[2011] UKFTT 78 (TC)

TC00956

Appeal number: TC/2010/01932

Income tax – trading – taxi driver – closure notice increasing taxable profits – confirmed – discovery assessments for other years confirmed on basis of presumption of continuity – appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	KHALID M SUDHAN	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL: JOHN CLARK (TRIBUNAL JUDGE)
						JULIAN L SIMS ACA, CTA

Sitting in public at Southampton on 30 November 2010

Sameeh Zubairi ACMA for the Appellant

Mr Massey, officer of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	The Appellant, Mr Sudhan, appeals against a closure notice issued by the Respondents (“HMRC”) in respect of the year 2005-06 and discovery assessments in respect of the years 2003-04, 2004-05, 2006-07 and 2007-08.
The facts
2.	An agreed Statement of Facts was provided, together with a bundle of documents. Oral evidence was given by Shoukat Ali and Mr Sudhan in support of his case, and by Jim Robinson for HMRC, who also supplied a witness statement. A small amount of additional documentation was produced in the course of the hearing. From the evidence we find the following background facts; we consider other factual issues below.
3.	Mr Sudhan had come to the UK from Pakistan. Initially he did factory work, then decided to start a taxi business. At the time when he started the business on 10 April 2003, he was not yet married. It was a condition of his prospective marriage that he should own a house. At the time of his 2003-04 return, he lived at a relative’s house. He subsequently purchased a property, in September 2005.
4.	On 6 April 2006 a self-assessment tax return was issued to Mr Sudhan. On 28 September 2006 Mr Sudhan submitted his tax return for 2005-06. This included taxable profits of £15,436 arising from his self-employment as a taxi driver for the accounting period ending 5 April 2006.
5.	On 13 June 2007 a notice of enquiry was issued under s 9A of the Taxes Management Act 1970 (“TMA 1970”).This advised him of HMRC’s intention to enquire into his tax return for 2005-06. As the notice was addressed to an incorrect number in his street, HMRC reissued the notice to him at the correct address on 21 June 2007.
6.	The notice asked Mr Sudhan’s then representative to provide:
(1)	The prime records of the business, the financial accounts, balance sheet and details of any estimates or balancing charges in the accounts;
(2)	Bank and building society account statements, details of business loans and details of the source of capital introduced to the business;
(3)	Particulars relating to various entries within the financial accounts.
7.	On 21 August 2009 HMRC issued a closure notice under s 28 TMA 1970 to Mr Sudhan relating to the enquiry into the 2005-06 return. The notice concluded that Mr Sudhan’s profits from taxi driving had been understated by £16,629. Mr Sudhan’s return was according amended to reflect such conclusion. This resulted in additional tax payable of £4,988.70.
8.	On the same date HMRC issued assessments under s 29 TMA 1970 to make good to the Crown a loss of tax and national insurance contributions following a discovery:

Year	Additional profits	Tax and NIC	
2003-04	£22,328	£6,698.40	
2004-05	£24,833	£7,409.94	
2006-07	£17,352	£5,205.60	
2007-08	£19,583	£5,869.30	

9.	On 21 October 2009 Mr Sudhan’s representative appealed on his behalf against the four discovery assessments and the closure notice, and requested postponement of the tax due on the additional profits. The grounds of appeal are considered below. The appeal also included a request for an independent review of the case.
10.	On 12 November 2009 HMRC wrote to Mr Sudhan accepting the review request, confirming HMRC’s current view of the matter, and refusing the application for postponement of the tax due.
11.	 On 23 November 2009 HMRC issued penalty determinations under s 95 TMA 1970. On 25 November 2009 Mr Sudhan appealed against the penalty determinations, requested a review and requested postponement of the penalties. On 26 November 2009 HMRC wrote to Mr Sudhan, accepting the review request and refusing the postponement application. HMRC explained that the substantive appeal and the penalty appeals would be reviewed together.
12.	On 1 February 2010 HMRC issued a review conclusion letter. This amended the amounts assessed, and consequently also the penalties, in order to reflect a reduction in engaged mileage of 3,100 miles and an increased deduction of £571 from the original accounts figures (compared to £975 in the closure notice dated 21 August) to take account of additional fuel costs. The amendments resulted in the following:
Year	Revised additional tax/NIC	Revised penalty	
2003-04	£4,469.10	£2,011	
2004-05	£5,109.84	£2,299	
2005-06	£2,929.80	£1,318	
2006-07	£2,739.90	£1,232	
2007-08	£3,306.00	£1,487	

13.	On 10 February 2010 Mr Sudhan’s appeals were notified to the Tribunal Service.
Arguments for Mr Sudhan
14.	Mr Zubairi explained Mr Sudhan’s background and the circumstances in which Mr Sudhan had started his taxi business after working in a factory. It was acknowledged that Mr Sudhan had made errors as a result of not understanding the position, and had made an incorrect estimate of private mileage. Mr Zubairi referred to three elements in relation to the discrepancy alleged by HMRC. When he had taken over Mr Sudhan’s case it had been uncertain whether HMRC were basing their views on fuel consumption, mileage or banking and private expenses. It had subsequently emerged that the principal basis was mileage. Mr Zubairi referred to alternative calculations for the year ended 5 April 2006; we consider these below.
15.	In relation to banking and private expenses, Mr Zubairi drew attention to Mr Sudhan’s personal circumstances and to his financing arrangements. To the extent necessary, we deal with these below.
16.	Much of what was shown in HMRC’s revised figures, produced with their letter dated 24 April 2009, was acceptable. The figures for private use and tips were not agreed.
Arguments for HMRC
17.	Mr Massey agreed with much of Mr Zubairi’s comments. A considerable proportion of the calculations depended on estimates. However, the total mileage figures and the bank statements were matters of fact. It had not been possible to reach a settlement as between the parties.
18.	The enquiry had been opened, and had established that Mr Sudhan’s records were incomplete. Mr Massey referred to the comments of Walton J in Johnson v Scott [1978] STC 48 at 56 relating to inferences to be derived from estimated figures; these comments had been approved by the Court of Appeal. The amounts in Mr Sudhan’s case were estimates; Mr Massey accepted that these involved a number of guesses based on the information provided by Mr Sudhan. Figures could be adjusted, but ultimately the matter came down to estimates. Under s 50(6) TMA 1970, the burden of showing that the assessments overcharged Mr Sudhan fell on him.
19.	HMRC had concluded that the 2005-06 figures as shown in the return were an understatement, and then applied this to other years by reference to the “usual presumption of continuity”, as indicated by Walton J in Jonas v Bamford (1973) 51 TC 1 at 25.
20.	Mr Massey submitted that the assessments should be determined in accordance with HMRC’s review decision dated 1 February 2010; if Mr Sudhan had not provided any basis for amendment of the figures set out in that letter, the appeal should be dismissed in those figures. If the Tribunal were to determine the appeal using other figures, he requested that the decision should outline the principles adopted, such as the extent of private use, and its other conclusions.
Discussion and conclusions
21.	There was no challenge on Mr Sudhan’s behalf to the making of the discovery assessments on Mr Sudhan, or to the issue of the closure notice in respect of the year 2005-06. The challenge related to the quantum of profits assessed as a result of the closure notice and the discovery assessments. As Mr Massey submitted, the burden of showing that the assessments overcharged Mr Sudhan to tax fell on him.
22.	The principal argument for Mr Sudhan was that the figures used by HMRC for mileage in calculating the assessable profits, including those in HMRC’s revised computations on review leading to a downward adjustment of the tax chargeable, were incorrect. The total mileage, as Mr Massey pointed out, was a matter of record and had been derived from readings taken by Winchester Council. The debate concerned the extent of private mileage and the fares likely to have been earned for normal local journeys as well as for airport trips. (Mr Sudhan had not been advised when starting his business that mileage for travel between home and work was to be treated for tax purposes as private mileage and this had led him to give a misleading answer to the original questions from HMRC about mileage.)
23.	Mr Zubairi provided a schedule setting out the points of agreement and disagreement between the figures used by HMRC in their final proposal issued on 17 March 2009 (as used in calculating the revised assessable amount for 2005-06, but before the changes made pursuant to HMRC’s review letter of 1 February 2010) and the figures put in a proposal submitted on Mr Sudhan’s behalf in December 2009. Concentrating on the disagreements, the mileage figure proposed by HMRC for private use was 11,356 (shown in Mr Zubairi’s schedule as 10,156), whereas that for Mr Sudhan was 17,250. HMRC’s figure for airport runs mileage was 3,300; Mr Sudhan’s was 2,420, although the income figure was agreed at £1,320. HMRC’s average figure for rates per trip was £7.27; Mr Sudhan’s range was from £6.72 to £11.20. HMRC’s figure for tips was £2,010, whereas Mr Sudhan’s was £629. The overall gross takings produced by the exercise were calculated by HMRC as £42,224, and by Mr Zubairi for Mr Sudhan within the range from £25,812 to £28,480.
24.	The first material difference was the private motoring mileage, subsequently readjusted on review from 1,000 miles back to the percentage originally claimed, ie 10 per cent, giving a figure of 4,100 miles. This figure on review did not displace the other elements mentioned in the March 2009 proposal, namely 7,956 miles between home and work, and 2,400 miles for trips to Mr Sudhan’s cousins in London. The total of 11,356 miles was therefore increased on review to 14,456 miles. The second main difference was the average trip fare, and the third was the figure for tips.
25.	We regard the total figure accepted by HMRC for private mileage as relatively generous. Mr Sudhan indicated in his answers to our questions that he travelled home and back once or twice a week in the middle of his shift for family-related occasions. We do not find this convincing, as a break in shift long enough to give time to travel 13 miles and back and to participate in the relevant occasion would take a very large time out of Mr Sudhan’s customary evening shift. We find that such occasions would have been exceptional, and thus not material to the calculation of the private mileage. We are not satisfied that there is any evidence to justify a private mileage figure greater than the estimate adopted by HMRC.
26.	In relation to the average trip fare, we do not consider that the evidence given on behalf of Mr Sudhan is sufficient to displace the figure of £7.27 estimated by HMRC as the average fare. This was based on an average trip length of 3.2 miles, using the Winchester Council differential rates for the initial and subsequent parts of a journey, and taking into account the additional element where the journey was after 11 pm. Mr Ali, who had worked as a taxi driver in Winchester for a six month period, emphasised the importance of the nature of the local area in assessing what the average trip length would be and indicated that it would probably be about 3.5 miles, but accepted that he had not been working in the area during 2005-06, the year in question. His evidence does not persuade us to depart from HMRC’s figure, nor was there anything in Mr Sudhan’s evidence to suggest any reason for that figure to be adjusted.
27.	The remaining point of difference is the figure for tips. The difference between HMRC’s figure and Mr Sudhan’s is £1,381. Mr Ali’s evidence was that tips could be generous, but also that some customers gave no tips at all. He referred to the occasional risk of a customer running off without paying at all, but did not indicate how frequently or otherwise such cases occurred. Again, we treat his evidence as of limited value, given his short experience as a taxi driver up to August 2003, as shown by his tax return. We find that there is nothing in the evidence either from Mr Ali or Mr Sudhan to justify amending the level of tips assumed by HMRC at 5 per cent of the “total expected fares” figure.
28.	Thus we have found no evidence to displace the assessment for 2005-06 as set out in HMRC’s review letter dated 1 February 2010. We find our conclusion reinforced by a number of other elements of the investigation. Substantial amounts were paid into Mr Sudhan’s bank account; although indications were given in evidence and in correspondence that these amounts were loans or in certain cases repayments of loans or receipts of legacy monies, Mr Sudhan was only able to point to limited documentation to support these contentions. In particular although occasional payments were identified as loan repayments, we were provided with no evidence of how Mr Sudhan funded the original loan advance to the borrower. We would have expected Mr Sudhan to have had clear knowledge of amounts lent or borrowed, and of any monies inherited from Pakistan. In relation to Mr Sudhan’s takings, the figures extracted from his takings book contained no odd pence, and certain figures appeared repeatedly; this evidence persuades us that his business records were far less than adequate and questionable as to their accuracy. As Mr Robinson indicated, no daily records of income were kept, only a weekly figure. In relation to private expenses, the evidence given by Mr Sudhan was not sufficient to persuade us that any adjustment should be made to the 2005-06 assessment.
29.	Mr Massey submitted that in the light of the comments of Walton J in Jonas v Bamford, the presumption of continuity should apply to the making and calculation of the discovery assessments. We accept this submission. All our findings in relation to the 2005-06 assessment apply equally to each of the discovery assessments. We see no reason to adjust in any way the basis of calculation either of the 2005-06 assessment or of the discovery assessments. We therefore confirm each of the assessments in the figures reflected in HMRC’s review letter dated 1 February 2010, ie the underlying figures giving rise to the additional tax liabilities specified in that letter.
30.	In relation to penalties, Mr Zubairi submitted that they should be mitigated down from the levels set in HMRC’s review letter. Mr Massey contended that Mr Sudhan had been negligent; estimates should be reasonable and fair, in accordance with Johnson v Scott. He submitted that Mr Robinson’s figures and those of HMRC’s reviewer met this test, whereas Mr Sudhan’s record-keeping displayed negligence.
31.	In respect of the penalties, Mr Massey explained that in assessing their level at 45 per cent, Mr Robinson, the HMRC officer, had considered the following factors. The first was the extent of disclosure, which had included some acceptance of the errors by Mr Sudhan. The second was the level of co-operation during the enquiry; this had been variable (particularly as there had been some delays and formal information powers had had to be used). The final factor was the size and gravity of the error; correction of the error had resulted in a doubling of taxable profits and the error had covered a period of five years).
32.	In considering the percentage rate of the penalties, we have regard to the general circumstances, and in particular to the following elements. We note that the amount of the additional tax has been reduced to approximately half of what it had been on the basis of the earlier estimated figures, but the enquiry has continued for a considerable period through the medium of successive advisers to Mr Sudhan. Finally, we consider certain elements in the calculation of the assessments to additional tax to have been somewhat generous. We take all these issues into account in considering whether the penalties should be further mitigated to a percentage lower than the 45 per cent. Our conclusion is that the penalties should remain at the level set out in HMRC’s review letter dated 1 February 2010.
Summary of conclusions
33.	We dismiss Mr Sudhan’s appeal and confirm the assessments in the figures reflected in HMRC’s review letter dated 1 February 2010, and confirm the penalties in the amounts shown in that letter.
34.	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.

JOHN CLARK

TRIBUNAL JUDGE
RELEASE DATE: 25 JANAURY 2011