In Patrick Rodney Boden & Anor v HMRC [2024] TC09181, the First Tier Tribunal (FTT) found that a partnership could not use the cash basis to exclude nearly £1m of unpaid sales from tax. HMRC’s discovery assessments were valid.
- Mr and Mrs Boden traded in Partnership during the tax years 2011-12 to 2014-15.
- Part of the partnership’s trade included providing consultancy services to various family companies at £500 per day plus expenses. These companies were wholly or partly owned by Mr and Mrs Boden.
- No payment was made for the services and expenses: Mr and Mrs Boden expected to be paid once the family companies’ businesses became successful.
- The sales to the family companies were referred to in the partnership accounts as ‘proforma invoices’. These totalled £150,000 to £217,000 per year.
- The partnership’s accounts excluded the proforma invoices from the calculation of profits.
- Mr and Mrs Boden believed they could use the Cash basis of accounting as the proforma invoices had not been paid and were not expected to be paid for some time.
- Partnership profits excluding the proforma invoices ranged from £7,300 to £16,000.
- Schedules of partnership expenses indicated that round-sum claims were made.
- These included mileage at 45p per mile, and, when working away, breakfast and lunch at £14 each, dinner at £27, hotels at £125 and out-of-pocket expenses at £10 per day.
- Mr and Mrs Boden did not file tax returns for 2011-12 to 2014-15.
- HMRC raised Discovery assessments on 1 December 2017.
Mr and Mrs Boden appealed to the First Tier Tribunal (FTT), which found that:
- The cash basis of accounting could not be used by the partnership.
- The cash basis could not apply to 2011-12 or 2012-13 as it was not introduced until 2013-14.
- The partnership’s cash receipts from third parties in 2013-14 and 2014-15 (£96,609 and £96,607) exceeded the cash basis limit.
- Irrespective of whether invoices were issued in respect of the ‘proforma invoices’, the value of the services rendered to the family companies should have been accrued in the partnership’s accounts for each year.
- HMRC had discovered a loss of tax caused by Mr and Mrs Boden’s Failure to notify chargeability. This allowed a discovery assessment to be made.
- All of HMRC’s discovery assessments were validly made.
- The 2013-14 and 2014-15 assessments were made within the general four-year assessment time limit.
- The 2011-12 and 2012-13 assessments were made within the 20-year assessment time limit in s.36(1A)(B) TMA 1970. This time limit applied as neither taxpayer had notified chargeability, nor had they received a Notice to file under s.8 TMA.
- HMRC’s approach to restricting allowable expenses was reasonable.
- For 2014-15, all overhead costs were allowed. The cost of one hotel room per trip was allowed, subsistence claims were reduced to £5 for breakfast, £5 for lunch and £10 for dinner. Out-of-pocket expenses were disallowed in their entirety.
- HMRC used a route planner to determine likely business mileage based on places visited, adding 25% to cover route variations. A Flat-rate claim at 45p for the first 10,000 miles and thereafter 25p per mile was allowed.
- These adjustments reduced the taxpayers’ 2014-15 expense claim to 63% of that submitted. This percentage restriction was then applied to reduce claims submitted for the earlier tax years.
- No bad debt relief claim was allowed.
- The availability of bad debt relief must be assessed when the accounts are prepared; the benefit of hindsight is not permitted.
- There was no indication when the accounts were prepared that any sum would not be paid in due course. It was anticipated that payment would be made when the companies’ businesses were established.
Useful guides on this topic
Cash or accruals accounting toolkit
Unincorporated businesses can elect to use one of two different methods of accounting for tax: simpler accounting (cash basis) or accruals basis accounting.
Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? Can HMRC issue two alternative assessments for the same period? What are your rights of appeal and defences?
Flat (fixed) rate expenses or actual cost toolkit
What types of expenses can I use fixed-rate expense deductions for? Which is better, fixed-rate deductions or actual cost?
Failure to notify chargeability to tax
What is failure to notify chargeability to tax? What happens if you fail to notify HMRC about your taxes? What penalties apply for failing to notify HMRC that you have a tax liability?
Notice to file a tax return: section 8(1) TMA 1970
A guide to explain the implications of a notice sent to an individual under s.8(1) TMA 1970 to file a tax return.
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