A special commissioner decided that, in computing the amount of the profits of the taxpayer for one tax year under Sch. D, Case I, income had been understated and expenditure overstated on his tax return. However, in respect of the two previous years, the Revenue had not discharged the burden of proving that income which ought to have been assessed to income tax had not been assessed as a result of negligent conduct on the part of the taxpayer or a person acting on his behalf.

Facts

The taxpayer was a self-employed plasterer. His tax returns for the years ending on 5 April 2001 and 2002 were accompanied by monthly tax payment vouchers under the construction industry scheme. Tax payment vouchers under the construction industry scheme were given by contractors to subcontractors. Each voucher was in respect of a stated month and showed the amount of the payment gross. From that was deducted the amount paid for materials by the subcontractor leaving an amount liable to deduction of tax. None of the vouchers showed any amount deducted as paid for materials. In the returns an amount was claimed for materials as a percentage of turnover. His return for the year to April 2003 was accompanied by seven tax payment vouchers. None of the vouchers showed any deduction for materials. A percentage deduction was made for materials.

The Revenue enquired into the 2003 return under TMA 1970, s. 9A and, when no further documents were provided, concluded that the taxpayer had income other than that shown in the income and expenditure account derived from the tax vouchers. On the basis that the declared turnover was derived from seven months only, the return was amended by a closure notice increasing the tax due on the basis of what the taxpayer would have earned in 12 months, the difference between the amount declared and the amount earned being derived from private work. The reason for that assumption was because expenditure on materials had been claimed as a deduction and not under the tax vouchers. The Revenue also issued assessments in respect of the two previous years on the same basis, namely that the amount of income returned was the income from seven months only. In relation to the earlier years the Revenue argued that a loss of tax had been discovered attributable to negligent conduct on the part of the taxpayer or a person acting on his behalf within the meaning of TMA 1970, s. 29(4). The taxpayer appealed against the closure notice and notices of assessment.

Issues

Whether income had been understated or expenditure overstated in respect of the 2003 year; and whether, in respect of the earlier years income which ought to have been assessed had not been assessed as a result of negligent conduct on the part of the taxpayer or a person acting on his behalf.

Decision

The special commissioner (Dr AN Brice) (allowing the appeal in part) said that, as regards the first issue, the burden of proof was on the taxpayer to satisfy the special commissioners that the closure notice was incorrect. If there was any uncertainty as to where the truth lay, the appeal on that issue had to be dismissed. Although the taxpayer had claimed that certain plumbing work had been done for a contractor, and was covered by the tax vouchers, the fact that the purchase of materials was not recorded on any tax vouchers under the construction industry scheme led to the conclusion that the plumbing work was private work the income from which was not returned. It was reasonable to conclude that some private income was earned by the plumbing business. That conclusion indicated that the taxpayer had understated his income in his return. It was reasonable to assume that the amounts in the seven tax vouchers represented payment for seven months and that for the other five months the taxpayer earned at the same rate. It was also reasonable of the Revenue to conclude that, if income were increased to take account of private work, then the expenditure claimed was reasonable and should not be reduced. It was also relevant that the taxpayer's continued failure to provide full records meant that the Revenue had no other information on which to base their figures. On the evidence the taxpayer had failed to show that the closure notice was wrong.

The Revenue had not discharged the burden of proving that there was a loss of tax in the two earlier years. It was the lack of tax vouchers in the year ending in 2003 which led to the conclusion that income had been under-stated in that year but there was no lack of tax vouchers in 2001 and 2002. Thus, there could be no presumption that the understatement in 2003 also applied to 2001 and 2002.

Further, for the years ending in 2001 and 2002, there was no s. 8 notice and no notice under s. 9A nor 19A. The working schedules supplied at the time of the appeals did relate to the years 2001 and 2002 but the bank statements supplied related only to the year ending in 2003. The expenditure receipts relating to the plumbing activity almost all related only to the year ending in 2003. No attention had been drawn to any matters in the working schedules, nor to any matters mentioned at the interview, to support the view that there had been a loss of tax in the years ending in 2001 and 2002.

The assessments sought to make good the loss of tax only by reference to income which had been understated and not by reference to expenditure which had been overstated. The amounts of the expenditure claimed in the years ending in 2001 and 2002 had been estimated but there was an equal possibility that, following Hurley v Taylor [1998] BTC 479, the inadequate records could result in the taxpayer paying too much tax rather than too little. However, more importantly, the fact was that the assessments were made to make good understated income and understated income had not been proved.

(2006) Sp C 575.
Decision released 12 December 2006.