The background to this case is that our client, who we’ll call Adam, has dabbled in property over the years. It isn’t his main job, but he’s bought and sold a few houses, and received a small amount of rental income. Adam has always completed a tax return because he is self-employed (in a business not connected to property) and at the start of 2018 he received a letter from HMRC asking him for a list of all the properties he’s ever owned. Adam employed a local bookkeeper at the time to help him with his tax returns and he asked the bookkeeper to reply to HMRC. The bookkeeper duly provided details of all the properties that Adam had ever been involved with, including a house that had been sold, which had correctly shown on the 2016 tax return as a capital gain.
HMRC’s response a month later was probably not what the bookkeeper was expecting. It was a very lengthy letter with over 100 questions about each and every property asking how the properties were purchased, what funding was involved, what costs were incurred on each property (including the house that had been sold and was correctly shown on the tax return), and a request to see all the supporting invoices. Undeterred, the bookkeeper continued to correspond with HMRC and answered all the questions without any thought as to whether HMRC were entitled to ask them. Adam decided to seek a second opinion when the next letter from HMRC had another 100+ questions along with some tax assessments.
I spent several hours going through the correspondence and background with Adam at an initial meeting. It has to be said that Adam had made a few mistakes with his tax affairs in the last few years. He received a small amount of rental income that hadn’t been disclosed to HMRC because he thought his rental expenses were higher than his income. He had also claimed Principal Private Residence Relief on the disposal of a flat where the relief wasn’t going to be due. He had lived in the flat for 6 months, but the flat had been on the market before he moved in and remained on the market whilst he was living there. There was no degree of permanence to the occupation and it was clear that we needed to withdraw the claim for PPR relief and agree that a capital gain would now arise. We also calculated the rental income and disclosed this to HMRC which they accepted.
At this stage we were hopeful of resolving the remaining issues with HMRC and bringing the enquiry to a close, but as I write this blog over a year later, the issues still haven’t been resolved and we are now well on the way to a Tribunal hearing.
The Remaining Issues
The first issue is that HMRC asked on a number of questions about the property disposal that had been correctly shown on Adam’s return. The Inspector had not raised a valid enquiry into the relevant tax return but was now looking to disallow the renovation costs because Adam didn’t have the invoices. We had pointed out that HMRC was not entitled to ask questions about the property disposal because they hadn’t raised the correct enquiry and were now out of time to do so. We also pointed out there was no discovery position in law. The Inspectors’ answer was full of ‘fluff and bluster’ but did not address the specific legal points. We had also explained that the property disposal was actually a joint venture with another person and that the other person had been responsible for the building improvements and had retained the cost invoices. Despite Adam’s best interests he hadn’t been able to get the invoices from his former partner however he was able to provide a number of before-and-after photographs showing the work that had actually been carried out. HMRC didn’t accept our arguments, so we appealed the assessment and then asked for the decision to be independently reviewed.
As a separate issue, I regularly have HMRC decisions reviewed if I don’t think they are correct and I have found the reviewing officers decisions to be quite fair and balanced in most cases. In this case the review decision was complete gobbledegook that showed the reviewing officer had completely misunderstood the whole point of the case. He had the dates wrong and referred to the wrong properties in his summary. Even the Inspector dealing with the case apologised and sent it back for further clarification however, the reviewing officer, quite possibly embarrassed by his mistake, chose to back the Inspector and ignore the legislation rather than review the case objectively. I am hoping that the reviewing officer comes along to the tribunal hearing later this year. I would love to put a face to the ineptest officer I’ve ever dealt with from HMRC Solicitors Office!
The second issue is a little more straightforward. We withdrew the principle residence claim on the flat disposal which resulted in a capital gains charge. HMRC considered the penalty position and decided that Adam was guilty of deliberate behaviour! We had a number of discussions with the Inspector to say that, in our opinion, claiming the relief could be considered careless but certainly not deliberate. Adam isn’t a trained accountant and has no tax qualifications or any knowledge of tax legislation, he is one of the many taxpayers who mistakenly believe that living in a property for even a short period of time, results in a capital gain not being chargeable. He would be careless of not taking tax advice, and the penalty would be at a lower rate than a deliberate penalty with the possibility of it being suspended. For the penalty to be deliberate Adam would have had to fully understood the complex rules about Private Residence Relief, realised they did not apply but then claimed the relief anyway.
We had that decision reviewed by the same person at a solicitor’s office and, maybe unsurprisingly, he upheld the Inspector’s decision. HMRC had made the suggestion that Adam never lived in the property at all, but this is a complete nonsense. We had provided documents to show he lived in the flat but HMRC chose to disregard this.
Lessons to be learned
Always check the legality of any information notices or enquiry letters issued by HMRC. Do not be intimidated by the letter or notice, and do not assume that because it has come from HMRC that it must be right. Tax Inspectors can make mistakes and not all HMRC officers understand the very complex tax laws that govern what HMRC are allowed to do and what questions or years are out of bounds. It also has to be said that occasionally, some tax Inspectors simply choose to ignore the rules. Certainly, in my former life as a tax inspector there were a few occasions when I asked for information and documents that I knew I wasn’t entitled to. If the taxpayer or the accountant went along with my request, then that was fine with me and more fool them. The better more experienced accountants would point out my “mistake” and I would withdraw my request. I also had more respect for them for doing so.
Don’t assume that answering all of the Inspector’s questions will make you their friend. If they have asked for something that isn’t correct then challenge the request, they won’t take it personally. Always remember that the Inspector’s job is to test the accuracy of a taxpayer’s tax return or tax position and to collect any back-dated tax, interest and penalties if anything is wrong. The tax laws, as they currently stand, are very heavily weighted in HMRC’s favour and the fail-safe laws on the side of the taxpayer generally consist of HMRC having to act in a reasonable and proportionate manner and within specified time frames. If HMRC ask for information or a document that is out of time or not covered within specific legislation, then don’t be afraid to challenge the request and say no.
Don’t be afraid to challenge HMRC decisions if they are wrong. It might seem like a lot of time and effort to take a case to Tribunal but sometimes HMRC’s decision making process is just wrong... plain and simple. Don’t be intimidated, make your case in front of the judge. I have always found the judges at tax tribunals to be more than fair and helpful to the taxpayer and accountants.
If the original bookkeeper had not answered questions about the joint-venture property disposal we wouldn’t be faced with one of the open points that we are now taking to Tribunal. The deliberate penalty decision would, in fairness, probably have happened anyway. I’ll report back later in the year to let you know how we get on.
By Neill Staff
Tax Partner and Tax Investigation Specialist
If you need advice regarding responding to a HMRC enquiry, contact our Tax Partner at firstname.lastname@example.org or call him on 020 3146 1605.
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