FTT: HMRC issued massive tax bill to ‘frighten taxpayer into responding’
A taxpayer failed to respond to questions about used car sales, so HMRC plucked a figure of taxable profit out of the air to use as the base for tax and penalty assessments totalling £342,943.
HMRC asserted that Cussens (TC07337) had been trading between 2004/05 and 2015/16, buying and reselling used cars under the name “Waltham Cars”. Based upon this belief, HMRC raised assessments and penalties totalling £342,943.11.
At the first tier tribunal (FTT), Cussens asserted that he had not traded. He said he had no income which would take him above the personal allowance, and that he was in receipt of enhanced employment and support allowance (a DWP benefit paid to people unable to work owing to physical or mental impairments).
The problems started because Cussens did not answer questions from HMRC at the commencement of its investigation, or at any other time prior to the hearing. HMRC was therefore compelled to draw inferences from the limited information it possessed.
The basis of HMRC’s investigations appears to have been information from Worldpay (a payment processing company), which referred to Cussens as the “principal” of Waltham Cars. We may assume that the entry included a figure for payments received on behalf of Waltham Cars.
Taking the gross receipts for 2015/16, HMRC deducted 50% for expenses to arrive at a profit for that year.
Next, profits were computed for the previous 11 years by applying the retail prices index (RPI) to the 2015/16 figure.
When the appeal came to internal statutory review, the reviewing officer stated that the assessments had been made using “best judgment” based upon the limited information available to the assessing officer.
The case law is clear in such cases. There is a two-stage process for the FTT to follow:
- Consider whether the assessment was made according to the best judgment of the assessing officer. If not, the assessment fails and stage 2 does not arise.
- If (and only if) the assessment survives stage 1, consider whether the amount of the assessment should be reduced by reference to further evidence available to the tribunal.
In order to determine whether best judgment had been exercised, the FTT has a number of principles to bear in mind:
- HMRC must have “some material upon which a best judgment assessment can properly be based”’
- HMRC is not obliged to undertake all the work which the taxpayer would ordinarily undertake to arrive at the exact amount of tax due; and
- HMRC is entitled to make a value judgment based on the material available.
The FTT must assume as its starting point that HMRC has made an honest and genuine attempt to arrive at a fair assessment.
The FTT is equally warned not to invalidate an assessment simply because it disagrees with the conclusions drawn by HMRC. It should only overturn the assessment if HMRC’s conclusions were wholly unreasonable.
What evidence was presented?
HMRC put forward no witnesses, so the FTT had no way of knowing what factors were taken into account, or not taken into account, by either the assessing officer or the reviewing officer.
Cussons was accompanied at the tribunal by his 81-year-old father, who told the tribunal:
- All vehicle trading that had taken place was actually through Waltham Builders Ltd, the father’s company;
- Vehicles are purchased at auction and then sold at “trade” prices: on average the profit per vehicle is around £200.
The FTT observed that the £200 figure for profit per car “chimed with what we would reasonably have expected to be the position”. It also felt that an average of 50% profit margin was inconceivable in the circumstances.
The FTT was not satisfied that HMRC had given much serious thought, consideration or analysis before applying the 50% profit inference. This seemed to be a figure “simply plucked from the air”.
Judge Jones commented: “it seems in no way conceivable that an individual classified by the Department of Work and Pensions at the start of 2014/15 as unfit to work on account of their physical or mental impairment could earn £81,594 from their own efforts.”
Not best judgment
The FTT’s view was that the unrealistically large tax assessments did not represent “best judgment” of the tax lost. Instead, those assessments appear to have been issued “to frighten the taxpayer into responding to requests for information”.
The FTT threw out the assessments and penalties, making it clear that it was not the duty of the tribunal to attempt to re-work the assessments into something more appropriate.
HMRC was told it could start again for any in-date years based upon the additional information now available, and Cussens was urged not to be “ostrich-like” in future.
This is not an uncommon situation. Taxpayers, especially those with medical issues, are frequently inclined to hide away from answering HMRC’s questions. This places HMRC in a difficult position. There may be valid grounds for believing tax has been underpaid, but the taxpayer is not helping to determine exactly how much tax is due.
What HMRC cannot do, is to pile on a massive tax assessment in the hope of shaking the tree. The assumptions used in preparing an assessment must be reasonable and justifiable.
Perhaps HMRC was wise not to put forward any evidence of the thought processes by which this “best judgment” was reached, as any such evidence may have been even more damning!