Ruhal Islam v The Commissioners for HMRC

Mr Islam argues that HMRC’s contention that he has made a very substantial undeclared profit on a continuous basis since 2007 is erroneous and that no such undeclared profits were ever made.

The problem arises because there are, what he describes as, “certain anomalous receipts” for the period between November 2015 and 26 January 2016.

Mr Islam’s argument is that those receipts were “invented” for the purpose of inflating reported takings in anticipation of the sale of the business. They were intended to mislead prospective purchasers only and did not reflect actual sales. They can be distinguished from the actual receipts from the same periods and were only provided accidentally to HMRC.

There is a small issue in relation to a failure to disclose rental income. There was no profit in that regard and HMRC have included only rent receivable without giving any deduction for rent and other expenses payable, yet Officer Bagley conceded in his witness statement that “…it was established that there was no tax loss”.

On reviewing the till reports HMRC had decided that Mr Islam had under-declared the gross daily sales on his tax return and there was therefore a shortfall in tax. The till interrogations of the two tills show that identical items were sold for the same prices on the same days, therefore showing that both tills were being used in conjunction with each other for business purposes. That behaviour on the part of Mr Islam was deliberate in relation to both the under-declaration of sales and the failure to declare property income.

HMRC have applied the presumption of continuity.

This was not a satisfactory case and these issues are at the heart of that. HMRC argue that what they call the handwritten notes are a true and accurate reflection of what was discussed at the July meeting and they accurately reflect the fact that the meeting lasted 45 minutes. We cannot agree.

We will refer to them as the “Brief” because they are headed up “Interview brief”. We are a specialist Tribunal and know from experience that a well prepared HMRC officer visiting a taxpayer will have prepared a brief in advance. It is precisely that; an aide memoire.

It is blindingly obvious that the handwritten notes on the Brief were written up after the event. In cross-examination Officer Bagley conceded that his notes of the July meeting “were not verbatim”. We can see that they are derived from, and closely mirror, the Brief. They are not complete.

We say that because, for example, the Brief records HMRC’s prior assumption that the rental for the flat above the business was £562 per month but it does not include Mr Islam’s refutation where he points out that it was only £500.

Furthermore, that figure of £500 is supported by the Letting Agreement, as Mr Islam points out in his witness statement.

In regard to the rental of £475 per month for the other flat it does not record Mr Islam saying that it varied, depending on the tenant or, indeed, Officer Bagley saying “absolutely” in response!

It seems more likely to us that the type of notes that are to be found on the reverse of the third (and last) page of the Brief may have been the sort of minimalist note that the officer took since those items are expanded upon in the handwritten notes in the actual Brief. Indeed they may be the only notes taken at the time.

In summary, we really cannot place great reliance on either the Brief or the notes derived from that given the wording in the transcript, even although it is not complete.

Mr Sykes rightly points out that many of the witnesses were not challenged in cross-examination and that therefore their evidence should be found as facts. We have done so.

Mr Pink had worked for Mr Islam from 30 August 2009 until 8 September 2018. He very fairly pointed out that he only worked part-time so he could not confirm exactly what happened but he confirmed that no money passed through Till 2 and it contained no money. It was not put to him that he was lying or mistaken about how he saw Till 2 being used or that Till 1 had been replaced by Till 3 in 2015. He was a credible, straightforward witness and it seems inherently unlikely that he would not have been aware of sales being processed through Till 2 if that was the case. He was clear that he had never seen that.

Mr Hussain was also credible and confirmed that Till 3 had been given to Mr Islam by him in early 2015 to replace Till 1 since it had the same programming.

Mrs Begum confirmed that her husband had replaced Till 1 with Till 3 in early 2015 and that Till 1 had thereafter been kept at home. Her evidence that she had printed the till rolls for the disputed period and that she and her husband had always struggled financially was not challenged.

Mr Islam had said in his first witness statement that his business had struggled and Mr Hart corroborated that. It was not put to either of them that that was untrue. Indeed, Mr Hart was unchallenged in stating that the downturn in the business had been significant, falling from £146,000 in 2009 to £116,000 in 2012 and £85,000 in 2015.

The evidence of Mr Tajul Islam and Mr Hoque was not challenged. Both explained that they had not proceeded with a possible purchase of the business in 2015 because both had noted that there was a very low footfall. Both had visited the property to observe the business in operation. Both were concerned about the level of turnover and potential profitability.

Mr Tajul Islam said that in around November 2015, he had asked for till receipts but that after seeing the premises he had withdrawn his offer without sight of those. Mr Hoque also visited in November 2015 and asked for sight of till rolls but withdrew before they were produced.

On the balance of probabilities, we accept that the till rolls for the disputed period were produced by Mr Islam’s wife on Till 1. Frankly, we are surprised that HMRC have not addressed the very physical and abundantly clear, in our view, evidence that the till rolls were very different.

HMRC, whether Officer Bagley or Officer Matthews, appear to have had a very blinkered and entrenched approach to this. We say that for a number of reasons. In cross-examination, Officer Matthews freely admitted that she had relied on Officer Bagley’s evidence when coming to her decisions.

Both officers conceded in cross-examination that HMRC had executed covert activity. Indeed at paragraph five of her witness statement, Officer Matthews stated explicitly that her review had encompassed the two interrogations of the tills and the covert operations. Absolutely no evidence of the covert operations has been produced.

The discovery assessments and Closure Notices (apart from rental income) are based only on the alleged till evidence.

If HMRC had evidence from covert activity, particularly since Mr Sykes had lodged the witness statements of Messrs Hart, Tariq Islam, Hoque and Mr Islam and his wife saying how poorly the business was trading, we would have expected that evidence to be lodged. It was not. We therefore derive the adverse inference that it would not have assisted HMRC.

Bluntly, there are issues with both Officer Bagley’s and Mr Islam’s evidence. We were not enthused by Officer Bagley’s evidence-in-chief when asked the question – “did he [Mr Islam] say that the rent covered the rent he paid” – and he answered “no”. It is clear from the transcript that he said the opposite.

HMRC did not take us to it but Mr Islam is not covered in glory because there are undoubted contradictions in, for example, his letter of 28 May 2018 to Officer Farrow referring to her notes of meeting and that does not square with his witness evidence.

He failed to co-operate with HMRC for a significant period after the July meeting. That may be because he was unrepresented, and as Mr Sykes suggests, stressed. We do not know.

We do not weigh that in the balance since the issue for us is whether HMRC have established whether there was a loss of tax which is the starting point.

HMRC bear the burden of proof. We have huge difficulties.

As we indicate, the disputed period was the foundation of HMRC’s case. Firstly, it is a tiny period in the context of the assessments.

Secondly, the witness evidence casts serious doubt on whether the evidence from Till 2 is even relevant, and thirdly there is a lack of evidence on covert activity.

We can see clearly that the till receipts are very different; in many cases inappropriate to give to a customer because of the printing issues. On the balance of probability it is unlikely that they would have been so used.

We are simply not persuaded that HMRC have discharged the burden of proof.

The onus of proof, for all but the last two years, is on HMRC to show a loss of tax. Officer Matthews conceded in oral evidence that she accepted that she estimated that there was neither a profit nor a loss but she simply did not have the evidence to support that view. As indicated above at paragraph 33, Officer Bagley conceded that there was no loss of tax.

On the evidence before us we cannot find that there is a loss of tax in any year. The appeal succeeds to that extent.

At the outset we indicated that this was not a satisfactory case. It was not. Neither party “proved” their case. It came down to the burden of proof and HMRC have not established a loss of tax because of deliberate or careless behaviour in the years for the discovery assessments. For the Closure Notices, we do not find that there is a loss of tax in regard to the rental income. Because we do not accept that the till receipts in the disputed period were “sales” the appeal must succeed in that regard.

The appeal is allowed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.