Gold dealer’s poor records lead to high tax demand
HMRC presumed there was a continuity of income and expenses in earlier years, and estimated that profits were understated by £9m. The upper tribunal set aside this presumption of continuity.
In its 2006 accounting period, Stirling focused on selling jewellery to the public and other shops. By 2011, its business had transformed dramatically and consisted almost entirely of purchasing scrap gold for smelting. Turnover also increased substantially, from approximately £5m in 2009 to over £140m in 2011 and in excess of £206m in 2012.
However, there were issues with the company’s recordkeeping, which were not resolved until 2012 when a qualified accountant was hired.
While the FTT noted that Stirling’s back office function was “perhaps” appropriate for the type and size of business up to and including 2009, the position changed dramatically from 2010, when turnover increased to approximately £50m.
Initial HMRC enquiries
The inadequacies in Stirling’s recordkeeping came into particular focus when HMRC, having performed a detailed calculation in relation to Stirling’s 2011 accounting period, determined that there was a difference of £9,078,689 between the amount that Stirling claimed to have spent on purchases of gold and the amount that HMRC considered could be established by reference to Stirling’s business records.
On this basis, HMRC increased Stirling’s profits chargeable to corporation tax in 2011 by the £9,078,689.
HMRC also assumed that the additional profits were lent to a participator in the company, leading to tax charges under s 419 ICTA 1988 and s 455 CTA 2010.
HMRC also concluded that corresponding adjustments should be made to the profits of other accounting periods, applying the presumption of continuity.
Stirling appealed against HMRC’s discovery assessments and closure notices for accounting periods ended 31 January 2007 to 31 January 2014 [TC06940].
The FTT made the following determinations:
- Some expenditure had to be added back to Stirling’s corporation tax calculation in 2011, but the amount of add-back was lower than HMRC’s calculation. This adjustment led the FTT to conclude that Stirling made a gross profit margin, before administrative expenses, of 3.24% on its total turnover in 2011.
- The presumption of continuity was applied to 2010, such that some expenditure also had to be added back in that year. The amount was calculated by reference to the proportion of expenditure added back in 2011 per the FTT’s determination, meaning the amount of add-back in 2010 was also lower than HMRC’s calculation.
- Stirling was not liable for any tax under s 419 ICTA 1988 or s455 CTA 2010 for any accounting period under appeal.
The FTT declined to apply the presumption of continuity in any accounting period other than 2010. Stirling’s appeals against HMRC’s closure notices and assessments for 2007 to 2009, and for 2012 to 2014 were therefore allowed.
Appeals against FTT decision
Both Stirling and HMRC appealed against the FTT’s decision [UT/2019/0163 (V)].
Stirling argued the add-backs that the FTT made in respect of 2011 (and also for 2010) were too high. It did not challenge the FTT’s decision to apply the presumption of continuity and add back expenses in 2010.
HMRC appealed against the FTT’s refusal to apply the presumption of continuity to accounting periods 2007 to 2009. It did not challenge the FTT’s refusal to apply the presumption of continuity in accounting periods 2012 to 2014.
Stirling’s appeal allowed
While the UT acknowledged that the FTT had faced an unenviable task in determining the true amount of Stirling’s taxable profits in 2011, given the chaotic nature of Stirling’s business records, it found that the FTT had erred in law.
When determining Stirling’s taxable profits, the FTT lost sight of the relatively predictable gross margin on sales of scrap gold of 2.25%. Also the conclusion that Stirling made a 3.24% gross margin in 2011 could not be justified in light of the FTT’s other findings and the evidence before it.
The UT allowed Stirling’s appeal.
HMRC’s appeal dismissed
HMRC’s appeal was based on the argument that poor recordkeeping in 2007 to 2009 would have caused just the same proportion of overclaimed expenses as it did in 2011. Therefore, in those accounting periods, Stirling’s expenses should be added back in the same proportion as they were added back in 2011, applying the presumption of continuity.
The UT did not accept HMRC’s argument. There was a material difference between accounting periods 2007 to 2009 and accounting periods 2010 and 2011, such that the presumption of continuity should not apply in 2007 to 2009.
HMRC’s appeal was dismissed.
Case remitted back to FTT
The UT set aside the FTT’s decision insofar as it determined Stirling’s taxable profits in 2010 and 2011. In all other respects, the decision was to stand.
The case is to be remitted back to the FTT to reconsider the extent of Stirling’s taxable profits in those two periods (applying the presumption of continuity to 2010), although the Judges expressed the hope that HMRC and Stirling would be able to agree on a revised assessment so as to make a further hearing before the FTT unnecessary.
In spite of the apparent level of “missing” expenses in 2011, there was no suggestion of any attempt to extract money or gold from the business, or to suppress takings to evade tax. As such, this case is another, albeit somewhat extreme, reminder of the importance of good recordkeeping.