PPR and Entrepreneurs Relief

I have recently had a Local Compliance Capital Gains Tax check on one of my clients.

He sold his guest house in June 2008 and made a gain of £ 250,000. As part of the guest house was private accomodation, HMRC have agreed he is entitled to 20% PPR.

I sent in my CGT comp as follows:

Gain                                                                               £ 250000

Less: PPR 20%                                                              £   50000

                                                                                      ------------

                                                                                      £ 200000

Less:Entrepreneurs Relief £ 200000 x 4/9                    £   88889

                                                                                       -----------

Gain before exemption                                                  £ 111111

I had a phone call from HMRC this afternoon. The inspector said he agreed all the figures except that I should have reduced the claim for entrepreneurs relief by 20% as it is only claimable on the business proportion of the gain. I pointed out that I was only claiming it on the business proportion as the £ 200000 is the gain after PPR but he insisted the Entrepreneurs Relief should be £ 88889 x 80%.

He said he saw my point totally that the PPR % was being used twice but that he had checked with a number of colleagues that this was the way the calculation should be made. He tried to find an example but has not yet come back to me.

This seems totally ridiculous to apply the business proportion twice. Has anyone else heard of this as it seems totally unjust? I have trawled the internet this afternoon looking for some information on this but have found nothing at all. Any help greatly appreciated.

David