TC09555 - [2025] UKFTT 00748 (TC)

Having concluded that Officer Pinder discovered an insufficiency in 3KH’s self-assessment to tax in respect of the section 455 CTA charge in circumstances where deliberate conduct has been established, we have to decide whether the 3KH can satisfy us that the underdeclared profits were not in fact extracted by way of loan or otherwise advanced to them. If they are able to satisfy us, we would use our powers under section 50(6) TMA to reduce the Discovery Assessments and we would set aside the NICs Decisions

Somewhat ironically both parties contend that there is no direct evidence as to what happened to the under declared profits:

In our view the Supreme Court analysis in Armstrad plainly sets the position in civil litigation but not where there is a statutory burden of proof. We read the decision in Thomas as requiring that whilst it was not for HMRC to prove that the taxpayers in that case were settlors, the assessing officer did have to show, by reference to the evidence, that they held an objectively reasonable belief that the taxpayers were settlors. As the reference to R v The Kensington Income Tax Commissioners (ex-party Aramayo) (1931) 6 TC 279 confirms, that belief need not be ascertained by legal evidence. We consider that a prima face case, in that case, that the taxpayers were settlors, could be made out by reference to the circumstances from which an inference might reasonably be drawn. It will then be for the taxpayer to show why the inference is wrong.

In this case HMRC have shown that very substantial sums of cash were not included in the 3KH’s declared turnover resulting in an understatement of profits and an insufficiency in the tax returned by 3KH. Officer Pinder did not need to know where the money had gone (and she accepted that she did not know) as in the absence of evidence to indicate that the business retained that cash the logical, or only, inference to draw was that the cash was extracted by or for the benefit of the participators i.e. MJ and MB. We consider that HMRC have established a prima face case of extraction, and it is then for the Appellants to show what did happen to the cash we find to have been suppressed.

The Appellants contend that even were HMRC to have made a prima face case that the profits were extracted as both MJ and MB stated in oral evidence that they had not received a loan from 3KH, and that statement had not been cross examined, it was to be accepted and the inference had been rebutted. In response to the allegation that he had failed to cross examine on this critical issue Mr Simpson argued that HMRC’s position on section 455 was clear, the witnesses were not to be believed and there was no other evidence to support their bald statements that they had not received a loan.

In this regard we note that neither of the witness statements asserts that no loan or advance was made to either of MJ or MB. We permitted clarificatory questions to be asked by Mr Blades of the witnesses. We note that Mr Blades did ask MB whether he had received a loan from 3KH. That could not have been a clarificatory question given the absence of any reference to extraction in the witness statement. Further the question was limited to a loan and not to any other form of advance. Having carefully considered our notes it does not appear MJ was asked by Mr Blades whether he received a loan or advance prior to cross examination [he may have asked him in re-examination].

In any event it remains a matter for us, whether we believe the evidence, and we do not believe the witnesses in this regard. They made no attempt to explain what had or could have happened to the cash other than a vague assertion that it may have been stolen by staff contrary to their asserted zero tolerance of cash shortages. Such an assertion is literally incredible and wholly unbelievable in light of our findings as to the extent of the suppression and the hands-on way in which MJ and MB were involved in the business.

We therefore find that the inference that profits were extracted is a very strong one in respect of which there was no contrary evidence we therefore uphold the section 455 CTA charge.

3KH accepts that if, as we have, found that the fund were extracted the NICs Decisions and Penalties were correctly raised.