Adspec Ltd & Anor v The Commissioners for HMRC

These are appeals against the following -

Corporation Tax (‘CT’) assessments issued to Adspec Ltd (‘the Company’) for the accounting periods ended (‘APE’) 3 March 2014 and APE 31 March 2014 – TC/2017/02816.

A Closure Notice issued to Adspec Ltd for CT for the APE 31 March 2015 – TC/2017/02816

A Penalty assessment issued to Adspec Ltd for the APE 3 March 2014, APE 31 March 2014 and APE 31 March 2015 – TC/2017/02816.

VAT assessments issued to Adspec Ltd for the period from 4 March 2013 to 31 December 2013 and from 1 January 2014 to 31 December 2015 inclusive – TC/2017/02817.

A Penalty assessment issued to Adspec Ltd for the period from 4 March 2013 to 31 December 2013 for failing to register for VAT from the appropriate registration date - TC/2017/02817

A Penalty assessment issued to Adspec Ltd for the VAT periods from 1 January 2014 to 31 December 2015 for submitting inaccurate VAT Returns to HMRC - TC/2017/02817

A Personal Liability Notice (‘PLN’) issued to Mr Adil Hussain for the CT Penalty of Adspec Ltd– TC/2017/05136.

A PLN issued to Mr Adil Hussain for the VAT Penalty of Adspec Ltd– TC/2017/05138.

A PLN issued to Mr Adil Hussain for the VAT failure to register penalty - TC/2017/05138.

The amounts under appeal are set out in the Appendix to this Decision.

On 13 January 2022 HMRC applied for permission to lodge a supplementary statement. In short, the HMRC officer who was responsible for the corporation tax aspects of the case, Mr Frost, has since making his statement retired from HMRC. The additional statement from Mr Brooks covers his review of the case and additional evidence sent in by the Appellant since Mr Frost’s retirement. Mr Brooks assessed all documents available to Mr Frost and independently reached his own conclusion.

We allowed HMRC’s application. In our view there was no prejudice to the Appellant; to the contrary Mr Brooks was available for cross-examination by the Appellant in relation to the corporation tax elements under appeal where Mr Frost was not.

The second matter related to Mr Brooks’ review of the case and his identification of potential additional liabilities which were seemingly overlooked by Mr Frost, namely a charge to tax under s455 CTA 2010. HMRC, fairly in our view, indicated they were content to proceed only on the amounts assessed by Mr Frost and Mr Davies although they noted the that the Tribunal has power to increase, as well as decrease, any amounts assessed.

We took the view that given the late stage of proceedings at which the additional charge to tax was identified, we would proceed only on the basis of the figures assessed to ensure the Appellant was not prejudiced by an inability to challenge the potential additional liabilities on limited notice.

Adspec Ltd sells electronic tablets and accessories imported from China on the internet via Amazon and eBay. Mr Adil Hussain is the sole director of the Company. The corporation tax return for Adspec Ltd for the APE 31 March 2015 was received by HMRC on 31 December 2015.

A VAT enquiry was opened into the Company by letter dated 8 January 2016. An enquiry was opened into the CT Return on 2 February 2016 which was run in parallel with the VAT enquiry.

Corporation tax assessments were issued to Adspec Ltd on 10 August 2016 for the APEs 3 March 2014 and 31 March 2014 under Section 41 Schedule 18 Finance Act 1998. A Closure Notice was issued to Adspec Ltd on 10 August 2016 for corporation tax for the APE 31 March 2015 under Section 32 Schedule 18 Finance Act 1998. A penalty assessment was raised on Adspec Ltd on 10 October 2016 for the APEs 3 March 2014, 31 March 2014 and 31 March 2015 under Schedule 24 Finance Act 2007.

HMRC raised these assessments on the basis that data had been made available to them showing the level of imports made by the Company and by Mr Adil Hussain as a director of Adspec Ltd. HMRC analysed the data and determined that the quantity of imported goods was significantly higher than shown on the Company VAT returns. Using figures from a 3^rd party showing e-commerce sales HMRC concluded that there was a significant level of understated sales during the period reviewed.

HMRC requested the Company to provide information and documentation to enable a detailed review of the business to take place. To date these documents have still not been provided.

In view of the lack of co-operation and complete lack of business records provided, HMRC raised VAT assessments using best and reasonable judgement from information held in respect of the VAT due on the apparent understated sales.

The apparent omissions identified by the VAT review were used to form the basis of the revised corporation tax assessments.

HMRC submitted that as an officer of the Company, Mr Hussain was directly responsible for omitting from the Company accounts a significant volume of purchases that were far in excess of those recorded. Mr Hussain similarly failed to record the income arising from the associated sales within the Company accounts. Coupled with the general lack of co-operation with the enquiry, HMRC contended that they were correct to charge various penalties on the Company for deliberate inaccuracies arising. Furthermore, HMRC contended that as the failures are directly attributable to Mr Hussain, the penalties arising are due to be paid by him by way of PLNs.

An independent statutory review of the CT assessments and Closure Notice was carried out and a review conclusion letter was issued on 28 February 2017. The Review Officer identified some computational errors in the assessments raised and concluded that the assessments for APE 31 March 2014, 31 March 2015 and associated penalty assessments should be varied with the amounts due for APE 3 March 2014 and 31 March 2014 being increased.

VAT assessments were raised on Adspec Ltd under Section 73(1) of VATA 1994 for the period from 4 March 2013 to 31 December 2013 and from 1 January 2014 to 31 December 2015 inclusive. A penalty assessment was raised on Adspec Ltd for the period from 4 March 2013 to 31 December 2013 under Schedule 41 Finance Act 2008 for failing to register for VAT from the appropriate registration date. The Effective Date of Registration (EDR) for VAT purposes was amended to 4 March 2013 from 1 January 2014.

A penalty assessment was raised on Adspec Ltd for the VAT periods from 1 January 2014 to 31 December 2015 under Schedule 24 Finance Act 2007 for submitting inaccurate VAT Returns to HMRC.

The Appellant notified an appeal to HMRC against the VAT assessment and penalties by letter dated 4 November 2016 and the Appellant requested an independent statutory review of the decisions. Due to an oversight HMRC did not carry out the review until 26 September 2017, after the Appellant notified an appeal to H M Courts & Tribunal Service on 28 March 2017. The outcome of the review was that the decisions and associated penalty assessments should be varied. The original VAT assessment showed the wrong end period. The assessment was withdrawn and reissued in the same amount as the quantum was correct and HMRC were still in time to re-issue the assessment.

The Notices of Appeal set out the following grounds of appeal:

The issues to be determined by this Tribunal are –

HMRC led evidence from HMRC officers Mr Brooks and Mr Davies. The statement of Mr Frost was also relied upon. Mr Hussain gave evidence on behalf of the Appellants. For reasons we will set out, we found the evidence of HMRC cogent and compelling. To the contrary, we found Mr Hussain’s evidence was vague and lacked credibility.

Mr Davies explained that HMRC had identified three addresses that received imported goods sold via the Company. Inspections were attempted of those addresses on 2 December 2015 however Mr Hussain was not available at any of the premises visited. Mr Davies visited one of those addresses, the Storeroom Business Centre, with two other HMRC officers where a member of staff confirmed that he worked for Mr Hussain but did not know his whereabouts.

Whilst at the Storeroom the member of staff had confirmed his name as Mr Rashid who worked in packaging and dispatch of tablets and accessories. He had confirmed he was paid £8 per hour, approximately £600 per month (paid by bank transfer) and that there were two members of staff who dealt with dispatch which was done via Royal Mail.

Following the issue of a Notice to inspect goods by Customs, International Trade and Excise (CITEX) to the Company on 8 January 2016, Mr Davies accompanies two other officers on a visit to the Company on 2 February 2016. They met with Mr Hussain and his agent, Mr Zahur. During the meeting Mr Hussain confirmed the following:

In oral evidence Mr Davies explained that there was a risk of under-declared sales if the bank statements were used because platforms such as eBay charge fees and therefore payments to the Company are net of those fees. The correct figure to use would be the gross figure and deduct the fees as input tax. Mr Davies added that HMRC needed to see the three eBay accounts and the Amazon account to assess the sales and see the whole picture, however these were not provided.

An imports questionnaire was completed by Officer Patterson and limited records were provided by Mr Hussain who stated that his business laptop was not available for checks on electronic records for the eBay, PayPal and Amazon accounts. Mr Hussain agreed to make the laptop available along with other records within 3 weeks however when followed up by officer Patterson by email on 4 and 15 February 2016 no response was received. Mr Frost issued a Notice of Inspection of business and a Notice to produce documents under Sch 36 FA 2008 proposing a visit to the business on 10 March 2016 however three hours prior to the visit the Appellant’s representative notified HMRC that Mr Hussain had cancelled the meeting due to personal and health reasons and that he would not correspond with HMRC.

Mr Zahur agreed to provide copies of the detailed VAT summaries he held for the Company which were received on 16 March 2016. The summaries only provided monthly totals for sales and monthly totals for purchase expenses and overhead expenses with no other detail or underlying figures. Mr Frost found the information was insufficient for an audit trail and lacked the detail required to undertake checks into the turnover and tax position of the Company.

Mr Davies was provided with data from HMRC’s systems relating to the Company’s level of imports which he compared to the Company’s VAT returns. The information obtained related to the number of units imported which was identified by the commodity codes for android tablets. HMRC also obtained one of the Company’s eBay accounts which showed sales and price points. The comparison showed that the levels of imports would result in sales significantly higher than those declared. Based on data from an e-commerce site used by the Company which listed sales between 22 October 2013 and 18 November 2015, together with the import data, Mr Davies analysed the number of sales at different price points to establish the percentage of sales at each price point. Each price point percentage was then applied to the import data figure to establish the number of sales made at each particular price. In doing so, Mr Davies explained he had used best judgment to determine the level of under-declared sales and the VAT due. He added that there were also two other eBay accounts and the Amazon account which he did not have access to.

Mr Davies concluded that there had been substantial levels of imports prior to the Company’s VAT registration date of 1 January 2014. HMRC systems showed a total of 15,308 items had been imported in 2013, prior to the Company’s registration for VAT.

Mr Davies’s analysis of average weekly sales of android tablets indicated that in the 12 months to 31 December 2013 the Company had exceeded the VAT registration threshold. Mr Davies concluded that the VAT registration should be backdated to 4 March 2013 which was the date of incorporation.

As there had been no response by the Appellant to a penalty notice for failing to comply with the notice to provide information and documents, Mr Davies issued best judgment assessments to protect revenue and amended the VAT registration date. Mr Davies charged inaccuracy penalties on the basis that the Company had imported large volumes of tablets which were sold using online platforms and the sole director had failed to co-operate; very few records were provided and the notice requesting access to full records and the business laptop was not complied with. No explanation was provided by Mr Hussain and Mr Davies concluded that his actions were deliberate and that it was more likely than not that he knew his returns were inaccurate and that there was a significant understatement of sales. Mr Davies also took the view that it was highly likely that the Company would become insolvent and therefore Mr Hussain, as sole director, should be issued with a personal liability notice.

As no VAT return was submitted for the period 4 March 2013 to 31 December 2013, Mr Davies issued a further VAT assessment using his earlier analysis of sales.

Mr Frost was responsible for issuing the closure notices, discovery assessments and penalty assessments under appeal. At the meeting with officer Davies of HMRC on 2 February 2016 Mr Hussain was given an enquiry notice advising that HMRC would be looking into the Company’s corporation tax return for the period ended 31 March 2015. Mr Frost was provided with the notes of that meeting at which Mr Hussain had confirmed that he was the sole director and dealt with all aspects of running the Company including controlling various eBay accounts and an Amazon account through which sales were made.

Mr Frost was provided with a breakdown of Mr Davies’ analysis from import data and eBay sales and he apportioned the omitted sales calculations net of VAT across the corporation tax periods. The closure notice was issued to the Company on 10 August 2016 for accounting period 31 March 2015 along with discovery assessments for accounting periods ending 3 March 2014 and 31 March 2014 as Mr Frost concluded from the non-cooperation from Mr Hussain and his refusal to provide his business laptop that no further information would be forthcoming.

Mr Frost issued discovery assessments on the basis of his discovery that the Company’s Corporation tax returns were insufficient following receipt of Mr Davies’ calculations of omitted sales and VAT calculated by reference to import data held by HMRC. It was the examination of the import data in conjunction with the ebay selling data that led to Mr Frost’s discovery.

Mr Brooks received the direct tax elements of the case on 28 September 2021 and reviewed the decisions made by Mr Frost who had issued the closure notice, discovery assessments and penalty assessments in relation to omitted trading receipts through online platforms.

Mr Brooks reviewed all previous and subsequent correspondence, including information regarding the basis upon which the Company accounts were prepared (bank deposits only) and the Company’s Natwest business current account for the period 15 March 2013 to 31 December 2015. Mr Brooks wrote to Mr Hussain setting out the overall position as he saw it and the additional documentation required if Mr Hussain wished HMRC to reconsider the level of assessment.

No response was received from the Appellant. Mr Brooks concluded following his review that the Company and Mr Hussain had been uncooperative, possibly evasive, and that the bank statements did not displace the assessments as they did not show a complete trading picture. Mr Brooks noted that he had to consider with regard to stock purchased, where the sales were recorded and where the monies from these sales was retained. He considered it possible that monies could have remained in the Company’s Amazon, eBay and Paypay accounts without having been withdrawn. Funds could also have been personally withdrawn by Mr Hussain and not recorded in the Company accounts.

The analysis of HMRC’s import data and 3^rd party information regarding eBay sales showed a substantial level of omitted sales from which Mr Frost calculated the omitted profits chargeable to corporation tax. There was no documentary evidence provided to contradict HMRC’s case that sales had been under-declared and for the reasons we will set out in due course we accepted this to be the case.

As Mr Hussain had confirmed at the meeting with HMRC on 2 February 2016 that he had sole control over the online platforms used by the Company and he had approved the Company accounts, Mr Frost concluded that the sales were deliberately understated, and Mr Hussain knew that the returns were inaccurate.

The level of penalties was determined by the behaviour which led to the inaccuracies and reduced by factors such as the quality of disclosure. Mr Frost concluded that the submission of an inaccurate return was deliberate but as there was no evidence of any attempt to conceal the under-declarations the penalty fell within the range of 35 – 70% of the potential lost revenue. No reduction was given for telling as Mr Hussain did not admit to the inaccuracy or any wrongdoing nor did he provide any explanation as to how the inaccuracy arose. 10% reduction was given for helping as Mr Hussain admitted which platforms he used at the interview on 2 February 2016 but thereafter there was no further cooperation to help quantify the omissions. A 15% reduction was given for the information provided by Mr Hussain in relation to VAT summaries but there was no response to requests for other relevant information and he refused HMRC access to his laptop. The total reduction given was 25%. The reductions are then applied to the difference between the maximum and minimum penalty percentages and equated to an overall penalty percentage of 61.25% of the PLR.

Mr Frost considered that Mr Hussain was personally liable for the penalty as the deliberate inaccuracies can only be attributed to him as the sole director and he concluded that there was a significant risk of the Company being put into liquidation due to the substantial liabilities due and the fact that both the Company and Mr Hussain had stopped cooperating with HMRC. This led to the issue of the PLN to Mr Hussain on 13 October 2016.

Mr Brooks reiterated that Mr Hussain had confirmed that the Company prepared its VAT and CT returns from deposits into the account. The statements showed deposits from Amazon and also figures from PayPal which were in round figures because, as he understood the position, the PayPal figures were not automatic transfers but rather amounts which Mr Hussain had transferred himself which, he explained, did not necessarily cover the full amount in the PayPal account. He added that the Amazon payments included in the accounts would be net of costs and without access to the Amazon account he could not see if the full amount was declared. The lack of underlying records meant that the full picture remained unknown to HMRC.

Mr Hussain explained that where he was paid through PayPal the money would go into the PayPal account and then into the NatWest account, but he could choose how much to take out of the PayPal account. Mr Hussain thought he had two personal bank accounts in addition to the business and PayPal accounts. The payments received from Amazon sales went into the business bank account once Amazon took their fee every two weeks. Similarly, PayPal took its fee immediately and then he received the money but he could not recall the process through eBay. He agreed that he could log in to the PayPal account to see transactions.

We found Mr Hussain’s evidence was vague and we preferred the evidence of Mr Brooks and Mr Davies. It was accepted that Mr Hussain was responsible for transferring amounts from the PayPal account to the business account. However, in the absence of the PayPal records we could not be satisfied that the amounts transferred represented the whole amount and we agreed with HMRC that the full records showing eBay transactions and payments and Paypal log of transactions and payments in/out was required to verify the Company’s sales and income.

The bank statements showed that Mr Hussain introduced capital of £19,500 between May and November 2014 yet, Mr Brooks highlighted, over the Company accounting year 1 April 2014 to 31 March 2015 Mr Hussain was only paid a salary of £7,200 and the same for the previous year which raised the question as to how he sourced the difference and funded his personal living costs.

Mr Brooks explained in cross-examination that he did not attempt to establish where the money went or whether the Appellant lived a lavish lifestyle as ability to pay and evidence of wealth are not requirements for the issuing of PLNs. He added that the money could be in the Appellants’ personal accounts which he had requested but which were not provided.

Mr Hussain claimed that he lived on a low wage as he resides with his family and has few outgoings. He added that no regard had been given to his savings when HMRC queried how he had introduced capital into the Company plus it is a well-known practice in his culture to exchange cash on Eid or birthdays instead of gifts. He had also received money from family members and friends. His current situation is now similar or worse than the statement of assets and liabilities dated 5 October 2020.

Mr Hussain was unable to recall why he had told HMRC that he paid the employee approximately £8 per hour/£600 per month yet the bank statements sent to Mr Brooks showed Mr Rashid was paid £1600 on 1 July 2014 and £1375.12 on 26 August 2014. He could also not explain why there were 12 entries of £1300 or more per month. Mr Hussain could not recall telling HMRC that he also paid the other employee, Mr Ahmed Hussain, by bank transfer nor could he explain why there were no payments to Mr Hussain shown in the bank statements save one for £1857 on 5 February 2015 which does not equate to £600p/m although he stated that possibly he could not afford to pay so had delayed payment for three months.

We found the Appellants’ evidence regarding the source of capital vague; whilst we accepted that cash may have been gifted on occasions such as Eid, the Appellant gave no further details on the subject. We noted that amounts were received into the business bank account, for instance on 2 April 2013 and 10 April 2013 in the sums of £6,000 and £9,000 from “Mohammed M borrowing” and “Muzzam Mohammed loan” respectively. However, no corroborating evidence was provided either from the person purportedly making the loan, the terms/agreements pertaining to the sums nor any information as to the source of it. Furthermore, whilst we also accepted Mr Hussain may have had savings, again no information was forthcoming as to the amount of any such savings and we noted Mr Hussain had failed to provide his personal bank statements which were requested by HMRC and there was therefore no evidence to support the claim. In all of the circumstances we found this evidence unconvincing.

We also noted that the information provided by Mr Hussain regarding employees’ payments of £600 per month was not borne out by the evidence. The bank statements showed that Mr Rashid had been paid just short of £3,000 between 1 July and 26 August 2014 and there were a number of entries showing payments of £1,300 or more per month. We found this was indicative of the unreliable nature of the information provided by Mr Hussain and in the absence of a cogent explanation for the payments we inferred that Mr Hussain did not retain robust records capable of supporting his claims.

Mr Brooks stated that Mr Hussain’s mental health issues had never been raised with him but he would have been willing to allow the Appellant additional time if required. He noted that at the time of the enquiry Mr Hussain was still running the Company and he assumed was capable of making the necessary decisions for the business regarding buying and selling, he therefore considered that Mr Hussain had made an informed decision not to cooperate with HMRC. He had also continued to correspond with the Appellant until recently to afford him the opportunity of providing the information requested by HMRC.

Mr Hussain stated that initially he had cooperated with HMRC and provided all the information available to him at the meeting including his usernames for his online accounts. He believed that this information would be sufficient for HMRC to obtain all the information from the accounts as he was unaware of HMRC’s powers. Later he stopped cooperating which is being used as an excuse by the officers; although he agreed that HMRC did not have sufficient information he queried how they could make a reasonable decision on the information they did have. Mr Hussain explained that he had told his representative that he was not responding because he was suffering from stress and had sought help from his doctor. He stated he had mentioned his health issues to the officers before the assessments were issued and that they had not taken this into account when alleging his actions were deliberate due to his lack of cooperation which left Mr Hussain feeling ignored and unheard. He explained that even though he had a representative his reaction was to push issues under the carpet and he even ignored his representative as he could not cope with the enquiry, so he chose to do nothing. Even though time has passed he has not necessarily improved, and he found it unfair for people to comment on his situation.

As to the Appellant’s mental health issues, Mr Davies explained that this was only raised approximately 18 months after the assessments were issued when he received a medical note. Health issues would always be taken into consideration, but Mr Davies reiterated that he had only sought access to the business laptop and records, noting that the Appellant was represented and had been offered ADR but had stopped communicating with his representative as well as HMRC. The view that the inaccuracies were deliberate and not careless was based on the fact it was Mr Hussain’s choice not to declare all income. Mr Davies noted that the Adspec account he had accessed was not the busiest account as the Appellant he had told HMRC that 85% of sales were made through eBay and that adhus786 was the busiest account.

We were satisfied that the Appellant had raised his health issues in correspondence, for instance personal problems were cited as the reason for cancelling a meeting with HMRC on 10 March 2016 although no further details were given at that point and we noted that there was no suggestion that the enquiries were the cause of the difficulties, for instance a record of a telephone call between officer Davies and Mr Zahur on 11 March 2016 noted:

“Phone call to Amir Zahur…as a follow up to yesterdays cancelled meeting. Mr Zahur confirmed Mr Hussain has appeared to wash his hands of the whole situation - he advised Mr Hussain has cited health & personal issues as the reasons. He confirmed he was aware Mr Hussain's wife was pregnant, that Mr Hussain had also seen a doctor in relation to his own health (condition unknown) and that he was also aware Mr Hussain was stressed in relation to reliability issues on a number of 'hoverboards' he had sold. Mr Zahur is under the impression he is unlikely to hear from Mr Hussain in the near future as his own attempted contact has been ignored…”

In early 2017 the Appellant highlighted that he had sought medical help for diagnosed depression and provided a doctor’s note in support. The issue was acknowledged by HMRC on a number of occasions, for instance it was specifically taken into account in correspondence in March and April 2017 and in the statutory review of penalty notices dated 26 September 2017 HMRC stated:

“I am aware that Mr Hussain has been to see a medical professional who has made a diagnosis and had has prescribed medication for him as well a referral for further health care. I have seen the information that has been supplied to the tribunal and it shows that medical help was sought in April 2017. You will appreciate that the errors in this case date back to April 2013 and the enquiry began in 2016. At this point it is not clear how your illness has impacted on the inaccuracy or on your ability to cooperate with the intervention. If you have further information regarding the extent of your illness we would require further evidence showing that.”

We accepted Mr Hussain had suffered, and continues to suffer, with mental health difficulties. However, we did not accept that this had been ignored by HMRC nor did we accept that there was evidence to demonstrate that it played any part in the submission of inaccurate returns during the relevant periods or prevented him from co-operating with the subsequent enquiries by, for example, providing his laptop. We also rejected the Appellants’ claim that he believed he had provided HMRC with sufficient information by way of his online usernames. It was clear from the repeated requests from HMRC for information that they did not have sufficient information and required access to the accounts.

Mr Hussain stated that his returns were correct and if they did contain any inaccuracies, he was unaware of this. If he had made mistakes this was due to his young age and the fact that this was his first business, but he did not intentionally mislead HMRC or submit incorrect figures. He stated that at the time of the enquiry he still had big plans for the Company and even after HMRC concluded their investigation he had not wanted to close the business. He was proud of his company and it had been his dream. Mr Hussain claimed that no account was taken of expenses such as purchasing the goods or postage which was information contained on the returns. Mr Hussain stated that he received many faulty goods and at the start of the business he had scrapped many of the items due to faults. Furthermore, just because the goods were purchased it did not necessarily follow that they were sold.

Mr Davies was asked whether he had considered that refunds may be shown in one of the accounts he had not seen as his analysis was based only on one account. He explained, and we accepted, that he could not make an allowance where no information had been provided; although some stock received might be faulty HMRC could not quantify the volume given the lack of cooperation from the Appellant and the fact that HMRC only had access to one out of the four trading streams which was obtained using a 3^rd party information request.

HMRC in closing, fairly in our view, revised their calculations to take account of costs of purchase. In the absence of any evidence from the Appellant to show that the adjustments were incorrect, we accepted the adjustments.

We agreed with HMRC that a record of faulty items and any refunds received would be expected. In the absence of any evidence to demonstrate that the Appellant had not received a refund or that any adjustment was necessary to take account of postage we rejected the Appellant’s argument. Similarly, we rejected the Appellant’s argument that HMRC failed to take shipping costs and fees into account. Instead, we preferred the evidence of HMRC that the bank statements showed net figures which could lead to a deduction for fees being made twice. Without the source information to show the true picture we found no basis upon which we could conclude that any adjustments should be made in this regard.

Mr Brooks confirmed that no special circumstances had been identified but he had considered the issue. He had taken the view that the Appellants’ behaviour could have been classed as concealed but decided not to interfere to the Appellant’s detriment with Mr Frost’s decision in this regard. Mr Brooks also explained that where additional turnover/income is identified as omitted from the Company’s submitted accounts, general accountancy practice where there is no evidence to the contrary, is to debit the DLA because if monies are not identified as credited to the Company bank account or retained in another account held by the Company, it has more likely than not been deposited into account(s) of the controlling director/shareholder for their personal use which would create an overdrawn DLA for Mr Hussain due to the Company loan to him for which the Company is liable to a s455 charge until the debt is repaid to the Company. He highlighted that the returns were inaccurate by a significant sum – almost three times the declared amounts – which he concluded must have been known to the Appellants and therefore deliberate. He added that no clear reasons were given for the Appellants’ lack of co-operation; although health issues had been mentioned in a letter to Mr Davies in 2016, Mr Brooks’ involvement came many years later and it was unknown whether the health issues had continued nor was it known whether Mr Hussain was suffering at the time of submitting the returns.

Mr Brooks explained that it was Mr Frost who made a judgement call about issuing PLNs in 2016 as he believed the Company was heading towards liquidation. The Company was struck off in 2017 which, he believed, demonstrated that the decision to issue PLNs was correct. The evidence of both Mr Frost and Mr Davies was that they believed there were grounds to issue PLNs given the substantial liabilities of the Company which led them to conclude that it may become insolvent. Mr Brooks explained that he supported the issue of PLNs as the Company ceased trading in December 2016 as stated in a letter from Altman, Smith & Co in a letter dated 30 August 2018. As far as he was aware the Company could not be wound up while enquiry was open and there did not need to be evidence that the Company would become insolvent; the HMRC documents to which he was referred were no more than guidance. It had not been his decision to issue PLNs and therefore he did not know what, if any evidence was obtained in support of the decision however with hindsight he thought it was a valid one.

Mr Brooks reiterated that the records would be held on the Appellants’ eBay and Amazon accounts which could be used to support the information declared on the returns. There was no evidence to support an adjustment for expenses such as postage and although they were claimed as costs in the Company accounts he had seen no evidence in support.

Mr Brooks added that he could not take into account margins as no records or information was supplied to support any adjustment. The payments from Amazon were paid net of fees, but fees were included in the accounts which were drawn up from deposits into the Company bank account which indicated there could be double reduction. Without the records HMRC could not verify whether the same occurred with PayPal and eBay and therefore no adjustment could be made without the records to show the true position.

Mr Hussain could not recall the margins on sales which differed throughout the year due to supply and demand but stated that they were low to the point where he questioned whether, after postage, fees and returns, the business was worth it. He gave an example whereby receipt of faulty batches on which he had paid postage negated any profit. He said that the 73% margins alleged by HMRC were unrealistic and that margins in the industry were known to be between 5 and 20% at most; his were less as the goods were unbranded and his company name on the goods was not established.

Again, we found the Mr Hussain’s evidence vague. Although he dismissed the mark-up as ridiculous, he provided no documentary evidence or details in oral evidence to support his assertion. We accepted the evidence of Mr Brooks that there was no evidence to support any adjustment for fees or postage and for reasons we will set out in due course we accepted that the reason for issuing PLNs was not without foundation.

In the absence of any records to support the assertion, we did not accept Mr Hussain’s claim that the turnover reached the VAT threshold in December 2013. We accept that the legal requirement is for registration 30 days after the month in which the threshold was exceeded. However, without the full business records of purchases, sales and payments and taking into account the import data and eBay information which contradicted the Appellants account, we rejected Mr Hussain’s evidence as vague and unsupported.

In summary, the Appellant maintains that HMRC failed to consider the full picture and that he fully cooperated with the enquiry via his agent. Although he cancelled one meeting, Mr Hussain attended another meeting at which he cooperated fully; he was advised by his doctor and accountant to miss the follow up meeting due to the stress he was suffering as a result of the enquiry. The accountant continued to provide information to HMRC. It was the Appellant’s first business and he tried to do everything correctly; he had a lot to learn in a short period regarding record-keeping, VAT and cash flow.

There is no basis upon which to raise any penalty assessments as nothing was done deliberately or intentionally. If he had intended to deliberately under-declare sales, he would not have disclosed all four of his trading accounts to HMRC. As the penalties are a percentage of the assessments, they should not be calculated until the substantive appeals are determined.

The backdated effective date of VAT registration is without foundation; HMRC’s computations are based on figures of imports but there is no evidence that taxable supplies were made in the period 1 January 2013 to 31 December 2013 which exceeded the VAT threshold. Imports do not necessarily mean sales.

The assessments are not to best judgment nor are they arithmetically sound or intelligently interpreted. In McCourtie v CEC LON/92/191 the Tribunal considered the principles in Van Boeckel and added the following propositions:

HMRC analysed eBay sales over a 24 month period (1 January 2014 to 31 December 2015) which they used to arrive at average price points. They then used the number of units imported on the import data to project total sales of £979,193. Due consideration was not given to the very low mark up on electronics and the fact that the goods came from China and the majority were faulty which resulted in their return to the supplier or they were scrapped.

In assessing sales, HMRC only used data from one eBay account which does not give a true reflection of the Company. HMRC could have used its powers to obtain records for other accounts but failed to do so which demonstrates incompetence. Furthermore, Mr Hussain had made HMRC aware of all 3 eBay accounts which does not support the allegation that he was omitting sales and fabricating records.

HMRC have also failed to take into account expenses when selling with Amazon or Ebay; there are seller premiums upwards of 10-15%, shipping costs which can be upwards of 15% of the sale price and merchant processing fees such as PayPal which are in the region of 3%. Purchase costs were alco not taken into consideration and the mark-up of 73% is outrageous, particularly in the electronics industry.

Over a three-year period HMRC contend that the Appellant made £1,758,635.60 profits which was not viable and there is no evidence to support actual sales of such value. There is no evidence of these amounts being received by the Company or the director; a statement of assets and liabilities shows that as at 30 August 2018 Mr Hussain had no real assets. A further statement dated 5 October 2020 shows personal cash and assets of £450.40, liabilities in excess of £1000 plus loans from friends, company assets of £786.14 and liabilities in excess of £50,000. There is no evidence of a lavish lifestyle or where the funds went. Furthermore, the capital introduced into the Company by Mr Hussain cold have come from savings and Mr Hussain stated that he received loans from family and friends.

The penalties assume that inaccuracies are due to deliberate behaviour however Mr Hussain did not intend to transgress any guidelines or rules. He may have been naïve which meant he was careless, but he did not deliberately under-declare any sales or profits. Any lack of cooperation or cancelled meetings was due to medical reasons and HMRC were provided with evidence to show he was suffering from depression which has been ignored. The telling, helping and giving element is not indicative of the behaviour in itself in relation to any inaccuracies but is used to determine the reduction of any penalty however HMRC officers used it to show how they assessed deliberate behaviour.

Relying on HMRC’s guidance CH81140 and CH402704 the Appellant submitted that the inaccuracies were, at worst, careless and that HMRC had failed, as required by CH84615 to ask the Appellant about the inaccuracy and ensure that he was aware of his Article 6 rights. It was submitted that there was no evidence to support the officer’s suspicions that the Company may become insolvent as a strike off notice only occurred in March 2017 and was postponed; it therefore did not exist at the time the PLN was issued in 2016. Either the Guidance was ignored or not known to the officers which indicates their negligence and incompetence.

In submitting that there was no evidence to suggest that the Appellant knowingly or intentionally submitted inaccurate returns the Appellant relied on Auxilium Project Management v HMRC [2016] UKFTT 249 (TC) in which the Tribunal stated:

The factors set out above together with Mr Hussain’s financial position makes personal liability unjustified and unproductive; it is not in the public interest and the liabilities would not be recovered as shown by the statement of assets and liabilities.

The Appellant submitted that requests for independent reviews were ignored; they were made on 18 November 2016 but not carried out until 26 September 2017 after debt proceedings were initiated and in one case after an appeal was notified to the Tribunal.

A special reduction under para 11 Sch 24 FA 2007 is requested on the basis of Mr Hussain’s financial situation; this was not considered by HMRC.

The fact that HMRC have varied assessments due to computation errors demonstrates HMRC’s incompetence and lack of due care. The penalties and assessments should be struck out or at least limited to the Company.

The Company records were requested in the meeting with the Appellant and his agent on 2 February 2016. To date, despite repeated requests the business records and laptop have never been provided. HMRC submitted that this indicates that sufficient records have not been maintained to support the returns. The only records provided by the Appellant were 42 pages of bank statements in July 2021 which were considered by the officers. Whilst HMRC acknowledge that the Appellant had mental health issues, he was afforded a significant amount of time – 6 years - in which to produce the information requested and Mr Brooks continued to correspond with him until a late stage in proceedings advising that he was willing to review any information that the Appellant provided. In the absence of any information being provided by the Appellant to verify the returns, HMRC had no alternative but to use the limited information available to them from 3^rd parties relating to goods imported for resale.

The onus for VAT assessments is on the Appellant to demonstrate that they have not been made to the Officers best and reasonable judgement. HMRC contend that no compelling evidence has been provided by Adspec Ltd to discharge that onus.

The Appellant contends that this is his first business and he has tried to do everything correctly and also that he had a lot to learn in a short time about record keeping, VAT and cash flow and did not do anything wrong on purpose. HMRC contend that regardless whether or not this was the Appellant’s first business, there is publicly available information, plus the Appellant’s own accountant, from which he could establish what records needed to be maintained, for how long and in what format.

HMRC recalculated the profits of the Company using specific data made available in respect of the volume of goods imported by Mr Hussain and Adspec Ltd. The mark-up exercise was carried out as precisely as possible in the officer’s best and reasonable judgement subject to the Company’s failure to co-operate with the enquiry and to supply statutory records requested.

HMRC contended that the principle of best judgement is well established and has been adopted in line with the High Court Appeal case of Van Boeckel v C&E QB Dec 1980 , [1981] STC 290. HMRC consider the principles adopted by Van Boeckel can be summarised as follows –

HMRC submitted that by using the principles in Van Boeckel, they have clearly demonstrated that best and reasonable judgement was used in establishing the under-declared sales of Adspec Ltd resulting in additions to profits for CT and additional VAT due on the under-declared sales. HMRC submit that the assessments made were not frivolous, vexatious, or capricious but were made on a considered basis utilising the limited information that was available to the officers. HMRC have seen no documentary evidence or other records maintained by the Appellant, submitted as requested to support any of these purported expenses now being referred to.

HMRC contended that to date the Appellant has provided no meaningful data or accounts to support the assertion that the VAT assessments raised by HMRC are excessive.

The Company completed a VAT 1 registration form to register for VAT with a voluntary registration date of 1 January 2014. HMRC argued that the data made available to them clearly demonstrates that Adspec Ltd exceeded the VAT registration threshold prior to the stated registration date of 1 January 2014. HMRC contended that based on evidence seen, the revised effective date of registration is 4 March 2013.

The Appellant was notified of the revised, backdated registration date by letter dated 17 August 2016 and asked to provide any new information within 30 days. The Tribunal are advised that no response was received.

HMRC do not understand the validity of the assessments raised on Adspec Ltd to be in dispute but accept that a positive case must be advanced to demonstrate that the assessments are validly raised (see Burgess; Brimheath Developments Ltd v Revenue and Customs Commissioners [2014] UKFTT 301 (TC)). HMRC submitted that the statutory conditions for raising the assessments are met as Adspec Ltd generated additional turnover and trading profits in the periods assessed that ought to have been assessed to tax but had not been assessed and that in accordance with Para 41(1)(b) the assessment to tax for each of the periods assessed is or has become insufficient.

In Revenue and Customers Commissioners v Tooth [2018] UKUT 38 (TCC) the meaning of a discovery is set out as follows:

“… The word “discovers” does connote change, in the sense of a threshold being crossed. At one point an officer is not of the view that there is an insufficiency such that an assessment ought to be raised, and at another he is of that view. That is the only threshold that has to be crossed.”

HMRC contended that as a consequence of the enquiry into the Company Tax Return of Adspec Ltd there was a discovery from information newly made available to them that an amount that ought to have been assessed to tax had not been assessed. HMRC contended that an examination of the import data made available in conjunction with the data provided by E-bay created an awareness of previously unknown facts that materially altered HMRC previous understanding of the Company’s tax affairs.

HMRC contended that the behaviour that caused the inaccuracy is deliberate, and the condition at Para 43 is met. HMRC submitted that, as previously stated, by not keeping robust records and fully considering the accuracy of the records, the actions of the Appellant is considered to be deliberate.

HMRC submitted, relying on the case of Auxilium Project Management v HMRC [2016] UKFTT 249 (TC) that for each accounting period and VAT period, the inaccuracy was a deliberate one.

Within the Appellants skeleton argument, it is repeatedly stated that Mr Hussain ‘…did not intend to transgress any guidelines or rules…’ and ‘…if there are any errors , these are not due to consciously under declaring any sales or profits.’ HMRC contend that a repeated failure to maintain adequate and robust records to support the entries in a Return is in itself a deliberate act and cannot be reasonably attributed to a lack of experience.