Mark McLaughlin looks at HMRC’s ‘presumption of continuity’ in an enquiry into a taxpayer’s self-assessment return.
An HM Revenue and Customs (HMRC) enquiry into an individual’s self-assessment return sometimes extends beyond the tax year of the enquiry and into other tax years. For example, HMRC’s enquiry may have revealed understated profits of a self-employed individual, resulting in additional tax.
Spreading out!
Furthermore, HMRC might consider that the taxpayer’s profits for other tax years have probably been understated in a similar way and make ‘discovery’ assessments for earlier tax years. This HMRC practice of reopening earlier tax years is called ‘spreading’, or the ‘presumption of continuity’.
HMRC invariably cites an old tax case, Jonas v Bamford [1973] STC 519, in support of its practice of spreading. However, the judge in that case was referring to the presumption of continuity applying to later years, not earlier ones. This point was noted in Chapman v Revenue and Customs [2011] UKFTT 756 (TC), where the tribunal stated: “The presumption as expressed in that case looks to the future and not the past. It is difficult to see how one can apply such a presumption based on the enquiry year to the earlier years.”
However, in the subsequent case Allan v Revenue and Customs Comrs [2016] UKFTT 504 (TC), the tribunal stated: “Once the threshold requirement is satisfied for there to be a ‘discovery’ of loss of tax, the presumption of continuity applies in the raising of assessments for earlier years”.
Backwards and forwards
HMRC might consider Allan as authority for extending the scope of the presumption of continuity to earlier years, even though the decision in Allan does not set a binding legal precedent. The approach in Allan has subsequently been followed in some other cases (e.g., Whitlock v Revenue and Customs [2021] UKFTT 167 (TC)).
Limitations in the presumption of continuity were also highlighted in Syed v Revenue and Customs [2011] UKFTT 315 (TC), where the tribunal said: “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…in those circumstances continuity is unlikely to be present.”
One-off errors
HMRC accepts that the presumption of continuity should be used with some care for ‘one-off’ tax return inaccuracies; for example, in the Enquiry manual at EM3236, HMRC states: “If there is only one under-declaration shown in only one year, additional evidence will be required to conclude that other years’ figures may also be inaccurate.”
HMRC adds: “Assessments should not normally be raised before HMRC has a case both for the existence of current year assessed liabilities and for the presumption of continuity.”
It is important to bear in mind that if no errors are found to have been made in the taxpayer’s self-assessment return for the initial year of enquiry, the presumption of continuity cannot apply; any assessments based on the presumption of continuity should therefore fall away (e.g., see Nelson v Revenue and Customs [2019] UKFTT 36 (TC)).
Practical tip
It might be tempting to agree additions to business profits with HMRC, with a view to bringing an enquiry to an early conclusion. However, as profit adjustments for the year of enquiry can result in adjustments for other tax years based on the presumption of continuity, avoid agreeing any profit adjustments for the enquiry year without careful thought.
