[2009] UKFTT  319 (TC)

	TC00262
				Appeal number: TC/2009/11642       

INCOME TAX – adjustments to returns following enquiry – restriction of expenses claimed in respect of self-employment income – appeal dismissed	

FIRST-TIER TRIBUNAL

TAX 

		                      Mr A.I. Muhammad			              Appellant

        -and-

                                The Commissioners for Her Majesty’s Revenue and Customs         Respondents

	         
Tribunal:	Mr Peter Kempster	(Judge)	
	Mr Bob Grice
Ms Maryvonne Hands	(Member)
(Member)	

Sitting in public in Nottingham on 26th August 2009

Mr A.I. Muhammad (the Appellant) in person.
Mr P. Massey (HMRC Appeals Unit) for the Respondents

© CROWN COPYRIGHT 2009

					       DECISION NOTICE

The determinations and the appeal

1. On 5 January 2006 the Respondents (“HMRC”) opened a formal enquiry into Mr Muhammad’s self-assessment return for the tax year 2003-04 pursuant to section 9A of the Taxes Management Act 1970 (“TMA”).  On 13 April they issued a closure notice pursuant to section 28A of the TMA making several adjustments to the self-assessment, primarily in relation to employment income not reported and restriction of expenses claimed against self-employment income.

2. HMRC then issued discovery assessments pursuant to section 29 TMA in respect of the tax years 2001-02 and 2002-03, together with further closure notices in respect of the tax years 2004-05 and 2005-06.  In each case the main adjusting items were the same as in 2003-04.

3. Mr Muhammad appealed against all the assessments and HMRC accepted that his appeals were in time.  His grounds of appeal are covered below in relation to the matters covered during the hearing.

4. The proposed adjustments to the self-employment income would, if upheld, restrict losses available.  In only one year (being 2002-03) had there been a claim for relief against other income, so for the other years the dispute related to losses carried forward.

5. On the self-assessed figures, refunds had been made to or claimed by Mr Muhammad.  One effect of the proposed adjustments, if accepted, would be to necessitate repayment of those refunds.

Matters covered during the hearing

6. One of the main adjustments proposed was in relation to employment income.  Mr Massey exhibited the tax returns for each of the years in question in turn, comparing the figures declared with those obtained by HMRC from the PAYE records of Mr Muhammad’s employers.  In some years Mr Muhammad had entered employment income figures (together with PAYE deducted at source) on the return as “other income”; in other years he had requested that supplementary employment income pages for the return be sent to him, or had entered figures elsewhere on the return.  The Tribunal went through each of the years in turn with Mr Muhammad and was satisfied that the errors related to the reporting of the employment figures, rather than any dispute as to the correct figures and the proper years of assessment.  Some of those errors were serious; for example a PAYE refund of £114 had been reported as PAYE deducted at source of £1,114.  At the end of this lengthy exercise Mr Muhammad agreed that the employment income adjustments proposed by HMRC were correct.

7. There were some adjustments in relation to miscellaneous matters, such as disallowance of trade union subscriptions and disallowance of mortgage interest payments.  These had been agreed by Mr Muhammad.

8. The main point of dispute before the Tribunal concerned the disallowance of certain expenses claimed in relation to self-employment income of Mr Muhammad as a freelance musician.  The Tribunal heard from Mr Evans, who was the case officer who had conducted the enquiry.  Mr Evans explained that he had corresponded and met with Mr Muhammad.  Mr Evans had concluded that most of the expenses claimed by Mr Muhammad were not business related.  For example, Mr Muhammad had claimed a deduction for his entire domestic telephone and electricity bills.  In relation to the accounts for the year ended 29 November 2004 Mr Muhammad had claimed total deductions of some £18,000 against turnover of £635.  Mr Evans said that approximately £12,000 was supported by receipts, but he formed the firm view from his enquiry that very little of the expenditure was deductible in arriving at Mr Muhammad’s self-employment income.  There were some categories where Mr Evans had given the benefit of the doubt to Mr Muhammad; for example “day-to-day miscellaneous expenditure £1,930”.  Further, Mr Evans considered that none of the household expenditure was deductible as no room was used exclusively for business use.  Mr Evans’ best judgment was that only around 10% of some categories of expenditure was properly deductible, and none of the remainder.  He had proposed adjustments to the accounts under scrutiny accordingly.  He had then gone on to consider the surrounding tax years and concluded that similar adjustments should be made in relation to self-employment expenses claimed.  He proposed a simplification, which he believed was fair to Mr Muhammad, of taking the self-employment income for the tax years up to and including 2002-03 as giving rise, after expenses, to neither profit nor loss (so that there was no assessable self-employment income for those years but also no loss would be available for carry-forward).  Losses for 2003-04 onwards would then be adjusted as proposed, all to be carried forward against future self-employment profits.  

9. In support of HMRC’s refusal to accept an apportionment of Mr Muhammad’s household expenditure Mr Massey cited Caillebotte v Quinn [1975] 1 WLR 731 in relation to duality of purpose.

10. Mr Muhammad stated that he thought it unfair that the start-up costs of his business should be refused tax relief.  He had had extensive correspondence with HMRC and provided all the records he had kept.  He did not recall the particular information now being challenged having been requested in writing.  He believed he had maintained all the records required by law.  He accepted now that claiming all his household expenditure was incorrect but had been advised by his local business advisory service that he could claim part of those costs; he was unaware of any need to have a specific room in the house dedicated to his business – he did not work in that way.  He felt a fairer proportion of vehicle expenses for business use was 50% but could produce no evidence for that.  He would repay any excessive refunds already received but did not see how he could owe tax if he was making losses.

11. Mr Muhammad had made a formal complaint to HMRC concerning the handling of his affairs and was dissatisfied with progress.  The Tribunal explained that it had no jurisdiction in relation to HMRC’s internal complaints procedures.

Findings and reasons

12. The burden of proof was on Mr Muhammad and the standard of proof applicable was the balance of probabilities.

13. Mr Muhammad had now accepted the employment income adjustments and the adjustments in respect of the miscellaneous matters.

14. In relation to the self-employment income, the Tribunal was satisfied that adjustments should be made to the expenses claimed; Mr Muhammad’s original stance that all his household expenditure was wholly and exclusively incurred for his business purposes was clearly incorrect.  Despite requests in correspondence, Mr Muhammad had not produced to HMRC convincing evidence of what expenditure was allowable.  The figures used by HMRC were reasonable and had not been rebutted by Mr Muhammad.  HMRC’s proposal to take the self-employment figure for 2002-03 as no-profit-no-loss was effectively giving a deduction for some 20% of the expenses originally claimed, which was more than reasonable.  

Decision

       15. The appeal is dismissed.

16. The Tribunal decided that the assessments be confirmed as follows:

•	2001-02 in the amount of £601.00.
•	2002-03 in the amount of £1.10, which together repayment of a refund previously paid of £610.85 gave an amount due of £611.95.
•	2003-04 in the amount of £0.88, which together repayment of a refund previously paid of £1,177.81 gave an amount due of £1,178.69. 
•	2004-05 in the amount of a refund due to Mr Muhammad of £296.34.
•	2005-06 in the amount of £0.88.

17. Further, that the adjustments to the self-employment expenses for the tax years after 2002-03 were reasonable.  Liberty to the parties to apply for clarification and confirmation of exact figures if those cannot be agreed.

Right of appeal to Upper Tribunal
18. Section 11 of the Tribunals, Courts and Enforcement Act 2007 provides that any party to a case has a right of appeal to the Upper Tribunal on any point of law arising from a decision of the First-tier Tribunal. The right may be exercised only with permission which may be given by the First-tier Tribunal or the Upper Tribunal.  Rule 39(2) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 SI 2009/273 provides that a person seeking permission to appeal must make a written application to the Tribunal for permission to appeal which application must be received by the Tribunal no later then 56 days after the date that the Tribunal sends full written reasons for the Decision.  Rule 39(5) provides that an application for permission to appeal must identity the decision of the Tribunal to which it relates, identify the alleged error or errors in the decision and state the result the party making the application is seeking.
19. This document contains the full written reasons for the Decision, and replaces the summary notice of decision issued on 10 September 2009.

PETER KEMPSTER
JUDGE
Release Date: 11 November 2009