The recent tax tribunal decision in Dr Syed v HMRC TC 1776 has been bothering me. On the face of it, this was a straightforward case of HMRC denying a tax deduction for some of the expenses in a sole trader’s accounts. It would appear that some negotiations took place and Dr Syed’s accountants eventually agreed some adjustment to the computations. Sounds pretty normal.
HMRC then decided that they would raise assessments for the previous four years on the grounds that they claimed were justified by the “presumption of continuity” – a phrase which derives from the case of Jonas v Bamford 51TC1, in which the High Court said:
“Once the Inspector comes to the conclusion that on the facts which he had discovered, Mr Jonas 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”.
The tribunal considered this passage and concluded that it expressed no legal principle saying that as a matter of law it would be quite wrong to assume that because something happened in one year it must also have happened in the prior year. They considered that the Court was merely expressing a common sense view. The Tribunal said:
“it will generally be reasonable and sensible to conclude that if there was a pattern of behaviour this year then the same behaviour will have been followed last year. Sometimes however that will not be a proper inference: there will be occasions when the behaviour related to a one-off situation perhaps a particular disposal, or particular expenses; in those circumstances continuity is unlikely to be present. In the circumstance of Jonas v Bamford there had been undeclared income in a particular year and it was not unreasonable to conclude that the same habit of concealing income had been followed in previous years”.
Quite so. This is just common sense. If somebody is in the habit of deliberately concealing taxable income one may take a rather unsympathetic view. However Dr Syed was not in the habit of doing anything improper. He had professional tax advisers who would have approved the deductions claimed – even if they did not make them on their own initiative. It is going a bit far to suggest that because his accountant claimed for some expenses which HMRC were able to argue were not fully allowable, this means that Dr Syed was in the habit of impropriety to justify discovery assessments for the previous four years. Indeed, the passage from Jonas v Bamford quoted above would not seem to authorise retrospective application it merely says that “the situation will be presumed to go on until there is some change” which seems only to deal with the position in the future.
Even the HMRC Manuals do not suggest that the presumption of continuity can be used to reopen earlier years. Furthermore, they say that the presumption of continuity alone does not justify increases in assessments, the onus being on HMRC to bring evidence in support of the argument.
Despite all this, and despite the absence of any suggestion that there was anything wrong in the previous years, HMRC concluded that because they were able to agree a disallowance of expenditure in one year, they were entitled to assess tax for the earlier years without any further justification.
The Tribunal agreed with them on the grounds that there was no evidence that HMRC were wrong – a bit surprising as there was no evidence that they were right either. It seems to me that this deserves some critical examination.
We know that once HMRC has raised an assessment the onus of proof is on the taxpayer to show that on the balance of probabilities it is excessive. However, this case goes much further and takes the onus of proof to a whole new level. Not only does this seem to be inherently unjust and unreasonable but it is stretching the decision in Jonas v Bamford way beyond breaking point.
Woe betide anybody who agrees a disallowance or an adjustment in their tax computations. On the basis of this decision, such agreement could have rather more expensive consequences than they might have thought.