Payment for renovation help was not deductibleby
In this case, the tribunal found that payments made to a distant relative for assistance in a property renovation project were not deductible as an incidental cost of acquisition or disposal.
Following the sale of a renovated property, Wayne and Beverley Bottomer claimed a deduction for a profit share paid to a distant relative, Stuart Bottomer, who introduced them to the opportunity and subsequently assisted with managing the project.
Stuart, an accountant who was also involved in various other business activities including in the property sector, acted as introducer between Wayne and Beverley and the seller of the property on the understanding that he would receive a fee if they went ahead with the purchase. Nothing firm was agreed, but fees in the range of £10,000 to £15,000 were discussed.
The purchase was completed in August 2014. Normally, being a carpenter and joiner by trade, Wayne would have expected to manage the renovations to the property himself. However, owing to illness, he had minimal involvement in the project for the first nine to 12 months after the property purchase.
Wayne reached an agreement with Stuart that he and Beverley would pay half the eventual profit on sale to Stuart and that Stuart would help as necessary with the oversight of the property during Wayne’s illness. No written agreement was ever entered into.
In September 2017, the property was sold at a gain. One half of the final agreed net profit of £63,813 (£31,906.50) was paid to Stuart by the Bottomers.
The Bottomers reported the disposal in their 2017/18 tax returns, claiming the payment of £31,906.50 (approximately £16,000 each) as a deduction.
In November 2020, HMRC wrote to Wayne, seeking further information about the transaction, having noticed discrepancies on the stamp duty land tax return made by the Bottomers because Stuart had also referenced the property in his self assessment return.
HMRC accepted that the disposal should be treated as giving rise to a chargeable gain and issued assessments in March 2022, disallowing the £32k in deductions. The Bottomers appealed [TC08968].
The first tier tribunal (FTT) had only one issue to consider, namely whether the Bottomers were entitled to deduct the payments of £31,906.50 under section 38 TCGA 1992 in computing their respective chargeable gains arising on disposal of the property.
The only substantive point of dispute was whether the payments qualified as “incidental costs” of the acquisition or disposal (under section 38(1)(a) or (c)), or as “expenditure wholly and exclusively incurred on the asset” by the taxpayers “for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal” (section 38(1)(b)).
The FTT quickly rejected the argument that the payments qualified for relief under 38(1)(b). In the FTT’s view, they did not represent expenditure “on” the property, nor were they in any way “represented in the state or nature” of the property when it was sold.
Not wholly and exclusively
As to whether the payments could be regarded as “incidental costs”, the FTT noted that the payments would, in line with section 38(2), have to “consist of expenditure wholly and exclusively incurred for the purposes of either the acquisition or the disposal” and would have to “represent fees, commission or remuneration paid for the professional services of a surveyor or valuer, or auctioneer, or accountant, or agent or legal adviser”.
Given the payments had not even been agreed at the time of the acquisition in 2014, the FTT struggled to see how the payments were incurred “wholly and exclusively for the purposes of the acquisition”. Conversely, as the disposal would have taken place independently of any obligation to make the payments, the FTT also found it difficult to see how they were incurred “wholly and exclusively for the purposes of the disposal”.
Not an agent
Additionally (and in the FTT’s view, most crucially), since Stuart Bottomer was not a surveyor, valuer, auctioneer or legal adviser, the payments would have to represent “fees, commission or remuneration paid for the professional services of an accountant or agent”. As it was clear Stuart was not providing professional services as an accountant in exchange for the payments, the only question was whether they might represent “fees, commission or remuneration paid for the professional services of an agent”.
Ultimately, the FTT found that this was not the case. Stuart introduced the seller to the Bottomers, as an estate agent might (though in a very much less formal way), but there was no evidence that he carried on any profession of that type.
Even once Stuart’s role evolved into something rather more participatory and a clear agreement on a profit-sharing arrangement was reached, the FTT did not consider it correct to regard the payments as being for his “professional services” as an agent, but rather as arising from a profit-sharing arrangement that had been agreed between the parties on what had become a shared project.
The appeal was dismissed.
Cautiously restrictive terms
In its arguments, HMRC referred to the case of Blackwell vs HMRC  EWCA Civ 232, in which Briggs LJ commented “s38 is couched in cautiously restrictive terms, plainly designed to ensure that not all forms of expenditure which a businessman might think should be taken into account in identifying his chargeable gain are in fact permitted deductions.”