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.
Glaring errors
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.
Mortgage redemption
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.
Replies (40)
Please login or register to join the discussion.
What's terrible here is that the sale of property in 28th October 2015 resulted in a judgement in 25 July 2023
It is 2828 days from the start date to the end date, end date included.
Or 7 years, 8 months, 28 days including the end date.
Or 92 months, 28 days including the end date.
At what cost and time, MTD will fix it /s
Thanks (5)Any professional prepared to state to HMRC that:
“There is no law which says you can do that; laws are made to say what you can’t do”
... is not performing within the bounds of acceptability (of their PB if they have one, but frankly also of basic common sense).
Why do we hear of PB penalties for relatively minor (typically administrative) failures, but as far as I can tell here the incompetent is free to continue issuing completely incorrect advice & returns?
Thanks (12)Actually, the words are not totally incorrect. Legislation does tend to be either prescriptive or prohibitive. A 70 mph speed limit sign on the motorway does not say that you may drive at 70 mph. It says that you may not drive above that speed. Likewise, while s38 appears to say that one may deduct x, y and z what it really says is that one may not deduct anything but x, y and z.
Thanks (2)Interesting point - I may have jumped without enough initial consideration.
But, due to the ever-increasing rate of change in so many areas, some (non-tax) UK legislation is now inverting that approach.
IANAL but have been told, for instance, that the legislators gave up trying to keep pace with the slightly chemically altered 'recreational' drugs being invented by the dealers. These used to be expressly (and individually) put into law as a banned substance - but now ALL psychoactive chemicals are banned by default, unless they are expressly listed as not banned.
[Of course that led to problems the other way round as the initial drafters weren't aware that substances like caffeine are a psychoactive chemical!]
Anyway, despite my premature (and not fully justified) attempt to castigate the unknown 'agent' ... it was a singularly inept riposte by him to HMRC (unlikely to achieve anything other than winding them up].
Thanks (2)Definitely agreed on that last point
Thanks (1)What about any right of appeal or review? Or prescription for tax reliefs?
If it is all prohibitive then where is the prescriptive?
Thanks (0)I never said that it is all prohibitive.
Thanks (0)"while s38 appears to say that one may deduct x, y and z what it really says is that one may not deduct anything but x, y and z."
it's saying 'you can only deduct x, y and z'
if laws were literally saying what you can't do then each law would be never ending as there is an infinite amount of things that may not be deducted.
Thanks (0)Peter has got it right, here, and I don't know why anyone else finds it ambiguous. The opening sentence, "Except as otherwise expressly provided...." makes it quite clear that S38 is prescriptive, and goes on to be quite clear.
Thanks (0)I said that some laws are prohibitive and some laws are prescriptive.
Thanks (0)They probably did not query why only a tiny gain was due because, the idiot that was their agent told them so!
Folks are so trusting......
Thanks (0)I wonder what the agent charged for the tax return and dealing with HMRC correspondence
Thanks (0)£35 an hour? Well £20 back when they messed this up.
Thanks (0)Nice use of " " around the work "professionals"
I am a keen advocate of the word "accountant" for such levels of competence. Or Accountant [sic] for NME readers in the last century.
Its curious they are not named and shamed.
Thanks (4)To be fair to the Beesleys - both their accountant and lawyer (!?) gave corresponding tax advice. If two, presumably highly qualified, individuals told me something I'd also have gone on my merry way.
Sometimes hard to remember we all are constantly surrounded by accountancy stuff, and that most folk struggle with what we would consider the simplest of concepts. For example, I know nothing about cars so when my mechanic says x needs fixed I pay them to fix it - I'm sure any questions I would raise would probably be laughed at. Same principle applies.
Shame they couldn't go after the agents in question for penalties.
Thanks (15)I agree - there has to be a point at which people are entitled to rely on the knowledge of a professional they engage. I had a boiler installed last year. There are a myriad of legislation-backed rules and regulations surrounding the installation of boilers. Should I have studied the relevant legislation so that I could check that the installer did everything correctly? Or am I entitled to trust the registered, and regulated, professional I paid to do the job?
Thanks (0)As Blackadder might have said: 'There are amoeba on Saturn who could produce a more accurate CGT computation than you.'
Thanks (9)In fairness to the taxpayers, I reckon 7/10 ask me about the mortgage as a deduction, and their wee faces drop when I explain! So if a 'professional' says its ok, I wouldn't think unreasonable for taxpayer to go with it
Sort of thing that should really be passed to any association said 'professional' is linked with
I assume HMRC are now looking at all tax returns he has submitted
Thanks (11)Id be interested to know what the actual Purchase Price was. I note the accountant incorrectly used the mortgage value, but could it be it was 100% LTV? and would have resulted in similar figures anyway?
Thats not to excuse the poor understanding of the accountant. Just wondering if someone has mixed up the wording with regards to the figure, While incorrect I can see how someone may think a mortgage is a deductable expense, but omitting purchase price? find that one difficult.
Thanks (1)It says the original mortgage was "£98,000 in respect of a purchase of a property for £103,000" on 11th June 1998.
Thanks (0)If the purchase price and the mortgage repayments were both treated as deductions I suppose very few disposals would have a gain!
Thanks (0)The accountant should be named. As well as his other clients, I'm sure his professional indemnity insurer, if he has one, would be interested in his gross incompetence..
Thanks (0)This is no "accountant". Yet another charlatan who has leveraged and bestowed upon themselves a title.
Another day, another example of why our profession's job title should be privileged in the same vein as that of "solicitor" or "barrister".
If the agent in this case has bothered to take out, or is even aware that they should have PII, I would be stunned.
This couple, if they haven't already, should persue this douchebag for their losses. Sadly for them though, I expect this has been an expensive lesson.
Thanks (4)Not to revive a well worn argument, but please tell me why you feel the term should be protected. I'm QBE, and have been working in tax for 40 years (20 within HMRC, and 20 in practice).
Please tell me what you know that I don't, or what ethics you have that I don't.
Thanks (4)As hmrc seems to have found in this case it canbe difficult to argue with someone who is intelligent but impossible to argue with someone who is stupid.
I actually felt sorry for the hmrc employee who tried to engage with the agent.
I think the concept that you can claim anything you want so long as there isn't a specific law is interesting. I'd rather like to claim my cats vet bills against my next tax charge.
Thanks (3)"I'd rather like to claim my cats vet bills against my next tax charge."
I've looked all over and I cant see anything that specifically says you cant claim it.
Thanks (1)I can't believe no-one has done a Terry Wogan Janet and John comparison yet... Silly John
Thanks (2)Initially , no return of CGT was provided by the Beesleys - who were represented by their anonymous agent. Were they thinking they could get away with it ?
Perhaps the anonymous accountant - and the Beesleys - were a bit smarter than the learned judge's opinion of Incompetence and the HMRC's review officer deciding Carelessness - rather than Deliberate Error - or have I not understood the points regarding total ignorance by the Beesleys ? And Deliberate Carelessness perhaps by the agent ?
Anyway , it appears that the Beesleys have come up the Bee's Knees with this whopping penalty reduction of £14K.
Thanks (0)My guess is that there was no (spare) cash from the sale, it all went on paying debts.
This thread from a while back had similar:
https://www.accountingweb.co.uk/any-answers/how-to-calculate-cgt-on-prop...
It's obviously wrong in law, but it's not at all obvious to many that a tax liability can arise while there is no money to pay it. I suspect that most people think barter is exempt from tax.
Almost everybody, in almost all dealings with the taxman, will have recently had cash flow through their bank account if a tax liability arises - they might have spent the cash but they can still point to the cash that should have paid the bill. P11D is an exception - however I think most people get this mostly coded out so it ends up being invisible and for most people, it's a tiny part of their salary so it just "feels" as though there is income being taxed.
I cannot tell what liabilities there were here. One was a mortgage, and if they increased it to raise funds to buy another property then they may have never seen the money. There's also this "guarantee", whether it's allowable or not, if it was a liability that became payable on sale then it doesn't "feel" as though there's any money being made.
I have no idea where the Beesleys got their ideas from, but however wrong they were, I don't think absent other evidence, it's easy to show they were deliberately avoiding tax.
Thanks (0)There was money to pay it though. But they chose to pay something else.
The details said they increased the mortgage 4 times totalling £100,000 to help their struggling company and it was for the company that the personal guarantee was given. In order to meet the guarantee they decided to sell this property. It wasn't a case that it became payable on sale. The property was sold because the guarantee was payable rather than the guarantee being payable because the property was sold.
Thanks (1)Anonymous due to no PB? or anonymous because the PB would prefer it that way?
Surprised with the solicitor too, normally most have a decent grasp of CGT.
And 7 years plus from start to finish. Really.....??
Thanks (0)Many solicitors dont tell their clients about submitting a CGT return
Thanks (0)Agreed on the newish 30/60 day submission. Perhaps put it down to LE level and the sausage factory conveyancing grunt work?
However, most partners I've come across seem pretty clued up (i.e. the bigger jobs/clients).
Thanks (1)Usually if the Tribunal opt to keep an advisor anonymous it's because they're not party to the proceedings and so don't have any right to reply / tell their side of the story.
Thanks (0)The article does not do this Del Boy justice. The link to the judgement makes for a very interesting read.
Including where he appealed to the asylum chamber instead of the tax chamber and his case summary amounting to "We have been trying to get HMRC to accept our claim for losses but they wouldn't".
I find it horrific people of his calibre are charging people a fee for this disservice. I would have said service but it feels like an affront to the term.
Thanks (1)I think the term "incompetent" might be a bit harsh. Being nosy I looked at the judgement and the "CGT computation" and can see that the accountant was trying to be clever and split the purchase price down between amounts funded by cash, Swiss mortgage and other fees (s)he then applied exchange rates at purchase date on the cash transactions and at sale date on mortgage funding to presumably remove any exchange rate gains and losses on the mortgage funding. Sadly (s)he seems then to lose the plot when putting the computation together.
Thanks (0)I think incompetent is generous. The advisor appears to be incompetent at the outset. The longer they kept digging the hole whilst it collapsed in around them I think the more they transitioned from unknowingly incompetent to knowingly reckless.
Thanks (1)What a funny story. Sady, true.
Thanks (0)It seems quite common for clients to mistakenly believe that the amount they are taxed on with a property sale is whatever the final balance on the completion statement shows, being the actual cash they receive.
Thanks (0)Whilst agreeing with the other points, I don't agree this.
"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."
Although a level of competence expected, mind-reading is not one, if the tax payers had not told the accountant if the gain how could he have reported it, and as stated at the start, the sold it to repay a debt and were (allegedly) unaware they needed to, so that is not the accountants fault, his faut starts when he submitted the bolloxed up gain computation.
Thanks (0)