Stirling Jewellers (Dudley) Limited v The Commissioners for HMRC

The parties’ submissions revealed a degree of disagreement as to the nature of the FTT’s jurisdiction to determine Stirling’s profits for APE 2011 and we will, therefore, start with some brief remarks on this issue.

In his skeleton argument, Mr Chacko put Stirling’s case on this issue as follows:

Ms Choudhury for HMRC submitted that the FTT’s task was less extensive as follows:

The FTT’s power to displace the determination of Stirling’s liability to tax for APE 2011 derives from s50(6) of the Taxes Management Act 1970 (“TMA”) which provides, so far as material, as follows:

Mr Chacko argued that his submission as to the scope of the FTT’s powers was supported by the following passage from the decision of the Court of Session in Rouf v HMRC [2009] STC 1307:

It is important to bear in mind the context in which the Court of Session made the above remarks. In that case HMRC had made an income tax assessment because they considered that the taxpayer had underdeclared his profits. In his appeal to the General Commissioners, the taxpayer made a number of criticisms of the basis on which HMRC made their assessments, but elected not to put forward any alternative figures to those contained in HMRC’s assessment. He appealed to the Court of Session on the basis that the General Commissioners had dismissed his appeal solely on the basis that he had provided no alternative figures.

Therefore, in Rouf v HMRC, the Court of Session was not being invited to determine that the General Commissioners (or the FTT) had the kind of broad inquisitorial jurisdiction for which Mr Chacko appears to be arguing. Rather, the point at issue was much more limited: if the taxpayer could succeed in demonstrating that he was overcharged by HMRC’s assessments, was his appeal nevertheless bound to fail if he did not provide a specific alternative to those assessments? In the passage we have quoted, the Court of Session resolved that issue by determining that in such a case it would still be open to the General Commissioners to reduce the assessment if there was evidence before them supporting that reduction. It was implicit in the Court of Session’s conclusion that, provided it was supported by evidence, this course would be open to the FTT even if the taxpayer made no submissions suggesting a specific reduction. However, that is very different from a conclusion that the FTT must perform its own inquisitorial evaluation of the taxpayer’s profits.

In any event, in Rouf v HMRC, the point was academic because the Court of Session concluded that the General Commissioners had quite properly decided that the taxpayer’s general criticisms of the assessments did not demonstrate that they were excessive.

It follows, therefore, that we do not accept that the FTT had a duty to perform the broad examination for which Mr Chacko appears to be arguing. Once Stirling had demonstrated to the FTT’s satisfaction that it was overcharged by HMRC’s assessments, it could not simply hand matters over to the FTT and require it to perform its own examination and produce its own calculation of its true tax liability. Given the clear defects in Stirling’s records, both Stirling and HMRC had struggled to ascertain that true tax liability after examination and discussion lasting several months, if not years. It would be fanciful to expect the FTT to be able to do better if it simply performed its own analysis after a hearing lasting just a few days.

We therefore consider that Ms Choudhury’s formulation of the nature of the FTT’s task is closer to the mark. However, we would add an important qualification. Section 50(6) of TMA required the FTT to establish the amount of any overcharge in HMRC’s closure notice for APE 2011 because it makes it obligatory for the FTT to reduce the assessment by that amount. In determining the amount of the overcharge, the FTT had to determine the true amount of Stirling’s taxable profits in APE 2011. That was a finding of fact. Even if the FTT did do the “best it could” (to use Ms Choudhury’s words) if, in making its factual finding, the FTT ignored relevant considerations, took into account irrelevant considerations, or came to a conclusion that could not be supported by the available evidence, its determination can be set aside under the familiar principle set out in Edwards v Bairstow.

The significance of this point can be seen in the case of Rouf v HMRC. In that case, HMRC made an assessment in respect of the profits of a restaurant business on the footing that 26.06% of turnover was not being declared. The evidence also showed that 8.09% of customers were not being recorded. The Court of Session concluded at [35] of the reported decision that, if the General Commissioners could not rationally have accepted that 26.06% of turnover was being suppressed when only 8.09% of customers were not being recorded, it was entitled to interfere with the General Commissioners’ determination of the tax due on Edwards v Bairstow grounds. In the event, however, it declined to do so as it concluded that the General Commissioners’ approach was rational.

Therefore, while we do not accept that the FTT had a broad inquisitorial jurisdiction of the kind for which Mr Chacko argued, neither do we accept HMRC’s broad submission outlined at paragraph 44(1). We quite accept that both parties made submissions to the FTT about Stirling’s cash position. However, the FTT’s overall task was to decide whether Stirling was overcharged by HMRC’s closure notice and, if so, by how much. It was not suggested to us that the parties reached any agreement that the appeal could be decided by reference to an agreed list of questions relating to its cash position. In short, the entire question of the amount of Stirling’s profits for APE 2011 was at large before the FTT. It follows that, while the FTT was not under any obligation to “sense-check” its own determinations, since it was not performing an inquisitorial exercise, its overall determination of the level of Stirling’s profits had to take account of the material factors to which the parties drew its attention and be “rational” having regard to those factors. If it can be shown that the FTT’s determination did not meet those requirements, we are entitled to interfere with it.

HMRC place significant reliance on what they submit to be the uncertainty as to the price which Stirling received from Englehard and the price that Stirling paid to its customers. Without a high degree of certainty on both numbers, they argue that there can be no reliable “hard cap” on the amount of Stirling’s taxable profits for APE 2011.

The difficulty with this submission is that it overlooks the fact that, as we explain in the next paragraphs, the FTT itself made factual findings that, in APE 2011, Stirling paid at least 97.5% of the spot price for scrap gold and received at most 99.75% of the spot price when it sold scrap gold to Englehard. On those findings, and ignoring other factors such as the presence of other sources of profit and the effect of fluctuations in the gold price which we will address in the next section, Stirling’s maximum gross margin on sales of scrap gold was 2.25% (Footnote: ⁶).

HMRC referred to uncertainty as to when Stirling started to receive 99.5% of the spot price on sales to Englehard, as distinct from the 99.75% that it formerly received (see [260(5)] and [260(6)]). However, even if Englehard had paid 99.5% throughout APE 2011, that would only have reduced Stirling’s margin below 2.25%.

In a similar vein, at [271], the FTT set out uncertainties associated with the price that Stirling paid for scrap gold as follows:

We agree with Stirling that the points made at [271(2)] and [271(6)] could only operate to reduce Stirling’s margin below 2.25%. We will deal with the point made at [271(5)] when we deal with the potential effect of gold price fluctuations and address the point at [271(3)] in the next section dealing with potential additional sources of income.

That leaves the points made at [271(1)] and [271(4)]. If Mr Scadeng sold gold to Stirling at 97% of the gold fix (at the bottom of the range he gave), Stirling would make more than a 2.25% margin when it sold gold purchased from him to Englehard for a maximum price of 99.75% of the fix. If there was a defect in Stirling’s computer system so that Stirling was inadvertently paying less than 97.5% on some purchases, that could similarly increase the margin.

Mr Ragonesi’s evidence as to the problem with the computer system was that, unless manually corrected, it would carry forward information from the previous invoice generated into the next invoice. As Mr Ragonesi put it in his witness statement:

That evidence was not challenged in cross-examination (Footnote: ⁷). Therefore, the problem with the computer system could only result in a margin in excess of 2.25% on a particular transaction if Stirling paid a customer less than 97.5% of the gold fix and the computer replicated that amount on subsequent invoices. Yet Mr Ragonesi’s evidence was that Stirling advertised that it would pay 97.5% of the gold fix and never paid less than this in APE 2011. We will shortly consider the effect of Mr Scadeng’s evidence (that he was paid “97-98%” of the gold fix), but subject to that discussion, problems with the computer system could not themselves have increased Stirling’s margin on any particular transaction above 2.25%.

The FTT found at [271(1)] that Mr Scadeng would “usually (but not always)” receive “97-98%” of the gold fix when he sold gold to Stirling. That finding was accurate, but was an understandably compressed way of stating a conclusion based on a few pieces of evidence. A fuller explanation of the situation with Mr Scadeng was as follows:

There was, therefore, no evidence before the FTT to support a conclusion that Mr Scadeng received less than 97.5% of the gold fix on gold he sold to Stirling in APE 2011 and so no evidence that Stirling’s margin on transactions with Mr Scadeng was in excess of 2.25%.

We therefore accept Stirling’s arguments that the findings of the FTT, and the evidence before it, demonstrated that in APE 2011 Stirling would purchase scrap gold for a minimum of 97.5% of the gold fix and would sell it to Englehard for a maximum of 99.75% of the gold fix. If that was Stirling’s only activity, and ignoring the effect of fluctuations in the gold price, it could not have made a margin of more than 2.25%. In the sections that follow we consider whether other sources of income, or movements in the gold price, were capable of increasing Stirling’s margin to the 3.24% implicit in the FTT’s decision.

At [96], the FTT found that the “main focus” of Stirling’s business became the purchase and sale of scrap gold. It did not, however, make any express findings as to the scale of Stirling’s other activities or the levels of profit they could generate. We agree with Ms Choudhury’s general point that, in principle, other activities could generate material additional income even if they were less than the “main focus” of Stirling’s business. We have, therefore, analysed the evidence before the FTT as to the scale of Stirling’s other activities.

Mr Ragonesi’s witness statement did not take matters much further than saying that the business of buying and selling scrap gold became the main focus of Stirling’s business. However, he did explain that Stirling had started out as a jewellery retail business and had then expanded into wholesale and jewellery manufacture. After the “credit crunch” of 2008, he explained that manufacture and retail of jewellery became “more difficult” because the price of gold increased, making jewellery more expensive and people were less prepared to buy luxuries. By some time after 2008, Stirling had shut down all but two premises, retaining just one shop and one shop/wholesale premises.

Mr Ragonesi did, however, give unchallenged oral evidence that related to the scale of these other activities. He said that, in “2011” (Footnote: ⁸), Stirling did not even put retail goods out for display that the turnover for APE 2011 was “99.9-odd all bullion and odd rings”. That echoed an answer he gave to a question to the effect that turnover in “2011 and 2012” was “all bullion...give or take… I couldn’t say there isn’t a few hundred pound ring or something”. In “2010”, Mr Ragonesi thought that around £45 million of turnover of £50.7 million was related to the purchase and sale of bullion.

We agree with Stirling that the evidence before the FTT indicated that the wholesale and retail sale of jewellery, and the activity of manufacturing jewellery, produced no material contribution to turnover in APE 2011.

The position in APE 2010 is much less clear-cut. While Mr Ragonesi’s evidence certainly indicated that these other activities were much smaller than the activity of purchasing and selling scrap gold, they still generated material turnover of around £5m.

Another potential source of income available to Stirling took the form of revenue generated from extraneous metals found together with gold that Stirling sold to Englehard for example silver, platinum or palladium. The FTT made few findings as to the extent of this income. Having read the transcript of Mr Ragonesi’s unchallenged evidence, it appears to us that the position with these metals was as follows:

Overall, it seems clear from Mr Ragonesi’s evidence that revenue generated by Englehard paying for extraneous metals would have had some incremental effect on Stirling’s gross revenues. However, given his unchallenged evidence that Stirling would make money on platinum, but lose it on palladium, and that the additional receipts from sales of silver did not have a significant effect on profit and would typically be absorbed by other charges, we see no basis for a conclusion on the evidence that Stirling made a significant amount of its gross profit from sums that Englehard paid for extraneous metals.

Finally, we turn to revenue from the purchase and sale of gold coins. The FTT found, at [97], that Stirling would not sell coins of numismatic interest to Englehard as it could make slightly more profit, which the FTT put at “perhaps 1%” by selling those coins to specialist dealers. The FTT did not make any findings as to the scale of this activity. Mr Ragonesi’s unchallenged evidence was that the activity was “in the scale of things not very important”.

Our overall conclusion from a review of the evidence and the FTT’s findings is that in APE 2011, Stirling did have sources of income other than the maximum 2.25% margin that it made on the purchase and sale of scrap gold. However, we do not consider that the evidence before the FTT supported a conclusion that these other sources of income could have had the effect of increasing Stirling’s gross profit on total turnover from 2.25% to the 3.24% that was implicit in the FTT’s determination. To have such an effect, these other sources of income would have to increase Stirling’s gross margin by 44%. Yet there was no suggestion in the evidence that, either singly or cumulatively they could have had such a pronounced effect although, of course they would clearly have had some effect.

As we have noted at paragraph 17 above, Stirling did not consciously seek to speculate on movements in the price of gold. However, the ordinary conduct of its business necessarily meant that gold price movements could increase, or reduce, profits. The FTT did not make any findings as to the scale of this effect. However, Mr Ragonesi said in his witness statement that “[gold] price fluctuations were not a significant part of the profitability of the business” and that statement was not challenged in cross examination.

Ms Choudhury pointed out that Stirling’s own evidence before the FTT suggested that it had a gross profit margin in APE 2010 of 2.54% which, she submitted, demonstrated that it was quite possible for it to make gross profits in excess of the “hard cap” for which it argued. However, as we have already noted at [73], in APE 2010 Mr Ragonesi’s evidence was that Stirling sold material amounts of retail jewellery on which it made a gross profit of 10% to 20%. In APE 2011, by contrast, as noted at [71], there were negligible retail sales of jewellery. Therefore, the fact that, on its own figures, Stirling made a gross profit of 2.54% in APE 2010 says little about its likely gross profit in APE 2011.

Of more force was Ms Choudhury’s argument that, in APE 2011, for months in which no purchase invoices were missing, Stirling’s margin was 2.78% of total turnover. Mr Chacko invited us to attach little weight to this figure since it had been produced a long time ago by Stirling’s former accountants and Mr Ragonesi’s evidence in cross-examination was that the 2.78% figure had not been produced by considering actual receipts from Englehard relating to gold. It is not possible for us at this remove from the evidence to decide whether the 2.78% figure is accurate or not and, if it is, why it is higher than the “hard cap” for which Stirling argues. We observe only that, even if it is correct, the figure does not suggest that Stirling’s margin for APE 2011 could be as high as 3.24% of turnover.

The appeal before the FTT was unusual and raised difficult issues. Often when HMRC make assessments on traders with poor records, the central allegation is that the trader has “suppressed” receipts. However in this case, on the FTT’s findings which are not subject to appeal, there is no question of “suppression”. Rather, the question was how much Stirling could deduct from its receipts so as to produce taxable profits for APE 2011. The FTT faced an unenviable task in determining that issue given the chaotic nature of Stirling’s business records and the corresponding multiplicity of methods that the parties put forward for consideration in order to fill in the gaps left by those records.

The “anticipated profit margin” approach for which Stirling argued had some attractions. Stirling’s receipts from Englehard were, almost uniquely among Stirling’s poor records, both complete and reliable. The “anticipated profit margin” approach sought to build on the accuracy of the Englehard receipts and the fact that those receipts built in a (relatively) predictable margin over amounts paid for gold so as to reconstruct the amount that Stirling actually spent on cash purchases of gold in APE 2011. We do not criticise the FTT for deciding that it would not follow that method as it was correct to observe that it came with a degree of uncertainty as to, for example, the precise prices that Stirling paid and received for gold.

However, the method that the FTT ultimately adopted, of seeking to reconstruct amounts paid on the “missing days” partly by reference to average figures and partly by reference to receipts also came with its problems. Most fundamentally, that method lost sight of the relatively predictable link between gross receipts from Englehard and amounts Stirling paid to acquire gold that arose because Stirling sold gold to Englehard for at most 99.75% of the gold fix and purchased gold from its customers for at least 97.5% of the gold fix. We will not go as far as Stirling and decide that this placed a “hard cap” on the amount of profit it could earn. As we have noted in the preceding sections, fluctuations in the gold price, income from the sale of gold coins which attracted a higher margin, the occasional sale of retail jewellery and receipts from Englehard relating to extraneous precious metals all had the capacity to increase Stirling’s margin above 2.25% of total receipts from Englehard. However, the predictable link was highly relevant to a determination of what Stirling’s profits for APE 2011 could plausibly be.

In the broad sense, the FTT did not “ignore” the link we have referred to in paragraph 83. It made careful and reasoned findings as to the nature of that link. However, at the crucial point in the Decision, when it was determining the amount of Stirling’s profits for APE 2011, it lost sight of the significance of that link. As a result, it did not consider how Stirling could have made a gross margin of 3.24% when its business involved purchasing gold for a minimum of 97.5% of the gold fix and selling it to Englehard for a maximum of 99.75% of that fix. If Stirling had not put in issue the significance of its margin as a tool for estimating its maximum amount of profit (and had, for example, limited its submissions to the likely amount spent on gold on the “missing days”) we would probably not have concluded that the FTT failed to take adequate account of the significance of Stirling’s margin. As we have observed, the FTT was not exercising an inquisitorial jurisdiction and could scarcely be expected, without invitation or guidance, to perform calculations to “sense check” its own conclusions. However, Stirling had placed its margin at the heart of its case. At paragraph 9 of its skeleton argument before the FTT, Stirling made the specific point that HMRC’s assessments could not be based on an accurate estimate of its profits as Stirling could not earn the kind of margin that was implicit in HMRC’s calculations. In urging the FTT to adopt a an “anticipated profit margin” exercise, Stirling was arguing that its margin was a reliable guide to the determination of its profits. The FTT had itself recognised the importance of Stirling’s margin because it made findings going to the size of that margin. We do not, therefore, accept HMRC’s submissions that, in making points about margin in this appeal, Stirling is “island-hopping” in the sea of evidence (in the words of the Court of Appeal in Fage UK Ltd and another v Chobani UK and another [2014] EWCA Civ 5 at [114]).

We have carefully considered whether the other factors, such as income from other sources and the effect of gold price movements, could nevertheless support a gross margin of 3.24%. In our judgment, while these factors demonstrate that Stirling could make a gross margin in excess of 2.25% of turnover, they do not support the figure of 3.24%.

It follows, in our judgment, that the FTT’s conclusion as to the profits of APE 2011 is vitiated by errors of law. First, at the point it came to determine the level of Stirling’s profits, the FTT ignored a relevant consideration: namely that Stirling bought gold at a minimum of 97.5% of the gold fix and sold it for a maximum of 99.75%. Second, the FTT’s overall conclusion that Stirling made a 3.24% gross margin in APE 2011 could not be justified on the basis of the FTT’s other findings and the evidence before it. In reaching this conclusion, we would not want to be seen as being unduly critical of the FTT as Stirling’s chaotic records made the FTT’s task extremely difficult.

We are therefore allowing Stirling’s appeal by reference to its first ground set out at paragraph 42 above. In the circumstances, we do not need to consider the other arguments that Stirling raised in support of its appeal.

With the permission of the Upper Tribunal, HMRC appeal against the Decision on the following ground:

The essence of HMRC’s arguments, which we will consider in more detail in the sections that follow, is that in APEs 2007, 2008 and 2009, Stirling was carrying out a business of a similar nature to that carried out in APE 2011 and of a significant scale. Moreover, its records, and record-keeping procedures, were just as chaotic in those earlier accounting periods as they were in APE 2011. Accordingly, in those earlier accounting periods, Stirling’s expenses should be added back in the same proportion as they were added back in APE 2011 applying the presumption of continuity and the FTT reached a perverse and irrational conclusion in failing to do so.

HMRC argue that the comparison with APEs 2012, 2013 and 2014 is instructive. The FTT declined to apply the presumption of continuity in those accounting periods principally because it concluded that Stirling’s record-keeping improved so that all purchases of gold were being reliably recorded. HMRC are content with that conclusion and do not seek to disturb it. However, having concluded that better record-keeping in APEs 2012, 2013 and 2014 made all the difference, the FTT could not rationally have declined to apply the presumption of continuity in APEs 2007, 2008 and 2009 when record-keeping in those years was no better than it was in APE 2011.

Stirling argues that the FTT was entitled to reach the conclusion that there were material and relevant differences between APEs 2010 and 2011, and the earlier accounting periods.

At paragraph 38 above, we have set out a quote from the judgment of Walton J in Jonas v Bamford. Mr Chacko was right to emphasise, in his oral submissions, that the question is whether it can be presumed from the fact that Stirling under-reported taxable income in APE 2011 (by overclaiming expenses) that Stirling also under-reported taxable income in APEs 2007 to 2009. The question is not simply whether it can be presumed from the fact that Stirling’s record-keeping was poor in APE 2011, that it was similarly poor in APEs 2007 to 2009. Of course, we acknowledge that HMRC’s argument is that poor record-keeping in the earlier accounting periods would have caused just the same proportion of overclaimed expenses in that accounting period as it did in APE 2011. However, it is important to note that the presumption is focused on the amount of taxable income.

The focus of HMRC’s challenge was to the reasons the FTT gave at [278] for not applying the presumption of continuity in APEs 2007 to 2009 as follows:

We see little force in HMRC’s criticism that paragraph [278(1)] does not contain any reason for declining to apply the presumption. In that paragraph, the FTT is simply directing itself, correctly, that the presumption can be rebutted. Its reasons are therefore to be found in paragraphs [278(2)] to [278(6)], reading those paragraphs in the light of the Decision as a whole.

As regards [278(2)], HMRC acknowledge that there were some “quantitative” and “qualitative” differences between APEs 2007 to 2009 and APE 2011. Stirling’s business was smaller (though HMRC note that it remained large in all those accounting periods and had grown to £12.856m in APE 2007) and it was less focused on the purchase and sale of scrap gold. However, in HMRC’s submission, these differences could not justify or explain the FTT’s refusal to apply the presumption of continuity given that the poor record-keeping that led to Stirling’s under-declaration of tax in APE 2011 was just as present in the earlier accounting periods and was not corrected until APE 2012. HMRC refer to a number of findings of the FTT relating to poor record-keeping in the early accounting periods (Footnote: ⁹). At [158], for example, the FTT found:

HMRC point out that the “system” which the FTT was criticising in this paragraph was present in APEs 2007 to 2009 and did not change for the better until APE 2012. They submit that the FTT was not concluding that the poor first computer system, which was only introduced in APE 2010, was the cause of the problems because they made it clear at [178] that the new computer system simply failed to remedy existing defects in Stirling’s record-keeping procedures. Moreover, HMRC argue that the FTT’s finding at [143] that, up until APE 2009, Stirling’s “back office” functions “were (perhaps) appropriate for the type and size of the business” was a less than ringing endorsement suggesting that even in the earlier accounting periods, the FTT was not satisfied as to the adequacy of Stirling’s records.

We do not, however, accept this criticism of the Decision as we do not consider that it properly takes into account the overall conclusion that the FTT was expressing. The problem Stirling had in APE 2011 was in keeping accurate records of large numbers of high-value transactions for the cash purchase of gold. Those difficulties were compounded by the fact that Stirling often did not have the cash with which to pay its customers immediately and so also needed to keep track of hand-written IOUs, a difficulty to which the FTT referred specifically at [140]. The FTT did, as HMRC submit, find that there were weaknesses with Stirling’s record keeping regime that persisted from APE 2007 to APE 2011. However, the FTT’s point was that, weak though they were, the poor system of record-keeping did not result in under-declarations of tax until Stirling’s business increased dramatically in APE 2010 and started to involved purchases of large quantities of gold for cash, and, when Stirling had insufficient cash with which to pay its customers, the consequent need to keep track of numerous high-value, hand-written IOUs. That was why, at [143] and [144], the FTT drew a distinction between APEs 2007 to 2009 on one hand and APEs 2010 and 2011 on the other and why, at [278(3)], it referred to the book-keeping procedure and Ms Mullinder coming under “much less pressure” in the earlier accounting periods. It is also explained by the FTT saying at [149] that:

The FTT’s conclusion as we have explained it at [97] was supported by evidence. In APE 2009, Stirling’s turnover was £5,547,708. In APE 2010 that increased to £50,730,246. In APE 2011 it increased to £143,802,136. The FTT was entitled to the conclusion that, in the face of this rapid increase in turnover, and the corresponding need to issue paper IOUs when Stirling did not have sufficient cash to pay its customers in full, Stirling’s systems which had previously been “perhaps” appropriate for the previous type and size of its businesses, were no longer up to the task and led to expenses being overstated.

HMRC point out that Stirling’s turnover in APE 2007 was also high, at £12.856m. However, Mr Ragonesi explained in his evidence that most of this turnover was attributable to a single transaction: the purchase and sale of a bedstead consisting of some 100kg of high carat gold. A single transaction of that size clearly would not place the same demands on Stirling’s record-keeping systems as a large number of smaller transactions involving the same overall quantity of gold.

There was further evidence in the shape of witnesses’ answers to oral questions. For example, in answer to a question from the judge, Ms Mullinder said in her evidence:

Nor do we accept HMRC’s submission that the FTT’s reasoning at [278(2)] is undermined by the reasons given for not applying the presumption of continuity in APEs 2012 onwards. At [280], the FTT found that from APE 2012, Stirling’s record keeping system was good and produced no errors. That does not undermine the FTT’s conclusion that in APEs 2007 to 2009, Stirling’s record-keeping procedures, while weak, were able to produce the correct determination of taxable income for the business of the nature and scale that Stirling was operating in those accounting periods.

That also deals with HMRC’s criticism of the FTT’s reasons at [278(3)]. HMRC submit that those reasons were without a foundation in the evidence. They argue that the deficiencies that led Ms Mullinder to make the quite extraordinary £4.23m adjustment in APE 2011 were present from APE 2007 onwards and the FTT made no findings that, in those accounting periods, when turnover was less, she was able to keep accurate records on the basis of that system. But that is to invert the FTT’s reasoning. The FTT’s finding, which was available to it, was that the sudden and dramatic increase in turnover, and the consequent reliance on handwritten IOUs in APEs 2010 and 2011 led to expenses being overstated. That reasoning necessarily involves a conclusion that there was a material difference between APEs 2007 to 2009 and APEs 2010 and 2011 so as to justify a conclusion that the presumption of continuity should not apply in the earlier accounting periods.

We tend to agree with HMRC that [278(4)] to [278(6)] do not set out reasons why the presumption of continuity is displaced. The fact that HMRC chose only to perform a detailed examination of Stirling’s books for APE 2011 of itself says nothing about whether the presumption of continuity should be applied in determining Stirling’s profits of APEs 2007 to 2009. However, read in context, we think the FTT is saying that HMRC’s strategy in their enquiry was to focus on the profits of one accounting period and, if they were successful in adjusting Stirling’s tax liability for that accounting period, to rely on the presumption of continuity to adjust taxable profits for all other accounting periods in dispute. It was entirely open to HMRC to adopt that strategy, but it left HMRC vulnerable to a finding that the situation in certain accounting periods was different from that in APE 2011 so that the presumption of continuity was rebutted in those accounting periods and no adjustment would be made to the profits of such periods. From HMRC’s perspective such an outcome would compare unfavourably to the result that might obtain if they performed a detailed enquiry in all accounting periods in dispute. If they had done that, the FTT might well have been satisfied that some adjustment should be made to the profits of periods other than APE 2011 even if it felt that there were material differences between the situation in those periods and that of APE 2011. If that is the point the FTT was making in [278(4)] to [278(6)] we would respectfully agree with it. But even if the FTT was making some other point, it does not render perverse its finding that there were material differences between APEs 2007 to 2009 and APE 2011 for reasons that we have given.

For the reasons we have set out above, HMRC’s appeal is dismissed.

As we have noted, HMRC’s appeal is dismissed and the sole remaining question is what direction we should make given that Stirling’s appeal is allowed.

First, we are in no doubt that the errors of law in the Decision that we have identified at paragraphs 84 to 86 were material to it. We therefore set aside the Decision, insofar as it determines Stirling’s taxable profits of APE 2010 and APE 2011. In all other respects that Decision is to stand.

We will remit the matter back to the FTT with a direction that it reconsider the extent of Stirling’s taxable profits in the light of our conclusions at paragraphs 85 and 86 above.

We note that Mr Nicholas Dee, the FTT member, has retired since the Decision was released. We will not, therefore, prescribe the composition of the panel to which the appeal is remitted beyond saying that, to the extent practicable, it should include Judge McNall and Mr Dee to the extent that either or both are prepared, or able, to sit.

Since Stirling has not challenged the FTT’s conclusion that the “presumption of continuity” applies in APE 2010, the FTT must, in the remitted appeal, as it did in the Decision, determine the profits of APE 2010 by applying the same principles and methodology as it applies when determining the profits of APE 2011.

In the remitted appeal, primary facts to which we refer in paragraphs 10 to 30 above are to be treated as established unless both parties agree otherwise. Beyond that, we do not consider it practicable to specify every finding of primary fact that is to be treated as established in the remitted appeal. However, we will say that we hope that the common-sense and co-operation between the parties that was apparent in the proceedings before us will continue in the remitted appeal and that the parties will resist any temptation to go-over well-trodden ground unnecessarily. We would add that we hope that the parties will be able to agree on a revised assessment so as to make a further hearing before the FTT unnecessary.