[2010] UKFTT 567 (TC)

TC00818
Appeal reference: TC/2009/16008

CONSTRUCTION INDUSTRY SCHEME – dishonesty by person helping to run business – liability for the tax – appeal dismissed

FIRST-TIER TRIBUNAL
TAX

				               MICHAEL JOHN THOMAS	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Lady Mitting (Judge)
		M. Farooq (Member)

Sitting in public in Birmingham on 28 September 2010

The Appellant appeared in person

Mrs. B Robinson for the Respondents

© CROWN COPYRIGHT 2010
DECISION

1.	Mr. Thomas appeals against two assessments raised by the Respondents under Regulation 14(1) Income Tax (Subcontractors in the Construction Industry) Regulations 1993 in the following sums:
		2003 / 04		£7,161.48
		2004 / 05		£5,841
The assessments had been raised on 28 July 2005 and in circumstances which we describe below had been reduced on review to:
		2003 / 04		£5,642.10
		2004 / 05		£1,588.99
Mr. Thomas presented his own case and the case for the Respondents, who called no oral evidence, was presented by Mrs. B Robinson of the Appeals and Reviews Unit.
2.	We make two preliminary points.  First Mr. Thomas highlighted, in the course of his presentation, extensive delays in the Respondents’ handling of his case.  Letters had gone unanswered; different officers had made conflicting statements; court proceedings had been issued and pursued in an inappropriate manner.  Mr. Benford, the reviewing officer, states in the course of his review letter:
“Mr. S Rawlings wrote to you on 13 November 2007 after considering your late appeal and concluded that you had insufficient grounds.  I do not believe that Mr. Rawlings had the authority to refuse your appeal.  This matter was corrected at the Commissioners’ hearing on 30 September 2008.”
None of this should have happened and it is a matter of regret and concern that it did.  However, we do not in this decision go into any more detail than this because it is not central to the issue before us.  Secondly, Mrs. Robinson, in the course of her submissions, cast doubt on the genuineness of Mr. Thomas’s illness.  We record here that we accept without hesitation both the genuineness and severity of his illness.
3.	The background to the appeal is not in dispute and is as follows.  Mr. Thomas traded as Abacus Windows – double glazing installations – from January 2001 to 7 January 2005 when the business was transferred to a Mr. Simon Russell.  In July 2003, the Respondents started an Employer Compliance Review during the course of which it was found that Mr. Thomas was not correctly operating the Construction Industry Scheme.  The review lasted some two years during which various meetings took place, correspondence was exchanged and records were produced, some of which were lost whilst in the Respondents’ possession.  It was found that the Construction Industry Scheme had not been correctly operated in respect of various subcontractors.  A few held CIS 4 certificates but insufficient tax had been paid over in respect of them.  One held a CIS 6 certificate which was found to be invalid and therefore it was the obligation of the business to account for tax on his behalf.  Eventually, Mr. Thomas submitted End of Year Return forms (CIS 36) for the years ended 5 April 2004 and 5 April 2005.  Adopting the figures returned in their entirety, and giving credit for tax paid in 03/04, the Respondents raised the assessments under appeal.  No appeal was received, and indeed in his written presentation, Mr. Thomas stated that at that time he had no reason to doubt the validity of the assessments or that they applied to him.  The review process was consequently closed down in September 05 and nothing further was heard from Mr. Thomas until 8 August 2006 when he wrote in to the Respondents advising them that he had become aware of the criminal acts of a third party (Mr. Simon Russell) and that all figures returned by Mr. Thomas, he now believed to be incorrect and could no longer be relied upon.  He sought leave to make amendments to his returns.
4.	Gleaned from Mr. Thomas’s oral evidence and from correspondence contained in the extensive bundle of documents put before us, Mr. Thomas’s case is as follows.  Mr. Thomas had had a long history of serious illness and had in fact been on permanent incapacity benefit prior to his setting up Abacus Windows in November 2001.  His health deteriorated still further over the next few years with several hospitalisations and Mr. Thomas became increasingly dependant on Mr. Simon Russell to help run the business for him, Mr. Thomas cutting back his own involvement to a minimum.  The arrangement, we understand, was that in return for Mr. Russell assisting in the running of the business, Mr. Thomas would in time transfer it to Mr. Russell.  Until such time as it was transferred however it would remain Mr. Thomas’s business, being run on his behalf by Mr. Russell.  Mr. Russell kept the books and business records, and any figures returned and submitted by Mr. Thomas to the Respondents were based on those records.
5.	In July 2005 Mr. Thomas became aware, through one of his suppliers, that Mr. Russell had in fact been acting dishonestly and through enquiries and investigations made by Mr. Thomas over the next year he became aware of the full extent of Mr. Russell’s fraudulent dealings.  Mr. Thomas presented to the Respondents, and indeed there were before the tribunal, witness statements made by Mr. Russell in relation to two separate court actions arising out of Mr. Russell’s illegal activities.  One action was brought by Mr. Thomas against Lloyds Bank Ltd who had honoured cheques presented by Mr. Russell and signed by Mr. Russell even though he was not a signatory to the account.  The second action was by one of Mr. Thomas’s suppliers for supplies not paid for.  In the course of the witness statements, Mr. Russell stated that he had met Mr. Thomas when the latter was running a café in 1999.  In October 2001, Mr. Thomas had told Mr. Russell that he was closing the café and intending to run a double glazing business.  Mr. Russell, who was in the same trade himself, offered advice on such matters as materials, selling methods and advertising, and in November 2001 “became the manager of Abacus Windows”.  Due to his medical problems, Mr. Thomas spent less and less time in the office and Mr. Russell’s involvement grew.  Mr. Russell believed that the business would be made more profitable if the building work was expanded so he began to undertake building work which he sold on his account outside the remit of Abacus Windows but using materials paid for out of the Abacus Windows bank account.  Although he was not a signatory to the account he put cheques through signed by him and these were honoured by the Bank.  Mr. Russell kept all the monies which he received for the building work, intending to reimburse Mr. Thomas when the business was transferred to him.  However he began gambling heavily and lost all monies which he had accumulated.  In the text of the witness statements, Mr. Russell drew a clear distinction between the two areas of work, namely first that operated by himself and for his own benefit, albeit using Abacus-funded materials, and secondly the remainder using “materials supplied genuinely for the use of Abacus Windows”.  Mr. Russell identified and attached to the Lloyds Bank witness statement a list of the cheques which he had written and signed fraudulently for his own benefit.
6.	After a quite unjustifiable delay, the case finally came before Mr. Benford to carry out his review.  In his review letter of 23 October 2009, Mr. Benford accepted unreservedly that the thefts had occurred and that Mr. Thomas should be entitled to “some form of relief or adjustment”.  Mr. Benford referred to the HMRC instruction at Business Income Manual 45855 which, in respect of the calculation of profits of the self employed, established the principle that “losses arising from theft or misappropriation by an employee are normally allowable”.  Mr. Benford went on to say that he saw no reason why that principle should not be applied to Mr. Thomas.  Mr. Benford then set about establishing what he believed to be the appropriate amount of relief.  Mr. Benford had had sight of the business bank statements which showed that in the period 6 April 2004 to 6 January 2005 alone, the total deposits into the business bank account, excluding unpaid cheques, were £218,086.91.  Mr. Benford assumed that as this had been paid into the business bank account it related to jobs from which Mr. Thomas received the benefit.  On the assumption therefore that Mr. Thomas received some benefit from work done during the period an apportionment had to be reached.  The cost of materials which Mr. Russell had identified as relating to his own business totalled £75,831.  Mr. Benford split these between 2003 / 04 and 2004 / 05 on a dates basis; he then set them against the total cost of materials declared on the returns for each of the two years and established that in 2003 / 04 Mr. Russell used 6.5% of the total materials purchased and in 2004 / 05 he used 24.5%.  He applied these proportions to the assessments already raised.  Making a further adjustment for tax already paid in 2003 / 04, he reached the revised figures which we set out in paragraph 1.  In reaching his view, Mr. Benford expressly stated that he did not believe that there was sufficient evidence to conclude that all of the work undertaken by the subcontractors during the relevant period related to off-record jobs undertaken by Mr. Russell.
7.	Mr. Benford’s review was not acceptable to Mr. Thomas and he lodged the appeal with which we are now dealing.  Subsequent to the appeal and therefore by definition subsequent to Mr. Benford’s review, Mr. Thomas received a letter from Mr. Russell.  This was received in March 2010 and was immediately passed on to the Commissioners.  In his letter Mr. Russell admits that in fact from the time of Mr. Thomas’s hospitalisations in 2003, Mr. Russell had treated the entire business as his own.  Everything that had gone through the accounts had been for his benefit and not that of Mr. Thomas.  He used the entire income as his own and then lost it to gambling.  He further states that all the figures which over the years he had given to Mr. Thomas and upon which Mr. Thomas had based his returns, had been fabricated.
8.	It was Mr. Thomas’s contention, again taken from his oral submissions to us and from his correspondence to the Respondents, that the contents of Mr. Russell’s letter, taken together with his previous statements, clearly indicate that the liability for all outstanding tax belongs to Mr. Russell and not to Mr. Thomas.  He submitted that Mr. Russell’s final letter should be given the same weight as his earlier statements and that as Mr. Benford accepted the truthfulness of the two witness statements, the tribunal should now accept the truthfulness of the final letter.  As Mr. Russell accepted that he had made up all the figures which he entered in the business records and gave to Mr. Thomas, no reliance should be placed upon the returns submitted by Mr. Thomas and it should be accepted that he himself derived no income from the business during these two periods and should bear no liability for the tax.  The subcontractors were employed by Mr. Russell for works which he carried out for his own benefit.
9.	Mr. Thomas did make reference to his self assessment liability and VAT liability.  We don’t believe that the resolution of these two aspects has any bearing on the case before us.  We understand that both were resolved before Mr. Russell’s final letter was received and could not therefore have been resolved on that basis.  We were further given to understand that both the self assessment and VAT liabilities had been concluded on a similar sort of basis to that utilised by Mr. Benford.
10.	The onus of proof lies with Mr. Thomas.  His task is to put before the tribunal sufficient evidence to enable us to be satisfied on the balance of probability that throughout the entirety of the periods 03/04 and 04/05 (until the transfer in January), Mr. Russell was running the business entirely for his own benefit – that every job carried out was “off record”.  Until the receipt of Mr. Russell’s letter, the position appeared to be exactly as set out in the two witness statements.  There is a clear implication in these statements that Mr. Russell was in effect operating, through one account, two businesses – his own illegally funded one and the other the genuine Abacus Windows.  The only evidence that that was not in fact the case is the letter from Mr. Russell.  How much credibility can be attached to this letter?  It is a letter from an admittedly dishonest and fraudulent man.  It bears no address and date.  Mr. Thomas was not in touch with Mr. Russell.  Most importantly the contents of the letter cannot be corroborated.  The witness statements were accompanied by the schedule of cheques upon which Mr. Benford was able to justify an amendment to the assessment.  The review which Mr. Benford carried out was in our view full and fair, and Mr. Benford went as far as he could by accepting without question the schedule of cheques and making a rational and logical calculation from them.  The undated, uncorroborated letter provides no more hard and reliable information upon which any further amendment can be justified.
11.	There was also the point made by Mrs. Robinson that the meetings between Mr. Thomas and officers of HMRC themselves do not provide any corroboration as to the extent of Mr. Russell’s involvement.  In the meeting of 12 April 2005, Mr. Thomas very much plays down Mr. Russell’s role.  His involvement, as described, seemed limited to “giving advice”.  He was not paid.  His involvement was “not continuous”.  It “fluctuated”.  It was Mr. Russell’s idea to call himself General Manager as it gave him a title when dealing with suppliers.  Nowhere was it ever suggested that Mr. Russell was running the business to the entire exclusion of Mr. Thomas.
12.	Mr. Russell suggested in his letter that corroboration could be found in his own books which were in possession of the Respondents.  Mrs. Robinson told us this was not so and that they had no such books or records. 
13.	We have every sympathy for Mr. Thomas but without some form of corroboration we are not able to accept the uncorroborated assertion of Mr. Russell that all work was done for his own benefit and none for Abacus Windows.  We are not even in any position to put forward any sort of compromise figure as, without any further information any attempt by us to do that would be purely arbitrary.  In the light of the evidence in front of the tribunal, we are unable to accept Mr. Thomas’s assertions and must dismiss the appeal.  The appeal therefore fails and the assessments as amended by Mr. Benford are upheld.
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.

LADY MITTING
TRIBUNAL JUDGE
Release Date: 12 November 2010