A special commissioner decided that it was not appropriate to order a closure notice in respect of an investigation into the taxpayers' affairs where the tax inspector was not yet in a position to make a judgment of the tax due and it was reasonable for the enquiries to continue to the point where a figure could be placed on any under-declaration.

Facts

The taxpayers were a taxi firm dealing with contract customers and members of the public. An enquiry started by notice of 17 November 2005, within the time-limit. On reviewing the business records the tax inspector found that, in spite of having been told that there were not estimated or balancing items in the accounts, for the period 9 October 2002 to 20 July 2003 £1,252.87 (£30 per week) had been credited to takings, suggesting that that figure had been omitted from the business records. She also found that for the period 21 July to 30 September 2003 £832.37 (£83 per week) had been debited to drawings, suggesting that cash expenditure of that amount had been omitted from the business records. In addition petrol expenditure had been overstated by £782 because it was taken from credit card statements that included some personal expenditure. There was also a technical dispute about capital allowances.

There were no prime records of takings such as job-sheets or cash receipts that would enable the Inspector to check the takings. She did a takings build-up starting with the deposits into the bank accounts plus cash expenditure and drawings, deducted non-business income, and adjusted the figure for opening and closing debtors and VAT. The inspector had suggested a meeting but the offer had been declined. Her letter of 13 September 2006 enclosed a schedule of 83 questions and a form for entering personal expenditure during the trading year broken down into a number of headings with columns indicating whether it had been paid by the business, and whether in cash, by cheque, standing order, or credit or debit card. The taxpayers answered the majority of the questions but declined to answer those relating to personal expenditure. In addition the inspector asked for details of the number of vehicle licenses and where the vehicles were stored when not in use.

The taxpayers applied for a direction to issue a closure notice in respect of the Revenue's enquiries into their 2003—04 partnership return, which included the trading accounts for the year ended 30 September 2003.

The Revenue argued that the records were unreliable as demonstrated by the cash adjustments to drawings and takings. The inspector's takings build-up derived from the records and excluding non-business income indicated that there might be an understatement of profit of £5,947.77. Therefore, the inspector should be allowed to continue the enquiries until she was in a position to estimate the tax due, as in Jade Palace Ltd v R & C Commrs (2006) Sp C 540. That might be expected to take another six months and would include applying for notices under TMA 1970, s. 20.

The taxpayers contended that the enquiry had been going on for 16 months during which the inspector had asked numerous questions. The enquiries about personal expenditure were unnecessary and contrary to the right to respect for private and family life, home and correspondence in art. 8 of the European Convention on Human Rights.

Issue

Whether there were reasonable grounds for not directing a closure notice.

Decision

The special commissioner (Dr John Avery Jones) (dismissing the application) said that by TMA 1970, s. 28A(6) the burden was on the Revenue to show that there were reasonable grounds for not issuing a closure notice. The Revenue should be allowed to make enquiries until they were able to form a judgment about the tax due.

It was understandable that the taxpayers should be concerned about the scope of the Revenue's enquiries, particularly the 83 questions, but the position was that the inspector was not yet in a position to make a judgment of the tax due if a closure was directed. It was reasonable for the enquiries to continue to the point that the inspector could put a figure on her view of any under-declaration. The only way that she could do that was to see whether the taxpayers' expenditure in the year in question would enable the drawings said to have been deposited in the bank account to be available for that purpose, and that would also show whether more had been spent than was apparently available from the business.

On the taxpayers' human rights argument, while an investigation into their private expenditure was an interference with their private life, it was in accordance with the law and was necessary in a democratic society for the economic well-being of the country that such investigation should be permitted for the purpose of establishing the true taxable profit. If the taxpayers had kept better records such an investigation would not have been necessary, but there was no other way of verifying the accounts.

Accordingly the Revenue should be allowed to continue their enquiries and there were reasonable grounds for not issuing a closure notice at the present time. This did not prevent the taxpayers from applying again for a closure notice if they felt that the enquiries had gone on too long.

(2007) Sp C 604.
Decision released 26 March 2007.