In Babtunde Iginla v HMRC  TC8081, the First Tier Tribunal (FTT) restricted the amount of costs allowable against a capital gain for lack of evidence but partially allowed the taxpayer’s penalty appeal.
In 2015/16 Mr Iginla sold a residential property declaring a capital gain:
- Initially the property was his private residence but it was then rented out for many years.
- In declaring the gain on disposal he claimed a deduction for refurbishment costs of £96,350.
- His supporting evidence for the costs was an undated invoice and a letter dated 25 August 2003 from the builder which confirmed receipt of funds in Nigeria Naira from Mr Iginla’s father. The letter stated:
“This payment shall be the full and final sum for the renovation works at the above address. As you are aware, preliminary works commenced on August 18th 2003 and all works shall be completed on or before the 12th of September 2003.“
- He confirmed his father was his only source of funds for the work, that the building contractor had agreed to accept payment in Nigerian Naira at a fixed exchange rate and that he did not obtain any other quotes for the work.
- HMRC opened an enquiry into his 2015/16 Self Assessment return and requested more details of the refurbishment costs including proof of payment such as bank statements.
- Mr Iginla could and would not provide bank statements as his father was by then deceased. He stated that his contract with the building contractor was verbal.
- HMRC issued a closure notice disallowing all but £23,500 of the refurbishment costs. This was based on the opinion of the District Valuer (DV) as to the value of the works. He had ascertained the value from photographs online and did not visit the property. An agreement was reached with HMRC in respect of other disputed costs.
- Penalties were issued under Schedule 24 of Finance Act 2007 on the grounds that the understatement of the chargeable gain was deliberate and prompted error (but not concealed). Careless penalties were levied in respect of the other disputed costs.
The FTT found Mr Iginla to be a “less than straightforward witness” and his version of events to be “incredible”.
- The judge went through the refurbishment costs item by item and allowed a deduction for just £11,263.
- The penalty in respect of this inaccuracy was upheld.
- The penalties charged for carelessness in respect of the other disputed costs were vacated by the FTT. HMRC had not established that he had been careless since his accountants had advised him about the deductibility of these costs.
Records of capital expenditure may need to be kept for many years in case they are challenged by HMRC when the property is finally sold. This case also shows that a trip to the tax tribunal may leave the taxpayer in a worse position compared to simply accepting the figures provided by the District Valuer.
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Penalties: Errors in Returns and Documents (subscriber version)
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