Cash basis was not available to partnership

A spousal partnership failed to argue that the cash basis should apply to their business, in the first year when all self-employed businesses are taxed on exactly that basis unless they elect otherwise.

Patrick and Carole Boden’s most recent problems with HMRC related to years 2011/12 through 2014/15, during which time they operated as a partnership selling software developed by third parties to small businesses. They also sold electronic point-of-sale technologies developed by what the first tier tribunal (FTT) referred to as the “family companies” mostly owned and controlled by the Bodens. 

The couple provided consultancy services to the family companies at a daily rate of £500 plus expenses. The expenses were itemised and costed in round sum amounts within the partnership. Despite the Bodens issuing so-called pro forma invoices which “were expected to be paid when the companies become profitable”, no payments were received from the family companies for any of the periods in question. Other invoices issued to third-party customers were paid.

In P&C Boden vs HMRC [2024] UKFTT 00457 (TC) the FTT identified serious shortcomings in the records maintained and retained by the Bodens, and the accounts for the partnership were filed late, seemingly not in regulation format. The FTT eventually rejected an argument by the Bodens that records and accounts were in accordance with advice received from an HMRC officer during previous investigations into the couple’s affairs.

It should be noted that neither the partnership, nor the Bodens had filed returns of their income for any of the years involved, nor had they sought professional advice in relation to their tax affairs.

Payments not included in accounts

The accounts as finally produced showed cash receipts of between £82,000 and £97,000, with profits varying between £7,000 and £16,000 for each year. The pro forma invoices issued to the family companies were detailed separately in sums of between £152,000 and £217,000 for each year, but stated to be excluded from the profit computation due to payment not being expected for some time. The Bodens argued that those amounts would be included when payment was eventually received.

For HMRC it was argued that the accruals basis applied to the first two years – on the very reasonable grounds that the cash basis was not introduced until 2013/14. For that latter year and the following, HMRC further argued that the accruals basis applied unless the taxpayer had elected for the cash basis – which the Bodens had not done, or in any case the turnover exceeded the limits for the cash basis to be available. In order for the pro forma invoices to be ignored in calculating taxable income, the Bodens would have to show that the debts had become bad. 

The Bodens’ argument relied on the advice given during the previous investigation. They also admitted they were no longer speaking to their daughters who now controlled the family companies and could not therefore obtain evidence that the debts were bad.

Overstated expenses

Not only did HMRC question the stated turnover, but also argued that expenses were overstated.

“No receipts or invoices were retained to support the expenses claimed instead a flat rate was claimed in accordance with the partnership expense rules. All of the clients were the family companies. No records were retained of the nature of the work undertaken. There were no records to show the instructions received from the client companies. No records were available to show which clients Mr and Mrs Boden had visited on behalf of the family companies. No records of any sales were recorded.”

HMRC revised the amounts claimed in 2014 for mileage in accordance with distances calculated using an AA Planner plus 25%, applying 45p and 25p per mile as relevant. Amounts relating to hotel rooms booked for one of the Bodens’ daughters who allegedly accompanied her father on some trips, were disallowed, and the HMRC overnight allowances were substituted for the round sum amounts claimed. All out-of-pocket expenses were disallowed due to lack of any receipts. In total only 63% of expenses claimed were allowed.

Using the principle of continuity, HMRC similarly revised the expenses claimed for all years and all amounts were accepted by the FTT.

Bad debts

The major problem here for the Bodens was that accounts of the family companies showed creditors remaining due for all years, with no write-offs; and indeed, Mr Boden considered the debts to be recoverable.

The FTT accepted: “HMRC’s contention that Mr Boden’s evidence was that the payments for services provided to the family companies would be paid when the companies’ businesses were established. And there was no evidence that in 2016 when the accounts were filed with HMRC or at the dates to which the accounts were prepared any sum would not be paid in due course.”

The result

The result was emphatically in favour of HMRC on all counts. It should be noted that at a previous hearing, the FTT had given the Bodens time to produce evidence in support of their arguments, but none had been provided – including documents supporting that they actually owned a second car for which expenses had been claimed.

Obviously, this case is of historic interest only, except for all those businesses who will be electing to continue to use the accruals basis.