Tax evasion case: A fair cop or foul play?
In an intriguing case of a policeman turned private investigator, who was in turn investigated for tax evasion, HMRC came out on top.
HMRC was given intelligence, which turned out to be inaccurate and possibly even malicious, regarding a former police officer. However, it led to a discovery of under-declared tax.
The taxpayer challenged the assessment as being unlawfully made, and the first tier tribunal (FTT) was asked to unravel the situation.
Keith Hunter (TC07140) served for 20 years in the Metropolitan Police, including time spent as a Detective Sergeant in the Regional Crime Squad. On retirement in 1997, he became a consultant on anti-money laundering and similar matters via a private investigation company, Risc Management Ltd (RML), of which he was a director.
In 2012, he was arrested on suspicion of making corrupt payments to a serving police officer. No charges were pursued against him following an investigation. The police, however, did subsequently contact HMRC, suggesting that Hunter may have diverted and retained monies from RML which were supposedly paid to confidential sources or informants.
Steven Booth of HMRC’s Criminal Taxes Unit wrote to Hunter and invited him to a meeting, which took place on 29 April 2015.
Booth informed Hunter that:
- His enquiry was being opened under the discovery provisions and rather than issue assessments at the outset he had sought this meeting, which was being conducted on a civil basis.
- It was being held because HMRC had received information suggesting Hunter had submitted incorrect tax returns by failing to account for all of his worldwide taxable income.
- This information could be incorrect or capable of a satisfactory explanation, but it was his duty to fully investigate the matter.
- The meeting represented an opportunity for Hunter to secure the maximum benefit from making a full and complete disclosure of all irregularities in his tax affairs.
- Attendance was on a voluntary basis, and Hunter did not have to cooperate, was free to leave and could seek an adjournment at any stage.
- He was concerned cash meant for confidential informants may have been retained in its entirety or in part by RML employees and there were no records to suggest otherwise.
Booth requested Hunter’s bank and credit card statements for two sample periods (2008/09 and 2011/12). This led to 21 transactions being identified as requiring additional explanation, including one for £58,810.44 on 7 December 2011 identified as from “Upside Management $93,985.19”.
Hunter’s initial recollection was that this figure might have been a loan from a company in Lebanon.
Booth googled “Upside Management”, and found no hits from Lebanon. He did, however, find a property management company in Florida of that name. Hunter said he had “no knowledge of owning, purchasing, disposing of or being connected to any property in the USA”. No documents were produced to support the suggestion of a Lebanese loan.
In September 2017, HMRC decided the sum might well be undisclosed consultancy income and issued a discovery assessment for 2011/12, along with penalties, which were suspended subject to Hunter’s future full compliance.
Issues for FTT
The judge identified a number of issues, including:
Industry insightsView more
- Was the discovery assessment validly made?
- Given that it was issued outside the usual time limits, could HMRC show that loss of tax was brought about due to Hunter’s carelessness?
- Had Hunter demonstrated that the two deposits were from non-taxable sources? The onus of proof here lies with the taxpayer.
- Had HMRC acted unlawfully in conducting an informal (ie non-statutory) enquiry, and then using the fruits of that enquiry to make assessments?
Validity of the assessment
There was a discovery by Booth in 2017 when it became clear that there was no adequate explanation of the deposit to the bank account. Prior to that, he had not been “of the clear view or belief that a tax loss existed”, and indeed the initial suspicions he held in 2015 turned out to be fruitless.
It was entirely reasonable for Booth to draw the conclusion that the deposit of £58,810.44 was more likely to be a taxable receipt than a loan:
- Both the sterling amount and the original US dollar sum were “an abnormal amount to receive by way of a loan which one would might expect to be for a round number”.
- Booth had been unable to verify the existence of any institution in Lebanon named Upside Management.
- No copy of a loan agreement, nor any explanation why a loan was taken from Beirut, had been forthcoming.
- Hunter’s suggestion that the loan was interest-free and had no repayment date was frankly unconvincing: such a loan would be uncommercial in the extreme.
The assessment was not “stale”: while some seven months elapsed between Booth becoming aware of the potential tax loss and his issuing the assessment, those months were fully occupied in attempts to settle matters.
Once one takes the view that the deposit was taxable, Hunter’s failure to keep records in support of it, or to ensure it was included in his tax return, denotes carelessness.
Hunter, despite being given the opportunity to demonstrate convincingly that the money came from a non-taxable source (which would have meant he had no duty to preserve records), failed to do so.
Lawfulness of the enquiry
In 2015, HMRC could have opened an enquiry into Hunter’s tax returns under TMA 1970 s9A, or opened a fraud enquiry under Code of Practice 9, or issued information notices under Schedule 36 of Finance Act 2008. However, HMRC officer Booth was not required to do any of these things. Instead, he chose to handle matters informally and invited Hunter to make a voluntary disclosure.
Had Hunter declined to co-operate, the statutory powers would have been rolled out. As it was, Hunter provided some information, and Booth drew upon that to issue his tax assessment.
The FTT dismissed Hunter’s appeal.
This case is a welcome antithesis to the (all too frequent) occasions when HMRC seems to get too heavy-handed. In Hunter’s case, HMRC bent over backwards to give him an opportunity to escape taxation. Despite the initial sternness of Booth’s letter in 2015, the enquiry thereafter appears to have been conducted with kid gloves.
I am particularly delighted to see the proper use of suspending a penalty!