This case demonstrates how we helped a client reduce his tax assessments, as well as completely remove penalties owed to HMRC, all without the use of key supporting evidence withheld by a former friend.

Deliberately failing to declare

In March of this year, Buzzacott were approached by George*, who was desperately in need of professional assistance. He had jointly owned several investment properties with a friend. Over the years, they had renovated and extended the properties, incurring thousands of pounds of improvement expenditure in the process. When the properties were eventually sold, George and his friend both made sizable gains, which they had failed to declare to HMRC.

HMRC opened an investigation into George’s tax affairs and discovered his failure to declare the chargeable gains, issuing tax assessments amounting to more than £200,000. Furthermore, he had received a letter from HMRC indicating that it considered his behaviour to be deliberate and that it intended to charge a penalty worth more than £100,000.

George advised Buzzacott that he accepted his behaviour was deliberate. However, he disputed HMRC’s calculation of the gains. Unfortunately, as George’s friend had managed the improvement projects, he did not have copies of the invoices/receipts that could have been used to evidence the improvement expenditure. Having fallen out with his former friend, George was simply unable to supply HMRC with evidence of the costs. While HMRC accepted that there would have been some improvement expenditure, without supporting evidence, HMRC was only prepared to allow a deduction for improvement expenditure that was equal to 10% of the disposal price. George felt that this significantly understated the actual costs and resulted in a significant overstatement of the gain.

A robust recalculation of the tax

In recent years, Buzzacott have received instructions from several individuals who have disposed of property for a gain, but did not have evidence of their improvement expenditure. Strictly speaking, in order to claim a deduction for expenditure, a taxpayer is required to evidence that expenditure. Therefore, HMRC will often state that in the absence of supporting evidence, it will not allow a deduction.

In reality, when HMRC raises an assessment, in order for the assessment to be validly made, it must be made in accordance with best judgement. Therefore, HMRC’s assessments must factor in a level of improvement expenditure that is consistent with the increase in a property’s value, during the period of ownership.

Buzzacott’s Tax Investigations team have devised a formula for calculating allowable property expenditure in the absence of supporting documentation. Our formula is so robustly designed that HMRC has never even attempted to challenge it. In George’s case, this resulted in tax assessments originally worth more than £200,000, being reduced to less than £40,000.

HMRC’s failure to follow their own guidance results in no penalty

Whenever HMRC discovers irregularities in a person’s tax affairs, it’s obligated to consider charging an appropriate financial penalty. In this case, George had acknowledged his behaviour was deliberate, and therefore HMRC had advised that it intended to charge a deliberate penalty.

However as financial penalties, even in civil cases, are criminal sanctions, it’s incumbent on HMRC to make taxpayers aware of their rights under Article 6 of the Human Rights Act. The appropriate time for HMRC to do so is when it first discovers an irregularity in a person’s tax affairs. HMRC has issued guidance to its caseworkers, confirming that officers should issue taxpayers with two factsheets – one on penalties, and one on Human Rights, as soon as an irregularity is discovered. However, in this case, HMRC failed to issue either factsheet at the appropriate time.

When George approached Buzzacott, we conducted a full review of the case papers and identified that HMRC had failed to issue the relevant factsheets at the appropriate time. Crucially, George had continued to cooperate with HMRC after the irregularities had first been discovered. This meant, he had effectively incriminated himself without fair warning of his right to not self-incriminate.

In our response to HMRC, Buzzacott explained that HMRC had not only calculated the tax liabilities incorrectly but had also allowed an unrepresented taxpayer to incriminate himself without fair warning. We cited various pieces of case-law, as well as HMRC’s own guidance to support our view that despite George’s acknowledgement of deliberate behaviour, HMRC could not legally charge a financial penalty.

After careful consideration, HMRC confirmed that it had breached George’s human rights and, therefore, would not be charging a penalty.

Another happy client

This case demonstrates the value that a specialist tax investigations team can offer, even at a very late stage of an investigation. Had George not sought a second opinion, he would have ended up paying more than £300,000 to HMRC. Within just four months of appointing Buzzacott, his case had been settled for £38,000 – a saving of more than 87%.