TC09512 - [2025] UKFTT 00522 (TC)

On 9 November 2016 HMRC send letters to the Appellants stating that they had reason to suspect tax fraud and inviting the Appellants to co-operate with HMRC under the CDF. This offer was accepted on 4 January 2017 and an outline disclosure provided to HMRC.

Pursuant to the outline disclosure SA stated:

“Undeclared rental income:

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Rental income from two UK property has not been declared properly since 2012

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Rental income from property in Bangladesh has not been declared since 2010/11

Commission income from international students (Bangladesh)

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Commission income from international students recruited mainly from Bangladesh, recruited to UK educational institutions has not been declared to HMRC since 2010.

Dissolved Company: co no: 08441309

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Dividend income from “St Andrew’s Student Services LTD” from March 2014 to January 2014

…

I am the 50% owner of the rental income situated in Bangladesh”

SA accepted that the failures identified were deliberate. Confirming that deliberate conduct from 2012 for the UK property income, 2011 for the overseas property income, 2010 for commission income and March 2013 for the dividends.

NN’s disclosure stated:

“Rental income:

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Rental income from 1 UK property at 54 Brixham Street has not been declared properly

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Rental income from overseas (Bangladesh) has not been declared since 2011

Commission income:

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Commission income from international student recruitment services mainly from Bangladesh to UK educational institutions not been declared to HMRC since 2010”

Deliberate failures were disclosed from September 2013 in respect of the UK rental income, 2010 from the commission income and 2011 for the overseas rental income.

NN’s CDF also explicitly stated: “I will co-operate with HMRC to calculate and pay the correct amount of tax and interest payable to HMRC for the concerned periods.”

HMRC accepted the CDF on 27 January 2017 confirming that they would not start criminal investigations with a view to prosecution for the tax losses brought about through the Appellants’ deliberate conduct, but that criminal investigation may ensue if there were any omission from the disclosures made under the CDF.

A meeting between HMRC, the Appellants and their representative was arranged to progress the disclosure and quantification of tax losses on 26 April 2017. At the meeting SA and NN explained the operation of the respective sole trader businesses recruiting students for an educational establishment that they established and operated from 2009 to 2014 (St Andrew’s College (SAC)) through St Andrews College Limited (SACL)(a company of which SA was the sole or principal shareholder and of which NN, for the majority of the period of operation, was the sole director). SA and NN confirmed that SAC had provided education to predominantly Bangladeshi nationals in the period in which it was licenced as a tier 4 provider (2010 – 2014). SA and NN confirmed that it was the income from these recruitment activities which had been deliberately suppressed.

Some details were provided about the purchase of a property in Flansham House by SA which had initially been occupied by SA and NN but rented out from 2012 when a subsequent matrimonial home had been purchased. SA explained that a room in that new property had been let since 2012. The rent obtained from Flansham House was said to have been £850-£1,050 per month and that from the matrimonial home to be £700 per month. Some of the rent received had been declared on SA’s self-assessment return but not accurately. Both properties were stated to have been purchased with a mortgage.

NN confirmed that she was the sole owner of a property on Brixham Street. It had been purchased with a mortgage and had been let for between £1,150 and £1,350 per month from 2013.

SA and NN explained the purchase of, and letting arrangements for, the property in Bangladesh. They owned a 50% share each. NN’s father was said to manage the property in their absence and to pay them the rent collected on their approximately biannual return trips to Bangladesh.

SA provided further explanation of the underdeclared dividend he had accepted as received from a second company through which he taught students.

On 3 May 2017 HMRC wrote to the Appellant summarising the meeting and requesting clarification of certain matters arising. They invited a full disclosure report to be prepared.

There was a protracted period of a year before the report was submitted to HMRC on 14 May 2018. In that period HMRC wrote to the Appellants and/or their representatives on 6 June 2017, 1 September 2017, 27 October 2017, 18 December 2017, 21 December 2017, 2 January 2018, 5 February 2018, 8 February 2018, 27 March 2018, and 10 May 2018.

Through the course of that correspondence the Appellants’ representative sought meetings with HMRC. These meetings were attended by their representative without his clients on 18 September 2017, 17 November 2017. Periodic updates were provided, and extensions requested to the deadline by which the disclosure report would be submitted. However, it was not until HMRC threatened to remove the Appellant from the COP 9 process and take over the investigation unless the report was provided no later than 16 May 2018 that it was finally provided.

The report was prepared by reference to 62 appendices and schedules of which 17 (appendices 11 – 18, 19 – 21, 33, 38 – 44) were not provided with the report.

The primary source of information for the disclosure was amounts of cash deposited in the Appellants’ bank accounts. It was claimed that these deposits were from various sources: commission income, income from the UK and overseas rental properties and other miscellaneous sums including loans, reimbursement of expenditure incurred on behalf of the companies, cash salaries, and cash dividends. The report calculated the disclosure of commission income by deducting amounts considered attributable to other sources.

Tax due was calculated by reference to each income source after deduction of expenses all of which were estimated and in respect of which no underlying evidence was provided. The expenses claimed in respect of the commission income were: accountancy and travel expenses to Birmingham, Manchester and Bangladesh. With regard to the UK property income NN claimed mortgage interest, gas safety certificates, insurance, agency fees, licences repairs, wear and tear, and accountancy fees (no expenses were claimed by SA).

We note in particular, that the report narrative accepted that property income had been derived from Flansham House from 2012; however, in the tax liability calculations rent-a-room relief claimed from tax year ended 5 April 2011.

Further disclosures were made in the report concerning undeclared employment income and dividends. These disclosures were accepted by HMRC and are not in dispute.

The net effect of the disclosures accepted resulted in the Appellants admitting the under declaration of the following tax liabilities:

HMRC’s review of the report and information provided was apparently hampered by poor engagement by the Appellants. On October 2018 difficulties in engagement were explained as, at least in part, attributed to NN’s ill health for which some documentary materials were provided.

HMRC were required to chase provision of the missing schedules and responses to queries in respect of the report on: 6 June 2018, 10 August 2018, 27 February 2019, and 4 September 2019. The number of chasing letters/emails required promoted HMRC to indicate that unless greater engagement was demonstrated HMRC would conclude that the Appellants no longer intended to abide by the CDF. This prompted the Appellants’ representative to write on 15 October 2019 providing some of the information requested and promising the missing appendices and further requested information at a meeting he wanted arranged for November 2019. In the end no meeting could be arranged, and the additional information requested was not provided to HMRC prior to their issuing the Assessments on 4 February 2020.

Having undertaken a full review of the information available to them HMRC concluded that the reported disclosure could not been accepted in a number of specific regards:

The letter accompanying the Assessments dated 4 February 2020 explained the basis the adjustments made to the disclosure and thereby the sums assessed.

Following the issue of the Assessments the representative contacted HMRC to explain that the requested further information and appendices would be provided within the following 2 – 3 weeks. On 2 March 2020 the information and documentation was promised before 23 March 2020 and the Assessments were appealed. No grounds were provided. A further extension of 2 weeks was requested on 14 March 2020. Whilst a further extension was denied, on 22 March 2020 the representative wrote to HMRC explaining that appendix 11 had already been provided and that appendix 13 had been posted. It was claimed that appendix 12 was not available. The remaining missing appendices were listed but not apparently provided. In a call the following day the representative informed HMRC that documents and files could not be sent by email due to their size. HMRC confirmed that they could be posted.

Further information was sent on 7 April 2020, but HMRC were informed that accounts for the rental properties could not be sent until after covid restrictions had been lifted. HMRC reviewed the documents provided and by response dated 11 May 2020 noted that bank statements from some accounts and for periods relating to other accounts had not been provided and the majority of the outstanding appendices also had not been provided.

On 22 June 2020 the representative promised all outstanding documentation by 26 June 2020. It was not so provided. HMRC chased it in a call on 24 July 2020 and it was promised by 27 July 2020. Some documentation was provided, and it was confirmed that appendices 15 – 17, 19, 21, 33, 39 – 40 remained outstanding. HMRC were asked to confirm what else they considered to be outstanding.

No further documents were provided and on 16 October 2020 HMRC issued penalty explanation letters. These letters set out that for tax due in connection with all matters other than overseas rental the penalties were category 1 (domestic) penalties and would be issued at 58.75% for tax years ended 5 April 2011 – 2015 and 66.25% for the year ended 5 April 2010. In respect of undeclared overseas rental income the penalty was fixed at 85.87%. The penalties reflected that the errors were deliberate (but not concealed) and disclosure had been prompted in respect of tax years ended more than 3 years prior to the disclosure. In respect of the overseas property rental income Bangladesh was a category 2 penalty (one involving and offshore matter in a category 2 territory). 45% mitigation had been given for each failure arising in tax years ended 5 April 2011 – 2015 with 15% mitigation for tax year ended 5 April 2010.

On 31 October 2020 some of the missing information said to have been included within the appendices was provided, though by no means all and in many regards the information provided was not accompanied by supporting evidence and represented bald statements. By their response to the provision of this information HMRC noted further concerns arising from it and contradictions within it.

The Penalties were issued on 3 November 2020. They were appealed on 2 December 2020. The appeal provides no grounds and seeks to explain that the missing appendices are “very difficult to acquire” but would not fundamentally change the tax calculations in the disclosure report.

In their view of the matter letter issued on 31 December 2020, HMRC note with particular concern that documents said to have been relied upon to prepare the disclosure report were, by 2020, said not to exist. HMRC confirmed their view that the Assessments properly treated cash deposits as attributable to commission income. HMRC were satisfied that the amounts declared as rental income from UK and overseas properties in the report were assessable but were not subject to the deductions claimed.

HMRC accepted an out of time request for review. Following the review HMRC’s position was: