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Markel Tax

07 Oct 2020

Presumption is just a presumption: The Upper Tribunal case of Stirling Jewellers (Dudley) Ltd.

In the recent Upper Tribunal hearing of Stirling Jewellers (Dudley) Ltd [2020] UKUT 245 (TCC), appeals against the FTT’s decision by both the company and HMRC were heard.

This case is interesting and revolves around the huge increase in turnover in the business from around £3m in the 2006 accounting period to nearly £144m just five years later.  During this period the business had changed from selling jewellery to the public and other shops, to buying scrap gold for smelting, resulting in significant increases in purchases and sales.

The appeal by the company related to the FTT’s conclusion on the level of adjustments to the purchases and the effect on the taxable profit.  HMRC were challenging the FTT’s refusal to apply the presumption of continuity to earlier years.

The FTT had looked in detail at the company’s activity in buying and selling gold with the company’s daily need for large sums of cash and reliance on IOUs.  The fast-moving nature of the business, together with the payment methods employed, highlighted a number of inadequacies within the record-keeping.  Essentially, the record-keeping was maintained by one book-keeper which was considered by the FTT to be appropriate in the earlier years.  However, this reliance on the existing systems when the business income increased tenfold from 2009 to 2010 was said to be a significant “management failure” by the company.  There was no computerised system in place and the reliance on manual calculations and carbon copy purchase invoice books led to a number of defects with the system.

HMRC’s original position in the year of enquiry (APE 2011) was that more than £9m of expenses could not be verified and therefore should be disallowed.  It had been established that for 23 days when the shop was open there were no receipts for cash purchases of gold.  The FTT sought to reconstruct the purchases using an average of the cash spent per day together with some receipts for six of the days thereby reducing the adjustment down to around £2.2m, this also had the effect of implying a gross margin of 3.24% on total turnover.

The implied gross margin was refuted by the company as unachievable in view of the known pricing policy on purchases and sales, hence the challenge made to the FTT’s decision.

The FTT’s conclusions were subject to a detailed review by the UT who made reference to the legislation at s 50(6) TMA 1970 which requires the FTT to establish the amount of any overcharge by HMRC and reduce the assessment by that amount.

The conclusion on the company’s appeal was that “the appeal before the FTT was unusual and raised difficult issues.”  The conclusion goes on to say that the FTT faced “an unenviable task” in considering the correct level of deductions to produce the taxable profits in the year of enquiry.

The UT’s judgement was that the FTT’s conclusion regarding the profits in 2011 erred in law, as they had ignored a relevant consideration relating to the price that gold was bought and sold at.  The company’s appeal was therefore allowed.

The UT dismissed HMRC’s appeal to apply the presumption of continuity to the 2007 to 2009 accounting periods. Although the FTT had concluded that there were some weaknesses in the taxpayer’s record keeping in the earlier periods, it did not result in an under-declaration of tax until the taxpayer’s business increased dramatically in 2010 and 2011. It was the sudden increase in turnover and the consequent reliance on hand-written IOUs in 2010 and 2011 that led to expenses being overstated.

One of the key points to take from this case relates to the presumption of continuity issue.  We are used to seeing HMRC seeking to adjust earlier and later years based on their review of the enquiry period alone.  In this case, the FTT had concluded that adjustments be made to the enquiry period and the previous year, as only those periods had been affected greatly by the changes in the business. 

It is worth looking at the reasons the FTT gave in reaching their conclusion.  I have extracted these from the UT judgement as follows:

278. In relation to the earlier APEs, up to and including APE 09, we reject HMRC's case that the presumption of continuity operates so as to permit it to raise assessments by retrospectively applying the discrepancy percentage for APE 11:

(1) The presumption is just a presumption, and can fall to be displaced by a taxpayer;

(2) There is a clear difference - both quantitatively and qualitatively - between APE 09 and APE 10. In APE 09, the business was much smaller, and did not deal mainly in bullion, but was retail and the recycling of scrap gold jewellery to sell as jewellery.

(3) The book-keeping procedure and Ms Mullinder personally were under much less pressure;

(4) The only year which HMRC looked at in tremendous and forensic detail was APE 11;

(5) HMRC had not performed the same exercise which it had undertaken for APE 11 for any of the earlier years, although it could have done. HMRC said that it had 'effectively absorbed' the inquiries for APE 07 and APE 08 into the APE 11;

(6) APE 11 was the principal focus of HMRC's questions and the Appellant's answers.

279. We are persuaded that the Appellant has shown us enough to displace the presumption for the years before APE 10.

The decision in this case is a good reminder that the presumption of continuity is not automatic and the facts of each case need to be considered accordingly.  HMRC routinely rely on presumption of continuity and focus their attention purely on one year. 

The point was made in this case that this presumption is simply that, a presumption, and if rebutted it is up to HMRC to justify their position.  The significant changes in the business in this case, together with the fact that the record-keeping systems were considered appropriate and capable in earlier years, with new systems introduced in the later years, allowed the FTT to conclude that the adjustments sought by HMRC were not justified.  The fact that HMRC had solely focused on the year of enquiry, when they could have looked at other years independently to support their position, was noted and is useful to apply to any similar situations where this approach is taken. 

In summary, the FTT decision was upheld and HMRC’s appeal dismissed with the case remitted back to the FTT to reconsider the extent of the company’s taxable profits in light of the UT’s conclusions on this area.

For more information or help with enquiry matters please contact James Cordiner or call on 0333 920 5708.

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