Tribunal decision following back duty investigation
The first tier tribunal recently dismissed appeals against discovery assessments raised in respect of undeclared sales. The case developed from an investigation under Code 9 (suspected serious fraud) and took some years to come to court. The case is also noteworthy because of a dispute between the taxpayers and the first accountants they approached who then appeared as witnesses for HMRC.
The husband and wife taxpayers carried on business making and selling quilt covers, initially in partnership, but later through two limited companies of which they were the shareholders and directors. The taxpayers had also inherited money in an offshore bank account – the interest on which had not been disclosed nor had any income related to the subsequent offshore investment of these funds.
In September 1998 HMRC wrote to the taxpayers concerning the 1997 tax returns for the two companies asking for details of any monies invested by the directors and whether any of the directors either directly or indirectly had had any dealings with any overseas company or overseas trust. The taxpayers approached a firm of accountants who ascertained that cash takings had been invested offshore and that there was a potential undeclared liability to tax of almost £100k plus over £50k of interest accumulated over 24 years. The taxpayers and accountants fell out.
In April 1999 a ‘Hansard’ meeting was held between representatives of HMRC’s Special Compliance Office and the taxpayers and their new accountant. Two disclosure reports were then prepared and submitted. The first was dismissed by HMRC as inadequate although the second one also excluded any reference to undeclared cash sales.
In December 2002 HMRC raised assessments to tax the alleged undeclared income. The assessments covered the years ended 5 April 1983 through to 5 April 2001. The taxpayers appealed and the tribunal was hearing appeals against the closure notices issued by HMRC in 2004.
Delays then ensued in part through the taxpayers’ delays in producing information and partly due to the husband’s ill health. The tribunal considered that in the particular circumstances of this case the length of the investigation was not so excessive as to be unreasonable.
The tribunal upheld the discovery assessments as the taxpayers had failed to prove on the balance of probabilities that the assessments were excessive.