The High Court upheld a decision of the general commissioners confirming income tax assessments on partnership income where there was no error of law by the commissioners and there existed a proper basis on the evidence for their findings and decision.

Facts

The taxpayer brothers were partners in a restaurant. The Revenue commenced an investigation into their business and discovered that the taxpayers had suppressed their income which resulted in a loss of tax to the Revenue for the years 1995-96 to 1999-2000. The Revenue assessed the total income for each taxpayer for those relevant years in the sum of £237,500, giving rise to a charge to income tax totalling £71,341.31, in accordance with their powers under TMA 1970, s. 29(1), as amended, to make an assessment in an amount, or further amount, in order to make good to the Crown a loss of tax.

The taxpayers appealed to the general commissioners who decided that the assessments were valid since the Revenue had exercised due care and diligence and made a bona fide discovery of a loss of tax. They concluded that there had been a suppression of income by the taxpayers and, based on revised calculations proposed by the Revenue, they found that the amount of the assessments was excessive. The excess was not sufficient to invalidate the assessments but the total partnership profits for each taxpayer over the five years in question would be reduced to £129,939. The taxpayers appealed by way of case stated.

The taxpayers contended that the general commissioners had asked whether the Revenue had a bona fide belief that there had been a loss of tax, but had failed to consider also whether there was a bona fide belief in the amount of tax lost and in the amounts of the assessments. If they had applied the correct test, they could not on the evidence have concluded that there was a bona fide belief in the amount of the assessments. Alternatively, the case should be remitted to the general commissioners for further consideration applying the correct test. Furthermore, the lower figures accepted by the commissioners could not be supported on the evidence.

Issue

Whether the assessments were valid on the facts as found by the general commissioners, and whether their decision on the quantum of the assessments was one which it was reasonable to make.

Decision

David Richards J (dismissing the appeal) said that the element of guesswork and the almost unavoidable inaccuracy in a properly made best of judgment assessment, did not serve to displace the validity of the assessments which were prima facie right and remained right until the taxpayer showed that they were wrong and also showed positively what corrections should be made in order to make the assessments right or more nearly right (Bi-Flex Caribbean Ltd v Board of Inland Revenue [1990] BTC 452; 63 TC 515 applied).

On the evidence, the general commissioners had considered not only whether there had been a bona fide discovery of loss of tax, but also whether there had been a bona fide belief in the amounts assessed.

As recorded in the case stated, the Revenue had submitted that the amounts assessed had not been plucked out of thin air, although it was inevitable that there would be a certain amount of guesswork. Further, they submitted that they had undertaken an exercise to establish undeclared profits and that a discovery of lost tax had been made and the assessments had been properly arrived at.

The general commissioners found the Revenue had exercised due care and diligence and held a bona fide belief that there had been a loss of tax and that, while the amounts included in the assessments were excessive in the light of the evidence presented, that did not invalidate the notices of assessment. In the light of the submissions and evidence before the commissioners, there was no basis for saying that they had not applied the correct tests.

This was precisely the type of case in which there was liable to be a significant element of estimate or guesswork in the amounts assessed. The taxpayers had over a period of many years denied the true facts and had failed to provide any evidence of their partnership income. The totality of the evidence had fully justified the general commissioners’ conclusion that there had been nothing about the amounts which had invalidated the assessments, and that there had been an honest belief on proper grounds in the amount of the assessments.

It was a matter for them to decide the weight to be given to the observational evidence and to assess the soundness of the figures extrapolated from that evidence. In all the circumstances, the commissioners had been entitled on the material before them to accept the lower figures put forward on the basis of the calculations provided as part an investigation into the taxpayer's VAT affairs. The taxpayers, while not accepting the revised figures, had not adduced evidence as to the correct figures. This was an appeal without merit, involving an assertion of lack of good faith against the Revenue in circumstances where they had been severely hampered by the untruthful asssertions of the taxpayers and their failure to provide any records of their income.

Chancery Division.
Judgment delivered 15 June 2007.