In Ruhal Islam v HMRC [2022] TC08513, the First Tier Tribunal (FTT) upheld the appeal against discovery assessments imposing almost £300,000 in tax. It was on the basis that the till receipts that formed the assessment, using the presumption of continuity, were actually fabricated to increase the value of the business for a potential sale.

  • Mr Islam bought and operated a fast food takeaway from 2007. The deal included four tills, three of which were programmed for the takeaway's menu.
  • The business used Tills 1 and 2 until early 2015 and when Till 1 stopped working correctly and was swapped with Till 3.
  • The business declined over the years and in late 2015 Mr Islam tried to sell but was unsuccessful as the business was not performing.
  • In an attempt to make the business look more profitable, Mr Islam's wife fabricated till receipts for the business, using Till 1, for the period November 2015 to January 2016.  
  • Mr Islam also rented a flat for £500 per month and sub-let this at a rental of £6,000 a year.
  • In 2017, HMRC opened an enquiry into Mr Islam's Self Assessment Tax Return and whilst visiting the business premises, took away till rolls From April 2015 to April 2016. This included the 'invented' till receipts which inaccurately inflated the takings of the business and had not been reported in the accounts of the business. Consequently, the period of November 2015 to January 2016 showed much higher profits than usual.
  • In 2018, new case officers took over and visited the premises unannounced in April 2018 when the till reports were taken. One of the case officers then held a meeting about the discrepancies with Mr Islam for which the FTT openly criticised HMRC's incorrect and incomplete notes when compared to the recording of the meeting made by Mr Islam.
  • Shortly after this, HMRC issued Discovery Assessments on the basis that Mr Islam had suppressed sales and had not declared Rental Income from the sub-let property. They applied a presumption of continuity to extrapolate the sales of that quarter and estimate suppressed sales for seven years from 2007-08 to 2016-17, through the assessments and Closure Notices. The total tax due was £293,403.90.
  • It is also understood that HMRC conducted covert observations of the business premises but failed to provide details or evidence from these to support their case.
  • Mr Islam appealed to the FTT.

The FTT found that neither party was able to prove their case and that it was, overall, an unsatisfactory hearing. 

  • The case officers were blinkered in their approach and gathered little evidence. 
  • Mr Islam was uncooperative with HMRC and also produced conflicting evidence.

For the purposes of the appeal, the burden of proof was on HMRC to prove that there was a loss of tax due to deliberate or careless behaviour and the FTT found:

  • The witnesses supporting Mr Islam's version of events were credible.
  • On the balance of probabilities, it was Mr Islam's wife who fabricated the till receipts. The FTT was 'surprised' that HMRC had not addressed the very clear physical differences between the two sets of receipts, suggesting they were not from the same tills. They also queried the very short period of increased sales in comparison to the length of time to which the presumption of continuity was applied.
  • Both officers conceded there was no loss of tax with regard to rental income.

The appeal was allowed.

Useful guides on this topic

Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?

Closure Notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights? 

External link

Ruhal Islam v HMRC [2022] TC08513


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