Lack of records lands taxpayer with £200,000 tax billby
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.
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.
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.
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.
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.
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.
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.
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.
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.