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Does your accountant understand Construction?

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Perhaps one of the most important things an individual can do when self-employed is to keep meticulous accounts. This means not only keeping a record of income and expenditure, but also work in progress at the end of the tax year. The case of Mark Smith v HMRC [2012] TC02321, which was an appeal heard in the First Tier Tribunal of the Tax Chamber illustrates the potential ramifications of failing to keep one’s accounts in sufficient order.


The appellant in this case was trading as a builder. He sought to appeal against assessments to tax and amendments to self-assessments in respect of the years ending 5 April 2001 to 5 April 2007 inclusive.


The central issue before the tribunal related to the appellant’s computation of profits. It was admitted that his accounts understated the profits gained in a particular tax year. However, it was his contention that this was a “one-off”. Nevertheless, in following years, his assessments were raised in an effort to make good the profits previously understated. The question was whether these assessments were justified.


In the construction industry, building projects can last for several months or years, generally, each month the contractor will submit an application for payment to the client based on their assessment of the work. When and if the client agrees they will certify the work and make payment, if they disagree a lower amount will be certified. The certification process can often take up to 3 weeks.

 The Contractors Quantity Surveyor will prepare a report known as a Cost Value Reconciliation (CVR) or Cost Value Comparison (CVC).  These will show the value of the work completed to a set date (whether certified or not) and the profit, here is an example

 Often a CVR will list every sub-contract package and the materials ordered in great detail compared to the tender and stage of completion.

 The underlying principle is that of ‘matching’ costs and revenue to allow the accountant to accrue for costs and adjust revenue (accruing Income).

The decision


The tribunal held that HMRC’s assessments were in fact justified. In relation to quantum, the tribunal confirmed that the burden of proving the amount assessed lay with the taxpayer. In this case, the appellant failed to adduce evidence sufficient to displace the assessments made by HMRC. Accordingly, the assessments were confirmed and the appeal was dismissed. The appellant therefore remained liable in the amount as assessed by HMRC.


The reason why HMRC were successful was that in the case of Mark Smith he based his income on certified revenue, this meant that the profit was understated, within Construction “UK GAAP” requires revenue to be reported on application based on the CVR matching approach.

 The details of the additional profits and tax for each year are as follows:

(1)2000/01: additional profits of £43,189 giving rise to tax of £17,275.60

(2)2001/02: additional profits of £65,205 giving rise to tax of £24,972.02

(3)2002/03: additional profits of £73,889 giving rise to tax of £27,737.86

(4)2003/04:additional profits of £70,023 giving rise to tax of £27,503.41

(5)2004/05: additional profits of £70,000 giving rise to tax of 27,704.18

(6)2005/06: additional profits of £65,240 giving rise to tax of £26,735.44

(7)2006/07: additional profits of £45,541 giving rise to tax of £18,671.81

Who bears the burden of proving excessive assessments?


In establishing discovery assessments, HMRC bears the burden of demonstrating that they are valid. However, if an individual taxpayer believes the assessment to be excessive, the burden then shifts to that individual to prove that is the case.


Section 50(6) of the Taxes Management Act 1970 provides that:


“If, on an appeal notified to the tribunal, the tribunal decides—


(c) that the appellant is overcharged by an assessment other than a self-  assessment,  the assessment shall be reduced accordingly, but otherwise the assessment shall stand good.”  


In other words, once HMRC makes an assessment, the amount of that assessment stands unless the individual taxpayer can prove on the balance of probabilities (through the production of evidence) that the assessment should be different.


In this instance, HMRC had substantially underestimated the appellant’s profits for the year 2004/05. The appellant submitted that his underestimation for profits in 2004/05 was a ‘one-off’, and therefore did not warrant any adjustment for other years. It was for him to prove this. He was unable to do so and failed to adduce any evidence. HMRC concluded that the appellant had been gravely negligent in the conduct of his tax affairs and that further assessments were therefore justified.


Additionally, the appellant seemed to provide no explanation to the Tribunal to account for the under-declaration. There may have been a legitimate reason for this, and had his accounts been kept consistently throughout the period in question, he would have perhaps had evidence capable of proving to the tribunal that the error was in fact a sole incident.

 This is a joint blog between Rebecca Broadbent (Practice Manager, Chambers of Jason Elliott [Barristers]) and Steve Bicknell



  1. Harry Lipman says:

    There is a wider issue here. Do practicing accountants know sufficient about the clients’ businesses to advise them ?
    Too often accountants are too focused on tax and accounting issues, rather than helping clients in their businesses to produce better profits on which they can then provide proactive tax advice.

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