In Edwin Bekoe v HMRC [2017] UKFTT 772, the First-tier Tribunal (FTT) has held that the taxpayer was not liable to assessments and penalties where he had demonstrated that deposits paid into his brother's bank account were loans and not undeclared taxable trading income and HMRC's reliance on the "assumption of continuity" principle had been misplaced.

Background

Edwin Bekoe (the taxpayer) moved to the UK from Ghana and worked as an information technology specialist. He was employed full-time by a large company but also worked as a consultant on a self-employed basis for his former employer.

HMRC opened an enquiry into the taxpayer's 2009/10 tax return based on the low level of his self-employed profits. It discovered that amounts totalling £20,900 had been paid into a bank account belonging to his brother and was not satisfied with his explanation for the deposits. It concluded that the sums were undeclared taxable trading income and raised an assessment and penalties for that year.

HMRC then applied the "assumption of continuity" principle, discussed in Jonas v Bamford (Inspector of Taxes) [1973] STC 519, to issue discovery assessments for the 2008/09, 2010/11 and 2011/12 tax years and penalty assessments for each of the four years. HMRC's basis for this was that the taxpayer's situation had been the same during those years. He had deliberately understated his taxable income in 2008/09 and had carelessly, or deliberately, failed to disclose additional taxable income in 2010/11 and 2011/12.

The taxpayer appealed.

FTT's decision

The appeal was allowed.

The taxpayer argued that his brother had allowed him use his bank account when he was short of funds, and the additional deposits in 2009/10 were loans from his friends and family. HMRC argued that his evidence was inconsistent with the deposit descriptions in the bank statements and his agent's statement that the account was set up to receive the taxpayer's self-employed income. It argued that he had not demonstrated that the deposits were anything other than trading income.

The FTT considered the 2009/10 tax year, and was satisfied that the taxpayer had demonstrated that the monies in his brother's account were not undeclared taxable earnings. The FTT concluded that:

(1) the taxpayer's explanation for the payments was reasonable and credible. These were informal family arrangements and the lack of formal documentation did not suggest, contrary to HMRC's view, that the arrangements were not as he had described them;

(2) the taxpayer was not available for, nor interested in, the type of one-off supply of information technology services to clients that HMRC believed the payments had arisen from. He had been fully occupied with his full-time job and the consultancy work that he was involved in for his former employer;

(3) the taxpayer had undertaken the consultancy work at a low profit margin on the basis that there were potential future commercial advantages for him in staying in contact with his former employer;

(4) the fact that the taxpayer's agent had said that the account was set up to receive self-employed income did not necessarily mean that all sources of payment into that account should be assumed to be taxable self-employed income, particularly where the account was in another person's name and was used for a variety of other purposes;

(5) the brief descriptions in the bank transfer details shown on the bank statements for the account were not sufficient to determine their character in the face of an alternative reasonable explanation provided by the taxpayer;

(6) it did not have to be certain that the taxpayer's alternative explanation was correct; it merely had to be satisfied on the balance of probabilities that the deposits in question were something other than undeclared taxable income.

Given the conclusion reached that the taxpayer had not received additional taxable income in 2009/10, the FTT said he could not be treated, on the assumption of continuity, as deliberately failing to disclose taxable income in the 2008/09 tax year or being careless or deliberate in failing to disclose taxable income in the 2010/11 and 2011/12 tax years.

Comment

This case appears to be an example of HMRC forming a view on a matter early on in a dispute and then refusing to change its position, notwithstanding the provision of additional information and material by the taxpayer which undermined that view.

Not only did HMRC not accept the taxpayer's reasonable explanations, it sought to rely on a 'harsh' assumption of continuity for the surrounding periods to justify discovery assessments and penalties.

The FTT provided some helpful guidance on the "assumption of continuity" principle and confirmed that any such assumption has to depend on an established pattern of behaviour, or circumstances that might be assumed to continue because they formed a predictable pattern. In the present case, there was no basis for any such pattern.

A copy of the decision can be found here.