[2010] UKFTT 553 (TC)

TC00806

Appeal number:  TC/2009/12009

Income tax – Discovery Assessment and Closure Notices – Income from property sales, rental and management – Whether omitted from returns – yes – Whether assessments and notices reasonable – Yes – Adjustments made to income where sums assessed unreasonable – Appeal dismissed

FIRST-TIER TRIBUNAL
TAX CHAMBER

	MR B NJOKU	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS 	Respondents

			TRIBUNAL: 	 DR K KHAN (Judge)
					 RUTH WATTS DAVIES MHCIMA, FCIPD	 

Sitting in public in London on 6 September 2010 

The Appellant did not appear and was not represented

Nicola Parslow, Senior Officer, Appeals and Review Unit, HMRC, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction
1.	This matter was heard pursuant to rule 33 of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009.  The Tribunal was satisfied that the party, in this case, the Appellant had been notified of the hearing and reasonable steps were taken to inform the Appellant of the hearing by writing to his address which was confirmed in correspondence from the Appellant to the Commissioners of HM Revenue and Customs (“the Commissioners”).

2.	The appeals in this case are dated 3 September 2008 and are against:
(1)	Amendment to self-assessment made on 15 December 2006 under section 28A Taxes Management Act 1970 (“TMA 1970”) for the year ended 5 April 2003.  In this matter the self-assessment before enquiry was nil tax.  With the matter amendment the tax due is £259,747.60 so the amended self-assessment was for that sum. This includes Class 4 National Insurance Contribution.

There was an amendment to self-assessment made on 20 February 2007 under section 28A TMA 1970 for the year ended 5 April 2005.  The self-assessment before enquiry was for nil tax.  The amendment resulted in a £17,748.00 increase in tax due so the amended self-assessment was for that sum.  This includes Class 4 National Insurance Contribution.

(2)	Assessments were made on 15 December 2006 under section 29 TMA 1970 for the years ending 5 April 2001 and 5 April 2002.  The amount assessed for the year 2000/2001 is £89,388.05 with a previous assessment for £27,383.60.  The total amount charged by the assessment was £62,004.45.

The amount assessed for the year 2001/02 is £9,990.95.

There is a further assessment made on 20 February 2007 under section 29 TMA for the year end 5 April 2004.  The amount assessed is £17,979.60.

3.	The matters under appeal are illustrated in the chart below
Year ended	Date Assessment,
made	Date Appeal
Made	Total Tax charged	Legislation	Normal or extended time limit	
5 April 2001	15/12/2006	03/09/2008	£62,004.45	Section 29 YMA 1970	NTL ‘Discovery’ Assessment	
5 April 2002	15/12/2006	03/09/2008	£9.990.05	Section 29 TNA 1970	NTL ‘Discovery’
Assessment	
5 April 2003	15/12/2006	03/09/2008	£259,747.60	Section 28A TMA 1970	Closure Notice	
5 April 2004	20/02/2007	03/09/2008	£17,979.60	Section 29 TMA 1970	NTL ‘Discovery’ Assessment	
5 April 2006	20/02/2007	03/09/2008	£17,748.00	Section 28A TMA 1970	Closure Notice	

The facts
4.	The Appellant has three sources of income.  These are rental income, office and property sales and income from property management.

5.	The profits arising for the relevant periods from property transactions involving sales amounts to £329,000.  The rental income for the relevant periods, estimated at £500 per month to each of the properties comes to a total of £152,000 and the income arising from property management for the relevant period comes to £84,000.

6.	An enquiry was opened on 25 March 2005 under section 9A TMA 1970 into his tax returns for the year ended 5 April 2003.  Another enquiry was opened on 15 December 2006, under section 9A TMA into his return for the year ending 2005.

7.	For the two years ending 5 April 2003 and 2005 the taxable profit in each of these years was stated on his self-assessment to be nil.

8.	An informal request was made on 23 March 2005 for further information and a leaflet was provided dealing with self-assessment enquiries.

9.	A formal request was made pursuant to section 19A TMA 1970 on 10 May 2005.  The documents requested included the following:
(1)	Profit and loss accounts and balance sheets.
(2)	Business books and records including cash books, petty cash book, sales and purchase invoices and all business bank account statements, cheques stubs and paying.  A list of property bought and sold in the period and mortgage statements for all properties.
(3)	Business and financial records used in preparing the returns together with details of tests and checks carried out by accountants.
(4)	A list of books, records and non-financial records maintained by the business.
(5)	Details of adjustments made by accountants and their calculations.
(6)	Details of any balancing figures used in the accounts together with an explanation of how the figures were treated in the accounts.
(7)	Explanation of how the figures used in the accounts have been arrived at from the online records.

10.	No requested business records were provided.

11.	There was a further warning letter issued in pursuant to section 97AA TMA 1970 on 5 July 2005 and an informal request for information dated 8 December 2005.  There was a further informal request dated 19 June 2008.

12.	Penalties relating to the supply of information for the year ending 5 April 2003 were issued on 8 August 2005 (£50), 8 October 2005 (£55) and 5 January 2006 (£1,380).

13.	On 28 July 2006, on a telephone call from the Commissioners, the Appellant advised that his papers were in storage and that no papers will be provided to the Commissioners until reviewed by his accountants.  Between August and September the records were promised to the Commissioners but never submitted.

14.	The total penalties levied for the non-production of business was £2,228.

15.	The Inspector of Taxes (Paul Clark) obtained information that the Appellant had purchased properties and had rented those properties before being sold some years later.  The rental income received on those properties has not been declared on the Appellant’s tax returns.  There were, for example, three properties which were purchased in 2000 and sold in 2001 (16 March 2001) which were sold to a company of which the Appellant was a director and a loss was made on the sale.  The company Circa Estates Ltd later sold the properties for a significant profit.

16.	A transaction guide showing the purchase and sale of these properties by the Appellant to Circa and then their sale by Circa is given below:

	Bought by
Njoku
Date	

Price  	Sold to
Circa
Date

Price	

Profit	Sold by
Circa
Date	

Price	

Profit	
35A
Crystal
Palace Rd	19/04/2000	109,500	16/03/2001	50,000	-59,500	16/10/2002	220,000	170,000	
8B Lands-
downe Rd	28/03/200	 49,000	16/03/2001	50,000	   1,000	02/12/2002	120,000	  70,000	
89A
Croydon Rd			16/03/2001	50,000	 50,000	20/12/2002	139,000	   89,000	
Totals		158,500		15,000	  -8,500		479,000	 329,000	

17.	The Commissioners concluded that the Appellant would not have purchased properties and then disposed of them to a connected company at a loss.  They therefore concluded that the £329,000, being the difference between the price paid by Circa to the Appellant for the properties and the sale proceeds obtained by Circa, was trading income received by the Appellant for the year ending 5 April 2003.

18.	Closure Notices were issued on 15 December 2006, for the year ended 5 April 2003 and a further notice was issued on 20 February 2007 for the year ended 5 April 2005 which increased the declared profits by the Appellant to the amount of profits made by Circa on the sale of the properties.  Estimations were made in respect of letting income received and in respect of income from property development.

19.	The information held by the Commissioners shows that the Appellant had owned property during the years ended 5 April 2001, 2002 and 2004 and had been in receipt of rental income.  This rental income had not been declared in the tax return for those years.
20.	The Appellant had informed the Commissioners on 18 May 2004 that he had let properties.  However no income had been declared in his tax returns for the five years ended 5 April 2001, 2002, 2003, 2004 and 2005.

21.	The Inspector therefore estimated that the amount of income from each property would be approximately £500 per month which gave rise to rental income as follows:
(a)	Year ended 5 April 2001	£32,000
(b)	Year ended 5 April 2002 	£30,000
(c)	Year ended 5 April 2003	£18,000
(d)	Year ended 5 April 2004	£36,000
(e)	Year ended 5 April 2005	£36,000

22.	At the meeting between the parties on 24 August 2008, the Appellant informed the Inspector that the rental income had been under-estimated since the rental income was in excess of £500 per month for several properties.

23.	The Appellant confirmed that he was involved in property management.  He said that he had “looked after” the property of two friends who had moved overseas (Dr M Rawl and Mr C Horril).  He explained that he charged 5% of the gross rent for this service and the maximum he received was 5% of  £3,500 per month.

24.	The Inspector calculated that in the absence of records the income from property management received by the Appellant was as follows:
(a)	Year ended 5 April 2001	£12,000
(b)	Year ended 5 April 2002	£12,000
(c)	Year ended 5 April 2003	£12,000
	(d)	Year ended 5 April 2004	£24,000 
	(e)	Year ended 5 April 2005	£24,000

25.	The Appellant provided no records to show that the conclusions arrived by the Inspector were incorrect.

26.	All communications sent to the Appellant were to his confirmed address at 42 Brownhill Road, London SE26. This address was confirmed by the Commissioners on 21 September 2009.

27.	It should be noted that this matter was originally listed before the General Commissioners and heard on 25 March 2009 but the matter was re-opened under Rule 17 of the Tribunal Rules 1986.

28.	The facts are not disputed.

The law
29.	Under section 50(6) TMA 1970 the onus is on the taxpayer in the assessments and closure notice to prove their case.  The onus is therefore on the taxpayer to show the true profits and to disprove the quantum of the enquiry amendment or assessment by presenting the supporting business accounts.

30.	The standard of proof is on the balance of probabilities.

12.	The Respondents also rely on the case of Nicholson v Morris 51 TC 95.

32.	The Respondents say that the omissions arise from negligent conduct and the appeals should be dismissed.

33.	The Respondents also seek to rely on the various provisions outlined above dealing with assessments and closure notices.

The Appellant’s arguments
1.	The Appellant is satisfied that the amendments to the self-assessments  and the assessments are excessive estimates and that information will be provided to demonstrate this.

2.	To date no information has been provided by the Appellant.

3.	The Appellant confirmed that he looked after the properties of two friends who had moved overseas.

4.	The Appellant said that several properties had been left empty for a long period.  The rental estimates were understated in some cases (certainly with regards to three identified properties) the monthly rentals approximately £50 to £100 more.

5.	The Appellant said that the calculations of the Inspector did not allow for expenditures incurred.  No evidence was provided for these expenditures.

6.	He disputes the ownership of three properties (4 The Fieldings and the ground and first floor flats at Beacondale Road).

Conclusions
34.	The Tribunal was asked to determine several issues.  The issues can be stated as follows:
(1)	Whether the profits from the sale of properties have been omitted from the declared profits on the taxpayer’s returns. 

(2)	Whether rental income from the properties which the Appellant owned have been omitted from the tax returns which have been submitted for the relevant year.

(3)	Whether income from property management services provided by the Appellant have been omitted from the profits declared on the tax returns.

(4)	Whether in all cases the amounts declared on the tax returns are correct and whether the Appellant has been able to demonstrate that the tax returns as made are complete and correct.

(5)	Whether the Commissioners have made the appropriate discovery assessments for the years ended 5 April 2001, 2002 and 2004 within the provisions of section 29 of the TMA 1970.

35.	Where there is an appeal lodged against an assessment that is not a self-assessment or is an amendment to a self-assessment the matter may be appealed to the Special Commissioners now the First-tier Tribunal.  In making such an appeal, the Tribunal may uphold or set aside the Commissioners’ direction.

36.	The Commissioners have power to make “discovery assessments” under section 29(1) TMA 1970 to prevent a loss of tax.  The assessment maybe for any period if a self-assessment has already been made by the taxpayer for that period.  In this case, a discovery assessment has been made where the taxpayer has already delivered the tax return for the year because the Commissioners believe that there is a loss of tax as a result of fraudulent or negligent conduct by the taxpayer or a person acting on their behalf.

37.	The Tribunal was given a paginated file and document bundle containing all relevant legislation details of the appeal and correspondence between the parties together with the tax returns of the Appellant.

38.	The Tribunal also had the benefit of skeleton arguments from the Respondents and a witness statement of Paul Clark, Inspector of Taxes, who conducted the enquiry and who also gave oral evidence on the day of the hearing.

39.	The Tribunal is concerned with discovery assessments for the year ending 2001, 2002 and 2004 and two closure notices for the year ended 2003 and 2005.

40.	The taxpayer appealed against an amendment to his self-assessment and also against closure notices which brought the enquiry to an end.

41.	The Commissioners have the power to make a discovery assessment under section 29(1) TMA to prevent a loss of tax.  The assessment is made where it is discovered, inter alia, that the assessment or self-assessment is or has become insufficient.

42.	Under sections 29(3) to (5) TMA 1970 where a taxpayer has already delivered a tax return for the year, a discovery assessment can be made where the loss of tax is a result of fraudulent or negligent conduct by the taxpayer or any person acting on the taxpayer’s behalf.  The Commissioners argue that such conduct is present and there  has been the omission of significant sums from the tax return which is attributable to negligent conduct.

43.	The Appellant has not objected to the discovery assessments made for year end 2001, 2002 and 2004.  The respective date of assessment for the first two assessments were 15 December 2006 and for the last was 28 February 2007.  The assessments were therefore within the time limit allowed for making a discovery assessment.

44.	Negligence means that a person does not do something which a reasonable man would do, or does something which a reasonable man would not do.  In this case, sufficient evidence has been obtained from the land registry to show that the statement of income submitted for the purposes of the assessment to tax contains errors or omissions which gives rise to a loss of tax.  This presents a prima facie case of neglect.  Where there is an error or omission leading to a tax loss and no reasonable explanation is provided, the Commissioners say that this constitutes neglect.  The taxpayer had failed to make a return of true profit computed in accordance with the Taxes Acts.  

45.	Mr Clark, the Inspector of Taxes, obtained information from the District Valuer about properties owned and sold by the Appellant in the period l6 April 2000 to 5 April 2003.  From this information, he was able to work out the gross profit made by the Appellant at the time the properties were sold.  He concluded that the profits from those acquisitions and disposals should be taxed as trading income.  He requested information on expenditure from the Appellant but was unable to ascertain the expenditure incurred.  There were over ten properties purchased and sold in this period.  No records were provided to the Inspector by the Appellant to show that the information obtained was incorrect or nor was it challenged.

46.	Further the Inspector found that various properties had been bought by the Appellant and had been sold to Circa Estates Ltd, the company of which he was a director and which subsequently sold the properties at a profit.  There were three properties sold. The profits realised by Circa were therefore attributable to the Appellant for the year ended 5 April 2003.  The profit realised was £329,000, being the difference between the price paid to the Appellant by Circa and the sales proceeds realised by Circa when the properties were later disposed.  The Inspector concluded that these profits were not previously declared by the Appellant and there was no information provided by the Appellant to rebut the profit figures.

47.	Various attempts were made to contact the Appellant to request information on 23 March 2005, 10 May 2005, 3l July 2005, 8 December 2005, 19 June 2006.  No information was provided pursuant to those requests.  Penalties were applied for the failure to supply information requested for the year ended 5 April 2003.

48.	The Appellant signed the returns which should be taken as confirmation of the declarations made in the returns.  No agent acted for the Appellant in this case.

49.	Regarding the rental income, the records show that on 18 May 2004 the Appellant informed the Inspector that he had let properties.  The information received from the District Valuer showed that some of the properties owned by the Appellant had been owned by him for a couple of years.  It would be reasonable to conclude in the circumstances that these properties would be let out during the period before they were sold.  However, the self-assessment returns filed by the Appellant showed no property rental income.  The Commissioners rightly concluded that it is reasonable to assume that the Appellant was in receipt of rental income which he had not declared on the returns.

50.	The Commissioners established the rental income at £500 per month for each of the properties owned.  There were approximately eleven properties which were owned and the assessments made on the basis of omitted rental income were (as stated before) £32,000 (2001), £30,000 (2002), £18,000 (2003), £36,000 (2004) and £36,000 (2005).

51.	At a meeting on 21 August 2008, the Appellant’s only contribution when asked about the rental income was that income had been understated and he gave three examples where the rental income received was in excess of £500.  He did not dispute the figures presented at the interview.

52.	The last source of income which was underdeclared concerned property maintenance.

53.	The Inspector stated that the Appellant made no declaration regarding property maintenance income.  Based on information, an assessment was therefore made for all the years and treated as additional income of the Appellant.

54.	At a meeting between the Inspector and the Appellant on 21 August 2008, the Appellant confirmed that he was looking after the property of two friends who had moved overseas.  He stated that he had charged 5% of the gross rent received.  The gross rent being £3,500 per month.  If we assumed there were two properties only, at that monthly rent, then this would yield approximately £4,200 in fees per annum. 

55.	The property maintenance income assessed by the Inspector was £12,000 (2001), £12,000 (2002), £12,000 (2003), £24,000 (2004), £24,000 (2005).

56.	It is accepted by the Tribunal that the Appellant did not provide any records or information to show that the conclusions reached by the Inspector were incorrect.  However the Tribunal does have reservations on the figures presented.  The property maintenance figures used by the Inspector appears excessive and it is not clear how the total annual figures were arrived at in making the assessment.  The commission figures received for two properties seemed to have been extrapolated in an unfair manner.

57.	Let us look at the relevant legal provisions dealing with this.  The Respondents refer to section 50(6) TMA 1970.  This section provides that evidence should be presented in order to reduce or amend an assessment.  The section provides that if it was established by evidence at the appeal hearing that the taxpayer was overcharged, the assessment should be reduced accordingly but otherwise the assessment should stand.  The onus of doing so rests with the taxpayer.  This was pointed out in the case of Hawley v Taylor 1998 (STC 2002 at 217) where Parke J stated:
“It is well settled by authority that this places the onus of discharging the assessment on the taxpayer.  If the Commissioners, having heard his case, are uncertain where the truth lies, they must dismiss the appeal and uphold the assessment”.

58.	In the case of Nicholson v Morris (Inspector of Taxes) [1976] STC 269 Walton J at 280 stated:
“… and that is why, of course, the Taxes Management Act 1970 throws on the taxpayer the onus of showing that the assessments are wrong.  It is the taxpayer who knows and the taxpayer who is in a position  (or, if not in a position, who certainly should be in a position) to provide the right answer …)”

He continued:

“It is the duty of every individual taxpayer to make his own return and if challenged, to support the return he has made, or, if that return cannot be supported, to come completely clean; and finally if he gives no evidence whatsoever he cannot be surprised if he is lumbered with more than he has in fact received.  It is his own fault that he is so lumbered”.

59.	It is clear that the taxpayer has to provide evidence to rebut the Inland Revenue’s assessment, and if he fails to do so, he cannot complain about the assessment.

60.	The onus of proof also applies to the closure notices which were issued for the years 2003 and 2005.  The same evidential burden in section 50(6) TMA 1970 applies to these notices as well.

61.	Section 28A TMA 1970 provides that the enquiry into a return is completed when a closure notice is issued and states the conclusions reached.  

62.	Section 31 TMA 1970 provides that an appeal may be brought against an amendment by a closure notice and any assessment which is not a self-assessment.

63.	It is clear therefore that the Appellant has a power to appeal with regard to the closure notices and discovery assessments. 

64.	While the assessments levied on the taxpayer fall within section 29 TMA 1970 and section 28A TMA 1970, it is questionable whether the conclusions reached by the Inspector with regard to the property management income was reasonable.  The Tribunal finds that there is very little, if any, evidence presented to show that the property management income came from other than the two properties and the figures presented in the assessment cannot be fair if based on that information

65.	In the circumstances therefore and pursuant to section 50(6) TMA the assessment with regard to the property management income appear to be excessive should be replaced by the sum of £4,200 per annum.  It is assumed that the property arrangement business was carried on for the entire period 2001-2005.

66.	The Tribunal is mindful that the standard of proof required is on a balance of probabilities.  The Tribunal takes the view that the profits from the sale of properties should take account of the acquisition and disposal costs provided by section 38 TCGA 1992.  While the Respondents have not provided information on deductible items such as, fees, commissions, legal charges, development costs and incidental and enhancement expenditure it is reasonable in the circumstances to assume that the compulsory stamp duty land tax on the sale or conveyance of property would have been paid to effect the transfer by the Appellant and this should therefore be deductible in calculating the assessed profits.  In the circumstances, it is reasonable for the tax calculations on the sale of the property to take the account of stamp duty charges paid.  It is an expenditure allowed by section 38 TCGA 1992 and would be an incurred cost in making the sale, regardless of whether the taxpayer provided evidence of having incurred it or not.  The tax calculations for trading income should therefore be redone to take account of the stamp duty paid on the conveyance or sale of the various properties transferred.

67.	The Tribunal therefore reaches the following conclusions.
(1)	The profits from the sale of properties have been omitted from the declared profits on the returns for the relevant years.

(2)	The rental income has been omitted from the tax returns submitted for the relevant years.

(3)	Income from property management, subject to the Tribunal’s suggested adjustments, were omitted from the declared profits on the relevant returns.

(4)	Tax returns submitted for the relevant periods were not complete and correct.

(5)	The discovery assessments were within section 29 TMA 1970.

(6)	Adjustments should be made to the trading income arising from capital gains to take account of the stamp duty land tax (or equivalent)  which would have arisen on the sale of property.  This is a compulsory transfer tax which would have been paid.

(7)	The penalties which were levied for the failure to provide information would stand as would the penalty determination issued on 9 August 2007, since there was no appeal in respect of this matter.

68.	Subject to these points, the appeal is dismissed.

69.	There are no issues of costs.

70.	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.

DR K KHAN

TRIBUNAL JUDGE
RELEASE DATE: 5 November 2010