In Stirling Jewellers (Dudley) Limited v HMRC [2020] UKUT 0245, the Upper Tribunal found that changes to a company's trade and the appointment of a qualified accountant meant that the 'presumption of continuity' could not apply to record-keeping and business margins for earlier years. The case has been remitted back the First Tier Tribunal.

The taxpayer originally traded as a jewellery manufacturer and retailer and in 2012 it became mainly a bullion dealer. The business experienced significant increases in turnover. In  2007, the business had reported a turnover of £12.86m. By 2012, reported turnover was £206.08m.

  • HMRC raised enquiries into the business and found a lack of evidence to support the large amounts of expenditure the taxpayer claimed they had spent on the purchase of gold.
  • Most of HMRC’s enquiries were focused on 2011 and reconciling the closing cash position of the business.
  • In arriving at their assessments and closure notices, HMRC increased the taxpayer’s taxable profits for 2011 by applying an ‘add-back' and assumed that additional profits had been extracted from the business by the shareholders and 'Section 419/455' Close company loans to participator assessments were raised for 2011 in respect of HMRC calculated cash extractions.
  • HMRC applied a ‘Presumption of continuity’ and issued Income Tax assessments and Closure notices to the taxpayer covering 2007 to 2014.
  • The business initially invested little into keeping its records in order. Record-keeping improved considerably from 2012 when the business employed a qualified accountant.

On appeal, the First Tier Tribunal (FTT) dismissed the Income Tax assessments and closure notices for all accounting periods except 2011 and 2010 and the 'section 419/455' tax charges raised by HMRC in all periods assessed.

  • The FTT concluded the ‘anticipated profit margin approach’ suggested by the taxpayer was not appropriate to recalculate the profits of the business.
  • Instead, the FTT calculated a revised 'add-back' resulting in a gross profit margin (before administrative expenses) for 2011 of 3.24%. A ‘presumption of continuity’ was applied to 2010.

The taxpayer and HMRC both appealed to the Upper Tribunal (UT).

  • On appeal by the taxpayer, the UT allowed the taxpayer’s appeal on the basis that the FTT erred in law in its conclusion about profits for APE 2011 by failing to take full account of the significance of the anticipated profit margin (UT determined a maximum of 2.25%) that the taxpayer had placed at the heart of its case or other factors such as whether it was plausible, based on the evidence, that other income sources could cause this profit margin to increase to 3.24%.
  • On appeal by HMRC, the UT dismissed HMRC’s appeal in respect of APE 2007, 2008 and 2009 on the basis that a ‘presumption of continuity’ did not apply to those periods as the business was not of a similar nature and did not deal mainly in gold bullion, as was the case for 2011 and 2010. The existence of poor record-keeping in the periods covered by HMRC's appeal was not sufficient evidence to conclude that the business under-reported its taxable income. 

The UT has sent the matter back to the FTT with an instruction that they reconsider the taxpayer’s taxable profits for 2011 and 2010 in light of the UT's findings.


Investigations: The presumption of continuity
What is the presumption of continuity and when could HMRC use it?

Closure notices
When does HMRC issue a closure notice? Can a taxpayer demand one? Are there appeal rights? 

How to appeal an HMRC decision
What type of decision can you appeal? What are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Time limits for tax assessments, claims and refunds
How far can HMRC go back and raise an assessment? How many years back can a taxpayer appeal? What are the time limits for correcting a tax return?

Close company loans
A detailed look at the Corporation Tax treatment when a Close Company makes a loan to a participator (director-shareholder). It also provides links to our guides for individuals on the making of loans to companies. Read this in conjunction with our Director's Loan Account toolkit which looks at the tax treatment for Income Tax purposes.

External link 

Stirling Jewellers (Dudley) Limited v HMRC [2020] UKUT 0245