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HMRC enquiries settling on disputed figures?

Client who claimed expenditure in excess of back-up/evidence kept - will HMRC settle

Hi all

I have a client who has been under HMRC enquiry for almost 2 years now. The initial return under enquiry was prepared by another firm.

The enquiry mostly relates to capital gains tax on property disposals. 

There is one particular property to which £450,000 of capital expenditure was claimed. We have only been able to provide documentary evidence so far of c£310,000. The expenditure goes back over 15 years. HMRC are therefore understandably arguing to disallow the £140,000. 

My client is adamant that the £450,000 claim is an accurate representation of the costs incurred, in fact he believes he probably spent more however he is unable to proivde me with evidence that I can pass to HMRC. 

Does anybody have any experience of negotiating a settlement with HMRC where they may meet in the middle? Does anyone have any case law or guidance around this area. My hunch is no and that HMRC are unlikely to accept a settlement.

Any thoughts or assistance appreciated.

Kind regards

TC

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20th Apr 2018 23:14

Difficult but not impossible. Does the evidence held show an obvious gap in time? If so can be claimed on the basis that it’s reasonable that the missing period also involved expense.

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21st Apr 2018 09:21

Case law won’t help you here. What you are trying to agree is a question of fact (what happened) not a question of law (what are the tax implications of the set of circumstances in question).

It’s a negotiation, with the backstop on both sides being whether the tribunal, if it comes to it, will believe your client is a liar (HMRC’s case) or not (your case).

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By Ruddles
to johngroganjga
21st Apr 2018 09:46

Case law, if there is any, could in theory help. It depends on the Inspector’s position. If for instance he’s simply saying that expenditure cannot be allowed without evidence but there is a decision in a similar matter which counters that, that may help. But I agree that even then you’re relying on the Inspector’s willingness to accept a higher amount.

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to Ruddles
23rd Apr 2018 13:37

Yes that's what I was hoping for. Not a case specifically on settling expenses as I doubt this exists, but if anyone is aware of any cases that have included this or discussed it that would be great!

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By Ruddles
21st Apr 2018 09:41

The outcome will depend on the mindset of the Inspector and your powers of persuasion.

I have managed to agree a figure in excess of the evidence, on the basis that, on the balance of probabilities, it is unlikely that the taxpayer would have kept every single document over a long period. However, it was a modest amount- certainly not “in the middle”.

If the Inspector stands his ground, as he is entitled to, your client’s options are limited - ask a Tribunal to consider whether it is likely that the amount of expenditure would have been greater than that supported by documentary evidence.

EDIT - typed while John was posting his

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to Ruddles
23rd Apr 2018 13:40

Unfortunately relying on the mindset of the adviser isn't going to help me here - she is out for blood!

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21st Apr 2018 10:45

It's a tough one and good luck.

Is this a case of enhancement expenditure on the property, maybe done piecemeal? Are there no bank records that you can dip into? What's the story behind "losing" £140000 of receipts? It's a fair amount to slip behind the radiator.

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to lionofludesch
23rd Apr 2018 13:54

Bank statements don't go back that far as we are talking early naughties.

My client has said that he would only ever keep receipts of costs of more than £500. All the smaller receipts for materials etc therefore weren't kept.

My hunch is that there were probably a lot of cash payments that receipts weren't kept for also.

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21st Apr 2018 13:00

£450,000 is a lot of money to spend. Presumably, it covered some significant works which are/were apparent in the state of the property at the time of sale. If those works are listed then presumably receipted values can be put against certain works leaving a list of unreceipted. The question then is whether the unreceipted works reasonably appear to constitute £140,000 worth of spend.

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to Accountant A
23rd Apr 2018 13:57

The property was sold for £3.5m, so not particularly large in comparison to the overall value of the property.

It did include significant works. According to my client, the whole property was remodelled. Almost every room was upgraded (marble, cast iron, custom staircases etc.)

The problem is that my client's record keeping is poor. We just have a box of the larger receipts and nothing else to back it up. No architects drawings, plans etc.

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to Tax Conundrum
23rd Apr 2018 15:00

Tax Conundrum wrote:

The problem is that my client's record keeping is poor.

Now's when he finds out just how cheap good bookkeeping can be.

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By DJKL
to Tax Conundrum
23rd Apr 2018 15:25

Was planning permission needed or were building warrants required (even if plans no longer available from your client)?

Are there invoices from a professional team that might give avenues to pursue re missing paperwork?

If warrants/planning were required would enquiries with local authorities (Up here a PEC) be worth trying?

Are there any CIS records on which to rely? (Long shot given client's reported record keeping habits- might also open a can of worms, albeit likely out of time)

I have certainly reconstructed planning/ warrants/ completions where such paperwork has gone awol, however not sure if this would really help that much with costing works (especially in terms 15 years ago)

Another long shot, client did not perhaps do before and after photos of his/her "baby", we take a lot of pictures re our developments so it is possible some evidence might be "gathered" from similar.

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By MJShone
23rd Apr 2018 09:55

We've managed to agree deductions from capital gains on the basis of what seemed reasonable to HMRC - not everything claimed, but a large proportion of it. We did have a description of what had been done, evidence from the architect and a brochure for the "before" state of the property.
The total improvement costs claimed amounted to a bit more than £950k. There were invoices etc to support a bit more than £570k. In the end, we split the difference with HMRC.

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to MJShone
23rd Apr 2018 13:59

Interesting. Splitting the difference is what I would like to get to but the inspector doesn't seem willing to budge on the point at all.

Did you quote any cases or guidance in your argument?

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to Tax Conundrum
23rd Apr 2018 15:46

Taxpayers should be reassured that the Inspector is not making it easy for you. Neither you nor the previous accountant appear to have, to date, a shred of evidence to support the numbers.

I daresay that if your client put their mind to it some evidence could be ascertained, be it from suppliers used, architects plans, the bank etc. However, that will require the client to put themselves out and throw some money at it. They might be reluctant to if there is some BS flying around.

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By MJShone
to Tax Conundrum
24th Apr 2018 14:03

No cases quoted - sorry. In the end I suspect HMRC could see that a substantial amount of work had been done and our client wasn't lying - but the client couldn't produce the proof. HMRC took the practical path and met halfway.

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By John R
23rd Apr 2018 11:01

Did you ask the previous accountant for details of enhancement expenditure, when you took over? Most accountants will be aware of such expenditure at the time it is incurred as they will have needed to check whether any revenue items were included. They would keep careful records of such expenditure as they would know that it will be needed when the property is eventually sold. If the accountant was aware of the expenditure, your client may wish to ask why a record was not kept or details not asked for at the time.

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to John R
23rd Apr 2018 14:01

The old accountant didn't have any back up. He included exactly £450k so I believe he has used an estimate and not marked it as such on the tax return. I am just left unravelling it.

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23rd Apr 2018 16:11

My somewhat harsh view is, tough! The client has defective bookkeeping, paid cash to the tradesmen as they were cheaper since they didn't need to charge VAT or pay tax. Oh, and by the way where did the cash come from in the first place? Another can of worms methinks.

My less harsh self would be gathering some evidence as described by other posters. Possibly starting with the sales details when they first bought the property. Architects and QSs tend to keep records for ages as do solicitors.

If at the end of the day there is no evidence whatsoever to support the £140k shortfall then it falls to a 'resonableness' argument with HMRC. There are no cases to help here, and even if there were they would be specific to the facts on that particular case and not have a wider application. I would ring up the Inspector and ask for a settlement allowing say 50% of the missing figure and settling for £50k!

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By MJShone
to Vaughan Blake1
24th Apr 2018 14:05

That's just what happened in my case!

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