Tribunal case – taxpayer understated turnover
The First-Tier Tribunal in London recently examined a case where HMRC alleged that a taxpayer had suppressed his earnings over a number of years. Discovery assessments mostly for between £10k and £14k per year were under appeal in respect of the period1998-99 through to 2006-07.
The taxpayer in this case operated a Chinese takeaway in Camberwell, London. HMRC had serious concerns about the accuracy of the business records as far back as March 2005. These concerns included that there was no primary record of sales, no daily record of expenses, no record of cash drawings, an unusual takings pattern, gaps in recorded purchases and negative cash shown the cash account of the business.
The enquiry lasted until 2008 and included HMRC completing what they refer to as a business economics exercise (BEE) involving the use of a model which is used to estimate typical margins for certain sectors based on a review of other businesses in the same sector. HMRC reached the conclusion that the taxpayer had significantly understated his turnover. This resulted in discovery assessments been raised for the tax years 1998-99 through 2005-06. Both sides made a number of submissions to the Tribunal with the taxpayer arguing that amongst other things, HMRC’s enquiry had been incompetent, that important records had been destroyed and that the BEE made a number of significant incorrect assumptions.
The Tribunal found that no cogent evidence had been provided by the taxpayer to contradict HMRC’s conclusions. The taxpayer’s case was also not helped by the fact that his 2002-03 return had been found to have understated his profits.
The Taxpayer’s accountant also made a serious allegation that HMRC’s conduct of the enquiry involved racism and the Tribunal examined correspondence between the parties on this issue. The Tribunal found that there was no evidence of racism or prejudice in the way the enquiry had been handled and accepted that a letter from HMRC which apologised for any unintentional offence had been sufficient.
The Tribunal found that the taxpayer had not been able to satisfactorily demonstrate that HMRC’s revised figures were incorrect and HMRC were entitled to make a presumption of continuity for all the relevant tax years. All the taxpayer’s appeals were therefore dismissed and the closure notices confirmed.