[2013] UKFTT 161 (TC)
TC02577
Appeal number: TC/2012/03906
INCOME TAX – adjustments to
self-assessment – discovery assessment – fairness of estimates by HMRC –penalties
for inaccuracies - appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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BHAGYA RAJ
SUBBRAYAN t/a
SWISS COTTAGE DIET CLINIC
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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 NICHOLAS ALEKSANDER
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A HUGHES
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Sitting in public at 45 Bedford Square, London on 29 November 2012
V Dhoshi, accountant, for the
Appellant
W Kelly, an officer of HMRC,
for the Respondents
© CROWN COPYRIGHT
2013
DECISION
1.
Dr Subbrayan appeals against the following income tax assessments and
penalties:
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Tax Year
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Assessment Amount
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Penalty
Amount
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2005/06
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£3828.02
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£1323.00
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2006/07
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£6320.32
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£2158.00
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2007/08
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£5387.06
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£1589.00
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2008/09
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£5040.00
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£1229.21
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Total
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£20,575.4
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£6299.21
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2.
At the hearing Dr Subbrayan was represented by Mr Dhoshi and HMRC was
represented by Mr Kelly. The Tribunal had before it bundles of documents, and
heard evidence from Mr Subbrayan (Dr Subbrayan’s husband) and from Mrs Ann
Jackson, an officer of HMRC who was responsible for the enquiry into Dr
Subbrayan’s affairs. Dr Subbrayan did not attend the hearing and did not give
evidence to us.
Background facts
3.
We find the background facts to be as follows:
4.
Dr Subbrayan is a self-employed doctor, practising as a weight loss
consultant under the trading name “Swiss Cottage Diet Clinic”. She employs no
staff, but her husband, Mr Subbrayan, who is a retired architect, helps her
with administrative and reception duties (including helping with financial
matters). She has been in business since September 1990.
5.
On 22 September 2008, Mrs Jackson opened an enquiry into Dr Subbrayan’s
2006/7 tax return under section 9A, Taxes Management Act 1970
("TMA"). Enclosed with the letter opening the enquiry was a schedule
of information requested from Dr Subbrayan. Dr Subbrayan submitted to HMRC
some, but not all, of the information requested. In particular, Mr Subbrayan
told Mrs Jackson on 5 December 2008 that cheque book stubs and paying-in books
had not been kept. Further requests for information were made and further
information and documents were provided to Mrs Jackson as the enquiry
progressed. Mrs Jackson had two meetings with Dr and Mr Subbrayan, one on 29
April 2009 and one on 8 September 2010.
6.
Notes of the meetings held on 29 April 2009 and 8 September 2010 were
prepared by Mrs Jackson and were included in the bundles. Copies of these
notes were sent to Dr Subbrayan shortly after each meeting, inviting Dr and Mr
Subbrayan to review them and notify Mrs Jackson if there were any material
inaccuracies. In the case of the meeting of 29 April 2009, the notes of the
meeting were countersigned and returned by Dr and Mr Subbrayan together with a
letter setting out various amendments. As regards the meeting of 8 September
2010, neither Dr nor Mr Subbrayan responded with details of any inaccuracies. We
find that the notes (taking into account the comments made by Mr Subbrayan in
respect of the 29 April 2009 meeting) are a materially accurate record of the
points discussed at the meetings.
7.
At the meeting on 29 April 2009, Dr Subbrayan discussed her pricing
policy in detail. It also became clear that Dr Subbrayan did not keep any
books of account. Her only financial records were her appointment book, cheque
stubs and bank statements. Periodically, Mr Subbrayan totalled and recorded
the amounts shown in the appointments book with separate columns for cash and
cheques. He then banked cheques received from clients. The appointment books
were destroyed.
8.
Few prime accounting records had been retained by Dr Subbrayan. In
particular Dr Subbrayan’s appointment book, which recorded the fees charged to
patients, had been destroyed, and cheque stubs and paying-in books were not
kept. Mr Subbrayan told us that there had been a burglary at the premises in
January 2008, and that the thieves had left the clinic in a complete mess. In
particular they broke the window (which was beyond repair) and broke into a
cupboard where all the medicines and records were stored, and the content of
the cupboard was tipped onto the floor. He had to arrange for a new window
frame to be installed, and had to pay for professional cleaners to clean up the
mess. Mr Subbrayan told the cleaners to throw away the old appointment books,
as they were not in a state that was worth keeping.
9.
We find Mr Subbrayan’s explanation implausible. We do not believe it for
the following reasons. Neither Dr nor Mr Subbrayan had ever mentioned a
burglary to HMRC during the course of their investigations as the reason why Dr
Subbrayan could not produce her appointment books and other prime records. If this
explanation had been true, we would have expected Dr and Mr Subbrayan to have
mentioned it to HMRC at an early stage as the reason why they could not produce
the appointment books and other records. Secondly, Mr Subbrayan produced no
other evidence to corroborate his story. He did not produce any report made to
the police. There were no records of payments made to either the carpenter who
replaced the window or to the professional cleaners (Mr Subbrayan told us that they
were both paid in cash). Thirdly, it seems to us unlikely that thieves would
have been interested in the appointment books and cheque stubs to the extent
that they would have damaged them to the extent suggested. Finally, this
explanation is inconsistent with the explanation given in the notes of
meetings, which is that Mr Subbrayan destroyed the appointment books once he
had transcribed the takings onto his A4 sheets.
10.
Dr Subbrayan did not keep her business income and expenditure separate
from Dr and Mr Subbrayan’s personal finances. They had a number of bank and
credit card accounts, and business income and expenses were paid into and out
of whichever account was most convenient.
11.
On the basis of the information supplied, Mrs Jackson undertook two
exercises. These exercises were reviewed with Dr and Mr Subbrayan at the
meeting on 8 September 2010. First she undertook a cash availability exercise,
where cash income and cash withdrawals from accounts were compared with cash
outlays. This exercise indicated that more cash had been spent than was
available. Mrs Jackson cross-checked her cash account exercise by undertaking
a business economics model, based on Dr Subbrayan’s pricing policy, mark-up of
medicines together with known clients. This too indicated that more cash had
been spent than was available.
12.
Following the meeting on 8 September 2010, further information was
supplied by Dr Subbrayan to HMRC, and Mrs Jackson’s exercises were fine-tuned
based on the further information supplied. On 29 June 2011 Mrs Jackson wrote
to Dr Subbrayan with her final view on the matter. These were that:
(a)
Dr Subbrayan had failed to keep a proper record of her income
(b)
She had understated her income by at least £17,772.43 during the year
2006/07
(c)
She had overstated her expenses by £3614.21 during the same period
(d)
She had submitted an incorrect return for 2007
(e)
As Dr Subbrayan had explained that the only change in her business was
that she had seen more patients in prior years, which is not reflected in those
prior year accounts, the same errors had occurred in prior years.
13.
Accordingly Mrs Jackson that Dr Subbrayan’s taxable income for 2006/07
should be increased to reflect her findings, and that the retail prices index
would be applied to the revised profit for 2006/07 to arrive at revised profits
for the other years. In respect of the year 2005/06, carried forward losses of
£7,900 from prior years were allowed. A closure notice for 2006/07 and
assessments for 2005/06, 2007/08 and 2008/09 were issued on 29 June 2011.
14.
Penalty determinations were raised on 25August 2011. For the periods
2005/06 to 2007/08, the penalties charged are governed by the s95(1)(a) Taxes
Management Act 1970. These provide for penalties of up to 100% of the tax
charged. Under HMRC’s published practice the penalty was abated to reflect
the following:
(a)
Disclosure – Mrs Jackson stated that only the over-claimed expenses had
been disclosed. She therefore allowed a 5% abatement out of a maximum
available abatement under HMRC practice of 20%
(b)
Co-operation – As Dr Subbrayan had attended meetings and provided some information
(although piecemeal), and shown generally a willingness to co-operate Mrs
Jackson allowed an abatement of 35% (max 40%)
(c)
Seriousness – as the returned profits were very low and the adjustments
were very large, Mrs Jackson allowed a 30% abatement (max 40%)
15.
The overall abatement given by was 65%, leaving a penalty charge of 35%,
and a penalty determination notice was issued in this amount on 25 August 2011.
16.
We have noted that the figures for abatement given in Mrs Jackson’s
letter of 25 August 2011 actually add up to 70%. The difference is explained
in the internal correspondence between Mrs Jackson and her senior officer at
HMRC who reviewed and approved the penalty determinations. Under the
seriousness heading, Mrs Jackson was only authorised to give an abatement of
25% - and there was a typographical error made when this was transcribed into
the letter sent to Dr Subbrayan. However the error was not raised before us on
behalf of Dr Subbrayan, and it makes no difference in practice, as the formal
penalty determinations (which are governing in this case) show the actual
amounts of penalties that were calculated on the basis of the 35% penalty
percentage.
17.
As regards 2008/09, the penalty is governed by schedule 24, Finance Act
2007. Mrs Jackson allowed the maximum abatements possible under the new regime
in order to bring the penalties in line with those charged in the earlier
years, and so a penalty of 35% was charged.
18.
Following a request by Dr Subbrayan’s accountant, Mrs Jackson’s decision
was reviewed. Small adjustments to the adjusted profits for 2006/07 were made
by the reviewing officer to reflect the fact that two items that had been
treated as having been paid in cash had in fact been paid into the bank. As
the other years were based on the profits for 2007/07 adjusted by RPI, a
corresponding adjustment was made to the other years. The reviewing officer
did not adjust the 35% penalty percentage. But the cash amount of the
penalties were adjusted to reflect the reduction in the amount of profits. The
adjusted amounts are set out in paragraph 1 of this Decision. It is these
adjusted amounts against which Dr Subbrayan now appeals.
Taxable Income
19.
The bulk of Mr Subbrayan’s objections to Mrs Jackson’s calculations
related to the manner in which her business economics model had been
constructed. However it was apparent from the correspondence with Dr Subbrayan
in the bundles and from Mrs Jackson’s evidence at the hearing that her
assessments had been based on her cash availability exercise, and the business
economics model was merely used as a cross-check. Mr Subbrayan’s comments on,
for example, amounts charged for each visit by a patient or the discounts given
to students or nurses, were therefore irrelevant.
20.
Mr Subbrayan also complained to us that there was an element of double
counting in Mrs Jackson’s calculations, as the bank statements would include,
for example, his pension. In addition, he regularly transferred funds from one
account to another to keep within overdraft limits and avoid penal charges. However,
on analysing Mrs Jackson’s spreadsheets, it was clear that she had stripped out
pension payments and various other payments. She had also removed transfers
between accounts. So that the only amounts left were cash and cheque deposits
that could only have come from the business. We reviewed Mrs Jackson’s
spreadsheets and are satisfied that she took care to avoid double counting. As
regards the transfers between accounts, many of the items in the bank
statements that Mr Subbrayan said represented transfers between accounts did
not reconcile, and Mr Subbrayan could not give us any satisfactory explanation
for the differences in dates and amounts.
21.
There are however two items where we would allow an adjustment. The
first is for a payment of £69.61 made on 25 July 2006 to Higher Nature. We are
satisfied that this was a business expense. We also consider that the payment
of £2240 for Dr Subbrayan’s subscription to the Healthcare Commission for
2006/07 should also be allowed as a deduction. Although the amount only
cleared the bank account on 22 March 2007 (after the accounting date), we are
satisfied that the amount relates to the 2006/07 period. We also note that the
corresponding subscription for 2005/06 had not been included at the beginning
of the year, so that there would be no element of double counting. These
adjustments would reduce Dr Subbrayan’s taxable profits by £2309.61.
22.
We are satisfied that Mrs Jackson made a discovery for the purposes of
section 29 Taxes Management Act 1970 and that Dr Subbrayan had been negligent
in making her tax returns for the tax years in question. As there had been no
significant change in the nature of Dr Subbrayan’s business for the years in
question, the principle of continuity applies (see Jones v Bamford
(1973) 51 TC 1) and it is proper for HMRC to raise assessments on the basis of
the profits determined for 2006/07 adjusted for RPI.
23.
The onus of proof is on Dr Subbrayan to show that HMRC’s assessments are
wrong. Save for the adjustment of £2309.61 mentioned above, we find she had
not discharged this burden..
Penalties
24.
Section 12B Taxes Management Act 1970 requires businesses to keep
records (and supporting documents) of all amounts received and expended in the
course of the business. The records in the case of this business would have
included Dr Subbrayan’s appointment book, as this was the prime record in which
the income of her business was recorded. We find that Dr Subbrayan failed to
comply with section 12B, as she did not keep the business records required.
25.
In the case of a penalty under section 95(1)(a) Taxes Management Act
1970 (which is also applicable national insurance contributions by virtue of s16,
Social Security Contributions and Benefits Act 1992) the burden of proof is on
HMRC to show that the incorrect returns were made “fraudulently or
negligently”. From the evidence before us, we are satisfied that Dr Subbrayan negligently
delivered incorrect tax returns for each of the years 2005/06, 2006/07 and
2007/08, and that HMRC satisfied the burden of proof.
26.
The question is therefore whether the abatement of 65% made by HMRC is
appropriate. In our view this abatement is fair and reasonable, and we do not
propose to adjust it further.
27.
For the year 2008/09, penalties for both income tax and NICs are levied
under Schedule 24, Finance Act 2007. This provides for a penalty rates for
delivering inaccurate returns at
(a)
up to 30% of the potential lost revenue if the inaccuracy is
careless
(b)
up to 70% of the potential lost revenue if the inaccuracy is
deliberate
(c)
up to 100% of the potential lost revenue if the inaccuracy is
deliberate and the person attempts to conceal it
28.
HMRC have discretion to reduce these penalties depending upon whether
the taxpayer disclosed the inaccuracy, whether the disclosure was prompted or
unprompted, and for the “quality” of that disclosure.
29.
In this case HMRC levied penalties on the basis that the inaccuracy in
the 2008/09 return was deliberate, but that Dr Subbrayan gave prompted
disclosure of the inaccuracy. The reduction given in this case was the maximum
allowed, reducing the penalty to 35%.
30.
We are satisfied that HMRC have discharged the burden of proof that the
inaccuracy in Dr Subbrayan’s tax return was deliberate. From the evidence
before us we are satisfied that she must have known that the amount of taxable
income shown on the return was less than her actual income for that period. We
are satisfied that she disclosed the inaccuracies following the opening of the
enquiry, and that she therefore gave prompted disclosure. We consider that
giving the maximum abatement in these circumstances is generous, but we are not
inclined in this case to interfere with HMRC’s decision to levy penalties at 35%.
Conclusions
31.
For the reasons we have given above, we adjust the amount of taxable
profits for 2006/7 by £2309.61. There will need to be consequential
adjustments to the RPI calculations for the other years under appeal.
32.
We confirm that penalties should be levied at 35% (after taking account
of the adjustments referred to above).
33.
We leave it to the parties to agree the revised amounts of tax and
penalties. If for any reason they are unable to reach agreement on the
amounts, we give leave to the parties to apply to the Tribunal (acting by a
single judge) to determine the amounts payable.
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.
NICHOLAS ALEKSANDER
TRIBUNAL JUDGE
RELEASE DATE: 1 March 2013
Cases mentioned in argument but not referred to in this
decision:
T Haythornthwaite and Sons Ltd v Kelly (1927) 11 TC 657
Nicholson v Morris (1976) 51 TC 95
Parmar v Woods (2002) 74 TC 562
Blyth v Birmingham Waterworks Co (1856) 11 Ex 781
Coy v Kime (1986) 59 TC 447
