Mark McLaughlin asks whether HMRC is correct in applying the ‘presumption of continuity’ in some tax return enquiry cases
Tax return enquiries by HMRC sometimes reveal omissions or understatements of income. For example, an enquiry focused on a self-employed taxpayer’s accounts may result in additional profits being assessed, on the basis that the disclosed income was understated.
Presumption of continuity
HMRC may seek to assess other years in addition to the enquiry year, on the footing that similar understatements arose in those years. This approach is commonly referred to as the ‘presumption of continuity’ (or sometimes ‘spreading’). In Jonas v Bamford  STC 519, Judge Walton J expressed the presumption of continuity as follows:
“…once the inspector comes to the conclusion that, on the facts which he has discovered, the taxpayer has additional income beyond that which he has so far declared to the inspector, then the usual presumption of continuity will apply. The situation will be presumed to go on until there is some change in the situation, the onus of proof of which is clearly on the taxpayer.”
Tribunals have considered HMRC’s attempts to apply the presumption of continuity to assessments outside the enquiry year in a number of cases, and have not always accepted this approach (e.g. see Chapman v Revenue and Customs  UKFTT 756 (TC), Syed v Revenue and Customs  UKFTT 315 (TC), Barkham v Revenue and Customs  UKFTT 499 (TC)) and Aeroassistance Logistics Ltd v Revenue and Customs  UKFTT 214 (TC)). However, more recently in Allan v Revenue and Customs  UKFTT 504 (TC) HMRC’s application of the presumption of continuity was upheld, and arguably extended.
In Allan, the appellant (who was not represented) was a self-employed painter and decorator. Following enquiries into his tax returns, HMRC considered that there was a shortfall in the appellant’s declared turnover and profits. HMRC issued closure notices (under TMA 1970, s 28A) for 2010/11 and 2012/13, and discovery assessments (under s 29) for the four tax years from 2006/07 to 2009/10 (based on the closure notice for 2010/11), and 2011/12 (based on the closure notice for 2012/13).
The First-tier Tribunal found that for the enquiry year 2010/11, the appellant did not keep full business records; he received substantial sums of money into his bank accounts for which he could not account; and he provided inaccurate information to his accountant for the purposes of preparing his tax return. The return for 2010/11 was therefore incomplete and inaccurate. A similar pattern was observed for 2012/13. Amendments were therefore required to the appellant’s tax returns for the enquiry years 2010/11 and 2012/13.
Furthermore, the onus of proof was on the appellant to prove that HMRC’s discovery assessments should be displaced. The tribunal commented: “Once the threshold requirement is satisfied for there to be a ‘discovery’ of loss of tax, the presumption of continuity applies in the raising of assessments for earlier years. The onus is on the taxpayer to rebut the presumption.”
However, the tribunal concluded that the appellant had not produced any satisfactory or credible evidence to displace the tax return amendments and discovery assessments.
Beyond the scope?
In Allan, HMRC raised assessments for earlier tax years than the enquiry years. By contrast, in Jonas v Bamford assessments were raised for 1957/58 to 1964/65 inclusive; Mr Jonas produced a great deal of evidence in relation to the tax years up to 1961/62, but consistently refused to produce any evidence for the last three tax years up to 1964/65. The Revenue (as was) contended that Mr Jonas had an undisclosed source of revenue, and made assessments of £5,000 each for 1962/63, 1963/64 and 1964/65. It should be noted that Judge Walton in Jonas v Bamford was referring to the presumption of continuity applying to later years, rather than earlier ones.
The HMRC practice applying the presumption of continuity to earlier years was rejected in Barkham. The tribunal in that case commented: “The presumption of continuity alone does not justify increases in assessments; the initial onus is on HMRC to show evidence in support of the making of the assessments. This would therefore be a limitation on the use of the presumption of continuity where previous year’s accounts are sought to be reopened.” However, the tribunal in Allan did not address the Barkham decision.
In any event, in some instances it may be appropriate to remind HMRC of its own guidance in the Enquiry manual (at EM3309): “The ‘presumption of continuity’ alone does not justify increases in assessments, the onus is on HMRC to bring evidence in support of the argument.”
- Mark McLaughlin CTA (Fellow) ATT TEP is a co-founder of www.taxationweb.co.uk – see www.markmclaughlin.co.uk
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