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.
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.
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.
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.