Poon v Revenue and Customs (INCOME TAX/CORPORATION TAX : Other)

Factual and Procedural Background

The Appellant carried on business as a restauranteur in The City during the relevant periods. In June 2008, the Respondents commenced an enquiry into the Appellant’s tax affairs which escalated in October 2010 into a full Code of Practice 9 (COP9) civil fraud investigation. The investigation concluded that the business had undeclared cash takings and unreported staff wages. The Appellant appealed against income tax, capital gains tax, PAYE, and VAT assessments covering multiple tax years and periods, alongside associated penalties.

Formal internal reviews adjusted one discovery assessment and penalty but upheld the other disputed decisions. The appeals were consolidated following a case management hearing. The Appellant did not attend the Tribunal hearing, which proceeded in his absence after reasonable notice was confirmed. The Tribunal considered a large bundle of documents, including witness statements from the Appellant and the HMRC case officer responsible for the COP9 investigation.

The COP9 investigation was initiated after HMRC discovered significant undeclared bank lodgements compared to declared drawings. The Appellant was represented by a chartered accountant fluent in relevant languages who assisted during the COP9 interview. The Appellant admitted to multiple inaccuracies and omissions in business records, tax returns, VAT returns, and disclosed additional unrecorded cash takings and staff wages. He also admitted ownership of several properties and a gambling habit. A possible settlement was discussed, including a proposed payment, though a cheque provided was later dishonored.

The Appellant changed advisers in August 2011, but cooperation with HMRC thereafter was deemed inadequate. Consequently, HMRC issued the disputed assessments and notices in early 2012. The Appellant made a complaint about HMRC’s investigation which was dismissed. The grounds of appeal included allegations of lack of qualified interpreter, coercion by the former accountant, unreliability of meeting notes, lack of evidence supporting HMRC’s findings, flaws in PAYE calculations, VAT timing issues, and penalty excessiveness.

Legal Issues Presented

1. Whether the tax assessments and penalties issued by HMRC were correctly calculated and justified, including the treatment of undeclared takings and unreported staff wages.
2. Whether the Appellant understood the COP9 interview process and whether admissions made therein were reliable.
3. Whether the PAYE assessments based on estimated wages were appropriate given incomplete staff information.
4. Whether the VAT assessments were timely and correctly applied, including the VAT treatment of food supplies.
5. Whether penalties applied under both old and new regimes were appropriate given the Appellant’s conduct and cooperation.
6. Whether the Tribunal should allow deductions for PAYE assessed in calculating income tax liabilities despite statutory time limits on amendments to self-assessment returns.

Arguments of the Parties

Appellant's Arguments

• No qualified interpreter was present at the COP9 interview, so the Appellant did not understand the questions and HMRC could not understand his answers.
• The Appellant was coerced by his former accountant into making admissions.
• The meeting notes from the COP9 interview were unreliable and not credible.
• There was insufficient evidence to support HMRC’s findings, including no third-party interviews or observations.
• The staff names used in PAYE calculations were incomplete or fictitious, rendering the assessments flawed.
• The staff wages were paid from the undeclared takings rather than in addition, leading to miscalculation of amounts.
• The VAT assessments were issued out of time.
• The food supplies should have been zero-rated for VAT purposes.
• The penalty rates applied were excessive.

Respondents' Arguments (HMRC)

• The COP9 interview was conducted formally with the Appellant represented by an accountant fluent in relevant languages who assisted understanding.
• The Appellant made several admissions during the COP9 interview, including undeclared takings, unreported wages, omitted rental income, and property disposals.
• Assessments and penalties were based on best judgment and supported by documentary evidence including Land Registry data.
• PAYE assessments were necessarily estimates due to incomplete information about off-record workers but were calculated on the basis of disclosed names and amounts.
• The VAT assessments were timely under the 20-year limitation for deliberate loss of tax and correctly applied; the zero-rating argument was rejected based on binding Court of Appeal authority.
• Penalties were calculated under both old and new regimes with abatements and mitigations applied where appropriate, reflecting the Appellant’s partial co-operation but subsequent delays and attempts to retract admissions.
• HMRC’s published practices regarding PAYE deductions from income tax profits were cited, emphasizing that deductions are allowed only if the statutory window for amendments is open or PAYE is paid, neither of which applied in this case.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal found the adjustments made by HMRC to be supported by admissions made by the Appellant during a properly conducted COP9 interview where he was professionally represented. The Tribunal rejected the Appellant’s claim of misunderstanding due to language barriers, noting the presence and assistance of his accountant fluent in relevant languages. The Appellant’s disclosure report was deemed unreliable and given no weight.

Regarding capital gains, the Tribunal accepted HMRC’s use of Land Registry data to assess gains on property disposals where the Appellant’s assertions of losses were unsupported. For rental income, the Tribunal found HMRC’s allowance for outgoings reasonable and upheld the taxable figures.

The Tribunal rejected the Appellant’s contention that undeclared staff wages were part of the undeclared takings figure, holding that both should be treated as separate additional takings. On VAT, the Tribunal held that the assessments were timely under the extended limitation period for deliberate loss of tax and correctly calculated, referencing binding appellate authority. The PAYE assessments were accepted as reasonable best judgments given incomplete information about off-record workers.

On income tax, the Tribunal accepted HMRC’s explanation for not allowing cost of sales deductions due to lack of evidence and agreed that VAT adjustments should be made to undeclared takings and wages. Importantly, the Tribunal diverged from HMRC’s published practice on PAYE deductions, holding that the Tribunal’s statutory role under s 50(6) TMA 1970 allowed it to make adjustments to ensure correct tax liability regardless of time limits on amendments. Therefore, a deduction for confirmed PAYE liabilities was warranted in calculating income tax.

Regarding penalties, the Tribunal found the penalty calculations justified given the Appellant’s partial disclosure but subsequent failure to cooperate and attempts to retract admissions. Adjustments to penalties were made consistent with adjustments to income tax assessments.

Holding and Implications

The Tribunal issued the following rulings:

• Appeals against VAT assessments are dismissed.
• Appeals against PAYE assessments (tax and NIC) are dismissed.
• Appeals against self-assessment closure notice and income tax assessments are allowed in part to reflect adjustments for VAT corrections and PAYE deductions as determined.
• Appeals against penalties are allowed in part to reflect the adjustments consistent with income tax assessment changes.

The Tribunal directed HMRC to provide revised figures reflecting these adjustments for formal confirmation or further queries. The decision clarifies the Tribunal’s authority to adjust tax liabilities to reflect discovered liabilities and deductions notwithstanding statutory time limits on self-assessment amendments, emphasizing the Tribunal’s role in ensuring correct tax is paid based on best judgment assessments and admitted facts. No new precedent beyond the application of existing statutory provisions and case law was established.