs Petterson's
name, against each item). The paid column referred to when Romark accounted
for the proceeds of sale to the owner of the Appro item. Mr Krempel had
started to tick paid when he put money into his mother's bank account but then
stopped because he realised there was no correlation between the sales of
jewellery and the payments into the bank account. There was no clear
correlation between the cash deposits and the sales of his mother's jewellery
but that was because large items or expensive items of jewellery would be paid
for in separate payments such as a deposit followed by instalments. Further,
Mr Krempel was not paying money into his mother's bank account
contemporaneously with the sales of the jewellery.
15.
Mr Krempel sold the jewellery through his shop over the next two years
and paid the amounts raised into the joint account in Guernsey. Mr Krempel
paid all the cash proceeds from the sales of jewellery directly into his
mother's account by depositing them at Barclays Bank in Bury St Edmunds. Mr
Krempel did not always pay the cash from the sales of his mother's jewellery
straight into his mother's bank account. He would not do so if he did not have
sufficient cash in the business to enable him to do so. In such cases, he
would defer payment until there was enough cash in the business. Any amounts
that were paid by cheque or credit or debit cards were paid into Romark's bank
account in the same way payments for purchases of Romark's stock but, at a
later date, Mr Krempel would pay an equivalent amount in cash into his mother's
account through the bank in Bury St Edmunds. Mr Krempel said that he did not
transfer money electronically from the business account to his mother's account
because, at the time, he didn't have the facility to transfer the funds
electronically from the business's bank account to his mother's account in Guernsey. The amounts received for the sales of his mother's jewellery were not shown in
the records of Romark because Mr Krempel considered that he was selling his
mother's jewellery on her behalf.
16.
Mr Krempel exchanged contracts to buy the apartment off-plan in 2001.
Completion was supposed to take place in autumn 2003 but it was delayed and eventually
took place in January 2005. Mr Krempel paid a deposit of 2 % or 3% on the
exchange of contracts. On 28 February 2002, Mr Krempel opened a euro account
with the same bank in Guernsey where his mother had her bank accounts. The
joint bank account was a sterling account. The purpose of the euro account was
to facilitate a euro forward contract and make the stage payments in euros to
the developer. There were five stage payments in February, May, July, October
and December 2004.
17.
Mr Krempel said that he paid the proceeds from the sales of his mother's
jewellery into his mother's bank account and not into the separate euro bank
account in his own name because, at the time, his euro account did not exist. In
fact, all but the first two payments into his mother's account were made after
the euro account had been opened. There was no correlation between deposits
into Mrs Petterson's account and the transfers to Mr Krempel's euro account.
At the end, some £30,000 more was transferred than deposited.
18.
Mr Krempel was first contacted by HMRC in October 2008 when he was
questioned about the offshore accounts. HMRC had received evidence that Mr
Krempel held an offshore bank account jointly with his mother. At a meeting on
4 November 2008, Mr Krempel told HMRC that he was a signatory to an
account with his mother, but said he had no idea that the account was in joint
names and that there were no other bank accounts. Mr Krempel's evidence was
that, at first, he had no idea what HMRC were talking about because his euro
account had been closed since January 2006. He said that it occurred to him
that HMRC were talking about his mother's bank account (he thought that there
was only one account at that time). He felt intimidated by HMRC's questioning
and did not feel able to talk about his mother's financial arrangements without
talking to her first. Mr Krempel admitted that he was evasive in the face of
questioning. Mr Krempel said that, with hindsight, his behaviour at that first
interview was a mistake as it was made HMRC more suspicious. After the
meeting, Mr Krempel disclosed that there were other accounts held jointly in
his and his mother's name. HMRC accepted that the other accounts related to
Mrs Petterson's foreign income.
19.
Mr Krempel was asked to provide bank statements in relation to the joint
account with his mother. Mr Krempel provided all the bank statements, save
two. Those two missing statements showed cash deposits in excess of £114,000
into the account from a bank in Bury St Edmunds over a two-year period. At a
meeting on 18 September 2009, Mr Krempel denied that there had been any
transfers to his accounts despite the bank statements showing M Krempel as the
reference. HMRC were also aware of other deposits in cash amounting to
approximately £30,000 at two bank branches in London. HMRC accepted that Mrs
Petterson lived in London at the relevant time and did not challenge that the
deposits had been made by her. The first mention of the euro account by Mr
Krempel to HMRC was at a meeting on 1 October 2009.
20.
At a visit to the shop on 28 July 2010, HMRC spoke to two members of
staff who confirmed the treatment of the Appro sales. The staff knew that
items of jewellery had been sold for Mr Krempel's mother and that the tickets
for such jewellery carried an H number although only one of the members of
staff had actually sold any of those items (but the other member had not been
working in the shop at that period). ). In addition, during the visit, Mr Krempel
had invited HMRC to look through the records and, apart from the poor Appro
record keeping, no other anomalies were found.
21.
In February 2011, Mr Krempel wrote to HMRC, rejecting the figures for
additional profits and making an offer to pay £10,000 to bring the matter to a
conclusion. Mr Krempel said at the hearing that he made the offer not because
he believed that he owed an amount of tax but because the matter had been
dragging on for some time by then and he had reached a stage where he was
willing to pay that amount just to get HMRC out of his hair.
22.
HMRC concluded that there were concerns over the record-keeping by Romark
and over the amounts of cash that had been banked by Mr Krempel. They considered
that there were a number of anomalies in the explanations that had been offered
and that Mr Krempel had only been forthcoming in providing information when
confronted with evidence obtained elsewhere. In March 2011, HMRC issued the
assessments that are the subject of the appeal.
Discussion
23.
The calculation of the assessments for 2003 and 2004 was based on
£140,000 derived from the list of jewellery items. HMRC's view was that Mr
Krempel had been a jeweller for a long-time and there had been certain off
record transactions ie items purchased but not going through business records.
When Mr Krempel visited France in 2001 and decided to buy the apartment, he
thought it would be a good time to cash in the off record items. HMRC
contended that the £140,000 was from the sale of items accumulated over the
years. They contended that there was no corresponding attributable cost since
that, in itself, would have derived from undisclosed profits of previous
years.
24.
It is understandable that HMRC should find Mr Krempel's behaviour
suspicious: he paid large amounts of cash into an offshore bank account over a
period of two years; at the time he operated a retail jewellery business where
large amounts of cash were received; the cash came from sales of jewellery
through the business premises; and, by his own admission, he was evasive and
uncooperative when first questioned by HMRC. It is however recognised that Mr
Krempel actually invited HMRC to review all the records at a subsequent visit.
25.
The outcome of this appeal turns on whether the Tribunal accepts Mr
Krempel's evidence that the amounts assessed were the proceeds of sales of
jewellery belonging to his mother. We bear in mind that the burden of proof is
on Romark. Having heard the evidence, however, we are satisfied on the balance
of probabilities that the amounts assessed were the proceeds of sales of
jewellery given to Mr Krempel by his mother. We reach this view for the
following reasons.
26.
Although Mrs Petterson did not give live evidence to the Tribunal and
was not available for cross-examination, we accept her evidence. The affidavit
of Mrs Petterson and supporting evidence in the form of a list of jewellery and
photographs leave us in no doubt that Mrs Petterson was the owner of a
substantial quantity of valuable jewellery. Two members of Romark's staff
confirmed to HMRC that there had been sales of Mrs Petterson's jewellery
through the shop. As Mr King acknowledged, it would be surprising if, having
taken large amounts of cash out of the business with a view to not including
them in the takings, Mr Krempel then paid them into a bank account via a UK
bank so that they could easily be traced. We find as a fact that Mrs Petterson
gave the items of jewellery listed in her statement to Mr Krempel to sell so
that he could buy an apartment in France. We also find that those items were
sold over the next two or so years and were the source of the amounts paid into
the joint account in Guernsey and ultimately used to buy the apartment in France.
27.
In view of our findings in relation to the assessments for 2003 and
2004, it follows that there was no evidence to support the estimated
assessments for 2005 to 2007. The penalty assessment also falls away.
Decision
28.
We find that Romark did not understate its profits on its tax returns
for the tax years in question. We find that the assessments to tax are
excessive and there is no liability to a penalty. Accordingly, the appeal is
allowed.
29.
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.
GREG SINFIELD
TRIBUNAL JUDGE
RELEASE DATE: 4 JULY 2012
