Dad’s advice was not tax deductibleby
A payment to the taxpayer’s father was not wholly and exclusively for the purpose of the trade, and was further undermined by the father’s evidence to the tribunal.
David Cation and a colleague formed Glassal Limited in March 2012 to provide bespoke glazing systems. Cation provided his personal services to Glassal via his sole tradership, DC Consult (DC).
During 2014/15, DC invoiced Glassal for £70,000, but it also incurred £30,000 of costs as a consultancy fee paid to Cation’s father, Peter Cation (Peter).
HMRC disallowed the £30,000 expense on the basis it was not wholly and exclusively for the purpose of the trade.
Mentoring and advice
Cation advised HMRC that the £30,000 fee was for Peter acting as a “mentor and advisor” to Cation over a period August 2011 to March 2014. The £30,000 was paid in smaller amounts, spanning the period July 2014 to February 2017.
HMRC understandably queried why the entire £30,000 cost had been set against the 2014/15 profits, when the work and the payments spanned two separate three-year periods. Cation replied to say the invoice had only been raised once Glassal was successfully established. He also confirmed that Peter was on a “success fee” engagement, where he would only be paid once an outcome had been achieved.
The invoice raised by Peter was no more than a hand-written note with no specific details or dates regarding the work completed. HMRC felt that there was insufficient evidence to show that the payment was genuine and wholly and exclusively for Cation’s trade.
Late registration and mis-stated income
It also came to light that Cation had failed to notify HMRC when he became self-employed. He submitted a 2013/14 tax return in June 2017, after the tax enquiry into his affairs was opened.
The 2013/14 return showed £20,000 of ‘freelance income’ which was not subject to Class 4 NIC. HMRC argued that this was clearly self-employed income and that Cation knew this to be the case.
Following an independent review, Cation appealed to the first tier tribunal (TC 08253). The additional NIC payable for 2013/14 was not part of this appeal.
The FTT sang the praises of Cation, finding him “sharp, sophisticated and successful”. They were also, in a more backhanded way, quite positive about his father Peter, commenting that he clearly wished to assist his son’s case, but without compromising his professional integrity. This integrity, however, led to Peter harming Cation’s case, such as when he admitted that he hadn’t expected to be paid for the work he did.
Peter’s experience was also noted to be with businesses several magnitudes smaller than the ones Cation dealt with, so the FTT expressed doubt as to how useful Peter’s advice would have been to Cation and whether the amounts were in fact just familial payments.
The FTT also noted that the largest payments to Peter were made after the tax enquiry started. In fact a lot of evidence presented struck the FTT as being created or tailored with the benefit of hindsight.
The onus was on Cation to prove the payment was wholly and exclusively for his trade and the FTT ruled he did not achieve this. Additional tax of £14,880.94 was confirmed to be payable for 2014/15.
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