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Overview Of HMRC Tax COP9 Defence Blown Away

In the case of Best On Convenience Store v HMRC [2022] UKFTT 97 (TC), an HMRC Tax COP9 Investigation defence was blown away in a somewhat irregular way.

The Wind Tunnel

The case involved a convenience store that, according to the partners Tasleem Balesaria and Salim Balesaria, they suffered the inconvenience of their store being situated on a street resembling a “wind tunnel“.

The case arose because of a COP9 investigation by HMRC into the partners’ tax returns in respect of income tax and VAT. HMRC was concerned about undeclared income and taxable supplies.

HMRC charged penalties to the partners in relation to deliberately concealed behaviour that it considered dishonest.

Mr and Mrs Balesaria acquired the Best On Convenience shop in December 2004.  On 12 November 2012 HMRC opened a tax enquiry in respect of the partnership’s income tax return for the year ended 5 April 2011.

The tax officer attending to the investigation was concerned that both purchases and sales had been absent from accounting records and, as a result, opened an investigation under Code of Practice 9 with effect from 10 March 2014.

What Is COP9 HMRC Tax Investigation?

An HMRC Tax COP9 Investigation is one in which there are suspicions on the part of HMRC of fraud and tax irregularities, in which a suspected loss to the Crown may arise.

As a result, the taxpayer is invited to enter into what is referred to as a Contractual Disclosure Facility in exchange for full disclosure. HMRC will not pursue criminal prosecution in respect of the potential tax irregularities PROVIDED full and frank disclosure is forthcoming.

Contractual Disclosure Facility Offer Accepted

The taxpayers accepted the offer of a Contractual Disclosure Facility and made various declarations through their instructed agent in relation to additional income tax and national insurance payable in the amount of £21,451.70 for the tax years 2004/05 to 2012/13.

In the Contractual Disclosure Facility (“CDF”) that was provided, the statements admitted irregularities but denied fraudulent activity.

A meeting took place on 21 October 2014 in relation to the Outline Disclosure.  The taxpayers suggested that everything crucial had been included in the same.

Loss Of Records Blown Away

The notes of the HMRC tax inspector that followed a meeting held after acceptance of the CDF were interesting.

Mr and Mrs Balesaria said they had purchased stock from a cash and carry wholesalers, and when they returned to the shop and opened the boot to unload it, the purchase invoices regularly blew away.  This did seem a remarkable explanation, and yet when they were asked why they did not take steps to prevent this from happening, the response, it appears, was that they were always rushing.  It seems this was a reason as to why the purchase takings and profits had been disclosed on an estimated basis.

HMRC’s Further Enquiry

According to the HMRC tax inspector, it appeared that there were undeclared purchases of approximately £200,000 during 2010/11.

This position was disputed by the representative for the taxpayers on the basis of the size of the taxpayers’ business.

On 27 May 2016, the HMRC tax inspector wrote to the taxpayers’ agent seeking explanations for discrepancies identified in the financial years ended 31 March 2007 to 31 March 2013. However, the tax inspector received no response to his queries, and as a result, issued VAT assessments on 25 November 2016 and amendments to the income tax return of the taxpayers on 19 December 2016.

The tax inspector, upon review of bank statements and generally, concluded that the behaviour of the taxpayers was deliberate, and that suspension of tax penalties was not an option.

Taxpayer Burden Of Proof

It is not HMRC’s job to do the taxpayer’s job in a regime of self assessment as highlighted by the following from the Tribunal:

60.         In respect of the VAT assessments, the burden of proof lies on HMRC to show that these were determined in accordance with best judgment. What amounts to best judgement was set out by Woolf J in Van Boeckel v Customs and Excise Commissioners [1981] STC 290 (not cited to us) as follows:

(1)          HMRC should not be required to do the work of the taxpayer,

(2)          HMRC must perform their function honestly and above board,

(3)          HMRC should fairly consider all the material before them and on that material, come to a decision which is reasonable and not arbitrary, and

(4)          There must be some material before HMRC on which they can base their judgement.

61.         The burden of proof rests with HMRC to show that Officer Shaw made a “discovery” for the purposes of s30B TMA. This is not an onerous requirement A discovery occurs when HMRC officer reaches a reasonable conclusion or forms a reasonable opinion that there is an insufficiency of tax. A discovery having validly been made, the burden of proof shifts to the taxpayer to show that the amount assessed by HMRC is wrong. In the case of Johnson v Scott (1977) 52 TC 383 at 393 (not cited to us) in the High Court, Walton J observed:

The true facts are known, presumably, if known at all, to one person only – the Appellant himself. If once it is clear that he has not put before the tax authorities the full amount of his income, as on the quite clear inferences of fact to be made in the present case he has not, what can then be done? Of course all estimates are unsatisfactory; of course they will always be open to challenge in points of detail; and of course they may well be under-estimates rather than over-estimates as well. But what the Crown has to do in such a situation is, on the known facts, to make reasonable inferences. When, in para 7(b) of the Case Stated, the Commissioners state that (with certain exceptions) the Inspector’s figures were ‘fair”, that is, in my judgment, precisely and exactly what they ought to be – fair. The fact that the onus is on the taxpayer to displace the assessment is not intended to give the Crown carte blanche to make wild or extravagant claims. Where an inference, of whatever nature, falls to be made, one invariably speaks of a “fair” inference. Where, as is the case in this matter, figures have to be inferred, what has to be made is a “fair” inference as to what such figures may have been. The figures themselves must be fair. So far from representing an inference that the Commissioners did not appreciate the Inspector’s figures fully, this demonstrates that they did. I think the point can be put conversely in another way. At times during Mr. Hall’s address to me it almost appeared as if what he was requiring by way of his “lawful proof” was a duly audited certificate as to the Appellant’s undisclosed expenditure. Of course, this was not what he was seeking; but once it is clear that this is not, and in the nature of things cannot be, available, then it follows as night follows day that some form of estimate must be made.

The Position Of The Taxpayers

The Judgment of the tax tribunal revealed a suggestion by the taxpayers that the street outside the shop where their business operated was like a “wind tunnel” and when they unloaded stock from their car, any invoices in the boot would blow away.  It seems when asked why they did not stop this from happening, that they were busy with the shop.

The taxpayers also put forward a position on missing till rolls. They denied that audit rolls from the till were destroyed.  They said they did not act deliberately or dishonestly in the suppression of purchases or sales, but that errors arose because they did not have information available for every year.

The Findings Of The Tax Tribunal

In general terms, the burden of proof is on HMRC in relation to the VAT assessments and the burden of proof is also on HMRC in relation to a discovery it makes and seeks to use to amend a partnership tax return pursuant to Section 30B of the Taxes and Management Act 1970.

The Purchase Invoices

A key finding at the tax tribunal was the reasons for the irregularities and related failure to keep documents necessary to verify the tax returns.  However, the tax tribunal struggled and or was troubled, it would seem, with the evidence as to why the irregularities arose in the first place. Suggestions of invoices blowing down the street on virtually every occasion the taxpayers opened the boot of their car to unload stock purchased from cash and carry wholesalers was, to use the expression of the tax tribunal, deemed “not credible”.

The tax tribunal also struggled with the notion that this was an occurrence that happened repeatedly over many years. It made the finding that missing invoices were thrown away deliberately to conceal the true nature of the stock purchases.

The Till Roll Records

The tax tribunal did not believe Mr and Mrs Balesaria that the audit rolls from their till disappeared through carelessness. The tribunal suggested this might have happened in the case of one or two instances, but they did not believe the taxpayers ie. that every single audit roll went missing through carelessness and found that this action was deliberate.

In relation to the COP9 Investigations and Contractual Disclosure Facility, the tribunal did not accept the taxpayers’ evidence that the information provided by their agent under the cover of its letter dated 12 June 2014, was a starting position for negotiation with the HMRC tax inspector.  The tax tribunal said that it arose because the taxpayers had failed to make complete disclosure to the tax agent, and accordingly found that it was not a negotiation tactic.

It, therefore, found that the income tax and VAT returns were incorrect.

Result: HMRC Tax COP9 Defence Blown Away

As a result of the above, the tribunal largely upheld the VAT assessments of HMRC, making some adjustments where there was some disagreement with the calculations of the HMRC tax inspector. However in general the appeals of the taxpayers were dismissed and HMRC tax penalties upheld.

Can’t Pay HMRC Tax Debts?

If you can’t pay HMRC Tax Debts and you want to close down a company then we can help you with that process. We are fully licensed to enable you to consider placing a company into Creditors Voluntary Liquidation and if it is right for the circumstances. This may enable you to make a fresh start but in any event, the Liquidation can look to address the HMRC Tax Debts. Contact us for a quote and free initial confidential advice.

What Next?

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Disclaimer: HMRC Tax COP9 Defence Blown Away

This page HMRC Tax COP9 Defence Blown Away is not legal advice and should not be relied upon as such. This article HMRC Tax COP9 Defence Blown Away is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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