CGT: Unsupported refurbishment costs fall flatby
The taxpayer claimed he paid a contractor £96,350 via accounts in Nigeria to refurbish a property in Fulham, London, but little evidence was supplied to support the costs supposedly incurred.
The first tier tribunal had two issues to consider during this appeal [TC08081]: whether the deductions claimed for refurbishment works was allowable, and whether HMRC’s penalties for inaccuracies had been calculated correctly.
Amount of chargeable gain
Babatunde Iginla reported a chargeable gain from the sale of a let residential property in his 2015/16 tax return.
HMRC opened an enquiry into the return in July 2017. Although agreement was reached between HMRC and the taxpayer’s accountants on several other deductions and reliefs, both sides reached an impasse on how much of £96,350 in refurbishment works was deductible.
This amount was purportedly paid to a contractor (JAJ) to refurbish the property. The payment was made in Nigeria as “that was the only place […] where additional finance could be sourced because the mortgagor could not extend any further loan for such enhancement.”
However, the only evidence provided to support this was an undated invoice, a bill of quantities (BOQ) and a letter on JAJ letterhead that acknowledged receipt of payment.
Initially HMRC formed the view, based on an estimate from the Valuation Office Agency, that only £23,500 could be claimed for the refurbishment costs.
At the conclusion of the enquiry HMRC increased the chargeable gain after all adjustments from £217,753 to £362,081, thereby increasing the capital gains tax due by £43,519.84 to £98,204.18. Iginla appealed.
The FTT did not find Iginla to be a credible witness, noting that the BOQ total was almost £24,000 less than the invoice total. Additionally, comparison between four photographs taken of the property in 2002 and Rightmove photographs taken in 2014 did not support the conclusion that major works had been undertaken at the property.
On the balance of probabilities, the FTT found that no more than £11,262.97 of refurbishment work had been undertaken to the property and so was allowable as a deduction.
The FTT dismissed Iginla’s appeal against his assessed liability to capital gains tax and directed HMRC to recalculate Iginla’s liability.
In May 2019, HMRC issued Iginla with a penalty of £22,085.89 under schedule 24, FA 2007, on the basis that Iginla had deliberately understated the chargeable gain and CGT due in his 2015/16 return.
However, the penalty calculation was incorrect. HMRC acknowledged at appeal that the deliberate penalty should only have been applied to the deduction relating to the claimed JAJ work, and that the penalty in relation to the other deductions and reliefs that were incorrectly claimed should have been imposed on the careless basis.
Further, the reduction to the penalty for disclosure in relation to the claimed JAJ work should have been 70% rather than 55%, while a full reduction for disclosure should have been applied in relation to the other inaccuracies.
This, HMRC argued, should lead to revised penalties of £9,281.09 on the deliberate basis and £3,394.48 on the careless basis.
Appeal partly allowed
The FTT was satisfied that HMRC’s proposed new deliberate penalty of £9,281.09 relating to the JAJ work was correct; Iginla knew he had not incurred £96,350 of refurbishment costs and knew that by claiming such a deduction he was filing an inaccurate tax return.
However, the FTT did not agree with HMRC’s position as to the careless penalties. Instead, the FTT found that HMRC failed to establish that Iginla, who was advised by his accountants as to the reliefs and deductions claimed, was liable to a penalty in relation to the other inaccuracies, even on the careless basis.
Iginla’s appeal against the penalty imposed was, therefore, allowed in part and reduced to £9,281.09.
Errors on both sides
HMRC made numerous errors when handling this case, not only in its initial calculation of the chargeable gain, but also when calculating the amount of penalty for inaccuracies.
Nevertheless, the FTT found the HMRC officer to be a credible witness who was just trying to do his job, despite some rather hostile correspondence from the taxpayer at times. The taxpayer, on the other hand, was not found to be credible, weakening his appeal in the process.