The case of Cooper (more fully Golamreza Qolaminejite aka Anthony Cooper v HMRC [2019] UKFTT 0713 (TC) – we’ll stick with just “Cooper”) has to do with an investigation into the taxpayer’s business affairs. It ranges over a good deal of ground and a number of years, but the point that interests us here is the burden of proof. Or rather, the burdens of proof, for the case addresses both the burden of displacing an assessment and that of demonstrating culpability.
The tax year 2006/7 was one of those covered by the enquiry. There were in that year nine deposits into Mr Cooper’s bank account which were, in HMRC’s parlance “unexplained” (meaning, of course, not that Mr Cooper had offered no explanation but that HMRC were not satisfied with it). HMRC thought that the deposits were undisclosed business receipts and assessed Mr Cooper to tax accordingly.
Once that assessment was made and Mr Cooper appealed against it, the burden of proof was on Mr Cooper to show that, on the balance of probabilities, the assessment was wrong. Sometimes people are surprised at that: it comes worryingly close to being guilty unless proven innocent: but that is without doubt where the burden of proof lies, and always has lain, where a tax assessment is disputed.
In the case in question, the Tribunal was not satisfied that the evidence showed, on the balance of probabilities, that the deposits in question had some source other than trading activity.
But that was not an end to it. Because HMRC had not made the 2006/7 assessment within six years of the end of the tax year, it could be validly made only if omission of the income was attributable to Mr Cooper’s deliberate conduct: or, as the Tribunal helpfully paraphrased it “that Mr Cooper knew that he had trading income and made a deliberate decision not to declare it”. And the burden of proof for that lies with HMRC: that is also established and uncontroversial law.
The Tribunal considered that in order to discharge the burden of showing that Mr Cooper knew that he had trading income, HMRC would first have to satisfy the Tribunal that the deposits in question were in fact (on the balance of probabilities) trading income. They had, in the Tribunal’s view, failed to do that. It’s worth setting out the Tribunal’s thinking:
HMRC have not set out to prove (even on the balance of probabilities) that the unidentified deposits represent undeclared trading income. Clearly they suspect that this is the case based on Mr Cooper’s known expenditure and the lack of any other credible explanation for the source of the funds and, in the context of the assessment itself, have been content to leave it up to Mr Cooper to try to discharge his burden of proof in showing that the deposits in fact represent some other source of funds. That however is very different to HMRC showing that the deposits are more likely than not to be trading income.
We are therefore left in a position where, although Mr Cooper has been unable to produce sufficient evidence to persuade us that the deposits do not represent trading income, there is also insufficient evidence for us to be able to say on the balance of probabilities that the deposits are in fact trading income.
HMRC had therefore failed to discharge their burden of proof; the assessment was not validly made and had to be discharged.
The approach taken by the Tribunal (that neither side’s case is proven on the balance of probabilities) is in our view novel. And, of course, helpful to Mr Cooper. There is only one logically coherent conclusion to be drawn from the Tribunal’s decision: its view of the evidence before it was that the deposits were neither more likely nor less likely to be trading receipts than to be something else. Such a “dead heat”, where the Tribunal assesses the balance of probabilities at exactly 50-50, is likely to arise very rarely.
The case is important in reminding us that where HMRC allege deliberate understatement (or even mere carelessness), they are obliged to make out every element of their case, including the taxability of the receipts in question. Sometimes that will be relatively easy, in others less so: but it must in all cases be done.
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This article was republished in TAXline (February 2020) and is available on the ICAEW website to ICAEW members.