SPC00596

DISCOVERY ASSESSMENTS AND CLOSURE NOTICE – based on explained bank lodgements – whether Appellant has satisfied burden of proof – no – assessments and closure notice confirmed
SECTION 9A TMA 1970 NOTICE – questions in accompanying letter going outside the scope of the enquiry – whether affects the closure notice or discovery assessments – no

THE SPECIAL COMMISSIONERS

	THOMAS DUFFY	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 
						IAN HUDDLESTON

Sitting in public in Belfast on 20 February 2007

Joseph Quinn, J Quinn & Company, certified Public Accountants, assisted by Michael Kelly, counsel, for the Appellant

Colin Williams, HM Inspector of Taxes, Appeals Unit Wales, Scotland and Northern Ireland, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Mr Thomas Duffy appeals against an amendment to his self-assessment for 2002-03 (tax £7,356.01) and discovery assessments for the years 1999-2000 (tax £7,413.12), 2000-01 (tax £6,411.10), 2001-02 (tax £11,960.70), and 2003-04 (tax £7,698.70), all made on 6 March 2006.  The Appellant was represented by Mr Joe Quinn, and the Revenue by Mr Colin Williams.
2.	There are three issues: (1) whether the Inspector’s asking questions outside the scope of an enquiry opened under s 9A of the Taxes Management Act 1970 invalidates the whole enquiry and the discovery assessments for the other years; (2) whether the Inspector made a discovery that would justify the discovery assessments, and whether there was negligent conduct on behalf of the Appellant; (3) the quantum of the assessments and amendment to the self-assessment. 
3.	We heard evidence from the Appellant and from the Inspector, Mrs C Heatley, and find the following facts:
(1)	The Appellant, having not previously made any returns, instructed an accountant, Rainey & Associates, to regularise his tax position.  They filed returns for the six years up to 2002-03.  
(2)	The Appellant is a musician who plays the guitar in pubs.  He claims that he plays only on Friday and Saturday evenings and earns about £100 per night (we make our findings on this below).
(3)	The Inspector opened an enquiry into the 2002-03 return by sending a s 9A Notice to the Appellant on 7 January 2005, which was within the permitted time limits.  That letter stated that “I have written separately to your advisers, setting out the information I require” and enclosing a copy of the letter to the accountants.  The letter of the same date to the accountants asked 11 questions relating to the return.  It then asked three questions relating to three capital gains on his private residences disclosed in the other returns.  The capital gains tax computations were stapled to the 2002-03 return.  The Inspector accepts that the capital gains tax questions were outside the scope of the enquiry since by s 9A(4) the enquiry extends to anything contained in the return.  No capital gains tax assessments were issued as the Inspector was satisfied with the answers to those questions.
(4)	At an interview on 8 March 2005 the Inspector’s notes, which were communicated to the Appellant’s accountants at the time, stated “Mr Duffy said he had no investments or interest in property in Spain” and also “Mr Duffy confirmed that he had held no other accounts including savings or offshore accounts and would be prepared to sign a statement to that effect.”  The Appellant did own a property in Spain which he sold at a loss.  He also had a bank account there.  He did not possess either at the date of the interview.
4.	The Inspector made the assessments and the closure notice for 2002-03 on the following basis (to quote from her letter of 26 January 2006):
“To arrive at the turnover figure I have totalled unidentified lodgements to [the Appellant’s] Bank of Ireland account (2001—2003), Ulster bank account (May 2002—April 2003) and Cambank account [in Spain] (2002).  In addition the sum of £16,430 has been included, which represents the cash sum paid by [the Appellant] for the purchase of the property at Cliftonville Rd (January 2003).
I have reduced the unidentified lodgements figure for 2001 to account for the additional rental income lodged in that year, as pointed out by you at he meeting.  Having reviewed the figures each year for cash available I consider that it would have been possible for [the Appellant] to fund his credit card cash payments and the additional £2,567 for the purchase of the Spanish property from cash available.  My totals for each year therefore of amounts unaccounted for are as follows - 2001—£40,274; 2002—£54,478; 2003—£45,939.
Unless the source of lodgements can be documented they would normally be treated as additions to income.  In this case [the Appellant] has maintained that there was a circulation of cash with sums of money being re-lodged to his account.  No records have been kept of this and there is no pattern between withdrawal and lodgements of cash.  This point was covered in detail at our meeting.  However, as a concession to [the Appellant], and in order to reach a settlement figure, I am prepared to accept that 50% of the larger sums withdrawn could have been re-lodged to his accounts at some time.  I have reviewed cash withdrawn for the 3 years for which statements are held and am looking to allow re-lodging sums of  -  2001—£15,750  (½ of £23,000 on 18/07/00, £8,500 on 21/11/00); 2002—£8,500 (½ of £17,000 on 28/06/01); 2003—£13,000 (½ of the withdrawals made from the Ulster bank account in that year).  This should leave sufficient cash for [the Appellant] to fund cash payments on his credit cards, costs involved with the furnishing, purchase and sale costs of his properties, yearly car purchase, holidays and the general cost of everyday living.  The resulting turnover are shown on the attached schedule [not reproduced].  For the years 2000 and 2004, I have taken an average turnover figure from the other 3 years.”
She allowed the full amount of expenses claimed even though there was no documentation and 100% business use was claimed for motoring expenses. 
Issue (1)
5.	Mr Quinn, for the Appellant, contends (to quote from his skeleton argument) that “a s 9A Notice is a formal notice of enquiry into a specific year and is a demand for information with no appeal unless unreasonable.  If not complied with a s 19A [Notice] is the means of enforcing a s 9A [Notice].”  Also that “there cannot be a discovery at the time of a s 9A [Notice] is issued…The s 9A Notice is fundamentally flawed and that anything that flows from it must also be flawed.”
6.	Mr Williams, for the Revenue, accepts that the capital gains tax questions were outside the scope of the enquiry but contends that at the highest that enabled the Appellant to refuse to answer, in which case the Inspector would have had other remedies such as a s 20 TMA Notice.  Nothing else was affected by the questions.
7.	Section 9A provides:
“(1) An officer of the Board may enquire into a return under section 8 or 8A of this Act if he gives notice of his intention to do so (“notice of enquiry”)—
(a) to the person whose return it is (“the taxpayer”),
(b) within the time allowed.
(2) The time allowed is—
(a) if the return was delivered on or before the filing date, up to the end of the period of twelve months after the filing date;
(b) if the return was delivered after the filing date, up to and including the quarter day next following the first anniversary of the day on which the return was delivered;
(c) if the return is amended under section 9A of this Act, up to and including the quarter day next following the first anniversary of the day on which the amendment was made.
For this purpose the quarter days are 31st January, 30th April, 31st July and 31st October.
(3) …
(4) An enquiry extends to anything contained in the return, or required to be contained in the return, including any claim or election included in the return, subject to the following limitation.
(5) If the notice of enquiry is given as a result of an amendment of the return under section 9A of this Act—
(a) at a time when it is no longer possible to give notice of enquiry under subsection (2)(a) or (b) above, or
(b) after an enquiry into the return has been completed,
the enquiry into the return is limited to matters to which the amendment relates or which are affected by the amendment.
(6) In this section “the filing date” means the day mentioned in section 8(1A) or, as the case may be, section 8A(1A) of this Act.
8.	A s 9A Notice is therefore a notice to the taxpayer that has to be given within a particular time limit, that enables the Inspector to enquire into the return.  The enquiry then extends to anything contained in the return.  The letter of 7 January 2005 is not a s 9A Notice but contains the questions that the Inspector then had on the return.  At that stage there is no sanction for not answering any of the questions.  If they are not answered a s 19A Notice is likely to follow, but was not used in this case as the accountant did answer the questions.  In other words, the s 9A Notice is the mechanism for stopping time running out for any enquiry into the return; it does not contain any enquiry itself.  We do not agree with Mr Quinn’s contention that a s 9A Notice “is a demand for information with no appeal unless unreasonable.”  It is not a demand for information at all and there is no sanction for not answering the questions that are raised following the giving of the Notice.  Accordingly we regard the Inspector’s additional questions as irrelevant to the validity of either the enquiry into that return or, what is even more remote, the discovery assessments.  If the same questions had been contained in a s 19A Notice the Notice would to that extent have been invalid (whether the whole notice would be invalid is not a question raised in this appeal where there was no s 19A Notice).
9.	Accordingly on this issue we agree with Mr Williams.
Issue (2)
10.	Mr Quinn contends that there has been no discovery, and no negligent conduct on the part of the Appellant, which are pre-conditions for an assessment under s 29 TMA.  He contends that there cannot be a discovery at the time a s 9A Notice is issued.
11.	Mr Williams contends that “In law, indeed, very little is required to constitute a case of ‘discovery’: see Cenlon Finance Co Ltd v Ellwood (Inspector of Taxes)” per Walton J in Jonas v Bamford [1973] STC 519, 538.  The Inspector discovered that the Appellant had resources in addition to his declared income.  There was negligent conduct in the sense in Blyth v Birmingham Waterworks Co [1843-60] All ER 478: 
“Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do.”
Here the negligent conduct comprised the Appellant’s originally failing to notify that he was chargeable to tax, and failing to maintain any records of his income.  He also attempted to mislead the Inspector in his answers about the Spanish property and bank account.
12.	Section 29 provides:
“(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment—
(a) that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or
(b) that an assessment to tax is or has become insufficient, or
(c) that any relief which has been given is or has become excessive,
the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.
(2) Where—
(a) the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, and
(b) the situation mentioned in subsection (1) above is attributable to an error or mistake in the return as to the basis on which his liability ought to have been computed,
the taxpayer shall not be assessed under that subsection in respect of the year of assessment there mentioned if the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made.
(3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above—
(a) in respect of the year of assessment mentioned in that subsection; and
(b) in the same capacity as that in which he made and delivered the return,
unless one of the two conditions mentioned below is fulfilled.
(4) The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf.
(5) The second condition is that at the time when an officer of the Board—
(a) ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment; or
(b) informed the taxpayer that he had completed his enquiries into that return,
the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.
(6) For the purposes of subsection (5) above, information is made available to an officer of the Board if—
(a) it is contained in the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return;
(b) it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim;
(c) it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer, whether in pursuance of a notice under section 19A of this Act or otherwise; or
(d) it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above—
(i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or
(ii) are notified in writing by the taxpayer to an officer of the Board.
(7) In subsection (6) above—
(a) any reference to the taxpayer’s return under section 8 or 8A of this Act in respect of the relevant year of assessment includes—
(i) a reference to any return of his under that section for either of the two immediately preceding chargeable periods; and
(ii) where the return is under section 8 and the taxpayer carries on a trade, profession or business in partnership, a reference to any partnership return with respect to the partnership for the relevant [year of assessment]2 or either of those periods; and
(b) any reference in paragraphs (b) to (d) to the taxpayer includes a reference to a person acting on his behalf.
(8) An objection to the making of an assessment under this section on the ground that neither of the two conditions mentioned above is fulfilled shall not be made otherwise than on an appeal against the assessment.
(9) Any reference in this section to the relevant year of assessment is a reference to—
  (a) in the case of the situation mentioned in paragraph (a) or (b) of subsection (1) above, the year of assessment mentioned in that subsection; and
  (b) in the case of the situation mentioned in paragraph (c) of that subsection, the year of assessment in respect of which the claim was made.”
13.	The Inspector can use this power only if there is a discovery and the conditions in either subs (4) or (5) are satisfied.  Here the discovery is that the Appellant had had resources in addition to his declared income.  The discovery must have taken place by the time of the assessment (6 March 2006); what the Inspector knew at the time of the s 9A Notice (7 January 2005) is not relevant.  So far as the assessments for 1999-2000 and 2003-04, which are based on the figures for the other years, are concerned this is justified by the presumption of continuity.  As Walton J said in Jonas v Bamford at p.540:
“But so far as the discovery point is concerned 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.”
14.	So far as negligent conduct is concerned we agree with Mr Williams that the Appellant’s failing to notify chargeability to tax or to keep records of his income was negligent conduct, although it must be said that to his credit he originally instructed an accountant to regularise his tax affairs before the Revenue made any enquiries.
15.	In relation to his answers relating to the Spanish property and bank account the Appellant said in evidence that he thought the Inspector was asking questions about Spanish property or non-UK bank accounts as at the date of the interview, which he answered correctly that there were none.  We do not accept he thought this.  The context of the statement about Spanish property in the note was that “Mr Duffy explained that he spent 3 weeks a months [in Spain] for a period of about 6 months between 2001-02.  He lived with his brother who has a property there.”  The statement that “Mr Duffy said he had no investments or interest in property in Spain” is the next following sentence.  The Appellant cannot, in our view, have thought that the Inspector was interested in knowing whether he had a property in Spain in March 2005.  We consider that the statement that “Mr Duffy confirmed that he had held no other accounts including savings or offshore accounts and would be prepared to sign a statement to that effect”  was even more clearly looking at the past from the words “had held.”  If the Appellant had really thought that the question related to the present he would surely have amended the statement to refer to the present rather than the past.  We therefore consider that his answers also amounted to negligent conduct.
16.	Section 29(5) is alternative to subs (4).  In relation to the years before 2002-03 the returns were issued on 16 June 2003 and must have been received by 26 June 2003, in which case the filing date was 26 September 2003 and the Inspector ceased to be entitled to give notice to enquire into the return on 26 September 2004.  By January 2005 the Inspector was therefore out of time and accordingly subs (5) is satisified in respect of those returns.  It is not, however, satisfied for 2003-04, but we have already decided that subs (4) is satisfied in relation to that year, which is sufficient for the section to operate.
Issue (3)
17.	Mr Quinn contends that in the years 2001 and 2002 the Appellant had known cash resources of £43,000.  Unidentified lodgements into his bank account in this period were £29,508.  The Appellant took money from the bank, kept it at home, and reintroduced it to the bank in order to show that he had income going into the bank account to support a mortgage application that he was making.
18.	Mr Williams contends the Appellant’s explanation is improbable.  For example, he deposited into the bank £2,800 on 29 April 2002, £2,500 on 30 April 2002 and £2,000 on 3 May 2002.  If he had been intending to show that he had a regular income why did he make three different deposits in the course of five days?  He drew our attention to the following passage in Johnson v Scott  [1978] STC 48, 56-7:
“Indeed, it is quite impossible to see how the Crown, in cases of this kind, could do anything else but attempt to draw inferences. The true facts are known, presumably, if known at all, to one person only, the taxpayer himself. If once it is clear that he has not put before the tax authorities the full amount of his income, as on the quite clear inferences of fact to be made in the present case he has not, what can then be done? Of course all estimates are unsatisfactory; of course they will always be open to challenge in points of detail; and of course they may well be under-estimates rather than over-estimates as well. But what the Crown has to do in such a situation is, on the known facts, to make reasonable inferences.” 
He contended that the Inspector had been more than reasonable in allowing a deduction for 50% of some of the lodgements, the whole of the expenses claimed and there was an inadvertent omission of £4,751 in calculating the turnover figure which made the assessments less than she intended.
19.	The burden of proof is on the Appellant.  We have given careful consideration to his explanation of re-cycling the funds and are unpersuaded by it.  The more probable explanation for the unexplained lodgements into the Appellant’s bank accounts are that they represent taxable income, although not necessarily limited to the Appellant’s earnings as a musician.  We agree with Mr Williams that the Inspector has been more than generous, which we say without any criticism as we consider that she was right to try to obtain a negotiated settlement by these means.
20.	Our decision is therefore:
(1)	while the letter of 7 January 2005 to the Appellant’s former accountants contained questions outside the scope of the enquiry this does not affect either the Notice or the subsequent closure notice or discovery assessments;
(2)	the discovery assessments were validly made;
(3)	the Appellant has not discharged the burden of proof in relation to the quantum of the assessments or closure notice
and accordingly we confirm the Closure Notice and discovery assessments.

JOHN F. AVERY JONES

IAN HUDDLESTON

SPECIAL COMMISSIONERS
RELEASE DATE: 5  March  2007

SC 3128/06

Authorities referred to in skeletons and not referred to in the decision:
Murat v IRC 77 TC 122
Siwek v IRC [2005] STC (SCD) 163
Kennerley v HMRC (2007 Spc 578
Hurley v Taylor 71 TC 268