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Where to put civil damges payments on a tax return

IFA has determined that a compensatory payment he has made is allowable against his income

In your view, which of the expenses boxes on a self-employment (full) return would best suit this cost?

His payment exceeded £10,000, and as a home-based sole trader this is a considerable amount when set against his other expenses, viz. it would stand out as exceptional whichever box was used.

 

 

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13th Apr 2019 14:30

If it’s a business expense it goes in the box for business expenses. If it’s not a business expense I don’t see how it’s allowable, but as you haven’t told us anything about the reason why the payment was made it’s not possible to say any more.

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to johngroganjga
13th Apr 2019 16:11

Thanks. I see 14 boxes for expenses; box 30 for "other business expenses", if that's the one you mean. As for the reason for this payment, all I know so far is that the IFA was compelled by the courts to make this payment to a client, presumably as compensation for mis-selling or something along those lines. HMRC believe it to be allowable from what I have told them.

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to Graham Greenwood
13th Apr 2019 16:54

Graham Greenwood wrote:

HMRC believe it to be allowable from what I have told them.

What did you tell them? HMRC don't give tax advice usually and the call centres, if that is who you spoke to, are not qualified to give advice. Was it purely compensation paid to a client?

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13th Apr 2019 14:32

If it is allowable against his income, why is it standing out as exceptional a problem? Put something in the white space explaining what it is and point HMRC to that if they query it.

Unless you think the IFA is wrong, in which case you shouldn't put it on the return at all. Do you think the IFA is wrong?

As for where it belongs, some actual detail on why it has been paid out might help.

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to stepurhan
13th Apr 2019 16:19

I thought it might stand out as it would be by far the greatest amount of his expenses, and I have tried in the past to limit entries in the catch-all "other business expenses" to small sundry amounts only. I like the idea of an entry in the white space to pre-empt any confusion at HMRC, though - thanks for that. As for the reason this payment was made, the IFA was compelled by the courts to pay his client compensation - something to do with mis-selling, perhaps; I'm sorry I don't have any more details at present. HMRC have said that they would regard it as allowable

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to Graham Greenwood
14th Apr 2019 10:49

Graham Greenwood wrote:
HMRC have said that they would regard it as allowable

If that's so, I'm not sure why you're concerned.

Which box to put it in ? We can't say if you don't tell us the story but the short answer is the most appropriate box. Which may be "Other Expenses". Or may not.

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to Graham Greenwood
14th Apr 2019 17:31

Graham Greenwood wrote:
As for the reason this payment was made, the IFA was compelled by the courts to pay his client compensation - something to do with mis-selling, perhaps; I'm sorry I don't have any more details at present.
If you are going to put it into a tax return, you need to get more detail. If you're just going to put in whatever the client tells you to put in without any sort of checking, you are in the wrong job.
Quote:
HMRC have said that they would regard it as allowable

HMRC have told you this, or your client tells you HMRC have told them this?

As others have said, unless HMRC put it in writing then you cannot rely on it. That goes double if you are getting this second-hand. Your client may have misdescribed the payment (accidentally or deliberately) meaning HMRC's response is based on erroneous information.

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13th Apr 2019 18:06

Foggier and foggier. Ignore any advice given by HMRC unless you have it in writing from an inspector. Advice from IFA on the allowability is unlikely to be helpful.

Not enough info here for anybody to make a decision. If it’s damages as a result of normal trading operations then it may be allowable. If it’s a failure to service or a penalty then it’s possibly not allowable.

On the information provided (scant) I would not allow it. I would want to know chapter and verse before I included it on a tax return.

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13th Apr 2019 18:09

You would need to establish why he paid the compensation to determine whether it is allowable. It's for you to decide whether it is allowable not your client. Have a look at Bim38510 is it covered in there?

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13th Apr 2019 18:25

IFA has determined . . .

This is where you are going wrong. You need to determine ‘if’ based on the evidence.

The question of ‘box’ is secondary.

Do not be overawed by the IFA’s alleged tax expertise.

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15th Apr 2019 09:36

As Andy says do not be swayed by the IFA he has clearly made serious errors already, get a copy of the court order. If it is allowable it should be a direct cost of sale and yes White Space it. Though given the loan charge shenanigans this defence seems of declining significance

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to carnmores
15th Apr 2019 10:32

Good point well made. Though there is of course no comparison between a one-off event, full details of which you disclose (in accordance with Veltema et al) to HMRC, and setting up a structure/being party to a transaction that takes your whole lifetime to complete.

In the first case, you are entirely within your rights to expect to be taxed in accordance with the rules as they are generally accepted to be at the time of the event. In the second, you are vulnerable to changes in the rules at any time before the transaction completes. Whatever the rights or wrongs of retroactive taxation, we’ve had it in the UK for years; the loan charge is just the latest example.

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15th Apr 2019 11:18

Although the circumstances were somewhat different, there are analogies in McKnight (HMRC) v Sheppard, which is worth a read
https://www.bailii.org/cgi-bin/format.cgi?doc=/uk/cases/UKHL/1999/6.html...(mcknight)

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15th Apr 2019 14:55

Thanks to all who responded to my question of the 13th inst.
I would agree with all of you in that if this IFA was a client of mine - he isn't - I should seek to determine the legitimacy or otherwise of a claim; as it is I was merely wondering which box amongst the expenses would be most appropriate should I find myself tasked with completing a tax return under such circumstances.
I can appreciate that each court order would need to be studied on its own merits, but perhaps because of the proliferation of TV and press adverts encouraging individuals to seek compensation from IFAs etc. for alleged mis-selling, in my ignorance I thought maybe this was a known thing.
As to HMRC's involvement, my call to the agents' helpline prompted a transfer to a member of their taxes technician team who kindly forwarded to me links to 6 BIMs (inc. BIM 38510 - thanks, Lesley) which, in her opinion, suggested civil damgaes were generally allowable (and outlined which weren't), links I passed on to the IFA who then concluded he had a claim.
So far, that has been my only contribution, but I am gateful for all your comments.
As to my vagueness, in view of the limited space available when asking a question, again in my ignorance I omitted much of the above - apologies if this was unhelpful.
Again, many thanks for your contributions

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