It’s not only journalists who need to look to their sources…
It is common and accepted practice in enquiry cases for HMRC to investigate closely what assets a taxpayer has accumulated over a period of time and what private expenditure has been incurred. The total of what has been spent and what has been saved, with appropriate adjustments for gifts, windfalls and so on, should, broadly speaking, reconcile with a taxpayer’s declared income. If there are significant differences, there will be some explaining to do. It has been ever thus from the days when the Enquiry Branch of the Inland Revenue carried out Back Duty work with pencil and paper and remains so today when HMRC’s Fraud Investigation Service (Service!!) investigate with the benefit of high-powered software.
But there are limits. And those limits were reached in the recent case of Mohammed Ashraf v HMRC  UKFTT 97 (TC).
Mr Ashraf had first attracted the attention of HMRC because of some alleged importation VAT irregularities affecting a company that he controlled. Suspecting serious tax fraud, HMRC launched an enquiry into his personal tax affairs under Code of Practice 9. They duly carried out a detailed review of his personal income and expenditure and concluded that there was an unexplained gap of some quarter of a million pounds.
Following various meetings and exchanges of correspondence, HMRC remained unpersuaded that there was a legitimate explanation for the discrepancy and they eventually issued assessments charging Income Tax on substantially the whole amount. Appeals against those assessments came before the Tribunal.
The rather curious aspect of this case was that HMRC offered no “case theory” of where the money had come from. Mr Ashraf had declared income from employments, profits from UK land and property, and dividends from UK company shares. He apparently owned a property in Spain but HMRC didn’t suggest that the money came from foreign rental profits or foreign property dealings. Nor did they suggest that Mr Ashraf was carrying on a trade personally. They said, effectively, that it was reasonable to assume that the money came from something taxable and they made their assessments under s687 of ITTOIA 2005. This provides for a charge to tax on “income from any source that is not charged to income tax under or as a result of any other provision of this Act or any other Act.” It is sometimes referred to as a “sweep-up” (or, less politely, “dustbin”) provision that covers income from sources not covered elsewhere in the Acts.
But that word “source” is important. It was not enough for HMRC to say, as they did, that the existence of the unexplained deficit was enough to found an assessment. To make a valid assessment, HMRC were obliged to indicate what “source” they purported to assess – to say, in other words, what taxable activity they alleged Mr Ashraf had been carrying on that gave rise to the amount of the alleged income. As it was, the judgment in the case records that HMRC “have not identified any sources – indeed they positively assert there are none outside those admitted by the appellant in his returns.”
With no identified or alleged source, the assessments were simply invalid and the taxpayer’s appeal was allowed.
It will be rare for HMRC to hand a get-out-of-jail-free card to a taxpayer by bringing such an obviously flawed case before the Tribunal. But the need to attribute alleged discrepancies to a source is of wider importance. Imagine, for example, a case where a trader’s business is conducted with a small number of large customers, all of whom pay him by bank transfer. Imagine that a review of his private expenditure shows a large number of unexplained small cash deposits to his bank account. If HMRC are to make a case for taxing them, HMRC must say from what source they think they arose. On the facts, it may be beyond the bounds of reasonable credibility to suggest that they are diverted business receipts. HMRC (and remember that it is on HMRC that the burden of proof lies) must come up with a “more likely than not” source. For example, if moonlighting is the chosen source, exactly what is the nature of the alleged work, when is it alleged to have been done, and what evidence is there for it?
The point is that, as HMRC were reminded in Ashraf, “unexplained income” is not per se a taxable source: the taxpayer is entitled to know what case he has to answer.
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