A special commissioner decided that, except for some specified items, the production of documents and the furnishing of the accounts and particulars specified in three notices were reasonably required by the Revenue for the purposes mentioned in TMA 1970, s. 19A(2) (as amended).

Facts

These were three appeals under TMA 1970, s. 19A(6) by two individuals, Z and U (who were brother and sister), and a partnership of which they were the partners and which traded from premises in Edinburgh ('the taxpayers'). The appeals were against three notices, served respectively on Z, U and the partnership under TMA 1970, s. 19A(2), requiring information concerning the business. They all related to the taxpayers' 2005 returns and the Revenue's enquiries into the completeness and correctness of those returns.

In January 2007, enquiries were opened into the taxpayers' returns and a variety of documents and information sought. Correspondence with the taxpayers' accountants ensued. They declined a meeting with the Revenue. In March 2007, they sent certain books and records to the Revenue. On receipt of the notices served on Z and U, the taxpayers appealed. They argued that the information requested had already been supplied; and that the balance of the information such as rental agreements, bank statements, etc. were not reasonably necessary in examining the taxpayers' returns. The partnership notice was appealed on the ground that the information not supplied was not reasonably required for the examination of the taxpayers' records.

The notices required the production of property income and expenditure for the years under enquiry including the expenditure vouchers and receipts for the deduction of sums claimed. If any of the expenditure was unvouched, the taxpayers were asked to say what evidence was available to support the expenditure claimed. The notices also required a copy of all the rental agreements with each tenant and bank statements to show the declared income and claimed expenditure.

Issue

Whether the parts of the notices still in dispute were reasonable; and whether the terms of the notices had been satisfied.

Decision

The special commissioner (J Gordon Reid QC) (allowing the appeal in part) said that the tribunal's task was to determine whether the Revenue were entitled to issue the notices in the terms in which they were framed. Even if the Revenue already had possession of a document called for in a notice, that would not invalidate the notice. It would simply mean the taxpayer need do nothing in response to it and could resist any application for a penalty for non compliance. He could not be required to produce the same document twice. What was important therefore was the precise wording of the notices and the statutory criteria which validated their issue.

The statutory criteria were broad but clear. First, the notice could only be directed at the taxpayer and not for example at a bank where he held an account.

Other statutory provisions were available to recover documents from third parties. Second, the taxpayer was obliged to produce documents in his possession and power. Third, such documents must reasonably be required for the purpose of determining whether, and if so to what extent, the taxpayer's return was incorrect or incomplete. The obligation to furnish was in contrast to the obligation to produce. It was implicit that the taxpayer might be required to prepare documents not previously in existence and provide information and explanation.

The part of the notice under the heading ‘Productions’ plainly required the furnishing of particulars as well as the production of vouching, i.e. existing documents. It was eminently reasonable for the purposes of an enquiry into the accuracy and completeness of a taxpayer's return to require the documents and information specified. Vouching or the lack of it was part of the process of checking accuracy and completeness. If the taxpayer considered he had already provided such a breakdown, he would not provide any further material and would resist any penalty proceedings. Whether such a stance would be justified remained to be seen and the appeal against that part of the notice failed.

However, it was difficult to understand how information as to who maintained the business records, where they were kept and for what period they were held would enable the Revenue to verify the accuracy and completeness of the return. What was important was the quality of the business records. A Revenue officer should very quickly be able to form a view on that from a brief examination of the business records.

For present purposes the identity of the record keeper, and where and for how long the records were kept did not assist in determining whether the returns were accurate or complete. Therefore the appeal would be upheld in that respect.

Moreover, the requirement to say what evidence was available to support the expenditure claimed seemed to be neither a requirement to produce documents nor a requirement to furnish accounts or particulars. It could be answered by saying that U had a good memory and recollected the details. However, that would not be furnishing particulars. In those circumstances, the Revenue could not validly require Z to say what evidence was available.

A copy of all the rental agreements with each tenant was part of the verification process. The rental agreement might for example contain provisions for payment for service charges which might be made in cash or for other payments which might be taxable. As such the requirement was reasonable for verification purposes. The appeal in relation to those matters therefore failed.

It was not unreasonable to require bank statements in the light of the quality of the solicitor/factor's statements. It was plain that the production of bank statements at least might form part of the verification process. It was reasonable to require documents to enable a cross-checking exercise to be performed so as to verify from several sources the accuracy and/or completeness of figures in the return. The purpose of requiring an analysis of the items of expenditure relevant to each of the let properties was to allocate the items of expenditure to a particular property. That was relevant to the genuineness of the expenditure and thus to the accuracy and completeness of the return. It therefore seemed to be reasonable to require such a breakdown. Further it was conceivable that some payments might be made in cash so those parts of the appeal also failed.

Where, as here, the return disclosed income from let properties, it was reasonable to require the production of information about them. It appeared to be some sort of leaseback arrangement and it was reasonable to check the position by requiring the provision of the relative particulars. The taxpayers argued that the properties in question had not changed hands for many years so nothing fell to be produced. While that might be so, it was not relevant to the validity of the notice.

That part of the notice was reasonably required and so that part of the appeal also failed.

(2008) Sp C 667.
Decision released 11 February 2008.