Mr Denis Madden Vs HMRC : COP9 Case

This case involves an appeal by Mr Denis Madden against income tax and penalty assessments raised by HMRC following a tax investigation into his affairs for the 11 years from 2003-04 to 2013-14.

Mr Madden has been self-employed since 1995 and has operated two businesses – a fuel business trading as MD Fuels and a tyre business trading as Modern Tyres. He had been submitting Self Assessment tax returns since at least 1995.

The Investigation In September 2013, HMRC opened enquiries under section 9A TMA 1970 into Mr Madden’s SA returns for 2008-09 to 2011-12, which he had submitted in January 2013 marked as provisional. At a meeting on 1 October 2013 between HMRC officers and Mr Madden and his accountant Mr Boyle, Mr Madden made disclosures that he had failed to declare several sources of income and had acquired high-value assets over the previous 12 years.

Based on these disclosures and suspicions of tax fraud, in April 2014, HMRC escalated the enquiry to a formal investigation under Code of Practice 9 (COP9). COP9 allows HMRC to investigate up to 20 years of a taxpayer’s affairs where tax fraud is suspected.

Mr Madden accepted the offer to make disclosures under the Contractual Disclosure Facility (CDF). Under CDF, HMRC does not criminally prosecute the taxpayer for any fraud disclosed. Mr Madden’s Outline Disclosure in June 2014 admitted to deliberately failing to submit tax returns, operate PAYE and declare rental income since 2002.

Despite this admission, Mr Madden failed to attend meetings during the COP9 investigation or provide records to quantify his undeclared income. After one meeting with Mr Boyle in October 2014, Mr Madden withdrew his cooperation.

The Assessments With no engagement from Mr Madden, in July 2015, HMRC raised assessments based on the best estimates from the information available:

• HMRC used the net VAT return figures for Modern Tyres as no income from this business had been declared.
• For MD Fuels, HMRC used the 2007-08 return and indexed this up for later years based on Retail Price Index as sales had increased significantly per the VAT returns.
• Household expenditure of £28,000 was estimated using average costs for a family of 4-5.
• Income from Mr Madden’s wife was estimated and offset against the expenditure.
• Where expenditure exceeded the estimated income in 2003-04 and 2012-13, HMRC assessed primarily based on the costs of assets acquired by Mr Madden in those years.

Penalties of up to 70% were also charged on the potential lost revenue.

Mr Madden’s Appeal Mr Madden appealed the assessments and penalties as excessive and inaccurate. However, no substantive evidence was produced to support his assertions that the figures were wrong despite Mr Boyle providing accounts for which HMRC requested supporting records, but these were never provided.

The First-Tier Tribunal’s Decision The Tribunal dismissed Mr Madden’s appeal, deciding the assessments were valid and he had not proven overcharged. The Tribunal was sceptical of Mr Boyle’s accounts due to a lack of supporting records and found HMRC’s approach reasonable given the limited engagement from Mr Madden.

The judge remarked that the assessments seemed “conservative” given potential further liabilities for VAT fraud, undeclared PAYE, and profits that were not included. The Tribunal confirmed the penalties charged given Mr Madden’s abilities as a successful businessman and the extent of his historical non-compliance spanning over a decade.

Opinion on the Best Route for Mr Madden In my opinion, Mr Madden would have been in a much better position if he had fully engaged with the COP9 investigation and provided complete and accurate information to quantify his undeclared income.

While COP9 limits HMRC’s powers to pursue criminal action, it still allows them to raise civil assessments on best estimates that taxpayers do not fully disclose. By accepting CDF but failing to cooperate and disclose, Mr Madden justified HMRC to use their powers to make speculative assessments in his case.

Even if the estimates seemed excessive, the onus was fully on Mr Madden to prove he was overcharged. But by not providing evidence of his true income and expenditure, he left himself exposed to the risk of inflated assessments being confirmed.

Had Mr Madden been open and transparent from the outset, HMRC would likely have had a clearer picture of his tax affairs and may have been more sympathetic when raising assessments. And with full disclosure and records, Mr Madden could have properly evidenced his actual income and tax, making it much harder for HMRC to justify excessive or speculative assessments.

Mr Madden could also have negotiated to spread any liability over an extended period rather than face sizeable one-off demands. And while penalties may still have been charged, full cooperation could have meant these were towards the lower end of the scale rather than the maximum.

Therefore, while no taxpayer wants an investigation into past affairs, the best approach when faced with suspected fraud is to engage professionally and provide complete information. Although unpalatable, this gives the best opportunity to quantify and reduce liabilities and penalties by working positively with tax authorities. Unfortunately, Mr Madden’s approach only served to compound his problems.

For tax resolution or compliance, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.