The presumption of continuity is a practice sometimes used by HM Revenue & Customs (HMRC) in tax enquiries. It is normally applied in the context of business profits. In broad terms, if an adjustment is required for the year of enquiry which results in an increase in taxable income, the circumstances giving rise to the adjustment may be presumed to have continued in other tax years as well.
HMRC may therefore seek to increase taxable income for earlier tax years, and sometimes later ones, in addition to the year of enquiry. The taxpayer is broadly required to demonstrate that the circumstances giving rise to the income adjustment were different in those other years, and/or that the adjustments are unreasonable; otherwise, HMRC’s assessments will stand.
Jonas v Bamford
The authority given by HMRC to apply the presumption of continuity (sometimes referred to as the ‘spreading’ of adjustments) is Jonas v Bamford [1973] STC 519, in which Walton J described the principle as follows:
“… once the Inspector comes to the conclusion that, on the facts which he has discovered, [the appellant] 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 upon the taxpayer.”
However, the presumption of continuity can be rebutted. For example, the taxpayer may be able to demonstrate that an event giving rise to an increase in taxable income for the year of enquiry was a ‘one-off’ event, which was not repeated in other tax years.
Aeroassistance Logistics Ltd v Revenue & Customs
In Aeroassistance Logistics Ltd v Revenue & Customs [2013] UKFTT 214 (TC), the company entered into an ‘event marketing agreement’ with a French company, in respect of a power boat grand prix in Tunisia. The company incurred hospitality costs of £54,601 in its 2004 accounting period. The cost was described as ‘sponsoring’ in its accounts. HMRC sought to disallow the expenditure as entertaining. The company appealed, and argued that the expenditure was a ‘one-off’ event in order to promote its business in Tunisia and North Africa. The tribunal acccepted that the expenditure benefited the company. However, it held that hospitality of the type provided by the company at the grand prix fell within the statutory definition of ‘business entertainment’ (within what is now CTA 2009, s 1298) and was therefore precluded from being an allowable expense.
The company’s 2005 accounts did not refer to ‘sponsoring’. The company claimed a deduction for ‘consultancy fees’ in its 2005 accounts, and the £54,601 shown as sponsoring in the 2004 accounts was described as ‘consultancy fees’. HMRC contended that the presumption of continuity applied on the basis that the amount described as consultancy fees in the 2005 accounts also included expenditure on business entertaining.
However, the evidence was that the business entertainment expenditure incurred by the company related to a one-off event (i.e. the power boat grand prix in Tunisia). The tribunal held that this was sufficient to rebut the presumption of continuity. The company’s appeal against the discovery assessment for 2005 was therefore allowed.
Limitations
HMRC have applied the presumption of continuity to a number of other cases. However, the tribunal has not always accepted its application, and has expressed reservations about HMRC’s use of it. For example:
- The tribunal judge in Aeroassistance Logistics pointed out that in another recent case, Guide Dogs for the Blind Association v HMRC [2012] UKFTT 687 (TC), the tribunal judge in noted that the presumption of continuity is only a presumption, which may be rebutted.
- In Dr I Syed v HMRC [2011] UKFTT 315 (TC), the tribunal observed: “In our view this quotation [from Jonas v Bamford] expresses no legal principle. It seems to us that it would be quite wrong as a matter of law to say that because X happened in Year A, it must be assumed that it happened in the prior year. An officer is not bound by law and in the absence of some change to make or to be treated as making a discovery in relation to last year merely because he makes one for this year. This tribunal is not bound to conclude that what happened this year will happen next year. It seems to us that Walton J is instead expressing a common sense view of what the evidence will show. In practice 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.”
- HMRC must be able to justify applying the presumption of continuity before assessing earlier (or later) tax years. In Barkham v Revenue & Customs [2012] UKFTT 519 TC), the tribunal judge said: “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“.
HMRC’s own Enquiry Manual points out that the presumption of continuity is not automatic, where an adjustment has been made to income for the year of enquiry. HMRC’s guidance states (at EM3309):
“If you have found only one omission in one year and when asked the taxpayer immediately offers a reasonable explanation for its existence, you would not be in a position to argue for additions to other years on that fact alone”. It goes on to state: “if there is only one under-declaration shown in only one year, it will need something extra to show that other years’ accounts may be false”. HMRC adds: “The ‘presumption of continuity’ alone does not justify increases in assessments, the onus is on HMRC to bring evidence in support of the argument”.
Unsatisfactory
In view of HMRC’s comments about ‘one-off’ adjustments in EM3309, it is perhaps surprising that the ‘presumption of continuity’ point was taken in the Aeroassistance Logistics case at all.
Unfortunately, HMRC appears to be intent on continuing to use Jonas v Bamford as authority for making adjustments to earlier and later years, despite the courts pointing out the limitations in HMRCs arguments.
Peter Vaines of Squire Sanders has summed up this unsatisfactory state of affairs as follows:
“There is something rather unsatisfactory for HMRC to keep advancing an arguments which the Courts keep telling them is wrong. I suppose that they hope one day a Tribunal will find in their favour. But what good will that do? One decision in their favour and a whole load against them. If they feel so strongly about this point, they should organise a change in the law rather than keep arguing that black is white”.
It is hoped that, rather than change the law, in future HMRC will only seek to reopen earlier or later tax years if there is clear evidence that is necessary to do so.