Trading income – An unfair assumption

Business owners whose tax returns are subject to enquiry by HM Revenue and Customs (HMRC) may be asked to provide evidence about the source of unidentified bank receipts into a ‘mixed’ account (i.e. an account used for business and private purposes) or sometimes even a personal account.

Prove it!

If the receipts cannot be identified and verified as already having been declared for tax purposes, or having a non-taxable source, HMRC may seek to assess the unidentified receipts to tax (and possibly National Insurance contributions (NICs)) on the basis that those amounts represent undeclared business income.

The end result can be tax (and possibly NICs), interest and penalties on amounts received from non-business sources (e.g. gifts or loans from friends or family) during the tax year of enquiry, because it cannot be shown to HMRC’s satisfaction that the amounts are something other than undeclared business income.

Worse still, HMRC might assume that the same situation has arisen for other tax years in addition to the tax return enquiry year. This approach is often referred to as ‘spreading’. It is based on a principle known as the ‘presumption of continuity’, which was established some time ago (Jonas v Bamford [1973] STC 519), although the tax tribunals have not always accepted this approach (e.g. Chapman v Revenue and Customs [2011] UKFTT 756 (TC) and Barkham v Revenue and Customs [2012] UKFTT 499 (TC)).

Not necessarily taxable

However, even if HMRC does not accept the business owner’s explanation of the unidentified bank receipts, it does not necessarily follow that the tax tribunal will agree with HMRC’s approach.

For example, in Bekoe v Revenue and Customs [2017] UKFTT 772 (TC), HMRC opened an enquiry into the taxpayer’s tax return for 2009/10. He was an IT specialist and consultant. The taxpayer and his wife were originally from Ghana, and had family members who lived there. The taxpayer also had two brothers who lived in London. A Barclays bank account existed in the name of one of his brothers. The taxpayer was given access to the account, and used it (on a non-exclusive basis) for his self-employment in 2009/10. HMRC concluded that the Barclays account was a business account of the taxpayer, and that cash payments of £6,740 and bank deposits of £14,160 paid into that account during 2009/10 were the taxpayer’s undisclosed taxable earnings.

The taxpayer stated that the cash payments of £6,740 were paid into the Barclays account by friends and family members who had travelled to the UK from Ghana, on behalf of the taxpayer’s father to support him in the UK. The taxpayer’s mother was a teacher, who had decided to set up a school in Ghana. The taxpayer paid £21,000 towards the costs of setting up the school. The taxpayer also stated that further bank deposits of £14,160 represented loans from a contact of his wife towards the taxpayer’s contribution to the school, which his father had subsequently agreed to repay for him. The First-tier Tribunal concluded that the taxpayer had demonstrated, on the balance of probabilities, that the above monies paid into the Barclays account in 2009/10 were not undeclared taxable earnings.

No continuity

In addition to concluding that further tax was due for 2009/10, HMRC had made discovery assessments for the tax years 2008/09, 2010/11 and 2011/12, based on the presumption of continuity that the taxpayer’s behaviour for those tax years was the same as for 2009/10.

However, the tribunal had concluded that the taxpayer did not receive additional taxable income in 2009/10. In any event, the tribunal’s view on the presumption of continuity was that it must depend on an established pattern of behaviour or circumstances, which may be assumed to continue because they formed a predictable pattern. However, it was hard for the tribunal to see the basis for any such predictable pattern in this case.

Practical point

HMRC argued that a lack of certainty about the sources of the Barclays monies meant that the funds must be treated as trading income, based on an earlier case (Ali v Revenue and Customs [2012] UKFTT 829 (TC)). Fortunately, the tribunal in Bekoe disagreed: “In our view there is no requirement that we are certain that Mr Bekoe’s alternative explanation is correct; we merely need to be satisfied on the balance of probabilities that the deposits in question are something other than undeclared taxable income.”

Nevertheless, it would be prudent to keep records and any documentary evidence to support the source and nature of any non-business receipts, to reduce the possibility of HMRC attempting to argue that those receipts represent undeclared business income, and possibly seeking to charge additional tax, interest and penalties.

The above article was first published in Business Tax Insider (March 2018) (

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