19 July 2022
In the event of selling a business, owners will want to present the optimal trading position of their going concern, so they can secure the best offer from prospective buyers. However, in the case of Ruhal Islam v HMRC, the taxpayer went a step too far and deployed unethical methods in his attempt to sell his business.
Mr Islam inflated the turnover of his business to entice prospective buyers. However, instead of receiving offers for his takeaway business, Mr Islam was given enquiry notices from HMRC for his 2015/16 and 2016/2017 tax returns. HMRC’s enquiry concluded that the taxpayer had understated profits in his tax returns for the period 2007/08 to 2016/17 inclusive.
The First-tier Tribunal (FTT) found a number of aspects of this case unsatisfactory, concerning the conduct and evidence from both HMRC and the taxpayer. However, due to various holes in HMRC’s case, Mr Islam’s appeal against his £300k tax bill was successful.
Mr Islam operated a fast-food takeaway from 2007. As part of the purchase of the business, there were two tills that were provided by the previous owners. Till one was used by Mr Islam for taking payments from customers, and till two was solely used for calculating the value of telephone orders and for training purposes.
Unfortunately, Mr Islam’s business was not a success with declining levels of turnover and so in late 2015, he attempted to sell it. Mr Islam decided to produce inflated till receipts for the period 29 November 2015 to 30 January 2016 to show to prospective buyers of the business.
In May 2017, HMRC opened an enquiry into Mr Islam’s 2015/16 tax return. During the course of the enquiry, HMRC visited the premises on more than one occasion to have meetings with Mr Islam. HMRC also reviewed the till rolls from both till one and till two for the period 4 April 2015 to 9 April 2016, and the cashbook for the 2 years ending 31 March 2017.
In September 2018, HMRC stated that it was the officer’s view that Mr Islam had supressed sales from till two (due to the discrepancy between the two till rolls and the inflated numbers on till one). HMRC was unsatisfied with Mr Islam’s explanations and raised discovery assessments for 2007/8 to 2014/15 inclusive, citing deliberate and careless behaviour, and issued closure notices for the tax years 2015/16 and 2016/17.
The FTT found that witnesses and physical evidence provided to HMRC cast serious doubts as to whether till two was relevant for the purpose of calculating underpaid tax. HMRC presumed a period of continuity of 10 years based on two months of inflated turnover and disregarded contrary evidence provided to them.
Given the FTT found that neither side had ‘proved’ their case, the burden of proof laid with HMRC for all but two of the years. HMRC failed to demonstrate that there had been deliberate or careless behaviour in respect of their discovery assessments and the FTT did not accept that the inflated till receipts were sales of the business.
It is surprising that a case with so many evidential flaws made it through HMRC’s litigation governance process, particularly as we are all familiar with the backlog of cases at the FTT, even before the impact of the pandemic.
Despite some of the unsatisfactory circumstances of this case, it still contains some key points for taxpayers and advisors. You cannot underestimate the importance of an evidence file containing contemporaneous documentation and records supporting the tax position. A taxpayer also has a right to challenge HMRC’s grounds and methodology of any assessments based on the presumption of continuity, especially when their case is not the strongest.