HM Revenue and Customs (HMRC) can open an enquiry into any self-assessment return within certain time limits. A tax return enquiry for one period could extend to other periods, such as where HMRC considers that a self-employed individual’s income for one tax year has also been understated in other tax years.
HMRC’s ‘presumption’
This HMRC practice of seeking to assess other periods in addition to the period of enquiry is commonly known as ‘spreading’. It is based on the ‘presumption of continuity’ (see HMRC’s Enquiry manual at EM3236) and follows the judgment in Jonas v Bamford [1973] STC 519.
However, the tax tribunal has not always approved the principle of spreading (e.g. Syed v Revenue and Customs [2011] UKFTT 315 (TC)), and has sometimes required HMRC to provide evidence to support spreading and the issue of discovery assessments for additional periods (e.g. Barkham v Revenue and Customs [2012] UKFTT 499 (TC)).
The domino effect
It should be noted that any spreading adjustments into other tax years is based on the self-assessment period of HMRC’s enquiry; so if HMRC’s adjustment for the enquiry period is wrong, the discovery assessments for other periods will probably be wrong as well.
For example, in Nelson v Revenue and Customs [2019] UKFTT 36 (TC), the taxpayer was involved in an eBay business. The taxpayer and his wife were partners in the business, together with his father (MN). Following an enquiry into the taxpayer’s self-assessment return for 2011/12, HMRC’s position was that there were two parallel businesses, one run by the taxpayer and the other by MN. HMRC raised a discovery assessment for 2011/12, and assessments for five tax years (i.e. 2007/08 to 2010/11 and 2012/13).
Fundamentally flawed
The discovery assessment for 2011/12 was based on an expenditure schedule provided by the taxpayer’s wife. HMRC’s assessments for the other five years relied on the ‘presumption of continuity’. The First-tier Tribunal found HMRC wrongly decided that the taxpayer was running a second eBay business. With regard to the expenditure schedule provided by the taxpayer’s wife, on which HMRC based their assessment for 2011/12, the tribunal noted it was clear on the face of the document (and confirmed by the taxpayer’s wife) that the expenditure was that of the taxpayer’s family, not the taxpayer alone.
The assessments for the other five tax years were based on the presumption of continuity. However, the tribunal held (among other things) that there was no basis for the application of that presumption, as the assessment for the ‘base year’ (i.e. 2011/12) was ‘fundamentally flawed’. The taxpayer’s appeal was allowed.
Forwards or backwards?
The presumption of continuity in Jonas v Bamford was expressed in the context of spreading forwards into later tax years. However, in practice HMRC often attempts to spread backwards as well.
Backwards spreading has been criticised (e.g. in Chapman v Revenue and Customs [2011] UKFTT 756 (TC)). On the other hand, it was approved in Allan v Revenue and Customs [2016] UKFTT 504 (TC). Until this point is finally decided either way by the courts, consider challenging instances where HMRC attempts to spread backwards instead of forwards.
The above article was first published in Tax Insider in August 2019 (www.taxinsider.co.uk).
