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Tax Authorities Alert to Unexplained Bank Deposits

In a telling reminder that the tax authorities are alert to unexplained bank deposits, a civil engineer has been directed to pay a £24,924 income tax demand – as well as a swingeing £11,216 penalty – after an inquiry into his tax affairs that stretched over four years.

Tax formThe taxpayer raised the suspicions of Her Majesty’s Revenue and Customs when he inaccurately stated in a tax return that he had not been gainfully employed. He had in fact earned more than £8,000 during the relevant tax year and further investigations revealed unidentified deposits into his bank account totalling almost £80,000.

HMRC refused to accept the taxpayer’s explanation that the majority of the deposits represented loans from friends and family to assist him in a property refurbishment and assessed him for £27,000 in income tax. He was also issued with a £16,201 penalty, assessed on the basis of 60% of the tax due.

Allowing his appeal in part, the First-Tier Tribunal accepted that some of the smaller deposits did not represent taxable income. It also found that the appropriate loading in respect of the penalty was 45%, rather than 60%, and reduced both the tax demand and the penalty accordingly.

The Tribunal acknowledged the difficulty that the taxpayer had faced in disputing the assessment given that the inquiry was not opened until almost two years after the end of the relevant tax year and had taken some four years to complete, involving three different HMRC inspectors.

However, the burden of proving that the assessment was mistaken fell upon the taxpayer and the Tribunal found that his explanations for the majority of the deposits were contradictory and did not make sense. The taxpayer had had more than sufficient funds to carry out the refurbishment without reliance on loans and had failed to establish plausible explanations for the larger deposits.