Stirling Jewellers (Dudley) Limited v The Commissioners for HMRC

On an appeal under section 50(6) of the Taxes Management Act 1970, the taxpayer must establish an overcharge. The tribunal must then determine the amount of the reduction on the evidence, but it has no broad inquisitorial duty to reconstruct the taxpayer’s affairs.

Its factual determination must nevertheless be rational and take account of material matters raised by the parties. A finding of taxable profit was unsustainable where it failed to address a predictable relationship between purchase and sale prices and produced a margin unsupported by the findings and evidence.

The presumption of continuity concerns underreported taxable income, rather than poor record-keeping alone. It may be rebutted by material differences in the scale and nature of the business and the pressures on its systems.

Stirling Jewellers (Dudley) Limited, a jeweller and bullion dealer, appealed against discovery assessments and closure notices for accounting periods ending between 2007 and 2014. HMRC had disallowed part of its claimed cash expenditure on gold purchases. The First-tier Tribunal allowed a reduced deduction adjustment for 2011 and, by applying the presumption of continuity, for 2010. It declined to apply that presumption for 2007 to 2009 and from 2012 onwards.

Stirling appealed the calculation of its 2011 profits. HMRC appealed the refusal to extend the presumption of continuity to 2007 to 2009. The central issues were whether the First-tier Tribunal’s profit finding was perverse or legally flawed, and whether the earlier years materially differed from 2011.

1. Stirling’s appeal was allowed and HMRC’s appeal was dismissed. The First-tier Tribunal’s decision was set aside only insofar as it determined taxable profits for 2010 and 2011. Those matters were remitted to the First-tier Tribunal.

2. Under section 50(6) of the Taxes Management Act 1970, a taxpayer must first show that an assessment is excessive. The tribunal must then determine the amount of the overcharge on the evidence before it. It does not thereby acquire a broad inquisitorial obligation to conduct its own reconstruction of the taxpayer’s profits. Its factual findings remain open to challenge under the principle in Edwards v Bairstow if they disregard material considerations, rely on irrelevant matters, or are unsupported by the evidence.

3. The First-tier Tribunal’s 2011 profit finding was flawed. It had found that Stirling bought scrap gold for at least 97.5% of the gold fix and sold it to the smelter for at most 99.75%. Other income and price movements could increase the margin above 2.25%, but the evidence did not support the 3.24% margin implicit in the tribunal’s determination. The tribunal had failed, at the decisive stage, to give proper weight to that material and predictable relationship.

4. The presumption of continuity derived from Jonas v Bamford (Inspector of Taxes) concerns whether an underreporting of taxable income can be presumed to continue. It is rebuttable. The First-tier Tribunal was entitled to find that the business in 2007 to 2009 was materially smaller and different, and that its record-keeping systems had come under substantially less pressure before the dramatic growth and cash-and-IOU practices of 2010 and 2011. Its refusal to extend the presumption to those earlier years was therefore rational.

5. On remittal, the First-tier Tribunal must redetermine profits for 2010 and 2011 consistently with the Upper Tribunal’s conclusions. The 2010 calculation remains subject to the unchallenged application of the presumption of continuity.

• Upper Tribunal (Tax and Chancery Chamber): Allowed Stirling’s appeal, dismissed HMRC’s appeal, set aside the First-tier Tribunal’s determination of profits for 2010 and 2011, and remitted those issues.
• First-tier Tribunal (Tax Chamber): Decision released on 22 January 2019. It made reduced profit adjustments for 2010 and 2011, but declined to apply the presumption of continuity for 2007 to 2009 and from 2012 onwards.