[2013] UKFTT 373 (TC)
TC02772
Appeal number: TC/2012/07860
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Capital Gains Tax – allowable
deductions from disposal proceeds – purchase of one half share in property
followed by later purchase of the other half share – latter transaction
treated in tax return for the year in question as disposal of existing half
share and acquisition of entire property, resulting in small tax payment –
whether, on a later disposal of the entire property, the Appellant should be
allowed to deduct market value of entire property at time of 100% acquisition
– held no – appeal dismissed
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FIRST-TIER TRIBUNAL
TAX CHAMBER
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BOOTA SINGH
CHAHAL
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Appellant
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-and-
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THE
COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS
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Respondents
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TRIBUNAL:
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JUDGE KEVIN POOLE
MOHAMMED FAROOQ
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Sitting in public in Priory Court, Bull Street, Birmingham on 24 April 2013
Talwinder S Patara of T S
Patara & Co, Chartered Accountans, for the Appellant
Christine Cowan, Presenting
Officer of HMRC, for the Respondents
©
CROWN COPYRIGHT 2013
DECISION
Introduction
1.
The appeal concerns the capital gains tax liability arising on a
disposal by the Appellant of a property known as 106 Grove Lane, Handsworth, Birmingham (“Grove Lane”).
2.
For many years, the Appellant owned a one half share in Grove Lane jointly with another individual. He then bought the outstanding half share from
that individual some years ago, at a price which the parties agreed to be one
half of the value of Grove Lane at that time (and significantly higher than the
price he had paid for his original half share).
3.
In his tax return for the tax year when he acquired the remaining half
share, the Appellant treated the transaction as a disposal of his half share
(on which he paid a small amount of capital gains tax) and, by implication, a
corresponding acquisition of the whole of Grove Lane for a price equal to its
agreed market value.
4.
Much later, the Appellant disposed of Grove Lane.
5.
The Appellant claims to be entitled to deduct, in computing the gain on
the eventual disposal of Grove Lane, its full market value at the time when he
purchased the outstanding 50% interest, rather than the aggregate of the sums
he actually paid to acquire the full 100% interest. HMRC do not agree. Hence
this appeal.
The facts
6.
On 5 August 1983, the Appellant and a Mr K Bhara bought Grove Lane in equal shares. They acquired a half share in it each, and each of them paid
half of the total price. The Appellant’s share was £7,500.
7.
Grove Lane was jointly owned by the Appellant and Mr K Bhara until 1
November 1999, at which time the Appellant bought Mr Bhara’s half share for
£26,000 plus incidental costs of £427. Whether or not the Appellant and Mr
Bhara were connected parties at that time, there is no suggestion that the
agreed purchase price for the half share was anything other than arms’ length
market value.
8.
Whilst the Appellant and Mr Bhara were business partners for a period of
time, Grove Lane was not a partnership asset.
9.
In his self-assessment tax return for the year 1999-2000, the Appellant
included entries which treated the November 1999 transaction as a disposal of
his half share in the property for net proceeds of £25,574. This resulted in
him reporting a taxable gain of £7,600 which, after the annual exempt amount,
resulted in chargeable gains of £500. The Appellant paid tax on this gain at
the time. His return for 1999-2000 was not taken up for enquiry by HMRC and
the time for making any amendments to it, or for claiming repayment of any tax
overpaid, is now well past. In his 1999-2000 return, the Appellant noted in
the “Additional Information” section that “Grove Lane was transferred into the
name of BS Chahal only in Oct 99”
10.
The Appellant ultimately sold Grove Lane on 19 June 2006 for £147,500.
He included details of the sale in his self-assessment tax return for 2006-07,
though the exact basis of his entries in that return is not totally clear.
11.
HMRC took up his 2006-07 return for enquiry on 25 August 2008. Their
enquiry was only into the capital gains tax treatment of his disposal of Grove Lane and another property during the same year.
12.
As the enquiry developed, it became clear that the Appellant’s 2006-07
return had been submitted on the basis that he had disposed of his half share
in Grove Lane in 1999 and had acquired the whole of the Grove Lane property in
the same year for a consideration equal to its total value at the time he
bought Mr Bhara’s half share.
13.
Various other issues arose about the calculation of the chargeable gain,
including indexation, taper relief and allowable expenses. These were all
resolved by agreement.
14.
The only outstanding issue in dispute between the parties was the tax
effect of the purchase of Mr Bhara’s half share in 1999. The Appellant argued
that he should be allowed to deduct the total value of the property at that
time in computing the gain on the 2006 disposal (even though he had only
actually paid Mr Bhara the value of the half share he was buying). He also
argued that HMRC were no longer entitled to question the treatment of the 1999
transaction as reflected in his 1999-2000 tax return because he had made full
disclosure of the basis on which he had accounted for the transaction in the
“Additional Information” section of that return.
15.
As the parties were unable to agree on these issues, HMRC formally
closed their enquiry on 7 March 2012, making an amendment to the Appellant’s
self-assessment return for 2006-07. The result was an increase of £4,006.40 in
the Appellant’s tax liability for the year 2006-07. This decision was
confirmed on review on 12 July 2012 and the Appellant now appeals against it.
16.
It is clear that the only dispute between the parties is whether the
Appellant should be allowed to deduct as allowable expenditure the whole market
value of Grove Lane as at November 1999, rather than the expenditure that he
actually incurred in two stages in 1983 and 1999.
17.
The only basis upon which the Appellant disputes HMRC’s calculation is
that he says they should be required to adopt the basis underlying his
1999-2000 return, even if it is incorrect, because they did not question it at
the time. He says that HMRC are effectively using their “discovery” powers to
override the 1999-2000 return, and they should not be permitted to do so.
The law
18.
This appeal is concerned with identifying what allowable expenditure may
be set against the disposal proceeds in computing the Appellant’s chargeable
gain. The relevant provisions are contained in section 38 Taxation of
Chargeable Gains Act 1992 (“TCGA”) which, so far as relevant, provided as
follows at all material times:
“38 Acquisition and disposal costs, etc
(1) Except as otherwise expressly provided, the sums
allowable as a deduction from the consideration in the computation of the gain
accruing to a person on the disposal of an asset shall be restricted to –
(a) the amount or value of
the consideration, in money or money’s worth, given by him or on his behalf
wholly and exclusively for the acquisition of the asset, together with the
incidental costs to him of the acquisition or, if the asset was not acquired by
him, any expenditure wholly and exclusively incurred by him in providing the
asset,
(b) the amount of any
expenditure wholly and exclusively incurred on the asset by him or on his
behalf for the purpose of enhancing the value of the asset, being expenditure
reflected in the state or nature of the asset at the time of the disposal, and
any expenditure wholly and exclusively incurred by him in establishing,
preserving or defending his title to, or to a right over, the asset,
(c) the incidental costs
to him of making the disposal.
(2) For the purposes of
this section and for the purposes of all other provisions of this Act, the
incidental costs to the person making the disposal of the acquisition of the
asset or of its disposal shall consist of expenditure wholly and exclusively
incurred by him for the purposes of the acquisition or, as the case may be, the
disposal, being fees, commission or remuneration paid for the professional
services of any surveyor or valuer, or auctioneer, or accountant, or agent or
legal adviser and costs of transfer or conveyance (including stamp duty or
stamp duty land tax) together –
(a) in the case of the
acquisition of an asset, with costs of advertising to find a seller, and
(b) in the case of a
disposal, with costs of advertising to find a buyer and costs reasonably
incurred in making any valuation or apportionment required for the purposes of
the computation of the gain, including in particular expenses reasonably
incurred in ascertaining market value where required by this Act.”
19.
As Grove Lane was not a partnership asset of the business partnership
between the Appellant and Mr Bhara, section 59 TCGA has no application in this
case.
Discussion and conclusion
20.
Regrettably we cannot agree with the Appellant’s argument. HMRC’s
calculation is technically correct and there is no basis for it being required
to include an additional £26,000 of allowable expenditure that the Appellant
did not in fact incur.
21.
The calculation of the Appellant’s tax liability must be carried out as
at the date of disposal, allowing only expenditure which is identified as being
allowable by the legislation. The fact that the Appellant may have made an
incorrect return for 1999-2000, on the basis of which he accounted for a small
amount of tax that should not have been paid, does not affect this. HMRC have
not (either expressly or impliedly) used their “discovery” powers, as the
incorrect contents of the 1999-2000 return are entirely irrelevant to the
correct CGT calculation for the 2006-07 disposal of Grove Lane.
22.
It follows that the appeal must be dismissed.
23.
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.
KEVIN POOLE
TRIBUNAL JUDGE
RELEASE DATE: 1 July 2013
