Tribunal finds insufficiency in taxpayer's return was not brought about "deliberately"

In Yip v HMRC [2024] UKFTT 00434 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's appeal finding that an insufficiency in his self-assessment return was not brought about deliberately.

Background

Chee Whye Yip was born in Malaysia. He arrived in the UK in 1961 and set up a food delivery business that operated as a partnership known as Archers Meat or Archers Supplies (Archers). The business was transferred to various entities, including to Archers Meat Supplies Ltd (AMSL) in 2006. 

In February and April 2012, two cash deposits amounting to almost £250,000 were made into a bank account in the name of AMSL. In April 2012, £250,000 (the Disputed Amount) was transferred from a separate AMSL bank account to Mr Yip's bank account. In June 2012, Mr Yip transferred £295,020.78 to a law firm in connection with the purchase of a property.

Mr Yip's tax return for 2012/13 did not include the Disputed Amount. The return showed that he had received total income in that year of £24,332, made up of dividends, interest and pensions. Mr Yip did not seek any professional advice in relation to the tax treatment of the Disputed Amount.

In the years prior to the payment of the Disputed Amount, Mr Yip was working for the business but did not receive a formal salary. His responsibilities were not defined by a contract as it was a family business, but he worked in a management capacity and his responsibilities included paying suppliers. The last time he was paid as an employee of the business was in tax year 2004/05.

In June 2017, HMRC identified a risk in respect of Mr Yip's tax affairs as a result of information provided in the course of another investigation. Much of HMRC's correspondence in connection with Mr Yip was with Indirect Sales Ltd (IS). IS acted at various times as agent for him and while the identity of the person corresponding with HMRC was unknown, the standard of written English in their letters was poor and consistent with the author not having English as their first language. In its initial correspondence with HMRC, IS referred to the Disputed Amount as Mr Yip's "return from the business”.

In March 2021, following correspondence between the parties, HMRC wrote to Mr Yip stating that it believed the Disputed Amount was a payment by AMSL to him for services provided by him in a self-employed “consultancy” capacity which should have been charged to income tax as an amount of “self-employment income”. Mr Yip subsequently discussed with HMRC health and memory problems he had and said he did not remember receiving the Disputed Amount but that if he had then he “earned his money”. Mr Yip said he was shocked to learn of HMRC's claim and that his accountants may have made a mistake.

HMRC subsequently issued a discovery assessment to Mr Yip in the sum of c.£120,000 on the basis that the Disputed Amount was taxable self-employment income. In HMRC’s view, Mr Yip acted deliberately and it issued a penalty assessment in the sum of approximately £55,000, on the basis that his tax return contained an inaccuracy that was “deliberate but not concealed” and that the disclosure was "prompted". 

The discovery assessment and penalty assessment were appealed to the FTT.  

FTT decision

The appeals were allowed. 

At the date of the hearing, Mr Yip was 85 years old and suffered from chronic metastatic prostate cancer. At the start of the hearing the FTT was informed that Mr Yip was unwell and was unable to attend the hearing. Having considered the matter, the FTT decided that it was in the interests of justice to proceed with the hearing in Mr Yip's absence (he was represented by counsel).

Mr Yip had provided a witness statement in support of his appeal, explaining that in 1997 he agreed to lend £250,000 to a Malaysian businessman named Mr Teo. The loan was made in cash and was not reduced to writing, but was based on trust. This was a personal loan from Mr Yip and not connected to his business and therefore no record of the loan was made in the company records. Mr Teo repaid the loan in the two cash deposits in 2012.

As Mr Yip was unable to attend the hearing, his statement was hearsay evidence. The FTT determined that the Disputed Amount was not the repayment to Mr Yip of a personal loan made to Mr Teo. In reaching that conclusion, the FTT considered a range of factors. Firstly, in estimating the weight to place on Mr Yip's evidence, the FTT had regard to the fact that he had a motive to represent matters in a manner that would result in the assessments being discharged (this can be said against all appellant taxpayers) and that this may render aspects of his evidence unreliable. Secondly, the FTT took into account that the witness statement related to historical events and that he  suffered from memory issues and his statement might not therefore be reliable. Thirdly, the FTT regarded it as highly unlikely that Mr Yip would have made a personal loan of £250,000 in cash in 1997, without documenting it in any way. Fourthly, Mr Teo was not produced as a witness and there was no evidence of his identity or existence besides Mr Yip's witness statement. Finally, the FTT considered that depositing the money into a business bank account and then transferring it to a personal account was not consistent with the repayment of a personal loan. It was more likely the deposits were related to the business of the company rather than to Mr Yip personally.

HMRC’s case was that the Disputed Amount was a payment for consultancy or management services provided to AMSL by Mr Yip in a self-employed capacity. The FTT agreed with HMRC that, in the absence of a credible alternative explanation, it was more likely than not that the payment was a reward for, or in recognition of, the services Mr Yip had provided to the business. The FTT was therefore satisfied that HMRC had discharged its burden to prove that Mr Yip’s return was insufficient.

However, the FTT concluded that HMRC had not proven that the insufficiency was brought about deliberately because it had not shown that Mr Yip knew that the Disputed Amount was taxable when failing to include it in his return. The FTT rejected HMRC's argument that Mr Yip's previous experience of the self-assessment regime meant that he would have given consideration to the tax consequences of the Disputed Amount. In that regard, the FTT took account of Mr Yip's  lack of sophistication in tax matters, HMRC's notes of conversations with him which, the FTT concluded, did not give the impression of someone intending to mislead HMRC. The FTT also considered that the fact Mr Yip received the Disputed Amount as a lump sum would make it less likely that he would have appreciated that it was subject to income tax, and the fact there was no evidence of any written agreement between Mr Yip and AMSL under which he would supply consultancy or management services in return for payment, increased the likelihood that he would not have viewed the Disputed Amount in this way. The FTT also rejected HMRC's argument that the fact Mr Yip did not seek advice as to the tax treatment of the Disputed Amount was evidence that he knew it was taxable.

Accordingly, the FTT allowed the appeals and discharged both assessments. 

Comment

As well as a reminder of the test that HMRC must satisfy in order to issue a valid discovery assessment under section 29, Taxes Management Act 1970, this decision provides some helpful guidance on the approach taken by the FTT to hearsay evidence. Given the length of time that HMRC enquiries and investigations often take, the unavailability of witnesses and gaps in the evidential record are risks that are frequently faced by taxpayers seeking to challenge HMRC decisions. While ultimately those issues did not prove fatal to the taxpayer's appeal in the circumstances of this particular case, the decision does highlight the importance of taxpayers considering how their witness evidence might be received in circumstances where the witness is unable to attend the hearing to provide their testimony and the proactive steps that should be taken in the preparation of witness evidence to mitigate any associated risks.

The decision can be viewed here.