[2013] UKFTT 294 (TC)
TC02700
Appeal number: TC/2012/04442 & TC/2012/04224
Capital Gains Tax – TCGA 1992 – Business Asset Taper
Relief (“BATR”) on the disposal of investment properties – application of
Schedule 1A TGCA 1992 – Para 5 – claim for BATR rejected – Appeal Dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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SIDNEY
McCAUGHERN & LOUISE McCAUGHERN
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Appellants
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE IAN HUDDLESTON
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CELINE CORRIGAN
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Sitting in public in Belfast on 17 December 2012
John Corbett, HMRC for the
Respondents
Dr. M. Laverty & Glen
Nichol on behalf of CR Accountancy, on behalf of the Appellants
© CROWN COPYRIGHT
2013
DECISION
Appeal
1. This
appeal arises out of HMRC’s refusal to allow a claim for Business Asset Taper
Relief against the disposal proceeds arising on the sale of two properties by
the Appellants – one at Douglas Terrace, Ballymena, and the other at Dunclug
Gardens, Ballymena, both County Antrim, Northern Ireland (collectively “the
Properties”).
2. The
original decision was notified by a letter of the 6 October 2012 when the
Appellants 2007/2008 Tax Return was restated.
3. HMRC’s
original decision was upheld on review and communicated to the Appellants on the
21 November 2011.
The Facts
4. The
facts can be reasonably shortly stated.
5. In
2010 HMRC commenced an investigation into the tax affairs of the Appellants for
the tax year 06/04 2007 to 05/04 2008.
6. That
investigation covered not just the trading aspects of Mr. McCaughern’s car
sales business, but also the income and capital tax computations which arose in
respect of a portfolio of investment properties. In particular, with relevance
to this appeal, the treatment of capital gains related to the disposal of the
Properties which were jointly owned by the Appellants came under enquiry.
7. After
a good deal of correspondence between the parties relating to the income tax
liability arising both for the car sales business and for the property letting business
operated by the Appellants, the focus narrowed on the correct tax treatment of
the Appellants’ disposal of the Properties.
8. HMRC
wrote to the Appellants’ then agents, DML Turgot, on the 18 November 2010
asking for clarification of the capital gains tax computation advanced by the
Appellants in relation to the disposals focusing in particular on the
expenditure incurred in the enhancement of both Properties amounting to £8,400
in the case of Douglas Terrace, and the sum of £14,700 in the case of Dunclug
Gardens.
9. I
should point out at this point that HMRC’s letter which was from a Mr. McAreavy
(and in which the enhancement expenses were queried) indicated his intention to
treat the gains arising as taxable profits under Schedule D, Case 1.
10. Further
correspondence ensued and, on the 22 February 2011 DML Turgot submitted
receipts for the enhancement expenses – at least insofar as they appeared to be
available.
11. On 24 February
2011 HMRC wrote seeking further information in relation to the provision of
receipts for the works carried out.
12. In the continued
absence of information or detail to provide further clarity in relation to the
nature of the receipts and the work done, an Information Notice was issued by
HMRC under paragraph 1 of Schedule 36 of the Finance Act 2008 on the 28 March
2011 specifically seeking further information on the enhancement expenses
claimed.
13. Following that a
Penalty Warning was issued on the 6 June 2011 with the Penalty Notice itself in
the sum of £300 issuing on the 4 July 2011.
14. A subsequent
conversation took place between DML Turgot and HMRC by telephone on the 6 July
2011 where again the requests for information in relation to the enhancement
expenses, legal and selling fees arising on the disposals, were discussed.
15. From an attendance
note on HMRC’s file there was, on that occasion, a reference to the parties’
discussions the tax liability arising on the “CGT computation under Schedule D”.
16. A further
conversation took place on the 22 July 2011 between HMRC and Dr. Maurice
Laverty of DMC Turgot.
17. The Tribunal was
furnished with a copy of the telephone attendance note and was provided with copies
of a follow up email exchange between Mr. McAreavy and Dr. Laverty.
18. Mr. McAreavy’s
email asked if he (Dr. Laverty) “could also confirm [his] agreement for
[HMRC] to disallow the enhancement expenses and selling fees of £8,400 (8
Douglas Terrace) and £14,700 (78 Dunclug Gardens) in their entirety.”
19. Dr. Laverty
replied to that email by way of email on the 25 July 2011 in the following
terms:
“Yes, please accept this email as confirmation
that I agree with you to disallow the enhancement expenses and selling fees of
£8,400 (8 Douglas Terrace) and £14,700 (78 Dunclug Gardens) in their entirety.”
20. By this stage
Mr. McAreavy had sought additional internal advice on the case (from a Mr. Uel
Magee) who had pointed out that rather than treating the taxable gains arising
as Schedule D income, that they should properly be treated as capital gains and
taxed accordingly.
21. I mention this
confusion as to the correct nature of the tax treatment of the gain because it
was referred to in the Appellants’ evidence and their agent’s submissions
before the Tribunal by way of mitigation.
22. In a follow up
internal conversation between Mr. McAreavy and Mr. Magee on the 22 September
2011, HMRC came to the view that Business Asset Taper Relief had been
incorrectly claimed on the basis that paragraph 5 of Schedule 1A TCGA 1992
provides that a Schedule A business does not count as a “qualifying activity”
for the purposes of Business Asset Taper Relief.
23. On the 23
September 2011 HMRC wrote to DML Turgot. That letter dealt with income tax
issues arising (which I do not comment on as they do not form part of this
Appeal) but in addition pointed out that in the 2007/08 return for the
Appellants:
(1)
the capital gains tax had been understated because Business Asset Taper
Relief had been wrongly claimed – by reference to paragraph 5 of Schedule 1A
TCGA 1992;
(2)
by setting out a revised capital gains computation for the disposal of
both Properties; and
(3)
finally, indicating HMRC’s intention to amend the 2007/08 tax return and
issue a closure notice.
24. On the 6 October
2011 HMRC wrote to each of the taxpayers identifying the shortfall in tax
which, as result of the restatement of the 2007/08 tax returns, then fell due.
In each case that shortfall was £21,189.83.
25. The Appellants’
representatives complained and, as a result, a review was carried out under
Section 28A TMA 1970.
26. That review
upheld the earlier conclusions of HMRC.
27. The Appellants’ new
advisers, CR Accountancy (in which Dr. Laverty continued to be employed as a consultant)
wrote to HMRC on the 19 January 2011.
28. In summary, the
focus of that letter was to make representation against HMRC’s decision on the
basis that:
(1)
as part of a VAT inspection on a previous occasion an Officer of HMRC,
Audrey Nesbitt, had suggested that the Appellants could claim VAT back on
expenses relating to the property portfolio, and that CR Accountancy took the
view that as VAT could be claimed back on business expenses, that the
Properties in question must therefore by extension be “business assets”; and/or
(2)
as the Properties were purchased from profits generated from the car
sales business, and that the Properties themselves were used to make profit,
that they therefore must constitute a business activity.
29. A rejection of
that line of correspondence and specifically those contentions has led to this
appeal.
Evidence
30. The Appellants
were represented at the appeal by Dr. Maurice Laverty who had advised them
throughout, initially as a principal in DML Turgot and, latterly, as a
consultant in CR Accountancy.
31. Dr. Laverty
called the Appellants to give evidence.
32. Both witnesses
gave evidence as to the circumstances in which they both bought, improved and
then sold the Properties.
33. Both gave
evidence to the Tribunal that the Properties had been acquired with a long term
view but, in one case, because they had had previous experience of “bad
tenants” that they had done up the property and then sold it, and that in the
other, as the sitting tenants wanted to buy it, the Appellants had agreed to
sell.
34. That led to the
disposals which triggered the tax liability in dispute.
35. In cross
examination, and focusing on Dunclug Park, Mrs. McCaughern gave evidence that
the property had been bought on the 21 December 2004 and improvements carried
out in January / February 2005 prior to it then being sold.
36. HMRC pointed out
that the date of the invoice which had been submitted as a part of the expenses
which were claimed against any gain arising on that Property was dated 20 May
2004 (ie. some eight months before the property itself was acquired).
37. Whilst no
satisfactory explanation was provided, both witnesses gave evidence to the
effect that a vehicle had been provided to the builder who had undertaken the
works by way of a counter set off for the expenses incurred.
38. Both witnesses
were questioned both through examination in chief and in cross examination as
to the discussions which they had had with Audrey Nesbitt and, more latterly,
with Mark McAreavy in relation to the treatment of expenses arising in relation
to the Properties and/or the consideration of the Properties themselves as
“business assets”.
39. The purpose of
that line of questioning appeared to seek to advance the argument as previously
(see Para 28) that because:
(1)
there was some degree of VAT recovery; and/or
(2)
that business profits (from the car business) had been used to buy the
Properties
40. they were de facto
“business assets” and that Business Asset Taper Relief ought to apply.
41. It is suffice to
say that no clear picture arose from that line of examination.
Decision
42. There is no
doubt that there was some initial confusion – may I say on both the Appellants
and HMRC’s sides – as to the taxable nature of the transactions which arose on
the disposal of the Properties.
43. From the
Tribunal’s perspective, we fail to see why such confusion arose.
44. Both Mr.
McCaughern and Mrs. McCaughern were very clear in the evidence which they gave
to the Tribunal.
45. Both indicated
that the Properties had been acquired with a view to them being held as long
term assets – indeed Mr. McCaughern referred to their purchase as part of their
ultimate “pension” provision.
46. In both cases,
they were residential properties which were acquired as such, refurbished and
let out as private rented accommodation.
47. On the evidence
before us it was quite clear that the Properties were bought as investments and
not as business assets.
48. It is equally
clear from the evidence before us that the income arising had been treated as
Schedule A income – again, there may have been some confusion in both the minds
of the Appellants’ advisers and, indeed, HMRC, as to the treatment of that
income, but nonetheless it was Schedule A income and (eventually) treated as
such.
49. It logically
follows that Business Asset Taper Relief could never have applied on the facts
of this case.
50. For Business
Asset Taper Relief to apply (per paragraph 5(2) of Schedule A1 of TGCA 1992) “the
asset [must be] a business asset ….. being used wholly or partly for the
purposes falling within one of more of the following paragraphs:
(a) the purposes of a trade carried on at that
time by that individual or by a partnership of which that individual was at
that time a member ….”
51. At the time of
the disposal of the Properties we find that there was no trade being carried on
in respect of these Properties, they were simply investment properties which
the Appellants had rented out.
52. Dr. Laverty’s
suggestion – which he attempted to advance both in correspondence and before
the Tribunal – that the use of profits from the car sales business was
sufficient to render those Properties as assets of a business or trade – had
neither a firm basis in law or, indeed, in logic. In questioning by the
Tribunal it tended to suggest a lack of understanding between trading or
revenue receipts and capital receipts.
53. On the facts, it
is clear to us that the disposals made in the tax year in question were
disposals which properly fell to be attributed to capital gains and for the
reasons given based on Schedule A TGCA we find that Business Asset Taper Relief
did not apply in the circumstances.
54. We have some
sympathy with the Appellants in that clearly, on the evidence before us, there
were some substantial alterations carried out, at least to one of the
Properties. We accept that oral evidence and find that alterations were
carried out.
55. The real issue,
however, is that the Appellants’ agents put forward very scant information as to
the nature of those expenses and/or to explain the discrepancies that HMRC had
raised over the invoices that were furnished.
56. Those which
related to legal expenses were allowed by HMRC as, indeed, were some agent’s
fees insofar as they related to the acquisition and/or disposal of the
Properties.
57. Where the
dispute arose in the main was in relation to the enhancement expenses.
58. I have already
commented above that some of the invoices which were advanced actually predated
the works, which would automatically have raised enquiries with HMRC. No
satisfactory explanation was provided as to why that might have been the case either
through correspondence or as part of the Appeal hearing.
59. In relation to
the two material lots of expenditure, ie. the £8,400 and the £14,700, the email
of the 25 July 2011 is evidence of clear acceptance on the part of the
Appellants’ agents that HMRC could disallow those expenses.
60. They were,
unsurprisingly, subsequently disallowed which resulted in the tax computation
which is now in dispute.
61. We cannot
comment on the exact rationale behind Dr. Laverty’s email concession on the
point, but nor have we seen any documentary evidence for the enhancement
expenses which were initially claimed.
62. It will be
evident from what we have said above that we have concluded that this appeal
should be dismissed.
63. The Appellants’
claim for Business Asset Taper Relief was not well founded.
64. We were not addressed
on the issue of those costs, and make no finding in relation to them.
65. This document contains full
findings of fact and reasons for the decision. Any party dissatisfied with this
decision has a right to apply for permission to appeal against it pursuant to
Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules
2009. The application must be received by this Tribunal not later than 56
days after this decision is sent to that party. The parties are referred to
“Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)”
which accompanies and forms part of this decision notice.
IAN HUDDLESTON
TRIBUNAL JUDGE
RELEASE DATE: 10 May 2013
