Taxpayer loses 120k expenses claim
20 Mar 2020
A taxpayer who claimed self employment expenses of £120,000 against income of £5,000 has lost a First Tier Tribunal (FTT) appeal against HMRC’s refusal to allow the deductions
20 Mar 2020
Alistair Jordan challenged a closure notice for the 2013/14 tax year, which saw HMRC disallowing a professional fees and subscription claim of £19,128 and ‘value adding services’ self employment expenses of £120,000. [Alistair Jordan and the Commissioners for Her Majesty’s Revenue and Customs,  UKFTT 0743 TC07501].
The tribunal heard Jordan had been employed by Rapid Platforms Ltd (RP Ltd) for many years, a company owned by his parents where he held a minority shareholding.
When his parents decided to sell the company, Jordan started self employment while still employed with RP Ltd. When this self employment work became significant he agreed to sign a new contract of employment with RP Ltd. He also incorporated his business in a private limited company, A & C Jordan Ltd (ACJ).
Jordan had signed a contract of employment with RP Ltd for his director duties and a second contract for consulting services for which he received £5,000 in the year in question. As he had little in the way of provision for his retirement he sought the services of a professional to explain the options available to him. This advice cost him £25,000 and was reported in his employment expenses.
The tribunal was shown two invoices explaining the spending on professional fees. One was from Sympatico Corporate Strategies Ltd for £19,128 relating to pension scheme needs analysis and solution implementation, and the second was from Jordan’s accountant, Hall Accountancy Ltd, for £5,872 relating to tax and accounting matters, including the preparation and submission of a self assessment tax return.
HMRC told the FTT that the professional fees of £25,000 should be substantially reduced. The fees of £19,1280 submitted by claimed on the 2013/14 tax return were not paid until 30 April 2015 from the account of ACJ Ltd.
The Sympatico fee failed the tests imposed by s336 Income Tax (Earnings and Pensions) 2003 (ITEPA 2003) as the advice was personal to Jordan and was not incurred in the performance of his duties.
The second claim was for self employment expenses of £120,000, which arose from an invoice dated 31 March 2014 from ACJ Ltd for ‘value adding services’.
HMRC pointed out that the self employment business of value adding services commenced on 19 February 2014 and appeared to cease on 5 April 2014 as no further entries have been made in Jordan’s personal tax returns for any of the subsequent tax years.
This business was carried out for 46 days during which Jordan reported income of £5,000 and expenses of £120,000 resulting in a loss of £115,000. HMRC argued Jordan had artificially created a loss of £115,000 to enable him to make a repayment claim.
The tribunal found that Jordan had failed to adequately explain what value adding services actually was.
It pointed out that these services began on 19 February 2014, and ACJ invoiced him on 31 March 2014 for 1,200 hours of work.
However, there are only 984 hours between 19 February and 31 March (41 days x 24 hours – 2014 was a leap year).
The FTT stated: ‘The burden is on Mr Jordan to prove on the balance of probabilities that the work referred to in the ACJ Ltd invoice resulting in a fee of £120,000 could genuinely have been carried out.
‘Mr Jordan has failed to convince this tribunal that “value adding services” were in fact carried out.
‘In the alternative, this Tribunal is satisfied that there was no commercial activity supporting the arrangement between Mr Jordan and ACJ Ltd. A net loss over the period 19 February 2014 to 5 April 2014 with no further income reported in subsequent does not amount to a commercial trade as required by s66 Income Tax Act 2007 (ITA 2007).’
As a result, Jordan’s appeal was dismissed. HMRC indicated it was going to issue a penalty notice for inaccuracies of £11,201. However, in error it failed to do so and accordingly no penalty is payable by Jordan.