Lack of documentary evidence no bar to proving capital loss claim

In Altan Goksu v HMRC [2022] UKFTT 00213 (TC), the First-tier Tribunal (FTT) found that the Appellant was entitled to claim a capital loss from the sale of a commercial property and that inaccuracies in the Appellant's return had not been brought about deliberately.

Background

This appeal concerned a closure notice issued by HMRC amending the Appellant's 2014/15 tax return, to increase the capital gains tax due on a gain realised by the Appellant on the sale of a commercial property (Broadway) in 2015. The Appellant had reduced the gain for tax purposes by the amount of a loss incurred on the sale of another property (The Grove) in 1998.

Upon the sale of The Grove, the Appellant’s accountant, Mr Musa, advised that he could claim a capital loss to set against the gain on a future sale of Broadway. However, when preparing and submitting the Appellant’s 1998/99 tax return, Mr Musa did not include the loss claim. 

Following the sale of Broadway, the Appellant's new accountant prepared and filed the Appellant's 2014/15 tax return but did not include the loss from the sale of The Grove and overstated expenses claimed on the sale of Broadway. The accountant submitted an amended return, deducting a loss of £549,235 from the sale of The Grove and expenses of £610,717 from the sale of Broadway.   

HMRC opened an enquiry into the Appellant's 2014/15 return as it was of the view that there was no allowable loss. The Appellant sought the assistance of Mr Musa and, in August 2017, Mr Musa found a handwritten computation on his case file showing that the capital loss computation he had submitted in relation to the sale of The Grove was incorrect because it had overstated the purchase price of The Grove. 

In December 2017, HMRC closed its enquiry and amended the Appellant's return, removing the loss from the sale of The Grove and reducing the quantum of the expenses claimed. HMRC also imposed penalties for inaccuracies, on the basis the loss claim was a careless inaccuracy and the expenses figure was deliberately inaccurate. 

The Appellant appealed, arguing Mr Musa had notified the loss within time, that he had taken reasonable care when including the loss in his return and the expenses inaccuracy was neither deliberate nor careless.

FTT decision

The appeal was allowed. 

In the view of the FTT, in order to be entitled to deduct the capital loss incurred in respect of The Grove when computing the gain on Broadway, the Appellant had to notify the loss to HMRC before 31 January 2005 and, in accordance with section 16(2A), Taxation of Chargeable Gains Act 1992, the loss had to be quantified in any such notification. The FTT accepted it was sufficient for the Appellant to prove the loss was quantified in the notification rather than to prove the precise amount stated in that notification. The FTT also agreed that if the Appellant could not prove the precise amount but could show that the quantification would have been no less than a specific amount, he was entitled to treat that amount as an allowable loss. Accordingly, the Appellant was required to prove, on the balance of probabilities, that a quantified loss was notified and the amount, or minimum amount, of that quantified loss.

Although the documentary evidence was extremely limited given the period of time that had elapsed, Mr Musa was able to describe to the FTT the process he would have used to notify HMRC, together with details of his office administration. The FTT accepted that he had submitted a capital loss computation to HMRC by letter in 2000 as an amendment to the Appellant’s 1998/99 return, and the claim was therefore notified in time. Further, while the FTT could not be satisfied of the accuracy of the figure stated in the Appellant's return, it accepted a calculation of the minimum amount of the loss of £412,126 prepared by the Appellant's advisers prior to the hearing. Accordingly, the FTT found the Appellant was entitled to deduct a loss of £412,126 on the sale of The Grove from the gain made on the sale of Broadway and the related penalty was reduced to zero.

In relation to the penalty for overstating the allowable expenditure, the FTT concluded that the Appellant's conduct was careless rather than deliberate. Accordingly, the FTT reduced the Appellant's penalty. 

Comment

This decision will provide some comfort to taxpayers faced with proving claims many years after they were made and where the available documentary evidence is extremely limited as a result. In such circumstances, the FTT will have regard to all of the available evidence, including evidence provided by taxpayers and third parties (such as their professional advisers), as to their usual practices, when considering what, on the balance of probabilities, was likely to have occurred at the relevant time. The decision also provides a timely reminder of the importance of ensuring that returns are accurately prepared and steps are taken to correct any inaccuracies as soon as they are discovered.  

The decision can be viewed here.