Record Keeping Failure Means No CGT Deduction

December 27, 2013

Record Keeping Failure Means No CGT Deduction

A recent tax dispute shows the importance of retaining records.

It concerned a man who bought two properties which he let out. When he disposed of them, he did not make returns of the capital gains which arose because he did not file a self assessment tax return for the year in which the disposals took place (2004/2005).

HM Revenue and Customs (HMRC), who routinely carry out comparisons between tax returns and Land Registry data, became aware of the disposals. They eventually raised Capital Gains Tax (CGT) assessments totalling more than £38,000 with regard to them.

The man claimed that the assessments should be reduced because he had spent considerable sums on improvements to the properties. Had he been able to provide adequate evidence that such sums had been expended, the CGT assessments would have been reduced appropriately.

He could show that withdrawals from his bank account of some £128,000 had been made, but he could not provide evidence that this money was spent on building work. HMRC claimed that he should therefore be allowed no deduction whatsoever. The man argued that he should be allowed a ‘reasonable deduction’.

The ruling of the First-tier Tribunal was clear, Judge Judith Powell commenting, “We can see it is very likely the Appellant incurred some expenditure on the properties. The difficulty is that we have no idea how much was spent. We are invited to find that some or all of the bank withdrawals were used in this way. The Appellant was unable to point to a single item and explain by way of illustration how the money leaving his account had been spent...We have no idea why the Appellant was so vague about the expenditure. It is impossible for us to conclude...that he spent some reasonable figure on these works and then guess how much that is – or accept what seems to us equally to be guess work by the Appellant about the expenditure.”

In the circumstances, the Tribunal had no alternative but to dismiss the appeal.