HMRC’s estimates of barrister’s profits were overstated

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HM Revenue and Customs (HMRC) opened an enquiry into the 2010/11 tax return of the appellant, a practising barrister. In correspondence with HMRC, the appellant’s accountants acknowledged that his accounts had been prepared on the cash basis with no adjustments because the majority of the appellant’s work was carried out on a contingent fee basis.

A closure notice was sent to the appellant on 26 January 2016, which increased the appellant’s taxable profits for 2010/11. A discovery assessment for 2012/13 was also sent to the appellant dated 25 January 2016, charging additional profits to tax. The appellant appealed.

The issue between the parties was initially the treatment of the appellant’s income in respect of the conditional fee agreements (CFAs), in particular the basis period in which the income should be recognised. Where the appellant carried out work pursuant to a CFA it was common ground that no income was to be accounted for until a fee became payable (i.e. when the case was successfully concluded). The appellant made no adjustment in his accounts for CFAs where the case had been successfully concluded before the end of the basis period but where payment of fees had not been made.

There was no dispute as to the relevant statutory provisions (ITTOIA 2005, s 25(1)). The issue was essentially one of timing. The appellant contended that HMRC were wrongly seeking to tax him in relation to ongoing CFA cases where no fee was payable at the end of the relevant basis period.

The First-tier Tribunal (FTT) considered that there were fundamental criticisms to be made of the basis on which HMRC sought to estimate CFA cases which had been won by the year-end, but which had not been paid. Consequently, the FTT was satisfied that the closure notice and discovery assessments were both likely to overstate the necessary adjustments.

HMRC sought to justify the discovery assessment on the basis of carelessness by the appellant (TMA 1970, s 29(4)). However, HMRC did not satisfy the FTT that they were entitled to make a discovery assessment. The appeal against the discovery assessment for 2012/13 was therefore allowed. The FTT also allowed the appellant’s appeal against the closure notice for 2010/11 in principle (as the FTT found that HMRC’s profit adjustment was overstated but there was insufficient evidence to say what, if any, adjustment ought to be made).  

Ahmed v Revenue and Customs [2018] UKFTT 0355 (TC)

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