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HMRC’s approach to penalties.
Years back, a client’s cousin (C) was diagnosed with Alzheimer’s and, at that time, C had persuaded him to enter into a lasting power of attorney (POA) so that, when the time came, my client could take over managing matters. C’s condition has deteriorated to the point where my client manages all aspects of C’s finances. C’s doctor confirmed that he was no longer capable of making important decisions.
C’s affairs were in a mess and it took my client a while to establish the entries for C’s latest self-assessment return. My client found that C had unwittingly omitted untaxed interest and dividends from his tax returns for at least two years. Some shares had also been disposed of (giving rise to a capital gain) but this disposal had not been shown on the 2021-22 return. C had told him that he had no recollection of owning the shares.
My client submitted C’s 2023-24 return before the deadline (and arranged for the tax due to be paid on time). HMRC was told of the POA and the fact that my client had reason to think that two earlier tax returns were incorrect – which he is investigating. My client worked out the outstanding tax and estimated the approximate interest to be charged.
He asked how HMRC officials approach the issue of penalties in such cases. Could he proceed on the basis that the grounds for mitigation would be sufficient for the penalties otherwise chargeable to be reduced to nil, ie if the medical evidence was produced?
I turned to HMRC’s manuals. SAM61340 only addresses late submission of returns (not omissions). I discovered DMBM585185 but this paragraph only relates to enforcement (health issues may be taken into account in deciding whether or not to take enforcement proceedings). I cannot find any more.
Is there written HMRC guidance to its staff on how to handle penalty mitigation in cases where the cause of omissions from a self-assessment return is declining health due to Alzheimer’s?
Query 20,479– Simpleton.
Calculating capital gain on sale.
My client bought a large property in 1985 to live in – she had no other properties. It was run down and she spent a significant amount bringing it up to a high standard.
About ten years ago she downsized into a smaller property (where she still lives) but she retained the original property, which she rented out. Rental income was fully disclosed on her tax return (no capital improvements were made while it was rented). The expenses for normal maintenance and decoration were deducted from the rental income.
She has decided that it is time to sell the original property. Clearly a significant part of the gain will be covered by PPR but part of it will be taxable. As I understand I have to calculate the gain first, and then apportion in the usual way. So the capital expenditure incurred while she lived in the property ought to be deductible in computing that gain. Do readers agree?
Assuming that is the case, we have a practical problem in that my client no longer has any records showing the amount spent on the capital works (she assumed that she would never need them as she intended to live in the house until it was sold). To what extent is it appropriate for estimates to be used? There is no other way we can find the exact figures (bank statements from so long ago haven’t been retained). And if we use estimates what disclosure has to be made to HMRC?
Query 20,480 – Downsizer.
Can company claim input tax?
One of my clients rents a shop in a town centre location and trades as a clothing store, and is registered for VAT. The business trades as a limited company and he is the sole director.
My client has suffered major cash flow problems in recent years, so has a poor credit rating personally and the company has an overdrawn balance sheet due to the balance he has invested personally through his directors loan account.
As a result of these financial problems, the landlord insisted that the lease for the shop is in the name of my client’s wife and issues invoices addressed to her and charges VAT. This is because the landlord has opted to tax the premises. The invoices are all paid directly by the company and the company also pays for repair costs because it is a tenant repairing lease. My view is that there is no problem with the company claiming input tax on the rent because it uses the shop to make taxable supplies but a colleague says that input tax can only be claimed if my client’s wife was also a company director, ie the supply of land is from the landlord to her personally and not the company unless she is a director.
Could readers advise please?
Query 20,481 – Barker.
Is VAT charged on vessel used outside UK waters?
One of my clients is a Maltese based company and is not registered for UK VAT, only for VAT in Malta. They have asked us about the VAT issues of a sea related vessel that will be purchased from a UK supplier. It will be used for a business purpose – research and development linked to products it sells – and its use will be wholly outside UK waters.
My client’s view is that the purchase of the vessel will be zero rated because it will be wholly used outside UK waters. However, my client is taking ownership of the vessel in Dover, so how can it be a zero-rated export by the UK seller? If VAT is charged at 20%, presumably my client can register for UK VAT as an overseas business – non-established taxable business – and claim input tax on its first VAT return?
Query 20,482 – Vessel Vera.
Queries and replies
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