UT/2023/000126 - [2025] UKUT 00145 (TCC)

The Appellants submit that the NCA bore a burden to establish that income was derived by the Appellants from money laundering or other trading activities which each of them carried on. It is said that the FTT erred in law in concluding that the NCA did not need to discharge that burden. The fundamental point advanced is that the FTT erred in failing to appreciate that the NCA was required to prove an actual loss of tax in relation to a trade, that trade being money laundering. The FTT was wrong to consider at [111] that the relevant burden to show loss of tax had been satisfied because of its earlier conclusion that the qualifying condition in s317 had been satisfied. Mr Sykes submitted that the FTT confused the requirement for the NCA to show there was a discovery under s29(1) TMA with the requirement to show loss of tax under s29(4) TMA and flowing from that a loss of tax for the purposes of s36 TMA.

The key issue here is whether the majority of the assessments were in time under s36 TMA. Section 29(4) TMA is relevant because, as explained in Mullens v HMRC [2023] UKUT 244 (TCC),a case we look at in more detail below, the same burden as to loss of tax applies in relation to s36 time limits as to loss of tax in s29(4) TMA. The issue is one which applies to assessments for all years apart from 2011/12 and 2012/13 (Mr Butt) and 2011/12 (Mrs Begum).

The Appellants’ argument that the FTT erred in its consideration of the NCA’s burden comprises a number of elements which we will deal with in turn:

Burden of proof in relation to loss of tax – Mullens v HMRC

The Appellants say that the NCA did not satisfy the burden on it to establish a loss of tax for the purposes of s29(4) and s36(1A) because it did not identify a source of income. The FTT failed to appreciate that the NCA was required to establish a source and had not done so.

We begin by noting a number of propositions which were not in dispute. Subject to s319, the NCA steps into the shoes of HMRC when making assessments. It therefore falls to the NCA to show that there was a discovery within s29(1) TMA that income which ought to have been assessed has not been assessed, in other words a loss of tax. It must also show that one of the conditions in s29(4) or (5) are satisfied. Section 29(4) requires that the situation mentioned in s29(1) has been brought about carelessly or deliberately. The extended time limit in s36 also requires that a loss of tax be brought about carelessly or deliberately. Both parties relied on what was said by the Upper Tribunal in Mullens and neither party suggested that we should depart from the reasoning in that case.

Mullens concerned a taxpayer who had failed to declare various payments received from his employer, contending that the payments were gifts. The Upper Tribunal drew a distinction at [30] to [32] between a discovery, involving a subjective test, and the existence of an actual tax loss being a question of objective fact:

“30.

Thus, and by contrast with the version of s 29 considered in para [24] above, to make a discovery assessment for a period for which a taxpayer had submitted a self-assessment return, it was no longer sufficient for an inspector or the Board to ‘discover’ certain matters. Additional threshold conditions needed to be satisfied as well (see s 29(3)). The condition relevant to this appeal concerns culpable conduct on the part of the taxpayer, namely sub-s (4). It is not in dispute that HMRC bear the Section 29(4) Burden of showing that the condition in s 29(4) is met.

31.

The ‘situation’ referred to in sub-s (4) is a reference to what has been described as an ‘actual insufficiency’ in the amounts charged to tax (see [33] to [34] of the judgment of Auld LJ in Langham (Inspector of Taxes) v Veltema [2004] EWCA Civ 193, [2004] STC 544, (2004) 76 TC 259, which considered the meaning of ‘the situation’ in the context of s 29(5)) or the ‘fact of the undercharge’ in Hargreaves v Revenue and Customs Comrs [2014] UKUT 395 (TCC), [2015] STC 905 (‘Hargreaves UT’) at [21](6)). The ‘situation mentioned in subsection (1)’, therefore, is not a reference to HMRC’s making of the discovery, as specifically confirmed in Hargreaves UT at [21](6).

32.

More generally, and contrary to some of Mr Goldberg KC’s oral submissions, s 29(4) is not concerned with the officer’s subjective opinion but with objective fact (see [21] to [28] of Lewison LJ’s judgment in Hankinson v Revenue and Customs Comrs [2011] EWCA Civ 1566, [2012] STC 485, [2012] 1 WLR 2322). It follows, therefore, that s 29(4) is asking whether the ‘fact of the undercharge’ was brought about by a taxpayer’s careless or deliberate conduct: HMRC’s opinions on the taxpayer’s conduct, and the amount of the undercharge, are not relevant.”

It was not in dispute before us that where HMRC has discharged a s29(4) burden then they would need to do nothing further to discharge the s36 burden, beyond showing the assessment in question was made within the 6 year or 20 year time limits. That was the issue that lay at the heart of Mullens. Was there an additional requirement for the s36 burden beyond the s29(4) burden? The parties in the present case disagree in their analysis of what that burden requires. The Appellants argue that an actual loss of tax arising from a particular source needs to be identified to meet the s29(4) burden and therefore the s36 burden. The NCA argues that this is not required. It should be noted the FTT did not have the benefit of Mullenswhich was issued a month after the FTT issued the Decision in this case.

It is also worth pointing out that the issue in the present appeal is not whether the section 29(4) burden has been met, but whether the section 36 burden for extended time limits has been satisfied. That is because, as the FTT found at [117], even if the NCA had not established the s29(4) burden then the condition for a discovery assessment in section 29(5) would have been satisfied. The tax loss was not something an officer could have been aware of at the time the officer ceased to be entitled to commence an enquiry into each of the relevant years of assessment.

We consider that the UT’s analysis in Mullens provides a complete answer to the Appellants’ case that the legal principles on s29(4) TMA and therefore s36 TMA require the NCA to establish an actual loss of tax from a specified source, namely a trade of money laundering.

To understand the Upper Tribunal’s reasoning in Mullens it is helpful first to appreciate what was common ground in that case and the particular matters which the taxpayer had argued that it fell to HMRC to establish (referred to as “Constituents”). The Upper Tribunal explained the grounds in Mullens as follows (at [9(1)]):

“9… (1) Grounds 1 to 4 (the “Assessment Appeal”) relate to the ETL [extended time limit] assessments only (dealing with Payments 1 to 4). It is common ground that, given the way that HMRC put their case, they bore a burden of proof in two respects. First, they had to establish that the pre-condition set out in s.29(4) of TMA was present (a “Section 29(4) Burden”). Second, they had to establish that the requirements of s.36(1) or (1A) of TMA were met so that they could make an ETL discovery assessment (a “Section 36 Burden”). Mr Mullens has not challenged the FTT’s decision so far as relating to the Section 29(4) Burden. However, he argues that the FTT erred by failing to realise that, for HMRC to discharge their Section 36 Burden, they had to show, in addition to culpable conduct, there was an actual loss of some tax in the years of assessment covered by the ETL assessments. Mr Mullens argues that to discharge their Section 36 Burden, HMRC needed to establish matters such as (i) the taxable source from which the payments derived; (ii) the status of the payments as income (rather than capital); and (iii) that the payments were taxable in the years specified in the ETL assessments, as distinct from other tax years (“Constituents (i) to (iii)”). Mr Mullens argues that the FTT erred by failing to recognise that HMRC bore this Section 36 Burden and/or by upholding the ETL assessments relating to Payments 1 to 4 when HMRC had not discharged that burden.”

The Upper Tribunal closely analysed Hurley v Taylor [1998] EWCA Civ 1605,Hudson v Humbles (HMIT) (1965) 42 TC 380 and James v Pope (HMIT) (1972) 48 TC 142. It stated at [48]:

“48.

In our judgment, the effect of Hudson, when read together with s.47(1) of the Income Tax Act 1952 was that (i) the Revenue bore the burden of proving a threshold condition, namely the presence of “fraud or wilful default” in connection with or in relation to income tax; (ii) to discharge that burden, the Revenue necessarily had to establish that some income tax is unpaid; (iii) to discharge that burden, the Revenue did not need to establish Constituents (i) to (iii); but instead (iv) if the Revenue could show (for example, by way of capital statements) that there was a prima facie case of income tax not being paid as a result of fraud or wilful default which the taxpayer did not satisfactorily answer, that was sufficient for the Revenue to discharge their burden and the burden then shifted to the taxpayer to show why the assessment was incorrect.”

By way of background, capital statements are statements of assets and liabilities and income and expenditure that were frequently used in tax investigations to reveal under-declared income by reference to changes in the taxpayer’s net assets over time. They will not necessarily identify the source of an unexplained increase in net assets. In the present appeal, the NCA carried out a more straightforward exercise focussing on expenditure which was not apparently funded by any known income.

The Upper Tribunal went on to explain at [49] to [50] the nature of the burden on HMRC and its rationale:

“49.

Having concluded that was so as a matter of statutory construction, Pennycuick J [in Hudson] went on (at p.387) to say that this outcome was in accordance with the justice and common sense of the matter: “The taxpayer knows the full facts, and the Revenue does not. In the nature of things, it must often be the case that, even if the Revenue can show a prima facie case that receipts have not been satisfactorily accounted for, it has no material upon which to set up a prima facie case for bringing the receipts in question under one or other source of income. On the other hand, it is always open to the taxpayer to challenge the assessment, not only on the ground that there has been no wilful default but also on the ground that the receipts did not represent income from the particular source selected by the Revenue.”

50.

That judgment was approved in James v Pope (Inspector of Taxes) (1972) 48 TC 142 in a judgment given by Ungoed-Thomas J. The limited nature of the burden on the Revenue was again emphasised: “‘prima facie case’ may in the present context be used in the sense of a case which requires explanation on the part of the taxpayer of the unexplained receipts or, alternatively, in the sense of a case which requires either such explanation or explanation why such explanation cannot be given”.

The above propositions were summarised by Park J in Hurley and his summary was incorporated in the Upper Tribunal’s discussion in Mullens at [60]which also helpfully incorporated references where the Court of Appeal in Hurley differed from Park J:

“…1. By s 36(1) of the Taxes Management Act 1970 an assessment to income tax can be made on a person outside the normal six years period (but subject to a maximum 20 years cut-off) 'for the purpose of making good to the Crown a loss of tax attributable to his fraudulent or negligent conduct'.

2.

This requires the Revenue to show: (1) fraudulent or negligent conduct by the taxpayer; and (2) a loss of tax attributable to it.

3.

On appeal to the commissioners the burden rests on the Revenue of establishing para 2(1) and (2). If they do not discharge the burden the appeal should be allowed (see e g Hillenbrand v IRC (1966) 42 TC 617 at 623 per the Lord President (Clyde)). I will call this 'the s 36 burden'.

4.

The burden does not rest on the Revenue to any greater extent than the s 36 burden. If they establish some fraudulent and negligent conduct and some loss of tax attributable to it they have satisfied s 36. From then on s 50(6) takes over and applies as it does for in-date assessments: that is to say, thereafter the burden rests on the taxpayer to establish that the assessment is wrong (see eg Johnson v Scott (Inspector of Taxes) [1978] STC 48 at 53).

5.

Reverting to the s 36 burden which rests on the Revenue, it may or may not be discharged simply by capital statements which show deficiencies. Whether it is so discharged or not depends on whether the taxpayer tenders any explanation of the deficiencies, and if he does, on how the commissioners view his explanation. [There was a further sentence here in Park J’s judgment which is not repeated because it was rejected by the Court of Appeal]. Normally it makes no difference whether a tribunal says that it rejects some item of evidence or that it does not accept it, and the two expressions are often used indiscriminately. Where, however, the burden of proof is in issue the distinction between them can be important.

6.

To be precise about a case where the Revenue produce and prove capital statements which show deficiencies:

6.1

If the taxpayer advances no explanation for the deficiencies the capital statements by themselves can, and usually do, discharge the s 36 burden (see Hudson v Humbles (Inspector of Taxes) (1965) 42 TC 380 at 386 per Pennycuick J, James v Pope (Inspector of Taxes) (1972) 48 TC 142 at 150 per Ungoed-Thomas J).

6.2

If the taxpayer advances an explanation but the commissioners reject it (that is, they positively disbelieve it) the capital statements by themselves can, and usually do, discharge the s 36 burden. Commissioners often have cases where the taxpayer gives evidence seeking to explain the deficiencies by reference to betting winnings. The commissioners listen to the evidence, including the cross-examination, and in many cases they reject it: they find it to be untrue. That, taken with capital statements which show deficiencies, is enough for the Revenue to discharge the s 36 burden. This judgment should not be understood as indicating that in my view whenever a taxpayer alleges that he won money by betting, the Revenue must produce specific evidence that he did not. What I have said in the above paragraph is subject to 7.1 below.

6.3

[This paragraph is not repeated because it was rejected by the Court of Appeal].

7.1

If the commissioners reject the taxpayer's explanation and therefore conclude that the capital statements are themselves sufficient for the Revenue to discharge the s 36 burden, their decision may be challenged by the taxpayer on appeal to the High Court but only on the Edwards v Bairstow ground that a decision positively rejecting the explanation (as opposed to one merely not accepting it) was one which no reasonable body of commissioners could possibly reach. …”

The Upper Tribunal summarised its own conclusions as follows at [69]:

“69.

From our review of the statutory provisions and authorities, we derive the following conclusions:

(1)

As a matter of statutory construction, if HMRC have discharged a Section 29(4) Burden, they need do nothing further to discharge a Section 36 Burden beyond proving that the ETL assessment in question was made within the 6-year or 20-year period specified in s 36(1) or s 36(1A) of TMA as the case may be. Nothing in the authorities we have been shown, including Hurley, alters that conclusion.

(2)

Where HMRC do not need to discharge a Section 29(4) Burden (for example, where a discovery assessment is made in reliance on s 29(5) of TMA or where the taxpayer has not submitted a self-assessment return for the tax year in question), the approach to the Section 36 Burden set out in Hurley remains valid notwithstanding changes to the statutory landscape since it was decided. By way of a summary of that approach as applicable to the facts of Mr Mullens’ appeal (which should not be taken as a substitute for the more detailed approach set out in Hurley itself):

(a)

There is a clear asymmetry in information between taxpayers and the tax authorities: taxpayers know about their affairs while HMRC can, in the absence of information as to those affairs, often do little more than make inferences from such information as they do have.

(b)

In the most egregious cases (such as fraud on the part of the taxpayer) HMRC are likely to be faced with taxpayers who have attempted to conceal the true position or put obstacles in the way of HMRC finding out the relevant material;

(c)

Consequently, if HMRC wish to make a discovery assessment, they will, almost inevitably in those egregious cases, struggle to do the job that the taxpayers are required by law to do, namely analyse a full and complete set of facts and then produce an accurate assessment of their tax liabilities.

(d)

The law recognises that essential difficulty by imposing a Section 36 Burden requiring HMRC to demonstrate only that the conduct in question meets the relevant culpability standard having a link to the tax being assessed and that the assessment was made in the requisite 6-year or 20-year period. Discharging the Section 36 Burden requires HMRC to demonstrate that the conduct resulted in some tax going unpaid as otherwise the requisite link will not be present.

(e)

However, the law does not require HMRC to do something that they are not equipped to do in those cases such as establish the presence of Constituents (i) to (iii).

(f)

The paradigm case in the past was where the Revenue produced capital statements which, prima facie, showed a loss of tax as a result of culpable conduct requiring an explanation from the taxpayer. If that explanation was not accepted, the Revenue would have met their Section 36 Burden. It would then fall to the taxpayer to displace the assessment: there is nothing unfair or unexpected in that as it is the taxpayer who has the relevant information.

(g)

However, the paradigm case considered in Hurley is not the only case. HMRC can meet their Section 36 Burden by putting forward a prima facie case of a loss of tax brought about by culpable conduct that does not rely on capital statements if the taxpayer fails to answer that prima facie case adequately.

In the above paragraphs it can clearly be seen that identification of a specified source (Constituent (i)) was not viewed as necessary in the context of meeting the s36 burden. As regards the relevance of that conclusion to this case, we agree with Ms Black that the exercise of putting together capital statements, with their limitations in terms of identifying the source of any particular income, was similar in character to the exercise the NCA carried out here of identifying expenditure and bank deposits that were unaccounted for and called for an explanation. In his oral submissions Mr Sykes took us to a number of cases where although capital statements had been accepted, a source had been identified. However to the extent that in such cases a source could be identified the cases do not assist; they plainly cannot stand as authority for a proposition that if no such source had been identified then the s36 burden would not have been met.

The Appellants also relied on a passage from the judgment of Ungoed-Thomas J in James v Pope where he said as follows:

“For the taxpayer it was submitted that to establish a prima facie case of wilful default the Revenue had to prove that the unexplained receipts were income receipts from a particular source. Pennycuick J. decided that there was nothing in the proviso which restricts the nature of the evidence required to establish a prima facie case of wilful default, and that therefore it was not necessary for the Revenue to show the particular quality or source of the receipts. I respectfully agree. It follows that the taxpayer's contention that the Revenue has to establish that the unexplained receipts are income receipts fails. But of course this does not exclude the possibility that cases in which there is the identification of the unexplained receipts with income receipts, or even income receipts from a particular source, might not, in the light of all the evidence available when the existence of a prima facie case has to be established, be helpful or even crucial to establish that prima facie case.”

We do not consider that this assists the Appellants. Clearly what is required to establish a prima facie case will depend on the circumstances of the particular case.

The taxpayer in Mullens had also argued on the basis of Park J’s proposition 2 above that HMRC had to show an “actual loss of tax”.

The Upper Tribunal addressed the taxpayer’s point at [62] as follows, acknowledging the need for it to be established “…that some tax is unpaid as a consequence of the culpable conduct”, by which it meant the requisite fraudulent or negligent conduct:

“Mr Mullens relies strongly on the second of Park J’s propositions to the effect that the Revenue must show both fraudulent and negligent conduct and a loss of tax attributable to it. In our judgment, that emphasis is misplaced. As we have explained, establishing that a taxpayer has behaved fraudulently or negligently in relation to tax affairs necessarily requires it to be established that some tax is unpaid as a consequence of the culpable conduct. When Hurley is read as a whole, it is clear that Park J was concerned with the same issues that arose in Hudson and James, namely whether the Revenue needed to prove the taxability of particular items of income for particular years (for example Constituents (i) to (iii)) or whether they could discharge their burden by presenting a prima facie case, based on capital statements, that the taxpayer did not adequately answer. Once that is appreciated, the conclusions expressed by Park J as approved by the Court of Appeal are no different from those reached by the High Court in the cases of Hudson, James and Johnson.”

In rejecting the taxpayer’s case in Mullens that the s36 burden required something more than s29(4), the UT thus explained in very clear terms that, read in their proper context, the authorities on s29(4), and in turn s36, did not require HMRC to show an actual loss of tax by proving the taxability of particular items of income. All that was needed was for the Revenue to present a prima facie case that the taxpayer did not adequately answer.

In reply, Mr Sykes emphasised proposition 4 in Park J’s summary above where it is said that the Revenue “must establish…some loss of tax…”. How, he asked could one establish a loss of tax attributable to a failure to notify or deliberate conduct without first establishing a loss of tax? It was not enough, he submitted, to show there were funds that HMRC, or in this case the NCA, did not understand. However that was precisely the question which the Upper Tribunal in Mullens had grappled with concluding at [48] and [49] that such proof was not required as a matter of legal principle.

In conclusion, there was no error of law on the part of the FTT as regards what s36 TMA required the NCA to show in respect of a loss of tax. The NCA did not have to establish an actual loss of tax, but did have to show a prima facie case that there was a loss of tax that the taxpayer did not adequately answer. It did not have to show a loss of tax from a specified source. To require that would plainly be inconsistent with the legal principles and the rationale for them explained by the Upper Tribunal in Mullens.

When this decision was circulated in draft for typographical corrections, Mr Sykes indicated that his submission had been that a taxable source or a number of possible taxable sources needed to be established, without the NCA needing to specify which was the relevant source in the latter case. He invited us to address that submission. We consider it ultimately still requires one source or a number of possible sources to be specified and is answered by our analysis above.

Scope of Appellants’ concession on s317

The Appellants also argue under Ground 1 that the FTT misunderstood the Appellants’ concession at [111]. All that the Appellants were conceding was that if they lost on s317 and the NCA established “reasonable grounds for suspecting chargeable income arose as a result of criminal conduct”, then a relevant discovery had been made for the purpose of s29(1) TMA. What the FTT was saying was that because of the concession made on s317 regarding a discovery being satisfied, that meant the loss of tax requirement was also satisfied. The FTT wrongly considered that the requirement to show a loss of tax was being conceded in the event the Appellants lost on the s317 issue.

There are two distinct strands to this alleged error regarding the concession:

The Appellants accept that this is a new point, which was not included in their grounds of appeal. They say that no prejudice arises from it being taken late in the day. The point was anticipated in the NCA’s Response to the grounds of appeal dated 2 February 2024 where the NCA said in the context of Ground 1 that to the extent the Appellants were seeking to resile from their concession, this should not be allowed. However, what was being anticipated there was not that the FTT had wrongly interpreted the concession but that the Appellants were seeking to resile from a concession that had been made. The Appellants’ argument that the FTT had misunderstood the concession was taken for the first time by the Appellants in their skeleton argument for the hearing before us and in their oral submissions.

A challenge to the FTT’s reasoning, although new, could be addressed without prejudice to the NCA. It goes nowhere however as there is no suggestion in the Decision that the FTT was proceeding on the basis that a s29(1) discovery, which it was agreed was subjective in nature and depended on the state of mind of a particular officer, was equivalent to the objective question of whether there had been an actual loss of tax for the purposes of s29(4) TMA. It is not the case therefore that the FTT’s reasoning was flawed.

The second aspect is more problematic. The scope of the concession that the Appellants actually made before the FTT is essentially a finding of fact as to what was communicated by the Appellants in their written and oral submissions. While we have the written submissions we do not have a transcript of the proceedings before the FTT. Although the Appellants sought to give their account in the form of a note from Mr Blades of counsel who had appeared below, this was not accepted by the NCA for whom Ms Black recollected that there had been oral discussion of the scope of the concession following questions from the FTT. This well illustrates the difficulty of raising this kind of issue for the first time at a hearing on appeal before the Upper Tribunal. If the point had been raised, as it could have been, at the permission stage, the FTT could have addressed it. Both parties could have asked for the FTT’s notes, and provided their own notes with any conflict between them being put to the Judge: see the Upper Tribunal decision in Fiander v HMRC [2021] UKUT 156 (TCC) at [30] – [40] for a helpful discussion of the procedure used where there was a conflict of evidence as to what occurred in proceedings before the tribunal whose decision was under appeal.

In William Archer v HMRC [2022] UKUT 61 (TCC) there was a dispute over the scope of a concession made before the FTT. The Upper Tribunal was provided with the Judge’s hearing note (see [159]). In that case the note did not help. The Upper Tribunal went on to say that, absent a transcript, it had little choice other than to accept that the concession was made in the terms recorded in the FTT’s decision. That is the position we would find ourselves in, albeit without the benefit of the Judge’s notes or observations on the issue. We must therefore find that the scope of the concession was that recorded by the FTT at [111].

We note the first sentence of [111] stated: “Given our conclusion that the s317 POCA condition has been satisfied it is not necessary to consider whether the NCA discovered a loss of tax, it has been accepted that it has”. Read in isolation, we can see there would be some ambiguity as to whether the concession was confined to the question of discovery or whether it also extended to satisfying the requirement for loss of tax. Any such ambiguity is however resolved when the sentence is read, as it must be, in context with the remainder of the paragraph. The fact the FTT considered the “loss of tax” issue in the alternative confirms that the FTT regarded the concession as extending not just to the discovery but to the existence of a loss of tax.

Accordingly, even if the Appellants had permission to argue this new point it would be to no avail as the scope of the concession would, as found by the FTT, extend to an acceptance that if the Appellants had lost on the s317 point they also lost on the loss of tax issue. It is worth pointing out that even if there was any error in the FTT’s interpretation of the concession, it would not assist the Appellants. That is because in our view, even if the FTT got the scope of the concession wrong it would inevitably have found that there was a loss of tax for the reasons expressed in the second part of [111]. That conclusion is challenged under Ground 3 as a finding the FTT was not entitled to reach. However, for the reasons we explain under that ground, the Appellants’ challenge is rejected.

Procedural unfairness

The Appellants argue that the NCA put its case to the FTT on the basis that under-declared income arose from a trade of money laundering or other criminal activity. That was therefore the case the Appellants were required to meet and it is argued effectively as a matter of procedural fairness that it should not have been open to the NCA to establish an actual loss of tax through any other route. The Appellants rely on the assessments, the “view of the matter” letters, the NCA’s statement of case, and Mr Diedrick’s evidence that the assessments were raised and supported on the basis that there was under-declared trading income derived from criminal activity. To understand the Appellants’ argument on this point we need to detail some passages from the relevant documents.

The earlier assessmentsmade on both Appellants state they are made under Schedule D Income and Corporation Tax Act 1988 “…Case I and/or in the alternative Case II and /or in the alternative Case VI [later assessments refer to the successor provisions s5 and s687 Income Tax Trading and Other Income Act 2005 (“ITTOIA”)]; or in the alternative pursuant to s319 [POCA]”. The Appellants rely on the fact that each year shows class 4 NICs as payable which is only consistent with a trade being carried on.

Mr Diedrick’s “view of the matter” letter in respect of Mr Butt in relation to the loss of tax stated:

“When the enquiry commenced I had reasonable grounds to suspect that you had been involved in alleged money laundering and as a result, you had received income that had not been fully declared to HMRC.”

…

“Whilst it is my view that at least part of your taxable income for each year under appeal were derived from acquisitive criminality, I have also given very careful consideration to the possibility that some figures may encompass an element of the undeclared taxable income/profits from legitimate trading activity.”

In respect of Mrs Begum, the “view of the matter” letter stated the following:

“The information available to me gives me sufficient reason to believe that you have directly benefitted from your husband's unlawful activities, as you have managed to purchase two properties… for cash, as neither of these properties are secured by a mortgage. Both of these properties have been acquired by you for cash, despite there being no legitimate source of income for you being declared to HMRC that would have shown that you had the financial resources available to fund the purchases of these properties.

Whilst it is my view that at least part of your taxable income for each year under appeal were derived directly from your husband's unlawful activity, I have also given very careful consideration to the possibility that some figures may encompass an element of the undeclared taxable income/profits from a legitimate trading activity.” (underlining added)

The NCA’s Statement of Case stated:

“The NCA believe there are reasonable grounds to suspect that the Second Appellant has been involved in fraud and has been receiving monies from her husband which has been acquired as a result of criminal conduct. For example, the legal ownership of… Dunstable Road, Luton has been transferred on multiple occasions, to and from different family members and often for little or no consideration.”

Mr Diedrick’s witness statement referred to the shortfall in funds available to meet Mr Butt’s expenditure and expressed his opinion that it came from criminal conduct. In relation to Mrs Begum, Mr Diedrick referred to the criminal conduct of others. The Appellants say this was consistent with Mr Diedrick’s initial view that he was assessing income from a trade, being a trade of money laundering, and carried on by someone other than Mrs Begum.

We agree with Ms Black that none of these documents, when properly considered in their full context, show that the NCA had put its case on loss of tax in terms of the loss deriving from a trade of money laundering or other criminal activities, or that there was accordingly any procedural unfairness in the FTT not insisting that the NCA prove its case in such terms.

The assessments and the cover letters to the assessments made no mention of a trade of money laundering. The cover letter for Mr Butt contrasts his declared income with his asset purchases and details how the NCA officer had carried out a comprehensive review of the available documents including bank statements and property purchase documents concluding that the officer was therefore of the opinion that there had been a significant loss of tax due to Mr Butt’s failure to notify that he had been in receipt of taxable income. The cover letter in respect of Mrs Begum was written in similar terms that referred to unaccounted for expenditure and funds.

There was an issue as to whether the “view of the matter” letters could inform the scope of the assessments. In any event, those parts of the letters relied on by the Appellants were directed at explaining how the qualifying condition in s317 POCA had been met, in particular whether the NCA had reasonable grounds to suspect that “all or part of the income, profits or gains [had] arisen or accrued (directly or indirectly) as a result of criminal conduct (including the conduct of a third party)”.

It is also notable that the year by year analysis contained in the “view of the matter” letters simply reflects the NCA’s explanation that personal expenditure, loans, and property purchase funds were unaccounted for and said to give rise to taxable income. There is no mention of a trade of money laundering.

We also agree with Ms Black that the Appellants cannot read into the fact that Mr Butt’s “view of the matter” letter had mentioned his legitimate businesses but did not attribute income to those businesses, that the income must then be from the money laundering also mentioned in the context of the qualifying condition. The reference to Mr Butt’s legitimate businesses simply reflected the fact that Mr Butt had claimed to have declared all taxable income from those businesses.

We do note that in Mrs Begum’s “view of the matter” letter there is a passage that reads: “when the enquiry commenced I had reasonable grounds to suspect that you had been involved in alleged fraud and received monies from your husband’s… unlawful activities and as a result, you had received income that had not been declared to HMRC” (emphasis added). Read in isolation this might be taken to suggest that the NCA were proceeding on an erroneous assumption that Mr Butt’s income from unlawful activity was somehow to be treated as Mrs Begum’s income. However, when read in context that would not be a fair interpretation given the text is in a section explaining the s317 qualifying condition and given the remainder of the letter makes clear that the basis for the assessment is that there was unaccounted for expenditure that was not tied to a particular source. Moreover, the letter also acknowledges that source could be a legitimate trade source.

The Appellants rely on [78] of Mr Diedrick’s witness statement in which he addresses Mr Butt’s argument that loans for family, friends and businesses were funded from his business and rental income and the disposal of a property in the Netherlands. Mr Diedrick explains that the declared income was modest and that Mr Butt did not know what had happened to the sale proceeds which had never been deposited into his bank accounts. Mr Diedrick continued: “…it is in my opinion that any shortfall in funds to meet his expenditure, came from another source i.e. criminal conduct”. In relation to Mrs Begum, at [79] Mr Diedrick noted she did have legitimate rental income, but that bank deposits included refunds and business income from Mr Butt’s business, and that she claimed these deposits came from Mr Butt. Mr Diedrick continued: “This leads me to believe that she has benefitted from the criminal conduct of others”. Again however, this is all under the topic of Mr Diedrick’s belief that the qualifying condition in s317 had been met.

The Appellants also referred to [120] of Mr Diedrick’s witness statement which addresses points made in the forensic accountant report that travel expenses could have been funded from rental income or bank deposits. Mr Diedrick noted that Mr Butt had also said he paid for overseas travel for family members and went on to state: “This means that this expenditure could not have been solely from his legitimate source of income or the revised amount of income, as per Mr Davidson’s report. So I believe that the shortfall was funded from another source i.e. criminal conduct”. This was all in a section in the statement dealing with Mr Davidson’s report, expressing Mr Diedrick’s belief that it did not provide any evidence that supported or substantiated the Appellants’ claim to reduce the tax assessments.

We also note in this context the FTT’s findings at [49] and [92] in the context of the qualifying condition:

“49.

… As for the criminal conduct concerned, although in evidence Mr Diedrick agreed, when questioned, that income assessed was “probably the result of money laundering” he also said, particularly in relation to the personal and travel expenditure and the unidentified income of Mr Butt and Mrs Begum that “it was not all related to money laundering.”

“92.

Before we consider s 319 POCA, on which the NCA relies to contend it is not required to identify the source of the chargeable income or gain, it is necessary to point out that Mr Diedrick’s evidence was that the income arising as a result of criminal conduct was “probably” the result of money laundering. However, he did not say that this was the only source of funds. He also said that the personal and travel expenditure and unidentified income was not all related to money laundering (see paragraph 49, above).”

Overall, we do not consider that the NCA put its case in relation to the loss of tax on the basis that the income was from a money laundering trade or other criminal activities. That conclusion should not be surprising given there was, as set out above and in relation to Ground 2 below, no requirement for the NCA to tie the loss of tax to a particular source such as a trade of money laundering. The NCA only needed to show a prima facie case of a loss of tax which the Appellants had not adequately answered.

For the reasons given above, we reject each of the alleged errors of law under Ground 1.