SPC00604

CLOSURE NOTICE – investigation lasting 12 months – Inspector wanting to investigate the taxpayer’s private expenditure – whether reasonable grounds for not directing a closure notice – yes 

THE SPECIAL COMMISSIONERS

	MR G R GOULD AND MRS H A GOULD 
	T/A GARRY’S PRIVATE HIRE	Applicants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 

Sitting in public in London on 20 April 2007

Kevin Wilson, Sanderson Wilson and Company Limited, for the Applicants

R Etty, HM Inspector of Taxes, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Mr and Mrs Gould trading as Garry’s Private Hire apply for a direction to issue a closure notice in respect of the Revenue’s enquiries into their 2003-04 partnership return, which includes the trading accounts for the year ended 30 September 2003.  The Applicants were represented by Mr Kevin Wilson, and the Revenue by Mr R Etty.
2.	I heard evidence from the Inspector, Mrs N Salter, and find the following facts:
(1)	The enquiry started by notice of 17 November 2005, which is within the time limit.  The Applicants applied to the Special Commissioners for a direction to issue a closure notice on 9 November 2006.
(2)	The Applicants are a taxi firm dealing with contract customers and members of the public.
(3)	On reviewing the business records the Inspector found that, in spite of having been told that there were not estimated or balancing items in the accounts, for the period 9 October 2002 to 20 July 2003 £1,252.87 (£30 per week) had been credited to takings, suggesting that this figure had been omitted from the business records.  She also found that for the period 21 July to 30 September 2003 £832.37 (£83 per week) had been debited to drawings, suggesting that cash expenditure of this amount had been omitted from the business records.  In addition petrol expenditure as been overstated by £782 because it was taken from credit card statements that included some personal expenditure.  There is also a technical dispute about capital allowances.
(4)	There were no prime records of takings such as job-sheets or cash receipts that would enable the Inspector to check the takings.  She did a takings build-up starting with the deposits into the bank accounts plus cash expenditure and drawings, deducted non-business income, and adjusted the figure for opening and closing debtors and VAT.  This gave a total of £122,382.77 compared to the figure in the accounts of £116,435.00, suggesting an under-declaration of £5,947.77, which the Inspector regards as the minimum figure for the addition to profits.  Mr Wilson contends that there is some double counting in her figures because some cash drawings in amounts of £110, £120 and a small number £100 have been paid into the personal bank account.
(5)	The Inspector has suggested a meeting but the offer has been declined.  Her letter 13 September 2006 enclosed a schedule of 83 questions and a form for entering personal expenditure during the trading year broken down into a number of headings with columns indicating whether it has been paid by the business, and whether in cash, cheque, standing order, or credit or debit card.  The Applicants answered the majority of the questions but declined to answer those relating to personal expenditure.  In addition the Inspector has asked for details of the number of vehicle licenses and where the vehicles are stored when not in use.
3.	Section 28A of the Taxes Management Act 1970 provides:
“(1) An enquiry under section 9A(1) of this Act is completed when an officer of the Board by notice (a “closure notice”) informs the taxpayer that he has completed his enquiries and states his conclusions.
In this section “the taxpayer” means the person to whom notice of enquiry was given.
(2) A closure notice must either—
(a) state that in the officer's opinion no amendment of the return is required, or
(b) make the amendments of the return required to give effect to his conclusions.
(3) A closure notice takes effect when it is issued.
(4) The taxpayer may apply to the Commissioners for a direction requiring an officer of the Board to issue a closure notice within a specified period.
(5) Any such application shall be heard and determined in the same way as an appeal.
(6) The Commissioners hearing the application shall give the direction applied for unless they are satisfied that there are reasonable grounds for not issuing a closure notice within a specified period.”
4.	Mr Etty, for the Inspector, contends:
(1)	The records are unreliable as demonstrated by the cash adjustments to drawings and takings.  The Inspector’s takings build-up derived from the records and excluding non-business income indicates that there may be an understatement of profit of £5,947.77.
(2)	The Inspector should be allowed to continue the enquiries until she is in a position to estimate the tax due, as in Jade Palace Ltd v HMRC [2006] STC (SCD) 419.  This might be expected to take another six months and would include applying for notices under s 20 of the Taxes Management Act 1970.
(3)	The Human Rights Convention does not prevent enquiries into the taxpayers’ personal expenditure aimed at establishing the correct amount of tax and treating all taxpayers equally.
5.	Mr Wilson, for the Applicants, contends:
(1)	The enquiry has now been going on for 16 months during which the Inspector ahs asked numerous questions.  The enquiries about personal expenditure are unnecessary.
(2)	While the enquiries in Jade Palace had been going on for 18 months the taxpayer in that case was larger, and there were many factual similarities with that case.
(3)	The enquiries about personal expenditure were contrary to art 8 of the Human Rights Convention scheduled to the Human Rights Act 1998:
“1.  Everyone has the right to respect for his private and family life, his home and his correspondence.
2.  There shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others.”
6.	By s 28A (6) of the Taxes Management Act 1970 the burden is on the Revenue to show that there are reasonable grounds for not issuing a closure notice.  In Jade Palace the Special Commissioner, Mr Wallace, accepted at [46] that the Revenue did not have to be satisfied about the return in order to state their conclusions.  As in this case, the Revenue were there proposing to apply for a notice under s 20 of the Taxes Management Act 1970.  The Special Commissioner allowed a reasonable time for the Revenue to be able to make a judgment of the tax due, which he fixed at a further four months rather than the six months for which the Revenue were asking.  Both parties drew attention to factual similarities and differences from this case, which I did not find helpful.  I follow the approach in this case that the Revenue should be allowed to make enquiries until they are able to form a judgment about the tax due.
7.	I can understand the Applicants being concerned about the scope of the Revenue’s enquiries, particularly the 83 questions, but the position seems to me to be that the Inspector is not yet in a position to make a judgment of the tax due if I directed a closure now.  Her minimum figure would be £5,947.77 but it is possible that some of this will have been caused by double counting, and in the other direction there may be other cash receipts that have not been included, so the figure would be little more than a guess.  I consider that it is reasonable for the enquiries to continue to the point that the Inspector can put a figure on her view of any under-declaration.  The only way I understand that she can do this is to see whether the Applicants’ expenditure in the year in question would enable the drawings said to have been deposited in the bank account to be available for that purpose, and that will also show whether more has been spent than is apparently available from the business.  In suggesting that an investigation into personal expenditure should be done I am aware of the difficulty of demonstrating the amount of personal expenditure in the year to 30 September 2003 and the fact that a schedule of such expenditure is likely to include many estimates.  I can also see that information about the number of vehicles may be relevant to seeing if the turnover figure is likely.
8.	On the Applicants human rights argument, while an investigation into their private expenditure is an interference into their private life, it is an accordance with the law and is necessary in a democratic society in the economic well-being of the country that such investigation should be permitted for the purpose of establishing the true taxable profit.  If the Applicants had kept better records such investigation would not have been necessary, but I can see no other way of verifying the accounts.
9.	Accordingly I consider that the Revenue should be allowed to continue its enquiries and so there are reasonable grounds for not issuing a closure notice now.  I am therefore faced with either directing a closure in six months, which is Mr Etty’s estimate of the time it will take, and which seems reasonable to me, or not directing a closure notice at all.  Because of the uncertainty of the time further enquiries are likely to take I prefer the latter course.  This will not prevent the Applicants from applying again for a closure notice if they feel that the enquiries have gone on too long.
10.	Accordingly I dismiss the application.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 26  March  2007

SC 3206/06

Authorities referred to in skeletons and not referred to in the decision:
Kempton v Special Commissioners [1992] STC 823
HMRC v Vodafone 2 [2006] STC 483 and 1530