A special commissioner decided that unexplained monetary deposits in the taxpayer's bank account and the taxpayer's personal expenditure incurred on his employer's credit card constituted taxable income which the taxpayer had not declared and paid income tax on for the years under assessment.

Facts

A dispute arose about income tax purportedly due on benefits in kind received by the taxpayer whilst a director of P Ltd and on unexplained deposits to the taxpayer's private bank account. The taxpayer denied that he received benefits in kind from P Ltd. Further the unexplained deposits represented receipts from the sale of personal items rather than trading income.

Monetary deposits, totalling £410,000, were broken down and allocated to the particular tax year when they arose. The deposits were assessed under Sch. D, Case I as self-employed earnings. The taxpayer's purchases on the credit card of P Ltd had not been debited to a director's loan account or recorded on a P11D as a benefit in kind. The Revenue assessed the value of the taxpayer's purchases under Sch. E as employee benefits. The amount assessed for the tax year ended 5 April 1999 was £47,500. In addition, the Revenue invoked the principle of continuity and assessed the taxpayer for the same employee benefits under Sch. E for the previous three tax years. The amounts assessed were £37,500, £40,000 and £45,000.

The taxpayer had supplied the Revenue with no tangible information which would challenge the assessments. The taxpayer did not co-operate with the Revenue's enquiry into his tax affairs.

The Revenue contended that the evidence adduced by the taxpayer was insufficient to discharge the burden of proving on the balance of probabilities that the said amounts of income tax were not due and in consequence the assessments should be upheld. There were subsidiary matters regarding the Revenue's powers to issue the assessments which concerned the requirements for issuing extended time-limit assessments and the validity of the jeopardy assessment for 1997-98.

The taxpayer did not attend the hearing. He considered that his attendance was not required because one of his creditors had obtained judgment against him. He had written to his known creditors advising them to petition for his bankruptcy. The taxpayer was of the view that his affairs would be in the hands of the Official Receiver, and that he was not empowered to represent himself before the hearing. The Revenue had enquired about whether a petition for bankruptcy had been issued but to their knowledge no such petition could be found. In all the circumstances, it was decided that the taxpayer had failed to put forward a good and sufficient reason for his absence and the appeal was heard in his absence in accordance with reg. 16 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994.

Issue

Whether the taxpayer had shown on the balance of probabilities that the sums received were not taxable as income.

Decision

The special commissioner (Michael Tildesley) (dismissing the appeal) said that the taxpayer had supplied no information regarding the origins of the £410,000 and had accepted on a previous enquiry that unexplained monetary deposits in his bank account represented receipts from a trade of selling wines. The taxpayer adduced no evidence to undermine the Revenue's conclusion that the unexplained deposits were either cash extractions from P Ltd or undeclared income from another taxable source. Therefore, the Revenue were correct to assess the taxpayer for income tax on the unexplained deposits totalling £410,000.

As regards transactions recorded on a credit card statement of P Ltd for the year ended 31 December 1998, the Revenue concluded that transactions to the value of £47,500 constituted taxable benefits of the taxpayer but was unable to obtain copies of the company's card statements for previous years despite an order for production under TMA 1970, s. 20.

Accordingly the Revenue applied the principle of continuity and made estimated assessments of the benefits to the taxpayer for the three preceding tax years. In the absence of evidence to the contrary, the Revenue were entitled to assume that the taxpayer used the company's credit card for items of personal expenditure in previous years and thereby raised the estimated assessments of the tax due on that expenditure which they categorised as employee benefits. Moreover, the Revenue had exercised their powers reasonably, deciding to go back three years to tax year 1994-95 not the opening year, 1992-93, of the enquiry into the company's tax affairs. Further the estimated amounts assessed for the earlier years were less than that assessed for 1998-99 and calculated on a rising continuum.

Discovery assessments

The assessments against the taxpayer except for tax year 1997-98 were made under the discovery provisions of TMA 1970, s. 29, and issued on 10 January 2002. The Revenue considered that there was a loss of tax to the Crown, in that the taxpayer did not pay tax on the income derived from the unexplained monetary deposits and his personal expenditure on the company's credit card; and that the loss of tax was attributable to the taxpayer's negligent conduct in that he failed to make personal return of the profits on the unexplained deposits and declare the benefits of the credit card payments. The taxpayer had not made a substantive challenge to the making of the assessments in accordance with TMA 1970, s. 29(8).

Therefore, the conditions of s. 29(1)(a) and s. 29(4) were met when the Revenue issued the assessments. The normal time-limit of six years applied to the assessments except those for tax years 1992-93, 1993-94 and 1994-95 which were outside the six-year limit. In respect of the latter assessments the Revenue contended that the 20-year limit under TMA 1970, s. 36(1) applied, under which the Revenue had the evidential burden of establishing that there was fraudulent or negligent conduct by the taxpayer; and that there was a loss of tax attributable to the conduct.

The Revenue asserted that the taxpayer was negligent in failing to make a return of the benefits in kind and of the profits arising from the unexplained deposits, and in consequence of his failure the Crown suffered a loss of tax. Since the taxpayer had given no satisfactory explanation for his failure to make returns, the Revenue had discharged their burden under s. 36 and so s. 50(6) took over with the burden on the taxpayer to establish that the assessments were wrong.

Jeopardy assessments

The 1997-98 assessment was a jeopardy assessment under TMA 1970, s. 9C which provided that a Revenue officer during the course of an enquiry into a return might consider that the assessment was insufficient and that, unless it was immediately increased, there might be a loss of tax to the Crown.

In such circumstances the officer might amend the assessment and had to give notice to the taxpayer of the amendment. The increase in the amount of the tax was payable within 30 days of that notice. A right of appeal existed against a jeopardy assessment but was not to be heard or determined until the enquiry had been completed. In this case the Revenue made the jeopardy amendment on 9 January 2002 and closed the enquiry on 8 January 2008 when the closure notice was issued to the taxpayer.

Under s. 9C, a jeopardy assessment could only be made if an enquiry into the taxpayer's self-assessment return was in progress under s. 9(1)(A). There was no evidence that such an enquiry had been started but the Revenue indicated that their enquiries into the taxpayer's tax returns arose from a formal enquiry into the tax affairs of P Ltd which explained why they made discovery assessments against the taxpayer in respect of the other tax years. Since the Revenue offered no explanation as to why they resorted to a jeopardy assessment for 1997-98 rather than a discovery assessment as with the other tax years, the conditions for a jeopardy assessment were not met for the tax year 1997-98.

However, the fact that the conditions had not been met for a jeopardy assessment did not, as a matter of course, render the assessment for 1997-98 invalid. The taxpayer had accepted the validity of the jeopardy amendment when it specifically appealed against it.

The taxpayer had not been misled by the assessment being made under the jeopardy provisions rather than the discovery provisions and so, on the facts, the Revenue were entitled to make a discovery assessment under TMA 1970, s. 29 (Vickerman (HMIT) v Mason's Personal Representative [1984] BTC 119 applied).