FTT rules against HMRC’s ‘presumption of continuity’

In the case of Aeroassistance Logistics Limited (ALL) (TC02628 published on 10 April 2013), the First-tier Tribunal (FTT) held that HMRC’s interpretation and use of ‘presumption of continuity’ could be rebutted.

The case itself could be viewed as fairly non contentious. HMRC raised an assessment in respect of the company’s accounting period ended 29 February 2004 and a further discovery assessment was raised for the following accounting period to 28 February 2005.  Both assessments were appealed against.

The assessment for the 2003/04 tax year included uplifts for bad debts, third party income and business entertaining, which was treated as ‘consultancy fees’.  The FTT agreed that all these should not be allowed.

It is the discovery assessment raised for 2004/05 which is of interest.  HMRC reviewed the following year’s accounts and noted that ‘consultancy fees’ had been included in the P&L in the following year.  HMRC then relied on the ‘presumption of continuity’ concept to conclude that business entertaining was improperly claimed in the 2004/05 year and that therefore an adjustment was required to the taxable profit of the company for that year too.

During the hearing, the director of the company gave evidence and explained that in the accounting period to 29 February 2004, the company had sponsored a power boat Grand Prix in Tunisia, which the director described as a one-off event to promote the business in Tunisia and North Africa.  The director argued that whilst this expense was sponsoring (and the FTT agreed with HMRC’s position on the earlier year), there was no further sponsoring expense during the next accounting period and, fundamentally, HMRC’s arguments were flawed and there was no discovery.

The FTT considered the ‘presumption of continuity’ point in detail and referred to the principles defined in Jonas v Bamford (1973) which clarified that the burden in such cases was on the taxpayer to prove the situation leading to the under-declaration had changed rather than HMRC had to prove the under-declaration had occurred.

The FTT then considered the judgement in Guide Dogs for the Blind Association v HMRC (2012) where the judge noted that the ‘presumption of continuity’ is only a presumption and which can be rebutted.

In coming to their decision, the FTT agreed with the decision in Dr I Syed v HMRC (2011) that the Jonas v Bamford case expressed no legal principle and merely that the judge was “taking a common sense view on what the evidence will show”.  In summary, the tribunal were not bound to conclude that what happened this year would happen next year.

Taking into account all the evidence and previous case law the FTT agreed with the company that the business entertaining expense was in relation to a one-off event and that this was sufficient to rebut the ‘presumption of continuity’.

The appeal against the 2005 discovery assessment was therefore allowed.

It is common for HMRC to assert that once it is identified that tax has been lost in the enquiry year that it automatically follows (via the ‘presumption of continuity’) that the problem existed in earlier or later years.

This case demonstrates again that HMRC cannot always make this type of assumption; instead HMRC should establish the facts to determine the extent of the problem since the FTT is not bound to conclude that what happens in one year will happen in the next.  Likewise, advisers should always seek to pre-empt HMRC asserting that the ‘presumption of continuity’ applies by clearly defining the time frame in which tax may have been underpaid.

Gabelle provides support to practitioners dealing with HMRC disputes and enquiries into their clients’ affairs.  We can advise on all aspects of the enquiry and the appeals system, including the referral of appeals to the First-tier Tribunal.  Please contact TaxDesk on 0845 490 0509 and ask for John Hood.