Tribunal allows taxpayer's appeal in part in case concerning deliberate and/or careless errors

In Shaun Harte v HMRC [2024] UKFTT 00493 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's appeal in part and reduced HMRC's assessments to income tax, penalties and VAT.

Background

HMRC opened an enquiry into Mr Harte's 2014/15 tax return in October 2016, during the course of which it identified income that it considered should have been, but was not, assessed to income tax in 2009/10 to 2017/18.

HMRC issued to Mr Harte a closure notice, pursuant to section 28A, Taxes Management Act 1970 (TMA); six discovery assessments, pursuant to section 29, TMA; penalty assessments (on the basis the inaccuracies were deliberate), pursuant to Schedule 24, Finance Act 2007 and a belated notification penalty, pursuant to section 76, Value Added Taxes Act 1994 (collectively, the Decisions).

The Decisions contained assessments to Mr Harte for income tax in the amount of £560,589.39, for inaccuracy penalties in the amount of £336,353.61 and an assessment by way of belated notification penalty in the amount of £54,609. 

Mr Harte challenged the Decisions and appealed to the FTT.

FTT decision

The appeal was allowed in part.

The FTT found that of the £560,589.39 assessed to income tax, £107,344.34 was due; of the £336,353.61 assessed in inaccuracy penalties, £58,089.38 was due; and of the £54,609 assessed by way of belated notification penalty, £21,642.12 was due. 

Mr Harte accepted that there had been some under declaration of income, that his behaviour was careless and that penalties were due. He rejected, however, that his behaviour was deliberate or that he should be assessed for accounting periods ending more than 6 years prior to 3 July 2018 (when the closure notice and discovery assessments were issued by HMRC). With regard to other payments, Mr Harte accepted that they should be treated as income as he was unable to explain the source and that his failure to declare this income was careless, but not deliberate. 

Burden of proof

HMRC bore the burden of proving that it had made a relevant discovery and that the discovered loss was brought about as a consequence of Mr Harte's deliberate or careless conduct. HMRC also bore the burden of establishing the circumstances justifying the issuing of the penalties. 

The burden of establishing that the Decisions were overstated by HMRC was on Mr Harte.

Issues  

The issues before the FTT were:

(1) Whether three identified receipts into the Mr Harte's bank accounts were assessable to income tax?

The FTT concluded that two payments were assessable to income tax in 2014/15 and a third payment was not. This reduced the income tax assessable in 2014/15 to £157,990.78 (from £182,843.92). 

(2) Whether certain items of expenditure met by Tasca Tankers Ltd (TTL), a company to which Mr Harte provided services to, through the use of a corporate credit card represented income of Mr Harte?

The FTT concluded that personal expenditure not reimbursed by Mr Harte to TTL, in the sum of  £12,930.89, should be added to the assessable income in his bank account. 

(3) Whether Mr Harte was entitled to capital allowances and a deduction in respect of the amounts claimed for his home office?

The FTT concluded that Mr Harte was not entitled to the deductions made in his return in respect of either his personal vehicle (£2,400 capital allowances) or his home office (£4,800 deductible expenditure). The FTT allowed deductible annual expenditure of £3,600 for motoring expenses and £500 in respect of his home office. 

(4) Whether Mr Harte's conduct was deliberate?

The FTT concluded that Mr Harte had deliberately failed to account for income tax received into his bank account. However, the FTT was of the view that he was careless in permitting his accountants to make claims to capital allowances and over claimed expenditure in respect of his home office. The errors arising from Mr Harte's personal expenditure on the credit card were considered to be made despite reasonable care having been taken. 

In relation to penalties, the FTT agreed with HMRC's penalty assessment of 60% of the potential lost revenue for the inaccuracy arising from a failure to account for income received into his bank account. With regard to his careless conduct, the FTT concluded that Mr Harte was liable for 28% of the potential lost revenue except in relation to the personal expenditure on the credit card, for which no penalty was due. 

(5) How do the FTT's findings in respect of conduct affect the periods for which Mr Harte could be assessed by reference to the extended time limit provisions contained in section 36 TMA?

Having considered the relevant case law, the FTT held that HMRC had met the burden on it to establish a prima facie case that the discovery assessments were valid (applying the extended time limit provisions), by establishing that the conduct giving rise to the errors in the return were deliberate/careless. However, the FTT was of the view that there was no deliberate/careless conduct in relation to the personal expenditure on the credit card. Accordingly, the FTT exercised its powers under section 50(6), TMA, to remove that part of the discovery assessment.

In relation to the careless errors relating to Mr Harte's personal vehicle and his home office, the FTT held that the 6-year time limit in section 36(1), TMA, applied. However, the FTT found that to assess these errors on the basis that the conduct was deliberate was not correct and would overcharge Mr Harte.

(6) Whether it is appropriate to apply the presumption of continuity? 

HMRC, having identified the errors, applied this presumption to conclude that similar errors were likely to have occurred in the tax years during which Mr Harte operated as a self-employed consultant with TTL (including the tax years 2009/10 to 2015/16). 

The FTT held that HMRC reasonably concluded the presumption of continuity to apply, such that it made a discovery that income tax had been insufficiently assessed in 2009/10 to 2017/18, whilst Mr Harte was a consultant to TTL.   

HMRC did not assess in respect of 2016/17 or 2017/18. The FTT commented that, strictly, HMRC may have the power to issue assessments for those later periods, but the FTT considered it would be unconscionable for it to do so taking into account that, by the time the enquiry windows closed, HMRC was sufficiently aware of the issues arising, including that Mr Harte was at least careless and had it wished, should have opened an enquiry into those years.

(7) Whether Mr Harte had a reasonable excuse for his failure to notify liability to be VAT registered?

In the view of the FTT, given its findings, it was clear that Mr Harte was required to be VAT registered. The FTT commented that Mr Harte had provided no explanation or excuse for this failure, other than that he had not paid sufficient attention to his tax affairs. The FTT concluded that there was no reasonable excuse for the failure to register and a penalty of £21,642.12 was appropriate, representing 15% of Mr Harte's turnover in the period for which he was not registered.

Comment

This decision is helpful in indicating the FTT's likely approach to  HMRC's application of the 'presumption of continuity principle' and importantly, the limitations of that principle. In particular, whilst finding that HMRC satisfied the burden which was on it to establish a prima facie case that the discovery assessments were valid (applying the extended time limit provisions), it could not be applied to errors that were not deliberate or careless, which would otherwise be time barred. This aspect of the decision will be welcomed by taxpayers.

The decision can be viewed here.