Simon James McMillan – TC07595
HMRC raised discovery assessments on a person who claimed that all his income in the relevant years (other than some bank interest) came from gambling wins. He had ceased gambling some years before HMRC issued the assessments, so he had no requirement to have retained any records of his gambling wins/losses for the years for which the assessments had been raised.
McMillan’s bank statements had shown amounts deposited frequently, and so HMRC suspected that he had an undeclared taxable source of income.
The FTT decided that the discovery assessments were not valid, saying:
The Tribunal is satisfied that that the Appellant had no taxable income source (save for any bank interest) for any of the periods for which the discovery assessments under appeal were raised. HMRC have not shown that the Appellant was employed or was engaged in any trade. This means that none of the assessments and the related penalties can stand. They are not valid.
Wei Xian Peng And Qian Hong Peng T/A Zhu Guang Restaurant – TC07523
This VAT case arose from observations and visits made by VAT officers to a restaurant. As a result, HMRC raised “best judgement” assessments for a number of periods, based on the figures derived by extrapolation from the results of the observations and visits.
There were some questions regarding the time limits for HMRC to raise the assessments, but the point which is likely to be of wider importance concerns whether the assessments were valid as “best judgement” assessments.
The till at the restaurant did not retain records in the memory, as the battery had been taken out. HMRC described these records as having been “destroyed”, though the FTT said that the burden of proof was on HMRC to show that there had been a deliberate attempt to avoid the creation of an audit trail and they had not done so.
On the “best judgement” issue the Judge concluded as follows:
The burden of showing that the assessments were not best judgment rests with the Appellants. I am satisfied that the Appellants discharged that burden. There were two elements in particular which indicated that Mrs Jackson’s decision was not a best judgment decision:
(1)The ratio of card to cash applied by Officer Jackson (37% card : 63% cash) was not representative of either the evidence obtained during the 23 day period of HMRC’s imposed self-invigilation (51: 49) or a weighted rate for the days between 1 February to 18 April (the period the restaurant was being watched by HMRC) (57: 43) or indeed reflective of what Officer Jackson considered was the norm for such a business (50:50). It is so out of line with any of these ratios that it is impossible to consider the decision to apply that ratio to be reasonable.
(2)The ratio adopted also produced an irrational result. The ratio implied that the turnover had been suppressed by £143,000 per year or £3,000 per week and that between 27 to 43 extra daily sales would be required. It is in my view difficult to see how Mrs Jackson could have subjected the assessment to the common sense test as required by HMRC Guidance.
This shows that HMRC’s observations must constitute an adequate representative sample, and, perhaps more significantly, HMRC must show that the results of their exercise must be subjected to a “common sense” test if the assessments are to be considered to be made to “best judgement”. In other words, HMRC must look to see if the figures they assess are “reasonable” in the circumstances of the case. Failure to carry out this test will lead to the assessments being declared invalid.
Bashir Ahmed Jafari – TC07465
HMRC raised discovery assessments, but the FTT decided that these assessments were invalid. They were “stale” because the assessments had been raised too long after HMRC had become aware that the amounts already assessed had become insufficient.
This is one of a number of recent cases on the issue of “staleness”. The two “lead” cases at present are Clive Beagles and Reginald Tooth, with the latter due to go to the Supreme Court.
It is also notable that HMRC were reprimanded by the Judge for a lack of candour in the case, saying:
It is one thing for HMRC to take a principled stance that certain decisions of the Courts and Tribunals contain errors of law and to argue accordingly (but frankly) in affected cases. But it is quite another thing to gloss over decisions which HMRC knows but dislikes and to proceed as if they do not exist. Doing so obscures the true position and risks the Tribunal coming to a legally insupportable conclusion.
HMRC must present the whole case, including taking into consideration “adverse” decisions, rather than trying to “hide” decisions which are detrimental to their argument.
Another recent “staleness” case is Oriel Developments Ltd (TC7306), where it was agreed that the tax would be due if the assessment could be validly made but HMRC could not collect the tax because the discovery assessment issued was “stale”.