[2012] UKFTT 419 (TC)
TC02101
Appeal number:
TC/2010/09199
INCOME TAX – amendment of partnership returns to
reflect undeclared income of partnership –income not declared – appeal
dismissed and amounts assessed confirmed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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ABDUL LATIF
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE GREG SINFIELD
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GORDON MARJORAM
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Sitting in public at 35 Bull Street , Birmingham B4 6EQ on 23 April 2012
Mr John Mitchell of Mitchell
and Company, accountants, for the Appellant
Mr Bryan Morgan of HM Revenue
and Customs for the Respondents
© CROWN COPYRIGHT
2012
DECISION
1.
Mr Latif and his son in law, Mr Ahmed, traded in partnership as Raj
Bangladeshi Cuisine during the relevant periods. The business was (and remains,
although now carried on by a limited company) a restaurant with premises at 30 Birmingham Road, Great Barr, Birmingham. The restaurant has seating for around 48
customers and also offers a takeaway service. The present appeal concerns
amendments to the partnership returns following enquiry closure notices in
relation to tax years 2002-03 and 2003-04. It also concerns discovery
amendments in relation to tax years 1998-1999, 1999-2000, 2000-2001 and 2001-02.
2.
The extent to which the amendments described above increase the
partnership’s taxable profits appears from the table below.
|
Year
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Type
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Profits shown on
return
£
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Additional
profits assessed
£
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2003-2004
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Closure notice
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6594
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26594
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2002-2003
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Closure notice
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15737
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35737
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2001-2002
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Discovery amendment
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14081
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30081
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2000-2001
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Discovery amendment
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17320
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37320
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1999-2000
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Discovery amendment
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14272
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36272
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1998-1999
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Discovery amendment
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11365
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26365
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3.
Mr Latif accepted that errors had occurred in recording sales of meals
for a period in 2002 but contended that it was an isolated occurrence while he
had been out of the country and the partnership had declared all income from
the business correctly in the other years. There were 14 meetings and a considerable
amount of correspondence between Mr Latif or his accountant and HMRC in an
attempt to reach a settlement. A settlement could not be agreed and, in a
letter dated 21 March 2010, Mr Latif requested a review of the decisions
leading to the amendments to the partnership returns.
4.
HMRC notified Mr Latif of the conclusions of the review by letter dated
7 May 2010 which upheld the amendments to the partnership returns. Mr Latif
appealed to the Tribunal in a notice of appeal dated 27 October 2010.
The reason for the appeal being notified after the expiry of the 30 day time
limit was that Mr Latif’s brother in Bangladesh was ill and subsequently died
and Mr Latif himself became ill and was admitted to hospital. HMRC did not
object to Mr Latif’s application for an extension of the time to appeal and the
Tribunal allowed the appeal to proceed.
5.
At the appeal, Mr Latif was represented by his accountant, Mr Mitchell,
and HMRC were represented by one of their officers, Mr Morgan. In summary,
HMRC submitted that the admitted failure to include all tax in the return for
2002-2003, unexplained amounts paid into Mr Latif’s personal bank account and
the low gross profit margin achieved by the business showed that the business
had under declared takings in the amounts in the table above. Mr Latif
accepted that errors had occurred in recording sales of meals for a period in
2002 and that his records were not perfect but he rejected HMRC's conclusions
that takings had been underdeclared in other periods. He said that his gross
profit margin was low but this could be explained. He denied that cash
deposited in his personal bank account came from the business and said that the
amounts came from family members.
6.
We heard oral evidence from Mrs Diane Hickman, the HMRC officer who
conducted the enquiry. We also heard oral evidence from Mr Latif. In
addition, the bundles contained a comprehensive collection of correspondence
and other documentation generated by the enquiries which we have taken into
account in this decision.
7.
Mrs Hickman said that the case was referred to her following a risk
assessment. She opened the enquiry by issuing a notice under section 12AC
Taxes Management Act 1970 to the partnership on 13 September 2004 in relation
to the 2003 tax return. The tax return covered the period 1 November 2001 to
31 October 2002 and showed a business turnover of £129,375, exclusive of VAT,
with a net profit of £15,737. In October, Mrs Hickman received various
schedules, including copies of the drawings account, sales summary and cash
account. At that stage Mrs Hickman had concerns about the gross profit margin
which, at 62%, was low compared to similar businesses and the low drawings
which were shown on the balance sheet as £12,898 for both partners.
8.
On 18 January 2005, Mrs Hickman and a colleague visited the business
premises at Birmingham Road, Great Barr. Mr Latif and his then accountant (not
Mr Mitchell) were present. The meeting was to discuss the business and to
collect business records. The only records produced at the meeting were table
order pads (but not any for August to October 2002). The table order pads were
added up each day, bundled together and the daily amount written on the back of
one of the pads for that day. Further records were provided later, including private
bank account statements from Mr Latif. No purchase invoices were provided for
the year to 31 October 2002 as Mr Latif said they had been lost.
9.
A review of the records by Mrs Hickman revealed that there were
discrepancies between the table order pads and the cash sheet figures. The
weekly cash sheets formed the basis of the sales figures. There were no weekly
cash sheets for the periods February to April 2002 and August to October 2002
so the figures for those periods could not be checked. For the period from
November 2001 to January 2002, £3,794 more was recorded on the table order pads
than in the weekly cash sheets. From May 2002 to July 2002, the discrepancy
was £2,745. This gave a total discrepancy of some £6,500 for the two
quarters. The table order pads also revealed a low level of drink sales with
some tables not being shown as ordering any drinks. The cash account prepared
by the partnership’s accountant showed a cash drawings figure of £7,480 for the
partnership. Drawings were not recorded in the accounts so the figure was
based on an estimate provided by the partners that Mr Latif normally drew
around £100-£150 a week and Mr Ahmed around £50 or £60 a week. The cash
account was balanced using an estimated figure. Statements from Mr Latif's private
bank account showed deposits, after allowing for a bank loan of £2,500, of
£15,200 for the period 1 November 2001 to 31 October 2002.
10.
Following the initial meeting in January 2005, there were a further 13
meetings between HMRC and Mr Latif. The details of each meeting were set out
in Mrs Hickman’s witness statement but, as the same matters were discussed at
several meetings, we summarise the relevant points below.
11.
The gross profit margin for the period covered by the 2003 tax return
was 62%. The gross profit margins of the business for the years under appeal
were around 60%. Mrs Hickman found that the gross profit margin for the
restaurant for 1998 was 65%. Once the additional amounts from the table pads
and the personal bank account deposits were added to the declared figures for
2002-2003, the gross profit margin was 67% which was closer to the level of
profit in 1998 and the margins that Mrs Hickman expected restaurants with a
similar business to produce.
12.
Mr Latif admitted that an error had occurred in transcribing the takings
from the table order pads onto the weekly cash sheets for a period in 2002. He
accepted that, as a result, sales were understated by around £6,000 but he
maintained that this happened in that one year only. Mr Latif said the error
had occurred when he had been in Bangladesh. During that time, his partner and
son-in-law, Mr Ahmed, had been left to run the business and had rushed matters
and made mistakes with the record-keeping. Mr Latif said that he was in Bangladesh in the second or third quarter of 2002. In cross examination, he said that he
thought that he was away between July and October but it was definitely for at
least two months.
13.
Mr Latif acknowledged that the gross profit margin was low but said that
this was due to a number of factors. He said that most of the time he offered
customers a free drink or dish as a form of promotion; the portions were larger
for take aways than for meals in the restaurant; sometimes people left without
paying; and he spent a substantial amount on food for his staff. Mr Latif did
not produce any evidence of the promotions. Mr Latif said that there were no
records to show how much was spent on staff food as it would be on the same
invoice as other food. He said that he did not keep records of the expenditure
on staff food or treat it as a taxable benefit.
14.
In relation to his private bank account, Mr Latif said that he did not
bank any of his drawings from the business into his private account. He said
that money paid into this account came from his wife and daughters. At Mrs
Hickman's request, Mr Latif produced bank and building society statements of
his wife and daughter as evidence that the deposits into his private bank
account were from his wife and daughter and not drawings from the business. An
analysis of the statements by Mrs Hickman showed that the withdrawals did not
match the deposits into Mr Latif's bank account. Mr Latif explained that his
wife primarily had cash income from her own restaurant business which would
have been the source of the deposits into his account.
15.
Mr Latif said the joint drawings of the partners would be in the region
of £130 to £160 a week and these were not recorded. Neither partner banks any
of their drawings. Mr Ahmed did not have a bank account although his wife did
have one. The bank statements of Mrs Ahmed showed regular round sum deposits
amounting to £11,000 during the enquiry year. At the hearing, Mr Latif
produced four letters from family members detailing their employment history
and containing statements that each contributed between £60 and £150 every
month in cash to the family household. The family members all contributed cash
to a pot which was used to cover living expenses and any excess, after the
expenses, was paid into Mr Latif's bank account. Mrs Latif had a bank account
and if she ever received a cheque, it would be paid into her account. The
excess from the family pot was never paid into Mrs Latif's account.
16.
Mrs Hickman calculated the amendments to the partnership returns by
applying the discrepancy in the table order pads over 12 months, which gave a
discrepancy of more than £10,000, and adding an amount of £10,000 in relation
to the deposits into Mr Latif's bank account. Mrs Hickman increased the
profits by £20,000 for 2002-2003 and 2003-2004 which gave a revised gross
profit rate of 67% and 66% respectively. The revised gross profit margins were
in line with similar businesses. Mrs Hickman considered that it was reasonable
to revise the figures for the earlier years to reflect a gross profit margin of
66% which led to the amendments that are the subject of the appeal.
Discussion
17.
The amendments for 1998-1999 to 2001-2002 were made under Section
30B Taxes Management Act 1970. Section 30B(4) TMA 1970 prevents HMRC from
making a discovery assessment unless one of two conditions is met. The first
condition is that the omission or deficiency is attributable to fraudulent or
negligent conduct of the representative partner or relevant partner or a person
acting on behalf of such a partner. The second condition is that at the time
when the enquiry window had closed, HMRC could not have been reasonably
expected, on the basis of information made available before that time, to be
aware of the omission or deficiency. It was not suggested on behalf of Mr
Latif that HMRC should have been aware of any omission or discrepancy in
respect to the years 1998-1999 to 2001-2002 before the enquiry window for each
of those years had closed. Further, we consider that the
admitted discrepancy in takings records for 2002-2003 together with the
admission that drawings were not recorded and the lack of complete records of
sales for the period of enquiry establish on the balance of probabilities that the
partnership was, at the very least, negligent in the completion of the
partnership returns.
18.
The burden is on the appellant to satisfy us that the amounts charged to
tax by the amendments are wrong - see section 50(6) Taxes Management Act 1970
and Brady v Group Lotus Car Companies plc [1987] STC 635. The question
for us therefore is whether we are satisfied on the evidence we have heard and
seen that the additional amounts chargeable to tax as a result of the amendments
are excessive. We answer that question and make our factual findings on the
basis of the balance of probabilities.
19.
In Jonas v Bamford 1973 51 TC 1, 1973 STC 519 Walton J observed,
at page [25], that once the Inspector comes to the conclusion that, on the facts
which he has discovered, the taxpayer has additional income beyond that which
he has so far declared to the Inspector, then the usual presumption of
continuity will apply. The situation will be presumed to go on until there is
some change in the situation, the onus of proof of which is clearly on the
taxpayer. HMRC referred to Jonas v Bamford in this case but they also
quite correctly cited the decision of the Tribunal in Dr I Syed v HMRC
[2011] UKFTT 315 (TC). We agree with the observations of the Tribunal in Syed
at paragraph 38 that:
"In our view this
quotation [from Jonas v Bamford] expresses no legal principle. It seems
to us that it would be quite wrong as a matter of law to say that because X
happened in Year A it must be assumed that it happened in the prior year. An
officer is not bound by law and in the absence of some change to make or to be
treated as making a discovery in relation to last year merely because he makes
one for this year. This tribunal is not bound to conclude that what happened
this year will happen next year. It seems to us that Walton J is instead
expressing a common sense view of what the evidence will show. In practice it
will generally be reasonable and sensible to conclude that if there was a
pattern of behaviour this year then the same behaviour will have been followed
last year. Sometimes however that will not be a proper inference: there will
be occasions when the behaviour related to a one off situation, perhaps a
particular disposal, or particular expenses; in those circumstances continuity
is unlikely to be present."
20.
We understood Mr Morgan to accept the views of the Tribunal in Syed.
HMRC's submission was that, in the absence of evidence that shows that the
underdeclarations were one off events, the underdeclarations in the year to 31
October 2002 are evidence that underdeclarations also occurred in other years.
21.
Mr Mitchell, on behalf of Mr Latif, accepted that the records for the
year ended 31 October 2002 were not accurate for the reasons described above but
that the year chosen for investigation was exceptional and, as such, should be
treated in isolation and not used as a model for other years. Mr Latif's
evidence was that the under-recording of sales was an isolated occurrence when
he was out of the country and left the running of the business to his partner,
Mr Ahmed, who made some mistakes. We do not accept this explanation. Mr Latif
said that he was in Bangladesh for two months or so from July 2002. The
discrepancies between the table order pads and the weekly cash sheets established
by reference to the only records available related to the periods from November
2001 to January 2002 and from May 2002 to July 2002. The two periods together
cover six months while Mr Latif was in the UK. We conclude from the evidence
that Mr Latif was present when the errors occurred and that he must share the
responsibility with Mr Ahmed for the discrepancies that led to takings being
understated. We regard this as evidence of conduct that is, at the lowest,
negligent. The fact that the discrepancies arose before Mr Latif went away
undermines his argument that the under-recording of sales was a one-off event.
Further, we consider that such systemic errors over a period of six months are
evidence from which HMRC could properly have inferred that under-recording occurred
in other periods. Mr Latif did not produce any evidence to show that the records
of takings in the other years subject to amendment were more likely to be
correct than the figures for the year ended 31 October 2002.
22.
The low gross profit margins also support HMRC's view that takings had
been underdeclared. Mrs Hickman's evidence was that a gross profit margin of
65% was achievable and, if the figures from the table pads and deposits were
added, the business produced a gross profit margin of 67% which, on Mrs
Hickman's evidence, is in line with similar businesses. Mr Latif did not
produce any evidence to support his claims for the items of expenditure which
reduced the profit margin and there was no explanation why these factors should
affect the partnership's business more than other similar businesses. On the
basis of the evidence, we conclude that the low profit margin reported by the
business was more likely to be due to the underdeclaration of takings than to
the various factors advanced by Mr Latif.
23.
Finally, we do not accept Mr Latif's explanation of the source of the
payments into his private bank account during the period of the enquiry. The
fact that members of the family contributed to household expenses by putting cash
into a joint pot does not adequately explain the deposit of £15,200 in the
period. The evidence presented by Mr Latif was that the payments were between
£240 and £600 each month. The pot was used for household and family expenses
with the excess being paid into Mr Latif’s account. If the contributions were
the only source of deposits that would mean an excess of £1,250 each month.
Another source was cash payments from Mrs Latif. It seems to us unlikely that
Mrs Latif, who had her own restaurant business and her own bank account, would
pay cheques from her business into her account but pay cash from her business
into Mr Latif's account. We did not see any evidence to substantiate such
payments by Mrs Latif.
Decision
24.
In conclusion, Mr Latif has not produced evidence to satisfy
us that the additional amounts chargeable to tax as a result of the amendments
are excessive. On the evidence that we have seen, we are satisfied on the
balance of probabilities that the takings of the partnership's business were
understated for the tax years in question. We consider that the amounts as
amended for the years under appeal are reasonable. Accordingly, we confirm the
amendments and dismiss the appeal.
25.
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.
GREG
SINFIELD
TRIBUNAL JUDGE
RELEASE DATE: 14 June 2012
