Despite not meeting the criteria, the taxpayer's claim for post-cessation trade relief was granted. If HMRC had issued its notice of intention to enquire within time, the claim would have been invalid.
A claim may be made for Income Tax relief against general income for a Qualifying post-cessation expense incurred within seven years of ceasing to trade. Qualifying post-cessation expenses include those incurred for remedying defective work.
The trade must have ceased and the expense must have been one which would have been deductible in calculating the trading profits i.e. it must meet the Wholly and exclusively test.
In Anthony Dennison v HMRC [2024] TC09153, the First Tier Tribunal (FTT) found that the claim for post-cessation trade relief was invalid. The claim related to settlement payments made because of breaches of fiduciary and other duties rather than for 'defective work done'.
- The taxpayer was a partner in a firm of solicitors and had a 33% interest in another company. This company negotiated contracts with the solicitors to provide services.
- The taxpayer negotiated the contract terms but failed to notify the other partners of his interest in the company.
- The solicitors ceased to trade and the former partners later discovered the taxpayer's interest in the company. They claimed breach of contract and breach of equitable and common law duties.
- The taxpayer was required to make settlement payments to his former partners and was struck off the roll of solicitors.
- The taxpayer filed his Self Assessment return claiming post-cessation trade relief in relation to the settlement payments.
- HMRC issued a Closure notice, stating that the claim was invalid. The settlement payments related to fiduciary breaches and other duties as a partner did not qualify for relief.
- The taxpayer Appealed, arguing that the claim was valid and that HMRC’s notice of enquiry was out of time.
The FTT found that:
- The notice to enquire into the taxpayer’s return was out of time:
- The taxpayer's 2009/10 tax return had been amended on 28 April 2011 to include the post-cessation trade relief claim.
- HMRC argued that the amendment was not received until after 1 May 2011, giving HMRC until 31 July 2012 to issue the notice to enquire.
- Even with this being true had HMRC issued the notice to enquire on 27 July 2012, the letter would not have been received before 31 July 2012.
- The notice was out of time and the enquiry was invalid.
- If HMRC had issued the notice to enquire within time, the post-cessation trade relief claim would have been invalid.
- The settlement payments related to claims made against the taxpayer for breach of contract and breach of equitable and common law duties that the taxpayer owed to his former partners.
- The settlement payments were due to unlawful profits made by the taxpayer, rather than for damages for defective work done.
- Payments made by the taxpayer were not qualifying payments and he was not entitled to the post-cessation trade relief.
- As the notice to enquire issued by HMRC was out of time, the taxpayer's claim was allowed. If HMRC issued the notice just days earlier the taxpayer would not have been entitled to relief.
The FTT allowed the appeal.
Useful guides on this topic
Losses, trade losses and sideways relief
How can trade losses be utilised? What are the restrictions?
Wholly and exclusively…toolkit
When is an expense allowed for tax purposes? What does 'wholly and exclusively' mean? How do you determine if a cost is wholly and exclusively incurred for the purpose of a trade? What cases are there?
Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
No post-cessation trading relief allowed
In David Sinclair v HMRC [2018] TC6873 an accountant's claim for post-cessation trade relief in defending a negligence claim was partly allowed, his claim to have created a trust in order to fund the compensation potentially due failed on basic principles.
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