Andy Keates reviews a case where a judge suggested the HMRC officer didn’t use her best judgment when making tax assessments, and was also scathing about HMRC’s handling of the entire appeals process.
Huge tax bill
Raju Popat (TC06349) received tax and NIC assessments totalling £885,696.29 in September 2016. He applied to postpone collection of this amount pending the determination of his appeals against the assessments. HMRC opposed his application for postponement of the tax, alleging that he had no reasonable grounds to do so. The First Tier Tribunal (FTT) ruled that Popat’s application to postpone should be upheld.
Popat owned a company (IH) from which he drew dividends, being the sole signatory on its bank account. He was the licensee (as named over the door in accordance with licensing laws) of a public house in Ilford, which IH operated, despite never registering with HMRC for either corporation tax, PAYE or VAT.
The HMRC officer, Ms Bray, concluded that Popat had significantly under-declared his personal income over many years. She approached him under Code of Practice 9 and offered the Contractual Disclosure Facility (CDF). This gives the taxpayer immunity from prosecution for tax fraud in exchange for a complete and accurate disclosure of all tax irregularities.
Bray decided there was a risk of loss of tax to the exchequer, and therefore issued protective assessments (ie estimated amounts), made “to the best of her judgment”.
For the years 2005/06 to 2012/13 HMRC assessed £84,008 each year as profits from self-employment. Bray said this represented profits extracted by Popat from the pub which the company, IH, was operating. Her figures were based on an elaborate business economics exercise extrapolating from the company’s known takings for part of the period.
For 2007/08 HMRC assessed £1,048,000 as profit from UK land and property. Bray claimed this represented significant rental income and property sales activities carried out in the period between 2000 and 2008. This apparently explained Popat’s ability to fund two known property purchases and the associated SDLT.
For the years 2007/08 to 2014/15 HMRC assessed £68,988 for each year as other income. Bray considered this to be necessary to explain how Popat could fund his mortgage costs for the properties mentioned above.
What was the dispute?
The FTT was asked to decide whether HMRC had the authority to enforce collection of the tax, before the right amount of tax due was determined.
A taxpayer can apply to postpone some or all of the tax charged by an assessment (TMA 1970, s 55). They must state how much tax they believe has been overcharged, and their grounds for that belief. Collection will be postponed to the extent that it appears those grounds are reasonable.
Who ran the pub?
Being a licensee for licensed premises does not mean that the business is that of the licensee. The license must, by law, be in the name of an individual, not a company. Popat declared that “he did not at any time operate the bar as a self-employed person. Just because the company’s profits were not returned to HMRC does not mean that they were not the company’s profits”.
Who funded the property?
The funding gap for the two properties came from additional mortgage funding and the re-mortgage of an existing property, which had been disclosed to HMRC. The mortgage interest was funded by property rental income, which had also been disclosed to HMRC. HMRC could point to no properties from which Popat might have derived income other than one which he had disclosed.
Popat also stated: “There are also alleged sources of income, gains and profit which have been fabricated by HMRC and which bear no resemblance to any reality whatsoever.”
Although this hearing was not about the appeals against the assessments but concerned the postponement of tax demands, the judge saw the two were clearly linked. The judge felt that the grounds advanced by Popat “would at any appeal against the assessments have a real and not fanciful basis”.
He went on to add that Popat might argue – with a good chance of success – that Bray had failed to make assessments to her best judgment: “this applies particularly to the assessment of over £1 million made for one year, when Bray agreed that the income she says was amassed must have been amassed over many years”. Also, the assessments on “other income” which disclosed no source for such income would be open to challenge “on a non-fanciful basis”.
Further, the judge criticised HMRC’s handling of the entire appeals process. Not only had HMRC rejected the postponement application without giving any real thought to the legal criteria for doing so, but a letter from Bray to Popat had misinformed him of his right to an internal review of his appeal against the assessments.
Popat admitted in his disclosure to HMRC that his deliberate conduct had caused some loss of tax. However, HMRC’s assessment of that tax loss appears wildly excessive, based on quite flimsy evidence and conjecture.
The judge, as well as allowing full postponement of all the tax and NIC, was scathing about HMRC’s administrative mishandling of this case, and even went so far as to offer some additional arguments Popat might use in his eventual appeal. A very clear shot across HMRC’s bows.