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
Replies (19)
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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).
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.
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
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.
£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.
The problem is that my client's record keeping is poor.
Now's when he finds out just how cheap good bookkeeping can be.
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.
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.
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.
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.
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.
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!