Dauti v Revenue & Customs [2010] UKFTT 532 (TC) (02 November 2010)

DECISION

1. This is an appeal against part of the amendment made by HMRC to the self assessment return in respect of the tax year 2006/07 and appeals against part of the consequent discovery assessments made in respect of tax years 2005/06, 2007/08 and 2008/09 following the conclusion of an enquiry into tax year 2006/07.

2. Evidence was given to the Tribunal by the Appellant and his partner Ms Sinon and by Mr Summerscales of HMRC who had carried out the enquiry into the Appellant’s tax affairs.

3. The issue for the Tribunal was to decide whether certain unidentified deposits into the Appellant’s personal bank account should be treated as income omitted from his tax return.

Background and Facts

4. The Appellant is a Bosnian whose family now live in Albania. He works as a subcontractor labourer largely within the Construction Industry Scheme (“CIS”). He has lived in the UK for some eight years and filed his first accounts for tax year 2003/04.

5. He rents a room which he shares with his partner in a multi – occupied house.

6. The Tribunal was informed by HMRC that the firm of accountants who had originally prepared the Appellant’s accounts was under investigation by them. The majority of this firm’s clients worked within the construction industry and it was believed by HMRC that in preparing the accounts the firm regularly inflated expenses and deflated income so that a tax repayment arose to their client of which they received a percentage.

7. An enquiry under Section 9A of the Taxes Management Act 1970 was opened by Mr Summerscales into the Appellant’s 2006/07 tax return on 3 October 2008.

8. A review of the expenses claimed by the Appellant was undertaken and the Appellant was informed that some of his expenses were excessive. As there did not appear to be any evidence to support the expense deductions the Appellant was informed that strictly speaking no relief was due for them. However Mr Summerscales told him that he was prepared to allow certain deductions on a concessionary basis and it was agreed that the expenses claimed by the Appellant would be reduced by some £2,400.

9. After reviewing the Appellant’s main bank account Mr Summerscales observed certain unidentified deposits. It was noted that no pay vouchers had been submitted for the two months ending 5 March 2007 but that there were regular deposits into the bank account during that period. After further correspondence it was established that these deposits had been made in respect of work undertaken for McCabe Builders Limited but this income and the tax deducted from it had been omitted from the Appellant’s tax return. The gross income from McCabe amounted to £2,559 with tax deductions of £460.26 and the Appellant admitted to Mr Summerscales that he had inadvertently omitted these payments from his tax return. This was a genuine mistake as when he had done his tax return he had not noticed that he did not have any pay slips from McCabe.

10. In regard to the other unidentified deposits the Appellant wrote to Mr Summerscales explaining that a deposit of £2,000 made in February had been cash borrowed from friends in order to bring the account balance to over £5,000 which was needed for immediate transfer to his family in Albania. For security reasons the transfer had been sent to them via Dritan Koleci’s account. Further deposits at that time were from savings the Appellant had made in previous years and loaned to friends in cash. These had been recovered from his friends in case his family needed more money. The Appellant also stated that a deposit of £2,400 made in April was from cash he had borrowed to buy a car but subsequently repaid as he had not bought the car.

11. Mr Summerscales requested evidence to support the explanations regarding the deposits amounting to £7,000 on 2 February 2007, 3 February 2007 and 5 February 2007 and the names and addresses of the persons to whom the loans had originally been made as he suspected that these deposits were receipts of income. The Appellant reiterated to Mr Summerscales that they were returned loans and that even if he had unsatisfactory evidence to prove this, no matter how much work he did in two months he could not earn £7,000 during that period.

12. The enquiry was closed on 17 March 2009. Mr Summerscales informed the Appellant that as there was no evidence to support his explanations he proposed to add the unidentified deposits totalling £10,500 to his income for the year together with the omitted income from McCabe and the disallowed expenses. This meant that the Appellant’s tax liability was £2,609.38 for the year and that the refund previously made of £1,564.54 was not in fact due to him.

13. The Appellant was informed of his right of appeal. No appeal was received within the statutory 30 days allowed and Mr Summerscales then wrote to the Appellant informing him of this and informing him that he would now consider what adjustments were necessary to be made to his tax returns for other years.

14. The Appellant was informed by Mr Summerscales that he considered that the Appellant’s expenses had been similarly inflated in his 2004/05, 2005/06 and 2007/08 tax returns and he intended to reduce them in line with the reductions agreed for the enquiry year. Mr Summerscales also pointed out that there was a discrepancy between the income and tax deductions included in his 2005/06 return and the details provided by the contractors for whom he had worked that year. Payments made to him were actually £18,293 rather than the £15,006 declared on his tax return. Mr Summerscales also proposed increasing the Appellant’s income by £9,500 for 2004/05, by £10,000 for 2005/06 and £11,000 for 2007/08. These adjustments were related to the unidentified bank accounts established in the enquiry year after adjustment for inflation.

15. The Appellant subsequently appealed against the amendment made for tax year 2006/07, the enquiry year, on the grounds that the unidentified deposits into his bank account were not income.

16. The Appellant also wrote to state that he did not agree with the adjustments made to the other tax years in respect of likely unidentified deposits into his bank account.

17. The Appellant appointed a new accountant to assist him and further bank statements were submitted. Mr Summerscales had further queries concerning certain deposits and the Appellant did his best to provide evidence that they had been the return of loans or money banked for friends who did not have bank accounts.

18. After considerable correspondence the Appellant was able to obtain copies of Mr Koleci’s bank account and to prove that money had been deposited into his bank account by a Mr Trstena who did not have a bank account and then transferred to Mr Koleci to be sent by Mr Koleci to Mr Trstena’s family. Mr Summerscales then reduced the unidentified deposits which he had regarded as income for the enquiry year and similarly reduced his adjustments for the other years.

19. Mr Summerscales was also informed by the Appellant’s new agent that whilst all the cheque deposits were from work undertaken, the cash deposits were made from previous withdrawals to lend to friends or for friends without bank accounts. The reduction in the expenses for the extra years and the income in respect of the pay from the contractor which had been inadvertently omitted were agreed.

20. The Appellant wrote again to Mr Summerscales providing detailed further information concerning the bank deposits in the enquiry year and in the three other years in respect of which Mr Summerscales had made discovery assessments. The Appellant provided details of each deposit together with statements and emails from a list of people confirming that they had borrowed and paid various sums to the Appellant.

21. Mr Summerscales managed to contact some of these persons but decided that their statements alone were not sufficient corroborative evidence to support the Appellant’s explanations in respect of the unidentified deposits. He confirmed his final adjustments after having taken account of the evidence in respect of Mr Trstena and the transfers to Mr Koleci.

22. Other evidence that the Appellant was able to produce included a copy of his passport which confirmed the dates that he had travelled to Albania after which he had deposited the money he had not spent there and a remittance advice from the Home Office which showed that they had paid him some money.

Appellant’s submissions

23. The Appellant explained that many of his friends were working in the UK illegally and therefore needed to stay below the radar. Any unidentified deposits made were the Appellant’s own money moving around which was lent to friends and then paid back. The Appellant contended that although it might seem unusual back then he had friends who didn’t have bank accounts. Some of them were trying to save money to send home to their families and gave their money to him. Most of them had since been sent home because they did not have the proper papers to be in the UK.

24. The Appellant submitted that he did not have any debts and never would. Most people he knew had debts but he didn’t. His sole purpose for working in the UK was to save and support his family in Albania. His personal monthly expenses including rent of £240 which included bills and having coffee with friends came to a maximum of £450 per month. He did not have children or drink or smoke.

25. Mr Summerscales had told him that it was unusual to make withdrawals and deposits back into the same account but when his friends paid back their loans he did want to keep the money at his house. He had banked the money they gave him for safekeeping because many families lived in the house where he had a room and there was nowhere secure to keep money. The one time he had left money in his room it had been stolen. In all the years he had been lending money to his friends he had never kept more than £100 at home. Since the HMRC enquiry had started he began keeping the returned loans at home and then someone broke into the house and stole £1,000.

26. In his correspondence to Mr Summerscales and when giving evidence to the Tribunal the Appellant went through the tax years in question and explained where the unidentified deposits had come from as far as he could. As the recipients of the loans were largely “illegals” they were reluctant to provide formal evidence to Mr Summerscales although where he could he had supplied Mr Summerscales with mobile phone numbers and email addresses. Many of them had long since left the UK as they did not have the necessary permission to remain. For instance cash deposited in 2004/05 belonged to a Mexican lady called Isela Dominguez who was the Appellant’s girlfriend at the time. She had asked the Appellant to save the money for her as she wanted to go back to Mexico. Although she did some saving on her own she thought that if the Appellant held it for her she would not be tempted to spend it. She had long since returned to Mexico and was not interested in becoming involved although the Appellant produced a letter from her confirming that he had held her savings for her whilst she was in London between June 2004 and March 2005.

27. The Appellant submitted that he had sent Mr Summerscales a number of similar letters or emails from a number of the friends to whom he had lent money. The Appellant submitted further explanations such as receiving a cheque from the Home Office with a remittance advice; banking a cheque which his uncle had received for work done on which the payee had been left blank; banking money the Appellant had brought back from his holiday in Albania.

28. Mr Summerscales had queried the Appellant’s living expenses on the basis that as he appeared to have so little left to live on he must have had additional income. The Appellant produced his tenancy agreement which showed that the amount he paid his landlord covered everything including council tax. Additionally Ms Sinon also worked and at the present time when he had been without a job for some two months she supported him.

29. The Appellant submitted that he had worked long and hard for all the money he had and made sure he paid all his tax. Whilst working he had earned enough money and had low enough expenses to be able to lend money to his friends in need, support his family and save at the same time. He did not use his credit card and had only applied for an overdraft in case he had to pay money to HMRC. He would however fight any attempt by HMRC to make him pay tax on money which had already been taxed.

30. Finally he wished to submit that he had not been aware of how the tax returns worked and thus had appointed an accountant. The first accountant had not cross checked his pay slips with his bank statements and so did not notice that some of the pay slips were missing. Now he had a new accountant who checked everything properly and knowing the complications his loans to his friends had created, no longer lent money to anyone.

HMRC’s Submissions

31. HMRC submitted that it had tried to be satisfied with the evidence provided but had come to the conclusion that the unidentified deposits “may well represent” income that had not been accounted for in the Appellant’s tax returns.

32. For certain periods 22 November 2004 to 1 January 2005, 11 December 2005 to 27 December 2005 and 28 November 2007 to 24 December 2007 there appeared to be a lack of personal cash requirements.

33. Although the Appellant had provided letters, phone numbers and emails some of the phone numbers provided did not work, some of the email addresses were hotmail accounts which could have been set up by anybody and the writing on certain of the letters appeared very similar.

34. HMRC did not believe that the Appellant withdrew enough money from his bank to fund his day to day living.

The Legislation

35. Section 50 of the Taxes Management Act 1970 states:

50(6) If on an appeal it appears to the majority of the Commissioners present at the hearing, by examination of the appellant on oath or affirmation, or by other evidence-

(a) that the appellant is overcharged by a self-assessment;

(b) that any amounts contained in a partnership assessment are excessive; or

the assessment or amounts shall be reduced accordingly, but otherwise the assessment or statement shall stand good.

Findings

36. The Tribunal noted that the Appellant replied regularly to all Mr Summerscales’s letters without delay providing reasonable and plausible explanations for the cash deposits into his bank account.

37. We found that the Appellant made persistent and concentrated efforts to account for every unidentified deposit and tried regularly to persuade his friends to give evidence. We understand why they were reluctant to do so. In many cases they appear to have left the country. The Appellant produced all the evidence he could and gave clear unequivocal verbal evidence to the Tribunal concerning the deposits.

38. We find it significant that in the case of the deposits from Mr Trsena where it was possible to obtain corroborating evidence the Appellant’s submissions to Mr Summerscales were proved correct and accurate.

39. We find it unlikely that the deposits were in respect of income. The Appellant when working earned some £250 per week. He was unable to keep cash in his house for security reasons and likewise was reluctant to carry any significant amount of cash to work. We find it far more likely that the deposits were the return of monies borrowed.

40. We found the Appellant and his partner sincere and truthful in their evidence. When challenged on the missing payments from contractors the Appellant immediately confessed to his error. He accepted the reductions in his expenses. We found it significant that on deciding to appeal he appointed new accountants. We suspect that this was because he realised that his previous accountants had been responsible for the deflation of his income from the contractors and the inflation of his expenses.

Decision

41. The unidentified deposits into the Appellant’s personal bank account during the year of enquiry should not be treated as income omitted from his tax return. There should be no adjustment to his declared income for tax years 2004/05, 2005/06 or 2007/08 for likely unidentified bank deposits.

42. The appeal is allowed and the amendment made for tax year 2006/07 shall be reduced by the amount which was added in respect of unidentified bank deposits. The discovery assessments made for tax years 2004/05, 2005/06 and 2007/08 shall be reduced by the amount which was added in respect of unidentified bank deposits.

43. 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.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

MRS.S.M.G.RADFORD

TRIBUNAL JUDGE

RELEASE DATE: 2 NOVEMBER 2010

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Dauti v Revenue & Customs [2010] UKFTT 532 (TC) (02 November 2010) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00786.html Cite as: [2010] UKFTT 532 (TC)