In Simon Fry v HMRC [2017] UKFTT 0158 the First-Tier Tribunal (FTT) found, that in calculation of tax penalties for errors in a return, 'potential lost revenue' should be calculated with reference to the taxpayer’s future plans, such as becoming non-resident.

  • The taxpayer claimed a capital loss of over £10.7 million under the loan to trader rules.
  • £202,071 relief was claimed in 09/10, saving £34,554 in tax, and the remainder was carried forwards
  • Before the claim was made, the loan was converted into shares and therefore, it was agreed that no loss relief was available.
  • HMRC issued a penalty for careless behaviour under schedule 24 FA 2007 and calculated the potential lost revenue (PLR) as follows:
    • 100% of £34,554 tax relief claimed
    • 10% of the unused losses carried forwards, i.e. £1,053,397.
  • Following a review, HMRC applied the minimum careless penalty rate of 15%, issuing a £163,192.65 penalty.

The taxpayer appealed:

  • He took reasonable care in completing his tax return, so there should be no penalty
  • Alternatively, the penalty was excessive and the PLR had been miscalculated.

The FTT did not accept that the taxpayer had taken reasonable care: they concluded it was correct to treat the mistake as a careless one.

In this case though, there was sufficient evidence that the taxpayer had become and expected to remain non-resident: he had moved to Switzerland, completed a P85, his wife and child were in USA and his son had taken up a place at a school there. There was enough evidence that the taxpayer’s intention was to move to the USA with them and that there was no expectation that he would become UK resident again in the future.

Although the FTT accepted that the loss carried forwards would be available for use if the taxpayer become UK resident again, there was no reasonable prospect of the loss being used: the unused capital loss used in the PLR calculation should be reduced to nil.

The revised penalty was found to be £5,183.21.


Our guides:

CGT relief: loan to traders

Non-residents & CGT

Penalties: Errors in Returns and Documents (subscriber version)

Case reference: Simon Fry v HMRC [2017] UKFTT 0158

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