Overview Of Reason To Suspect Tax Not Assessed
In reality, getting down to brass tacks the requirements for an HMRC Tax Information Notice are actually quite simple: a tax enquiry has to have been opened and HMRC has reason to suspect tax not assessed.
This all is fleshed out in Schedule 36 to the Finance Act 2008 if you want to unpick the legislation that is written like a jigsaw puzzle.
This was highlighted recently in the case of Nicholas Gilmore & Barbara Gilmore v Revenue & Customs [2022] UKFTT 116 (TC) which was in respect of two taxpayers operating a company (G & S Transport (Merseyside) Ltd (“the Company”)). They were served with an HMRC Tax Information Notice.
This is a case that any taxpayer should think carefully about when subject to HMRC investigation notwithstanding it had some fact sensitive matters.
Summarised as follows:
HMRC’s position is that an analysis of the accounts, payroll records, timesheets and bank statements from a company owned by the appellants (G & S Transport (Merseyside) Ltd (the “company”)) suggested that employees had been paid wages, subsistence payments and expenses in larger amounts than could be justified by payments from the company. In their view the source of these payments was the appellants who must, therefore, have an independent source of income which they have not declared in the tax returns for the tax years ending 6 April 2015, 2016, 2017 and 2018. The appellants’ position is that HMRC have misconstrued the information, and that the company had adequate resources to pay the wages, subsistence payments and expenses either directly from its bank account, or indirectly by making payments to the appellants by way of director loans which the appellants then paid, in cash, to the employees.
If anyone (companies included) live beyond their means then absent a good explanation of a funding source, if neither taxable income nor assets can finance the expenditure, then in general terms (as each case will turn on its own facts) perhaps it might be time to hold up your hands instead of doubling down and potentially digging an even bigger hole.
Amongst other things, one of the problems for the taxpayers, in this case, was that payments from the company bank account did not match the sums going to pay employee wages. Furthermore, the discrepancy could not be reconciled with some of the Directors’ tax returns.
The position of the HMRC investigating officer was as follows:
He further stated that a lot of cash wages were paid out; the payroll did not match either the accounts figure for wages or the time/control sheets; the subsistence payments were far higher in the time/control sheets than as recorded in the accounts; the cash withdrawn as noted in the bank statements did not tie in with the amounts debited in the directors’ loan account; and the difference did not account for all the amounts paid out additionally as cash wages and subsistence. This suggested to him that there was a systemic issue for which no explanation has been given which gave him serious concerns that the issue would also arise in earlier periods and not just the accounting period under enquiry for the company.
It was therefore perhaps unsurprising that HMRC wanted to look a little deeper into matters.
HMRC Transparency
From a practical perspective, HMRC transparency was highlighted as follows:
HMRC refer to the case of Stephen Price [2011] UKFTT 624 (TC) (“Price”) and in particular to [10] of that decision. That paragraph has been cited with approval in other Tribunal cases, most notably by Judge Sinfield in the case of Andreas Michael [2015] UKFTT 577 (TC). At [29] of that decision, he states as follows:
29. We take the same view as the tribunal in Stephen Price v HMRC [2011] UKFTT 624 (TC), another case which was not cited to us by the parties. In Price, the appellant had submitted that the enquiry could be closed and an estimated assessment made. The tribunal said that while HMRC has the power to issue such assessments:
“HMRC is entitled to know the full facts related to a person’s tax position so that they can make an informed decision whether and what to assess. It is clearly inappropriate and a waste of everybody’s time if HMRC are forced to make assessments without knowledge of the full facts. The statutory scheme is that HMRC are entitled to full disclosure of the relevant facts: this is why they have a right to issue (and seek the issue of) information notices seeking documents and information reasonably required for the purpose of checking a tax return (see Schedule 36 of Finance Act 2008).”
11. Although this decision is not binding on us, we agree with it and gratefully adopt it.
Tribunal Accepted Reason To Suspect Tax Not Assessed
The Tribunal in a nutshell accepted the HMRC officer’s analysis in terms of the need for further information:
In our view these discrepancies do justify Officer Roberts reaching the conclusion that additional cash might have been paid by the appellants.
21. Officer Roberts came to the conclusion that this additional money might have come from an undisclosed source, and thus justified his reason to suspect, on the basis of the financial information set out in the appellants’ tax returns for the tax years which covered the company’s accounting period ending 30 September 2016. In his view, that financial information showed that the appellants would not have been able to pay the additional cash to the employees. We agree that this is a rational and reasonable conclusion for him to reach. In rough numbers, in those two tax years, the appellants declared income of £120,000. So roughly pro rating, in the 12-month period ending 30 September 2016, their income would have been £60,000. This would clearly be insufficient to make cash payments of, on Officer Roberts’ view, £62,195. In our view this gives a reasonable ground to suspect that the appellants may have under declared income. We also believe that it is evidence that the information sought by the notices is reasonably required to check the appellants’ respective tax positions.
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