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Why was £335,329 missing from company’s turnover?

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HMRC requested a personal service company’s turnover details saying it was “reasonably required” to check the director’s personal tax position, and a tax tribunal agreed.

25th Aug 2023
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Edward Lam Shang Leen was a clinical consultant specialising in radiology. His personal tax return included income from an employment, a partnership and investment income.

Initial enquiry

HMRC opened an enquiry into Leen’s 2017/18 personal tax affairs in July 2019. As part of this enquiry, HMRC queried some amounts paid into Leen’s personal bank accounts which did not appear on his return. According to Leen, these amounts were treated as income of a company in which he was the sole director and majority shareholder — GRI Research Laboratories Ltd (GRI).

A breakdown of the fees received was supplied by Leen to HMRC.

Information request

HMRC concluded its initial review in February 2020 and noted that the fees received into Leen’s bank totalled £693,971, but the turnover as per GRI’s CT600 was £358,642. There was also a decrease in shareholder funds without any matching salary or dividends reported by Leen.

HMRC issued a request under FA 2008 Sch 36 Para 1 for additional information relating to shareholder fund and director loan account movements, as well as to why there was a £335,329 difference between the purported GIR income received by Leen and the reported turnover on GIR’s CT600.

Disagreement

Following covid-related delays and several reminder letters, Leen’s agent replied to HMRC in September 2021 to explain that they were happy to help HMRC but only where the information requested related to checks of Leen’s self assessment tax return. HMRC explained that a check of a personal return also included items not declared and stated that the items requested were ‘reasonably required’ in order to get the full picture.

The agent responded by confirming that Leen did not receive any income from GRI in the 2017/18 year and that HMRC had everything they reasonably required.

When HMRC continued to insist on a response, Leen appealed to the first tier tribunal (FTT), having first received a review by another HMRC officer.

Appeal

Leen’s argument was that the enquiry was into his personal affairs but the information HMRC was requesting related to GRI, making it beyond the scope of the enquiry.

The matter as the FTT saw it was to determine whether the information requested by HMRC was “reasonably required” to check Leen’s personal tax position. It first considered where the burden of proof in this matter was and determined it initially lay with HMRC to prove that the information it was requesting was reasonably required.

However, if HMRC passed that hurdle, the burden to prove the information was not ‘reasonably required’ then fell to Leen.

HMRC’s burden

The tax authority relied on having met condition B of Paragraph 21 — namely that it had reason to suspect an amount that should have been assessed to tax may not have been.

The FTT agreed that condition B was met. Leen had received income which he claimed was taxed via GRI, rather than on himself, but there was currently nothing to support this claim as the income hugely exceeded the company turnover.

The term “reasonably required” is not defined in the legislation, so the FTT considered prior cases and concluded that they should look for a ‘rational connection’ between the information requested and the underlying investigation. In order to check Leen’s claim that the income he had received had been taxed elsewhere, it was necessary to examine the company records in more detail. A rational connection therefore existed between the information and the enquiry.

Having concluded the information was reasonably required by HMRC, it was now for Leen to disprove that conclusion.

Leen’s burden

Leen was not able to disprove this, and the FTT determined that GRI appeared to be Leen’s personal service company and, as such, GRI’s information fell within Leen’s ‘power of possession’ and was relevant to his personal tax affairs. Leen’s position was that the company was taxed on the income he received; this could easily be confirmed by providing documents showing a breakdown of the income included in the company accounts and CT600. HMRC’s request was therefore found to be valid.

Conclusion

The appeal was dismissed, save to correct some mainly arithmetical errors HMRC had made during the enquiry.

It is interesting to note that under Paragraph 32(5) this decision is considered to be final and cannot be appealed.

During the hearing, the FTT noted that Leen had made significant payments to investment houses and speculated there may be further undeclared investment income. It also noted GRI’s turnover per the CT600 (£358,642) was significantly different to the turnover in its accounts (£66,759). Whether HMRC decides to pursue either of these oddities remains to be seen.

Replies (11)

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the sea otter
By memyself-eye
25th Aug 2023 17:33

Clinical consultant?
Working presumably in/for the NHS?
Thought he was above the law?
Seems not.

Good on HMRC.

Thanks (13)
Replying to memyself-eye:
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By NotAnAccountant2
28th Aug 2023 07:21

memyself-eye wrote:

Clinical consultant?
Working presumably in/for the NHS?

He might be working in/for the NHS but there's no way that income is coming from his NHS work.

https://www.bma.org.uk/pay-and-contracts/pay/consultants-pay-scales/pay-...

Thanks (2)
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By bobsto12
27th Aug 2023 15:09

Sounds like this is just the start of his problems.
Hmrc is doing its jo.
Most of us pay the tax we should without complaint.

Thanks (6)
Replying to bobsto12:
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By Hugo Fair
27th Aug 2023 22:30

What with Ricky's previous article last week (about an NHS Dentist), you can begin to see why anyone working for the NHS no longer gets an automatic free halo from everyone.
Which is unfair for the majority, but is a predictable side effect resulting from the increasingly greedy behaviour of those that hit the headlines.

Thanks (7)
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By Self-Employed and Happy
29th Aug 2023 09:59

We have a couple of NHS Consultants that earn more than their salary consulting, I think this is a huge inefficient area of HMRC and it just leads to people reducing hours on the NHS Payroll to then be contracted in by the NHS at vastly inflated rates to conduct the same work.

There should be rules on how much an NHS worker should be allowed to work as a Consultant, or they should have to complete a minimum amount of hours each week on the NHS Payroll before getting the consultant gig.

That aside both our examples have the type of Financial Advisors you want to shoot, the suggest everything under the sun types (pay the kids £12k salary to help pay for their school fees) knowing they have absolutely no recourse or worry about tidying it up when HMRC come knocking.

I think a lot of the time when you get an NHS Doctor coupled with these Financial Advisors it's a nightmare of "above the rules attitude"

Thanks (11)
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By [email protected]
29th Aug 2023 11:09

The most amazing thing is that anyone thought it a good idea to take this to the tribunal.
Turnover per the accounts completely different to the CT600 and massively less than the supposed company income banked privately.
A last desperate throw to avoid facing the inevitable?
And for these sums it won't be a cheap day out; deemed distributions? Then open up earlier years... ouch! No sympathy.

Thanks (3)
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By GDavidson
29th Aug 2023 12:55

And all that was just for 17/18? What about all the other years he was a consultant? No wonder this country has a fiscal deficit with cooks like him and his agent about.

Thanks (1)
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By Bobbo
29th Aug 2023 17:57

"During the hearing, the FTT noted that Leen had made significant payments to investment houses and speculated there may be further undeclared investment income. It also noted GRI’s turnover per the CT600 (£358,642) was significantly different to the turnover in its accounts (£66,759). Whether HMRC decides to pursue either of these oddities remains to be seen."

Hopefully HMRC opens an enquiry into every possible return, for every possible tax, filed by Leen or any company in which they have an involvement.

Thanks (2)
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By canderson1107
30th Aug 2023 08:26

Why is fraud not just fraud? or in this case just straight forward tax evasion.
Also. How can a consultant get a full time amount from both NHS and full time work from private consultancy. Wish I could work two full time jobs at the same time!!!!!!

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By AndrewV12
30th Aug 2023 10:30

Just idle curiosity are NHS consultants going on strike again soon.

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Replying to AndrewV12:
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By NotAnAccountant2
30th Aug 2023 11:42

AndrewV12 wrote:

Just idle curiosity are NHS consultants going on strike again soon.

No idea, but based on what this guy is earning, they'd probably do better just resigning en-masse and then contracting back to the NHS at market rates!

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