In a recent First Tier Tax Tribunal hearing, Raju Popat v HMRC, the judge severely criticised HMRC’s raising of discovery assessments and their management of the appeals process.
Ms Bray of HMRC’s Fraud Investigation team received an ‘Evasion Referral Form’ from a Local Compliance Office in September 2015. The reason for this referral was that the department had discovered that a previously unknown company, Ilford Hill Ltd (IHL) had been trading but had not registered for corporation tax, VAT or PAYE.
Whilst Mr Popat was the sole signatory on the bank account of IHL, he only became a director of the company in December 2011 rather than in 2009 when the company was formed.
Ms Bray and her team researched the affairs of Mr and Mrs Popat over a 20 year period, which included self-employed businesses and all companies of which they were shareholders or directors. Once the research had been concluded, Ms Bray recommended that under Code of Practice 9 the Popat’s would be offered an opportunity to enter the Contractual Disclosure Facility (CDF). CDF gives a person the opportunity to make a complete and accurate disclosure of all irregularities in their tax affairs in return for immunity from prosecution.
At the same time CDF was offered, Ms Bray decided it was necessary to raise discovery assessments for tax years where a return had not been made and where she had evidence of under-declarations on returns that had been filed. The assessments were made to the best of her judgment as follows:
Total profits of just over £84K were charged representing profits made from Mr Popat personally running the bar in Ilford from 2005 onwards. This was based on evidence that Mr Popat was:
Despite IHL being in existence, Bray based her assessments post 2009 on the fact that Mr Popat had no legal rights to the income of the company and was only made a director at the latter stages of its existence – the company was wound up in 2014.
An assessment on income of £1,048,000 was raised borne out of HMRC’s concern surrounding the ability of Mr Popat to fund two property purchases, as there was a gap of £899K between the costs of the properties and the mortgage funds, and there was also Stamp Duty Land Tax of £149K to be accounted for.
Bray said that she knew that Mr Popat had been involved in businesses during the period 2000 – 2008 and that she had evidence of “properties/business premises (pubs)/companies acquired and or operated during that time.” In many cases no business activity had been reported to HMRC and consequently no profits from sales, rents or trading had been disclosed to the Revenue.
Assessments on income of just short of £69K for each year were issued, representing amounts that would have been necessary to fund monthly mortgage payments.
All the assessments were raised in September 2016 which were appealed against together with an application for postponement of tax and Class 4 NIC charged. At the same time it was confirmed that a full disclosure of fraud was to follow.
In November 2016 Bray received the Outline Disclosure, in which Mr Popat admitted that he had a share of the rental income from residential properties in Ilford and Chigwell. However, associated mortgage costs and other expenses meant that there was unlikely to be any income tax payable. No other admissions of tax irregularities were made. Following this, Bray rejected the postponement application which sparked the appeal to the tax tribunal.
The issue the tribunal had to rule upon was whether HMRC had the right to collect tax before determining what the right amount of tax was.
As well as a right of appeal against an assessment, a taxpayer can ask for some or all of the tax charged to be postponed but must give reasonable grounds to support why they consider they have been overcharged to tax.
Mr Popat said the bar in Ilford was operated successfully by two companies, the later being IHL. Although he was the sole account signatory that was simply because the company was his and he extracted dividends from it.
With regard to the earlier period, the premises had been acquired from Wetherspoon’s and needed a lot of conversion time and expense.
Being a licensee for licensed premises does not mean that the business is that of the licensee. The law requires the licence to be in the name of an individual not a company.
At no time did Popat operate the bar as a self-employed individual. Just because the company did not declare any profits to HMRC did not mean they were not the company’s profits.
The gap in the funding of the properties came from additional mortgage funding and extracting equity by re-mortgaging an existing property, which was detailed in the Outline Disclosure. Also contained in that disclosure was details of property rental income that funded the mortgage interest.
Popat’s agent also stated that “there are also alleged sources of income, gains and profit which have been fabricated by HMRC and which bear no resemblance to any reality whatsoever.”
Popat admitted in his Outline Disclosure that his “deliberate conduct brought about loss of tax and/or duty” during the period of time when assessments were raised. As such, HMRC maintained that the taxpayer’s grounds were not reasonably arguable.
The tribunal considered that there were real, strong arguments that Popat could use to demonstrate that the assessments were not made to Bray’s best judgment. This applied particularly to the assessment of over £1M, when Bray had agreed that the income must have been amassed over many years.
The judge also believed there were arguments that the assessments on ‘other income’ were invalid as not disclosing a source and that the conditions for raising discovery assessments had not been met. There was nothing to indicate to the tribunal that HMRC had given any thought to whether the conditions were fulfilled nor did the department communicate this to Mr Popat.
Not only did HMRC refuse Popat’s postponement application with legal abandon, they also failed to offer him a review when the appeal was received, as was his right.
HMRC’s administrative mismanagement of the case was blasted by the judge who, not surprisingly, allowed the application for full postponement of all tax and NIC of around £886K.
On the face of it HMRC made a shambles of assessing the tax loss, basing it on supposition and incomplete information. This case only reinforces the importance of professional representation during any HMRC enquiry, to ensure that taxpayer rights are observed and upheld and to keep HMRC in line every step of the way, as they are not averse to taking liberties as we have seen!