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Taxpayer refused excessive cost deductions

Alistair Jordan [TC07501] lost his appeal against a closure notice for 2013/14, during which he claimed self-employment expenses of £120,000 against income of just £5,000.

9th Mar 2020
Tax Writer
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UK tax form, mirrors, no smoke
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During 2013/14, Alistair Jordan was a director of his parent’s company, Rapid Platforms Ltd (RP Ltd). In the same year he incorporated his self-employed consultancy business into A & C Jordan Ltd (ACJ Ltd) on 19 February 2014.

Jordan had an employment contract for his director duties with RP Ltd, as well as a second contract in place for consulting services, for which he received £5,000 in 2013/14.

Significant expenses claimed

Jordan claimed significant employment and self-employment expenses in his 2013/14 tax return.

The first claim was for employment expenses of £25,000 for professional fees, comprising:

  • an invoice addressed to Jordan from Sympatico Corporate Strategies Ltd (Sympatico) dated 28 February 2014 for £19,128; and
  • an invoice addressed to Jordan from his accountants, Hall Accountancy Ltd, dated 31 March 2014 for £5,872.

The Sympatico invoice related to advice given for “SSAS Pension Scheme needs analysis, solution, provision, solution implementation, intellectual property”. This advice was provided against the backdrop that the taxpayer was due to be made redundant following the sale of RP Ltd by his parents.

The invoice from Hall Accountancy related to a variety of tax and accounting matters, including the preparation and submission of a self-assessment tax return.

The second claim was for self-employment expenses of £120,000, which arose from an invoice dated 31 March 2014 from the taxpayer’s company ACJ Ltd for “value add services”.

The invoice stated that a total of 1,200 hours had been charged at £100 an hour, making the total invoice amount.

Enquiry opened

On 17 November 2015 HMRC wrote to Jordan to advise him that they were enquiring into his 2013/14 tax return, in particular his claim for losses arising from his self-employment.

Following extensive correspondence between HMRC and the taxpayer’s accountant Steven Hall, HMRC wrote to Steven Hall on 5 July 2017 stating that it was not satisfied with the evidence supplied to support the claims for the taxpayer’s employment and self-employment expenses. In the same letter, HMRC warned that it would issue a closure notice and recover revenue, impose interest and penalties.

HMRC issued the closure notice on 27 July 2017, which disallowed the Sympatico invoice of £19,128 as well as the ACJ Ltd invoice of £120,000. This resulted in a tax liability for 2013/14 of £22,860.55, as opposed to a repayment of £3,279.00 per the taxpayer’s original submission.

Jordan appealed against the closure notice.

Employment expenses dismissed

Under section 336 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003:

“(1) The general rule is that a deduction from earnings is allowed for an amount if –

(a) the employee is obliged to incur and pay it as holder of the employment, and

(b) the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.”

The FTT found that, in respect of the Sympatico expense, Jordan failed the tests under s336(1) ITEPA 2003 as the advice provided was personal in nature. Consequently, the expense of £19,128 was not allowable.

No commercial activity

Turning to the £120,000 of “value add” expenses, the FTT found that the taxpayer failed to adequately explain what “value adding services” actually was.

Further, it was unlikely this work was actually carried out. Despite invoicing for 1,200 hours of work between 19 February 2014 and 31 March 2014, the FTT noted that there were only 984 hours between these dates.

Even if these value add services were carried out, the FTT was satisfied that there was no commercial activity supporting the arrangement between the taxpayer and ACJ Ltd.

As the taxpayer’s self-employment activities appeared to cease on 5 April 2014 (no further income was reported in subsequent years’ tax returns) the net loss arising between February and April 2014 did not amount to a commercial trade as required by section 66 of the Income Tax Act (ITA) 2007.

As a result, the taxpayer’s appeal was dismissed.

Commentary

In this case, the taxpayer’s expense claims were patently excessive, and could not stand up to scrutiny from either HMRC or the FTT.

However, HMRC failed to capitalise on the amount of expenses that could have been disallowed. The FTT noted in its decision that it was surprised HMRC allowed the taxpayer’s claim for Mr Hall’s accountancy fees, although the FTT did not propose to amend the closure notice.

In a further misstep, HMRC also failed to issue a penalty notice for inaccuracies of £11,201.66, despite having stated that it would do so. Consequently, no penalty was payable by the taxpayer.

Replies (20)

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By DTB27
09th Mar 2020 11:15

I am assuming the accountant prepared and filed the tax return in question? If so, why on earth did they agree to it? I accept the return is the "taxpayers" and it is down to them to self-assess their income and expenses but surely the accountant must have pointed out that the expenses in question were not allowable. If the client insisted on still claiming them I personally would have said to the client they needed to file the return directly and not had anything to do with it.

I hope the accountant had plenty of file notes showing they told the client what they were doing was wrong.

Thanks (3)
Replying to DTB27:
blue sheep
By NH
09th Mar 2020 12:22

Yes but anyone can call themselves an accountant cant they - do we know if this accountant was qualified?

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Replying to NH:
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By Andy Reeves
09th Mar 2020 12:53

If the accountant is correctly named in the report, the practice is based in Gateshead, and has a huge balance sheet deficit. Also reports under FRS102 (probably unnecessarily as it has zero employees), so a few more notes on their accounts at Companies House (which are always filed on deadline day).

A Google search points to a website of a US based business.

All a bit fishy, and I would be surprised if HMRC were not already looking into the firm.

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Replying to NH:
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By Rt66
09th Mar 2020 12:54

Hi,
I was under the impression that you had to be qualified and, if working for yourself, hold a current practice license. Is this not the case?

I'm training as a bookkeeper and I have to be registered before I can take clients on.

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Replying to Rt66:
By ireallyshouldknowthisbut
09th Mar 2020 14:28

@RT, nope any monkey can call themselves an "accountant" without knowing squat, and unfortunately many do.

I should point out for balance, there are a large number of accountants who are not chartered who do an excellent job at full professional standards, including a number of respondents on here. Its about what you know, not the paperwork on your wall.

Thanks (1)
Replying to ireallyshouldknowthisbut:
7om
By Tom 7000
09th Mar 2020 15:34

You told me last night it was about who you know... not what ;)

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Replying to NH:
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By sammerchant
09th Mar 2020 13:04

Idle curiosity, but I've just had a look at the accounts of Hall Accountancy Ltd. Worth a scan. Net deficiency of assets of £350K as at 31 August 2018.

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Replying to sammerchant:
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By Trethi Teg
10th Mar 2020 08:25

The net deficiiency of assets is not such a big problem as it seems as the majority of that is a directors loan. Also £200k of goodwill amortised. So if one assumes the practice is still running at the same level then goodwill would be understated.

HOWEVER

With debtors at £3k it looks as if there is no business there or cleints pay up front. Quite how that would come about is very strange.

Based on information the minimum would be a conspiry to defraud, including the accountant. HMRC enquiries into accountant required and most certainly any business involved in any way by client or his family.

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Replying to NH:
Lone Wolf
By Lone_Wolf
09th Mar 2020 15:46

I'm afraid being qualified doesn't negate the willingness to get involved in claiming spurious expenses.

On more than one occasion I have, and am aware of colleagues, informing partners of the fact that there are no grounds for an expense to be claimed, or a vital piece of information missed from the return, only to be met with the "It's the client's self assessment at the end of the day."

They seem to think this removes responsibility from them, and the fact that we've told the client it's wrong, somehow gets them off with then submitting the return for the client anyway.

I suspect many would be shocked at the level of "professionalism" within our profession.

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Replying to Lone_Wolf:
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By raycad
10th Mar 2020 00:26

Quite right, Lone Wolf. Furthermore, under Sec99 TMA:

"Any person who assists in or induces the making or delivery for any purposes of tax of any return or accounts which he knows to be incorrect shall be liable to a penalty not exceeding £500."

That would include any accountant, partner or even (strictly speaking) anyone acting in accordance with a partner's instructions. Sec99 Notices are, true to say, very rare but whenever they are issued to an accountant/accountancy practice you can bet your bottom dollar that HMRC will scrutinise every single return submitted by said firm/individual!

Thanks (1)
Replying to raycad:
Lone Wolf
By Lone_Wolf
10th Mar 2020 09:39

I sometimes feel that should be in my email footer...along with a link to the ICAS/CIOT PCRT guidelines, money laundering regulations and HMRC guidelines on dishonest conduct by agents.

Those in practice in their own right will know better than me, but I would assume that your PI policy wouldn't ride to your aid if you are hit with fines, and potentially sued by the client, for getting involved in this sort of thing?

But us tax folk are just being difficult. Sigh.

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Replying to DTB27:
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By jvenegas16
09th Mar 2020 12:22

Ironically, it seems that the claim was defended without compromising: "Following extensive correspondence between HMRC and the taxpayer’s accountant Steven Hall, HMRC wrote to Steven Hall on 5 July 2017 stating that it was not satisfied with the evidence supplied to support the claims for the taxpayer’s employment and self-employment expenses".
That would have been an opportunity to rectify any of the expenses claimed. Anyone is entitled to make a mistake, or to rectify something they have identified later.

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7om
By Tom 7000
09th Mar 2020 12:30

I wonder what happened to the £120k income in his limited company... is that disallowed too?

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Replying to Tom 7000:
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By flightdeck
09th Mar 2020 16:36

Good point, there were two sets of fraud here

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By optimist
09th Mar 2020 12:49

DTB27 - but then this accountant wouldn't have been able to charge him almost £6k for next to no actual work. Taking a look at the accounting firms accounts, I think I'd be checking out their Corporation Tax returns too, and then their clients.

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By michael7
09th Mar 2020 15:28

"Mr Hall claimed that he had not seen HMRC’s closure notice dated 27 July 2017 until September 2017 as his offices are closed every year in August, December and January due to a combination of factor"

A small accountancy firm closed during December and January every year?! Must have some great clients.

Something seems very odd with this 'accountant' shall we say

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Replying to michael7:
blue sheep
By NH
09th Mar 2020 15:36

If I knew a client had an ongoing enquiry and was due to get a closure notice I would certainly not be on holiday for a whole month, especially for a fee that size!
Usually we have been in constant communication with the inspector by phone, email and letter during the process.
Something feels very wrong with this guy

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Replying to michael7:
7om
By Tom 7000
09th Mar 2020 15:40

Well you have to be odd to go to a tribunal....

or alternatively a top tax QC funded by an investment bank and you know you are right....and there £ms at stake

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By Mr J Andrews
10th Mar 2020 11:52

I do love it when HMRC enquiries come up trumps for such blatant Mickey Mouse
behaviour.
Sadly the Revenue didn't go further with disallowing further expenditure and issuing penalty notice[s] for what can only be described as dumb stupidity.
But hopefully Hall's card is marked.

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By chronus
10th Mar 2020 16:43

Here are the remarkable extracts from the judgement.

"Lastly Mr Hall explained that Mr Jordan had incurred expenses from ACJ Ltd billed by an invoice dated 31 March 2014 as follows:
“Value adding activities related to Financial Management £40,000.00
Value Adding Inbound Logistics £20,000.00
Value adding activities related to Marketing and Sales £20,000.00
Value adding activities relating to operational service delivery £20,000.00
Value Adding After Sales Care £20,000.00

The invoice indicated a total of 1,200 hours each charged at £100.00 making a total of £120,000.00. No VAT was charged.
Mr Jordan failed to adequately explain to this Tribunal what “Value Adding Services”actually was."
Had the invoice described the services rendered as "Value Deducting Services " he might have succeeded in his claim.

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