In Merrie v HMRC  TC016103 the tribunal upheld £95,112.79 in penalties for inaccuracies in a self-assessment return: the taxpayer misunderstood when he must declare the gain on the sale of his company.
It is the date of disposal which determines when a capital gain must be declared. Where the consideration is not wholly in cash the date of disposal may be automatically deferred:
- Where loan notes or shares (as a qualifying share for share exchange) are issued the gain is deferred until their redemption or sale unless an election is made.
- Where Entrepreneurs' relief (ER) is available an election can be made under s169Q or s169R TCGA 1992 to ensure that the gain is not deferred and to allow ER to be claimed.
Mr Merrie sold his company in August 2014 for £9.8m which was made up of cash, loan notes and shares in the acquiring company which met the 5% requirements for ER:
- At the time of the sale he was eligible for ER.
- He continued to work for the acquiring company until December 2015 when ill-health forced his retirement.
- He made the necessary elections under s169 TCGA 1992.
- He did not declare the gain in his 2014/15 return;he believed he did not have to declare it until he sold the shares in the acquiring company.
- He did not take any specific personal tax advice; having been advised that the 10% tax rate would apply under ER he did not wish to pay advisors fees for additional advice.
- He spoke to HMRC about his entitlement to ER prior to the sale.
The deadline for an ER claim was 31 January 2017.
- HMRC opened an enquiry into his 2014/15 return in January 2016, issued a closure notice in March 2016 and assessed Mr Merrie to penalties for inaccuracies.
- HMRC mitigated the penalties for the gain attributable to the consideration shares as Mr Merrie had a choice when to declare the gains depending on whether he made a s169 election. At the point he realised he needed to declare for 2014/15 his ill-health (he had a stroke) and lack of time prevented him from meeting the 31 January 2016 deadline.
- HMRC gave the maximum level of mitigation for co-operation; 15% penalties were charged.
- Mr Merrie appealed the penalties on the grounds that they were excessive and HMRC had refused to suspend them.
The tribunal upheld the penalties:
- They agreed the error was careless (and not deliberate); he had not taken reasonable care in not taking proper advice.
- It was a prompted disclosure, Mr Merrie did not notify HMRC of his inaccuracy even though he may have been aware of it for about a month before the enquiry commenced.
- They refused to suspend the penalties; the inaccuracies were in respect of a one-off transaction and not the result of a system error which could be rectified.
A good example of how a failure to take detailed advice can be an expensive mistake. Mr Merrie had objected to the level of fees his professional advisors wished to charge in respect of his transaction given that he already had confirmation that the tax rate would be only 10%. What he missed was the need to understand when and how he needed to declare the gain and pay the tax. His failure to take advice may have only his increased his liability by 1% but the cost to his already failing health was perhaps much greater than this.
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