Deliberate suppression of earnings results in costly discovery assessment

In Bobby Khan Enterprises Limited & Ors v HMRC [2022] TC08556, the First Tier Tribunal (FTT) found that store keepers consistently and deliberately suppressed purchases and corresponding turnover. This triggered Corporation Tax (CT), VAT and s.455 Directors' loan account charges for the missing income over a number of years.

• Mr Ali, Motia Begum and their two sons were directors of Bobby Khan Enterprises Limited (BKE), which operated convenience stores.
• During enquiries into the 2012 CT return, HMRC received information from suppliers indicating that a large number of purchases were not declared by BKE.
• As a result, Discovery Assessments were raised for CT and VAT liabilities for undeclared additional profits for all of the shops owned between 2010 and 2017. HMRC claimed these profits were misappropriated by the directors and treated them as outstanding Directors' Loan Accounts giving rise to s.455 charges for the company and Income Tax and NICs liabilities for the directors. Mr Ali and Mrs Begum were also assessed on undeclared rental income from the shop premises in 2010-11.
• The directors blamed an ex-employee for making the purchases without their knowledge to benefit his own business. They also claimed that any missing entries were down to the negligence or carelessness of their accountants, Accountants Plus.
• The appellants argued that the Presumption of Continuity should not apply as there was no direct evidence of suppression of purchases in any other year.
• The CT assessments, Closure Notices, VAT assessments, Income Tax assessments and Closure Notices for each director were all appealed. The issues were:
  • Whether there were additional profits arising to the company.
  • Whether the missing purchases and corresponding sales gave rise to additional VAT liabilities.
  • Whether the additional profits were misappropriated by the directors causing the creation of loans upon which s.455 charges were due and in relation to which Benefits in Kind arose leading to Income Tax and NICs liabilities.

The FTT found:

• Following evidence from the company's accountants at the time and witness statements from the directors themselves, it was clear that the appellants failed to keep proper accounting records and did not submit accurate returns.
• The evidence given by the directors was inconsistent and unconvincing, with little additional evidence to support their arguments.
• Contemporaneous correspondence from Accountants Plus showed repeated attempts to obtain accounting records from the appellants, making the argument that they were negligent or dishonest unlikely.
• The appellants knowingly filed incorrect returns in order to minimise tax liabilities.
• HMRC's assessments were made using best and reasonable judgement.
• The appellants offered no challenge to the assumption that the profits should be treated as loans. Such loans would be subject to s.455.
• The principle of Presumption of Continuity could be relied upon as there was nothing to suggest that there was anything unusual that had occurred in the year of the original enquiry, meaning that it was reasonable to assume the pattern of suppression continued into future years.

As such, the FTT was satisfied that the loss of tax had been deliberately brought about by the appellants and held that the Discovery and the assessments valid.

Useful guides on this topic

Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences? 

Directors' loan accounts: Toolkit
HM Revenue & Customs (HMRC) have a director's loan accounts toolkit for advisers. This is our enhanced version with planning points. 

Close company loans tookit (loans to participators)
This guide takes a detailed look at the Corporation Tax treatment when a close company makes a loan to a participator (director-shareholder). It also provides links to our guides for individuals on the making of loans to companies.

External link

Bobby Khan Enterprises Limited & Ors v HMRC [2022] TC08556