Incompetent accountant showed no grasp of CGTby
An agent made several glaring errors in this case, including allowing a deduction for the amount of the mortgage paid off out of the proceeds of sale.
A catalogue of errors on the part of an agent resulted in penalties for the two taxpayers of £11k each, reduced on review to £4k. It is a shame – although perhaps unsurprising – that the accountant in question is not named, as the level of incompetence shown is disturbing. As the judge commented: “It is apparent that the agent has never understood the basic principles of capital gains tax.”
John and Janet Beesley submitted their self assessment returns for the year 2015/16 in January 2017. Neither included a capital gain despite having sold a property on 28 October 2015.
HMRC wrote to them twice – copying in their agent – requesting information about the disposal. Eventually the couple’s agent replied stating that the property had been “sold for the sole purpose of repaying a personal guarantee to National Westminster Bank”.
HMRC requested a capital gains tax (CGT) computation, which was provided by the agent on 3 October 2018. Far from being an end to the matter, this was where the fun really began. The computation, which included some very questionable deductions (which we will delve into later), showed that Mr and Mrs Beesley each had a net gain of £17,779.50 and, at the 10% rate (incorrectly) used to calculate their CGT, each was liable for £607.95.
The HMRC agent replied explaining the several glaring errors in the computation, namely that two hefty amounts deducted were not allowable and that the agent had omitted to deduct the most basic of amounts including the purchase price. A revised calculation was provided by HMRC showing a net gain for each appellant of £134,945.
In February 2019, following a frustrating and largely nonsensical chain of correspondence from the hapless agent and radio silence from the taxpayers, HMRC issued assessments for £32,043 and £31,498 respectively. Penalties were also levied at just over £11k each.
It was not until debt collectors turned up at the couple’s house on 12 August 2019 that their agent contacted HMRC again. The ensuing back-and-forth between the agent and HMRC culminated in an appeal being lodged with the first tier tribunal in the summer of 2020.
So what was so wrong with the agent’s computation? Let’s take each issue in turn.
No gain reported
Regardless of errors in the figures, the fact remains that there was a CGT liability (albeit wildly undercalculated) and this should have been reported. The taxpayers would have been aware that they had sold a property at a gain and hence should have queried why no gain was reported to HMRC.
Capital gains tax rate
CGT should have been calculated at the standard rate of 18% but the agent’s computation used 10%, claiming entrepreneurs’ relief (ER). This is usually only available where a person sells all or part of their business. Although instances can arise where the sale of an asset qualifies for ER, this was not the case here. The fact that the couple owned four properties through which they conducted business did not entitle them to ER.
Any accountant worth their salt should surely be aware that the mortgage redemption amount should not be deducted from a capital gain. The legislation is absolutely clear on this. Failing that, a quick Google search will do the job. This agent decided that he knew better and included a deduction amounting to £186,345.
Personal guarantee payment
The computation also included a “personal guarantee payment“ deduction of £152,016 relating to a payment made in 2016/17, the year after the gain arose. Section 2 of the Taxation of Chargeable Gains Act 1992 (TCGA) provides that a loss cannot be carried back to an earlier year of assessment. So even if it were deductible for CGT – and HMRC was not convinced that it was – the payment had been made in the wrong year to relate to the gain in question.
HMRC invited the agent to quote the relevant legislation to support his belief that the personal guarantee payment was an allowable deduction. He declined, stating: “There is no law which says you can do that; laws are made to say what you can’t do.”
In fact the law is patently clear on what you can deduct for CGT purposes: the purchase price and any incidental costs of purchase; the incidental costs of sale and any expenditure incurred on enhancing the property.
Unfortunately for the taxpayers, they also received incorrect advice from their solicitor in this regard. A letter was provided as evidence in which the solicitor suggested in relation to the personal guarantee: “I would therefore have thought that the amount of liability that was met from the sale of proceeds should come off any capital gains.”
Warning to us all
The Beesleys did not respond to any letters or engage at all with HMRC. Nor did they attend the hearing. However it was noted in the tribunal report that had they tried to absolve themselves of responsibility on the basis of admittedly downright shoddy advice, this would not have been a reasonable excuse.
The only finding in favour of the couple was the reduction in the penalties from £11k each calculated on the basis of deliberate error to £4k each, as the HMRC review officer accepted that it was in fact only careless.
This story is a reminder to taxpayers everywhere that blindly relying on “professionals” to get it right without applying any of your own common sense can be a dangerous game to play.
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Consulting Tax Editor for AccountingWEB.
I have spent the last 10 years teaching the accountants of the future, mainly ICAEW advanced level corporate reporting. I also cover tax news and write and edit tax updates for other publishers including PTP Limited.