Share this content
Tribunal
istock_tribunal_ARMMY PICCA

Lack of records lands taxpayer with £200,000 tax bill

by

In the face of an extraordinary lack of evidence HMRC was forced to estimate the taxpayer’s income from letting property, self-employment and dividends over 16 years.

17th Aug 2021
Share this content

If HMRC believes there are gaps in a taxpayer’s records it can fill the void with estimates of income or gains. It is then down to the taxpayer to produce evidence to remove or replace these estimates. The case of Mohammed Shariff (TC08202) focussed on this issue.

Background

HMRC queried Shariff’s reported income in 2016. Following correspondence and meetings with HMRC it raised an assessment for £234,077.88. This covered the 16 tax years to 5 April 2017, but interestingly, no penalties were charged in respect of any of these years.

The assessments were based on HMRC’s judgements about several undeclared income streams. Having made these assessments, it was then up to Shariff to prove them to be incorrect.

Shariff appealed against the assessments, not on the grounds that they were not legally correct - he agreed he had failed to register for self-assessment and declare his income at the appropriate time - but purely to dispute the amounts assessed.

Points of agreement

During the hearing, Shariff agreed with HMRC’s assessment with regard to two rental properties and also an amount of dividend income (though not all of it). The FTT therefore only concerned itself with the remaining income streams.

The tribunal noted that in general, Shariff’s evidence was inconsistent and often contradictory. For example, he claimed a company he was involved with had never traded, but was also somehow able to make regular repayments of a loan to him.

Because of this poor standard of evidence, the FTT did not give much weight to Shariff’s arguments, further weakening his case.

Self -employment

Shariff was unable to provide profit and loss accounts for his self-employed business. HMRC therefore decided that the fairest way to assess his self-employed income was to base it on the expenses leaving the account used for his self-employed business. The FTT confirmed that due to the “extraordinary lack of evidence” provided by Shariff, this was a fair approach.

Dividends

HMRC included several undeclared dividend payments within its assessment. This was on the basis that Shariff was a 50% shareholder in a company and the other shareholder had declared dividends on their tax return. However, by providing a copy of the accounts, Shariff was able to demonstrate that only his fellow shareholder had received a dividend for one of the years in question. The FTT agreed that this dividend alone had not in fact been received by Shariff.

House deposit

HMRC identified that Shariff and his wife had paid a deposit of £75,000 for a house. As HMRC could not see where this money had come from, it concluded his share must have arisen from an undisclosed income source. Shariff was able to demonstrate that he funded his share of the deposit from a combination of savings from a taxed employment and also friends and family. Again, the FTT accepted this.

Rental income

Shariff received credits to his bank which he said were rent payments collected on behalf of other landlords. However, he could not identify any outgoing payments to show him passing the money on to the relevant parties.

Shariff had previously prepared reconciliation statements to keep track of these payments, however he had destroyed them in 2016/17 when his property management business ceased. The FTT commented that as the HMRC enquiry started in July 2016, Shariff appears to have destroyed documents he should have known would be needed for his appeal.

Clear Claims Ltd

Shariff claimed that payments made to him by Clear Claims Ltd, of which he was a director, were repayments of a loan. He could only give very vague descriptions of this loan and therefore in the absence of an adequate explanation these payments were held to be further income.

FTT decision

The FTT concluded that, with the exception of the single dividend and the money for the house deposit, all other amounts assessed by HMRC were correct. The tribunal noted that the amounts assessed as income were not out of character when compared to Shariff’s usual income levels prior to the assessed years, when he was working as a well-paid computer consultant.

Conclusion

All of the amounts assessed by HMRC were estimates, based on secondary evidence and assumptions. Furthermore, HMRC had made estimates for certain years, then assumed that the income also arose in prior years.

Despite these largely unsupported amounts, the burden of proof to correct the estimates lies with the taxpayer. Had Shariff retained even the most basic supporting evidence, as he was required to, he would no doubt have been able to reduce the value of estimated assessments.

Replies (16)

Please login or register to join the discussion.

avatar
By AndyC555
17th Aug 2021 13:21

"Had Shariff retained even the most basic supporting evidence, as he was required to, he would no doubt have been able to reduce the value of estimated assessments."

Why do you have 'no doubt' about that? Maybe the estimates were too low. Maybe there was stuff HMRC never found out about.

Thanks (4)
Replying to AndyC555:
avatar
By Paul Crowley
17th Aug 2021 16:38

I go with your opinion on this
Destroying records during an enquiry is not the decision of a person who wants the figures to be accurate

Thanks (4)
Replying to AndyC555:
By Duggimon
18th Aug 2021 10:02

It's a perfectly reasonable statement. Shariff said the assessments were too high, as stated in the article. There was no evidence this was not true, as stated in the article. It's perfectly reasonable therefore to say that had he presented any evidence at all he could have reduced the assessments.

Thanks (0)
RLI
By lionofludesch
17th Aug 2021 18:17

Unlucky.

Thanks (0)
avatar
By Justin Bryant
18th Aug 2021 09:18

No wonder vinyl is making a comeback.

Thanks (0)
avatar
By Marlinman
18th Aug 2021 10:12

He should have sold up and left the country as soon as he became aware they were onto his case. Now he faces bankruptcy and losing everything.

Thanks (0)
By Moonbeam
18th Aug 2021 10:34

Sounds 100% dodgy.

Thanks (0)
avatar
By NewACA
18th Aug 2021 10:41

This happens all the time and makes my blood boil!

So his income was similar to that when he was employed? Wrong!! IT consultants double their take home pay when they cease employment and work for themselves, which is why they leave employment. So, hmrc only found half his income.

Why no penalties? Where are the £3k pa x 16 loss of records fines? For every one of these guys that get caught there are another 100 getting away with it. They should simply be sent to jail. Of course you can bet hmrc only found half of what he was hiding, which he had the gall to appeal on, which would be recouped by the maximum 100% tax geared penalty for providing no help, being tardy and concealing (burning) all records.

Only just two days ago I walked into one of those phone refurbished/repair shops on a major town high street, where the rent they pay is close to the vat threshold and they tell me they are not yet vat registered when I ask for a vat receipt yet they've been there for years of course. From the volume of footfall they get, their turnover is likely to be about £500k I imagine. This is rife in this industry, as well as other industries such as barber shops, nail salons etc etc I've come across being in my practice near the high Street and these types coming in to see me.

Why is the government so soft on these people yet clamps down hard on those trying to be compliant?

Sorry, rant over!!

Thanks (8)
Replying to NewACA:
avatar
By tedbuck
19th Aug 2021 11:52

I sympathise with the rant. The simple truth is HMRC don't care two hoots about such cases as it involves too much time and skilled staff they don't have and, of course, they no longer have local tax offices where Inspectors could spot these people as they wander about their normal lives. They aren't too difficult to see but if you turn away you won't see. And what about the AML reports - how many of them get followed up? We get a freebie advertising magazine for local traders and quite a few of them look highly dodgy. Does HMRC look - no it's too busy trying to collect exhorbitant SDLT off people moving house. About time the Politicians got into the real world and took HMRC with them - still with their eyes firmly closed to reality it probably wouldn't make much difference.

Thanks (1)
Replying to tedbuck:
avatar
By NewACA
23rd Sep 2021 12:01

I think the simple answer to high street undeclared cash in the pocket fraud, is to make cash digital. You go to a"hole in the wall" or bank, and put cash on a card. Paper and coil money then disappear and their is a digital trail of money in and out.

Legal traders will prefer this, as then they don't have to worry about having to get change and cashing money at the bank, which is more expensive than the 1% card fees for machines.

If businesses complain about the 1% card costs, they don't know how to run a business. If everyone has to increase their prices by 1% and they don't, their is something wrong with them.

Suddenly the £100bn annual "under the table income" will appear as fraudulaent traders would worry about their digital trail of how cash was spent and received.

Thanks (0)
Replying to NewACA:
avatar
By sanjay100
19th Aug 2021 20:11

Totally agree. They should thrown the crook in jail. I can guarantee 90% in the construction industry avoid one form of tax or the other or overclaim on CIS refunds.

Tax evaders exist as they know HMRC are lax and their mates are doing it. I had one client who I thought was decent but then he saw his construction friends boasting what they were doing to evade tax so he started to not to pay tax. When I pointed it out that tax was due he decided to disengage my services and did the filings himself.

Thanks (2)
avatar
By dmmarler
18th Aug 2021 11:00

I doubt HMRC has found the half of it ... I am sure the tax will be paid, after a respectable tussle over lack of funds, and the individual will manage to keep his head above water with the help of friends and family. I have no sympathy for someone who destroys/does not keep records.

Thanks (2)
avatar
By Ian McTernan CTA
18th Aug 2021 12:16

HMRC probably didn't find even half of it in this case.

They should wait and see where funds come from to pay the assessment, then investigate all those sources too.

I'm surprised HMRC didn't use their powers to obtain full bank records and make it a criminal case.

This sort of criminal dishonesty needs sentencing plus asset seizure.

Thanks (4)
avatar
By sanjay100
19th Aug 2021 20:14

I thought HMRC has powers to access his bank account and at least work out his income more accurately ?

Thanks (0)
Replying to sanjay100:
avatar
By Paul Crowley
20th Aug 2021 14:18

They do

Thanks (0)
avatar
By Software Seeker
25th Aug 2021 11:48

Why the heck no penalties?

Thanks (0)