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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.

4th Oct 2019
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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.

HMRC’s inferences

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.

FTT’s task

The case law is clear in such cases. There is a two-stage process for the FTT to follow:

  1. 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.
  2. 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.

Profit estimate

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.

Conclusion

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!

Replies (26)

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By Justin Bryant
07th Oct 2019 11:32

But shamefully this HMRC tactic works perfectly when the poor over-assessed taxpayer does not appeal it in time (for one good reason or another) as has been noted here many times. See for example: https://www.accountingweb.co.uk/any-answers/harsh-refusal-of-late-permis...

https://www.accountingweb.co.uk/any-answers/interesting-case-on-how-hmrc...

https://www.accountingweb.co.uk/community/blogs/leshoward/out-of-time-ap...

https://www.accountingweb.co.uk/tax/hmrc-policy/hmrc-blasted-in-special-...

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By Small accountant
04th Oct 2019 22:25

In my experience, HMRC take this approach even where taxpayers have responded. I have seen them estimate astronomical income figures which would be completely impossible to attain, with no basis in common sense. They send out inspectors who know nothing about the taxpayer's industry and, in one memorable case, did not know the principle of double entry bookkeeping.

Thanks (6)
Replying to Small accountant:
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By leon0001
07th Oct 2019 13:48

Small accountant wrote:

In my experience, HMRC take this approach even where taxpayers have responded. I have seen them estimate astronomical income figures which would be completely impossible to attain, with no basis in common sense. They send out inspectors who know nothing about the taxpayer's industry and, in one memorable case, did not know the principle of double entry bookkeeping.

We had a case like this.
Apart from estimating tax and interest in respect of several years before the commencement of trading, they also assessed VAT on the estimated turnover. This was despite the fact that our client could not possibly trade without premises, plant, vehicles, employees, official licenses and contracts with local government customers.
They made several errors in their calculations regarding years he was trading, including getting the number of months in a year wrong ( twice), Trying to reconcile net reported sales with bankings without allowing for VAT and failing to ask for an explanation of the accounting records.
They also completely failed to understand the fundamental basis of our client's trade.
We went for a review by an independent HMRC officer.
His conclusion, "We haven't exactly covered ourselves with glory on this one".
All amounts assessed were cancelled, apart from a small adjustment to the first year's results, where we had insufficient records from the now deceased original accountant to fight it.
We complained and our client received sufficient compensation to cover our fees.
Not just vexatious but incompetently handled.
Neither I nor my colleagues have ever seen anything like this case, before or since.

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By JohnHilton
06th Oct 2019 16:40

This seems to be extortion by attempting to extract money that is not owed by making threats, and harassment by a "course of conduct" intended to cause distress or fear. Maybe the way to stop it is for someone to bring a prosecution under s3 of the Protection from Harassment Act which allows a citizen to seek damages and an injunction through the civil courts if, as the tribunal ruled, the assessments appear to have been issued “to frighten the taxpayer into responding to requests for information”.

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Replying to JohnHilton:
Psycho
By Wilson Philips
07th Oct 2019 14:51

Nonsense - it is simply a case of HMRC incompetence and laziness at its worst.

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Replying to Wilson Philips:
RLI
By lionofludesch
07th Oct 2019 17:41

I disagree, Wilson. It's not incompetence at all, Quite the opposite.

It's more a change of attitude from "collecting the right amount of tax" to "[***] the taxpayer for every penny HMRC can get."

It merely reflects plummeting Government standards in the twenty-first century.

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Replying to lionofludesch:
Psycho
By Wilson Philips
07th Oct 2019 21:29

I wouldn’t disagree with you. I just happen to consider that John’s reaction is way OTT.

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Replying to Wilson Philips:
RLI
By lionofludesch
07th Oct 2019 22:05

Wilson Philips wrote:

I wouldn’t disagree with you. I just happen to consider that John’s reaction is way OTT.

I wouldn't disagree with John.

HMRC shouldn't be allowed to bully folk. Nor should any Government department. Yet it happens a lot - if we are to believe the anecdotal evidence.

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Replying to Wilson Philips:
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By JohnHilton
08th Oct 2019 00:27

I had a friend attempt to commit suicide because of bullying by the DWP. He was bed bound, paralysed from the neck down apart from one arm with slight movement, and was told by a DWP assessor that he was "fit for work". He tried to commit suicide by taking an overdose, survived it, and died a couple of months later.
I've seen bullying by Government departments get worse and more extreme over many years to the point where some people are too scared to apply for help they are entitled to. It's not a party political issue, it's happened under different Governments. The fact is that civil servents think they are a law unto themselves.
How can that be right?

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Replying to JohnHilton:
By Ruddles
08th Oct 2019 11:28

JohnHilton wrote:

the type that targets any relatively new member, and I know exactly how to deal with them.


And I know exactly how to deal with someone that claims to be a relatively new member but who is anything but.
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Replying to Wilson Philips:
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By JohnHilton
07th Oct 2019 19:12

If it causes fear or distress without lawful excuse then it is an offence and issuing demands for amounts which HMRC know or ought to know are grossly excessive is not mere incompetence, it is, at the very least, reckless. There are numerous examples of people committing suicide when wrongfully chased for monies they don't owe, or, denied benefits they are entitled to. Never underestimate the damage such things can cause.

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By dmmarler
07th Oct 2019 11:52

On the basis that DWP provides State pension information direct to HMRC, why can't it provide information on those in receipt of specific allowances (which are to provide income to those unable to work) to ensure that (a) the claimant is not telling the DWP fibs, and (b) that HMRC does not waste its time (and our money) on cases such as these based on such flimsy evidence.

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By rbusfield
07th Oct 2019 12:45

We are often brought in after taxpayers or their accountants have delayed answering compliance check / tax enquiry questions and HMRC have raised very large assessments. Sometimes the taxpayer or advisers are too busy to deal with the questions, or they have an illness. Or the adviser cannot answer the questions because they never get sufficient records, or their client is very dominant and tells them what to put in the accounts. Its much better to get help early on to stop these issues escalating. Often the problems arise because the taxpayers haven't kept good records, or they don't keep a balance sheet listing creditors/debtors, and they don't reconcile the cash book. Rebecca Busfield (www.wattbusfield.co.uk)

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By Ian McTernan CTA
07th Oct 2019 13:33

50% net profit margin...just where in cloud cuckoo land do HMRC train their staff?

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By jamiea4f
07th Oct 2019 14:08

I don't know what the fuss is about, isn't this the same method that Amazon, Vodafone etc use when deciding how little tax they want to pay...?

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Replying to jamiea4f:
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By leon0001
07th Oct 2019 16:14

It isn't funny where the taxpayer under investigation stands to lose his home and his livelihood.

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By metaxa
07th Oct 2019 15:03

I know a case where the client was issued a £365000 tax bill and when his accountant challenged the revenue the inspector said he could make up any figure he wanted!!!

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Replying to metaxa:
RLI
By lionofludesch
07th Oct 2019 17:43

That's always been true.

But it wasn't taken to extremes in the days when HMRC was properly staffed.

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By ds
07th Oct 2019 16:51

So the Revenue issues an assessment to the "Customer" and he promptly files it in the recycling bin. I assume they then issue a court summons and this is promptly ignored too.
When does it get to the stage of either the cops kicking down the door to arrest the uncooperative "Customer" to place in front of a judge or the vexatious assessment gets lost in a pile of bureaucracy that the Revenue boys and girls have yet to get round to?
What happens if the "Customer" has gone to the next tax haven in the sky and has forgotten to tell HMRC ? Do they try to track down ghosts?

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accountant in london
By Accountant in London
07th Oct 2019 19:01

Sometimes the HMRC officer is on a training exercise, they have no clue how to approach the inquiry. And in trying to impress their manager they would request all sorts of info (applicable or not applicable). The manager only reviews their file every few weeks, by then the damage is done.

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By Ken of Chester le Street
08th Oct 2019 17:24

Sounds like the days of estimated assessments before the advent of self assessment.

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By Ken of Chester le Street
08th Oct 2019 17:24

Sounds like the days of estimated assessments before the advent of self assessment.

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By Paul D Utherone
08th Oct 2019 21:33

Many many years ago when I were nobbut a lad and working in HMRC I remember the annual manual assessment processing (way pre computers and bearing in mind I doubt I was earning more than £4k a year) went something along the following lines for non responders:
1) what did we assess last year? £5k.
2) OK did that elicit any sort of response?
3) No? Well they must have been happy with that; so
4) let's see how they feel about £7.5k

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By adam.arca
09th Oct 2019 12:51

I've got to say that I do have some (strictly limited) sympathy for the Revenue here.

We can all cite cases of wholly disproportionate bullying by the Revenue and gobsmacking incompetence and unbelievable gormlessness.

But, leaving that aside, how exactly are the Revenue expected to engage with uncommunicative taxpayers? At the end of the day, a significant proportion (I wouldn't necessarily go as far as saying 'most' but it may well in fact be most) of these will owe some tax and it's in all our interests that these taxpayers do pay what they owe.

For me too, I am reminded of the pre SA regime of estimated assessments and, as Paul says, the Revenue practice at the time (and, by the sounds of it, their practice still now) of increasing the amount of these assessments until the taxpayer blinks. I can't say that I necessarily see too much wrong with that practice.

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Replying to adam.arca:
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By ds
09th Oct 2019 18:00

But what if the customer just ignores the Revenue's demands every time?
There are many persons in the UK who think they are above the law and have no duty to pay tax to anyone. They work often in unsavory fields and earn money and don't see that anyone else should benefit from that effort. If they are good at hiding the money and are paid mostly in cash, who's to say how much they made ? Do the Rev just write these cases off as too hard ?

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Replying to ds:
RLI
By lionofludesch
09th Oct 2019 18:15

Too many what ifs here.

The real issue is the quantum of the assessment. If HMRC think £50,000 is about right, I don't have an issue with them estimating £60,000. I have a big issue with them estimating £600,000.

Let's not forget that, if that £60,000 is unpaid, HMRC can always raise a supplementary assessment later until the taxpayer (or nontaxpayer) is coaxed into compliance.

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