The owner of a chain of beauty salons was advised to wind-up his business to pay overstated tax assessments and received confusing advice about the appeals process.
Chiragkumar Kansara is the owner and director of Angel Beauty Parlour Ltd (ABP), which operates a number of beauty salons, some from shop premises and others from kiosks in shopping malls. He has been caught up in a tax nightmare which almost led to the liquidation of his entire business.
Not only was the tax demanded manifestly excessive, but the appeals process was almost denied to him due to unclear instructions provided by various branches of HMRC. The accuracy of the tax demands will be examined at a later hearing, but this first tier tribunal (TC07093) hearing primarily considered whether a late appeal could be accepted.
In 2016, HMRC undertook a PAYE compliance review of the beauty business which included mystery shopper visits by HMRC officers. The evidence collected in those visits was extrapolated to cover the whole business for four years using the following contradictory assumptions:
- All the salons were open for 7 hours a day, 365 days a year.
- All the staff worked full time.
- All the staff had other employments in which their personal allowances were used.
Point 1 was not a reasonable assumption and flew in the face of the information provided by ABP to HMRC.
Points 2 and 3 are mutually exclusive, and appear to be designed to demand the maximum amount of PAYE from the employer.
A full-time worker paid the national minimum wage will suffer very little PAYE if they have a full personal allowance available. Two part-time workers sharing the position will pay no income tax. HMRC was aware from the company’s records that many employees worked part time but chose to ignore this fact.
HMRC held detailed PAYE records for a number of the employees but chose a bizarre means of taking this into account. Rather than deduct their known gross salaries from the hypothetical undeclared gross salary total, HMRC merely deducted the known PAYE from the hypothetical liability. In effect this clawed back all the personal allowances HMRC itself had previously allowed these individuals!
HMRC’s methods were also questionable:
- The HMRC officers had all visited salons at lunchtime (presumably the busiest time), yet HMRC assumed that this level of activity was continuous throughout the day.
- Evidence of staff numbers derived from those visits was palpably unreliable: two officers visited the same salon at the exact same time but failed to agree on the number of staff they had seen!
As a result of the compliance review, HMRC decided that ABP was failing to deduct PAYE and NIC from payments made to its staff. HMRC issued Regulation 80 determinations for the tax years 2012/13 to 2016/17 totalling £528,056, together with penalties totalling £369,639.
To have funded a ghost employee operation of this scale ABP would have needed additional revenues of between £400,000 and £700,000 a year, and to have paid all the employees in cash. HMRC’s secret shoppers witnessed all takings being rung into tills or placed into the cash drawer: there was no evidence of any missing turnover.
What happened next?
In July 2017, HMRC carried out a statutory review of the assessments but no figures were changed.
A well-advised taxpayer would have appealed to the FTT within 30 days. However, Kansara did not appeal until 2 February 2018, as he followed this chain of events:
- He was first aware of the result of the review at the end of August 2017 when he returned from holiday.
- He telephoned HMRC, who informed him he had three options:
- Speak with HMRC Debt Management (phone number provided);
- Apply for Alternative Dispute Resolution (ADR); or
- Appeal to the FTT.
- Kansara, believing that this meant he had a choice of how to settle the matter, chose to call Debt Management. After a delayed response, he wrote setting out the details of ABP’s case, ending the letter “so please accept my appeal against this decision”.
- On 19 October 2017, HMRC emailed Kansara telling him that, if he wished to pursue the case any further, he should appeal to the FTT, “or alternatively you can apply for ADR”.
- Kansara, still under the impression that this was an either/or situation, applied for ADR, while continuing to correspond with Debt Management. An ADR Facilitator wrote back to him on 23 November 2017, pointing out that he could not currently avail himself of ADR since he did not “currently have an appeal that has been accepted by the tribunal”.
- Meanwhile, HMRC filed a winding-up petition at the High Court on 1 December. Kansara met with a firm of insolvency practitioners, who advised him to put the company into voluntary liquidation.
- Instead, in January 2018 Kansara spoke with solicitors Mills Chody LLP, who instructed tax Counsel on his behalf and advised Kansara to make a late appeal to the FTT.
Making a late appeal
The three-stage test for considering a late appeal was set out in Martland  UKUT 0178:
- Was there a serious or significant delay?
- What is the explanation for that delay?
- How can the tribunal deal justly with the application?
Of these, the first and second were relatively straightforward. Five months, in relation to a 30-day deadline, is clearly a significant delay.
HMRC’s somewhat vague and garbled information given to Kansara regarding his options, combined with the fact that English was not his native tongue, adequately explained his failure to appeal immediately to the tribunal.
At no stage prior to contacting Mills Chody in early 2018 did anyone set out clearly to him that – whatever else he might do – he must appeal to the FTT without further delay. Which is what he then did.
The FTT needed to consider fairness and balance for both parties. It must balance the consequences for HMRC of allowing an appeal to be heard late, against the consequences to the taxpayer of denying that application (termed “prejudice”).
Judge Redston ruled the prejudice issue in Kansara’s favour. Allowing the determinations and penalties to stand unchallenged could involve insolvency, personal debt and even “naming and shaming” as a deliberate defaulter. Against that, the downside for HMRC of allowing the appeal to be heard was minimal.
In addition, there was the strength of his case. Martland makes it clear that justice is best served by allowing a particularly strong case to be heard, and Kansara’s case was strong indeed.
The PAYE/NIC demands calculated by HMRC were, the judge declared, “unreasonable, even ludicrous”. She granted permission for the appeal to be heard.
This appears to be yet another case where HMRC’s “best judgment” in making tax assessments turns out to be speculation and wholesale exaggeration.
It also draws further attention to HMRC’s frequently lamentable ability to communicate clearly and effectively with taxpayers.