Category Archives: Corporation Tax

Qualifying capital expenditure not proved to reduce capital gain on property sale

In the First-tier Tribunal (Tax) Appeal of Swain & Ors v Revenue & Customs [2014] the Appellant company Clarisa Limited (“Clarisa”), in its accounts and in its tax return. claimed to have incurred additional expenditure of £360,000 in improving let properties that it owned.

In consequence of making a part disposal of one of the units in the properties, Clarisa claimed to have made a loss rather than a gain for capital gains purposes.

HM Revenue & Customs (“HMRC”) challenged whether the expenditure had been incurred.

Clarisa bought the relevant properties in about 1995 for £75,000 from the husband of its current shareholder. Clarisa itself appeared not to have traded and, was simply holding the various properties that had been transferred to it. They were all tenanted. No evidence was given as to how many tenants there were, and whether there was a regular turnover of tenancies and tenants.

12 Pelham Arcade, Hastings, representing roughly 25% of the total value, was sold. The properties 9 to 11 Pelham Arcade were retained. The capital gains calculation recorded gross sale proceeds of £90,000, reduced to £69,238 by costs claimed to be connected with the sale of the property.

Clarisa’s original acquisition cost of all four properties (£75,000) was then said to have been enhanced by £360,000 expenditure, and 25% of these costs were claimed as extra deductible costs in assessing the capital loss of £41,175 Clarisa now claimed on the part disposal of 12 Pelham Arcade.

When HMRC investigated what expenditure of £360,000 had been incurred in the year of claim, the husband of Clarisa’s shareholder said that he did not know why the accountant had inserted the deduction in that year’s accounts when it had actually been incurred, 15 years earlier, following the purchase of the property, at a time when the property was “derelict”.

When the work that had allegedly been carried out 15 years earlier, was described it was said that it included waterproofing, painting, layout changes, moving the kitchen, replacing toilets and redecoration.

Several of those items would not be deductible in a capital gains computation even if they might have been dealt with as revenue expenses deductible against rental income.

Apart from that, there was no evidence of anything that supported the claim concerning the work allegedly undertaken.

An accountant was said to have advised that a mortgage be registered against the properties. However even in 2007, and even assuming no other expenses and no salary payments to directors, since the rental income was only £30,000 per annum, it would have taken 12 years of gross income, to have financed either the expenditure or the repayment of borrowings. There was no evidence of them anyway.

There had been no account as to:

– how any capital expenditure had been incurred at any earlier time;

– what the money had been spent on;

– which contractors had been used; or

– how the company had actually financed the expenditure.

So, Clarisa had failed to demonstrate that such expenditure had been incurred, and HMRC was right to disallow the claimed expenditure, and to substitute a gain for the claimed loss, and to charge a penalty.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.