Even though a person may have income that they cannot immediately identify, it does not automatically mean that income is taxable and that they are tax evaders. They could, for example have received a gift, loan or legacy etc. This was exemplified in the recent First Tier Tax Tribunal decision in Mohammed Ashraf v HMRC.
Mr Shaw, an investigator in HMRC’s Civil Fraud team, received a report from a VAT Compliance Officer regarding Zonehead Ltd, a company controlled by Mohammed Ashraf. The report referred to claims made by Zonehead for VAT on imports which were not evidenced.
In early 2013, Shaw commenced his investigation under HMRC’s Code of Practice 9 and invited Mr Ashraf to make a full disclosure under the Contractual Disclosure Facility. Ashraf declined but agreed to co-operate.
HMRC’s investigation focused on Ashraf’s personal affairs and included an examination of his bank accounts, as disclosed, and a Spanish property purchased which Ashraf had disclosed at an opening meeting with Shaw. Schedules of Shaw’s findings were given to Ashraf, with the taxpayer being invited to explain certain large credits.
In March 2015, Shaw produced a schedule of his calculations of Ashraf’s personal income and expenditure over a period beginning in 2005. This showed a shortfall of approximately £258K in Ashraf’s declared income, without taking into account personal expenditure such as food and clothing, but was later increased to nearly £277K.
Discovery assessments were then raised in October 2015 by HMRC, based on the deficit for each year from 2004/05 – 2013/14, which were duly appealed.
Despite further correspondence and meetings between Ashraf and his accountant and HMRC, Shaw would not be moved from his view and so Ashraf asked for an internal review. With the exception of an acceptance of an explanation of £50K of the deficit, the reviewing officer upheld her colleague’s decision.
The UK has a schedular tax system, ie it identifies separate types of income and applies different computational rules and rates of tax to each. So before a profit can be assessed to tax its source must be properly identified and the rules for taxing it strictly adhered to.
For the years of appeal Mr Ashraf had declared income from employment, land and property, and dividends.
HMRC did not believe the alleged non-declared income was either foreign rental income, property dealing profits, trading in the type of goods Zonehead Ltd operated in or undeclared income of Zonehead diverted to Ashraf to provide him with additional remuneration. In fact, by HMRC’s own admission, they could not identify what the alleged omitted income source was, so described it as “other income” and, as such, was taxable by virtue of s.687 Income Tax (Trading and Other Income) Act (ITTOIA) 2005 – income tax charged on income from any source not charged by any other parts of the Taxes Acts, ie ‘Miscellaneous Income’.
The burden of proof was on HMRC to demonstrate there had been a loss of tax to justify their raising discovery assessments. HMRC had not identified any sources of income but relied on Shaw’s income and expenditure calculations which took known outgoings and known incomings and assumed the difference was taxable income. The tribunal therefore ruled the assessments invalid and ordered their cancellation, together with associated penalties.
It is staggering that, even though HMRC could not put a label on the income so as to tax it properly, the department were still prepared to waste taxpayer’s money and argue a lost cause at tribunal. Either this was another demonstration of HMRC’s high-handedness or there was a serious breakdown in their checks and balances.
Hopefully this case will serve as a reminder to HMRC that they cannot do whatever they please and run rough shod over the taxpayer, and also to ensure that their internal processes are honed to avoid any further public embarrassments.