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01 November 2000
If an Inspector accepts the accuracy of a client's self-employed accounts and records and the only other known source of income is a modest salary from employment, is he able to tax what he alleges are unidentified deposits to building society accounts? The client asserts these are from cash savings acquired over a period of time as a result of her frugal lifestyle.
(Query T15,702) Michelle.
'Michelle' has every right to feel perplexed that the Inspector has pronounced himself satisfied with the self employed accounts and we wonder if:
(Query T15,702) Michelle.
'Michelle' has every right to feel perplexed that the Inspector has pronounced himself satisfied with the self employed accounts and we wonder if:
If an Inspector accepts the accuracy of a client's self-employed accounts and records and the only other known source of income is a modest salary from employment, is he able to tax what he alleges are unidentified deposits to building society accounts? The client asserts these are from cash savings acquired over a period of time as a result of her frugal lifestyle.
(Query T15,702) Michelle.
'Michelle' has every right to feel perplexed that the Inspector has pronounced himself satisfied with the self employed accounts and we wonder if:
(a) this opinion was given in writing; and
(b) whether the unidentified building society receipts were known to him at the time of stating that conclusion.
Part of any examination of accounts revolves around whether the amount available after expenses gives the proprietor enough money to meet his standard of living. In this case savings are part of that living.
'Michelle' also has to ask the client why she retained savings over the years in cash and suddenly decided to put the money in the building society. Then the best, if somewhat costly, form of defence would be to draw up capital statements for each of the years in question that savings accrued demonstrating: (i) cash receipts from all sources; (ii) annual living expenditure developed from an examination of weekly or monthly spending patterns, e.g. food, clothing, refit, etc. With such an exercise, the greater the detail the more credible the exercise will be. One year could be used as an example, e.g. current expenditure and then indexed back using retail prices. Provided a surplus sufficient to cover the deposits with a credible reason for the change in savings pattern could be established, either the Inspector will be satisfied or evidence for an appeal to the Commissioners will have been produced.
The threat of an appearance before the Commissioners may in fact draw the Inspector on which Schedule he feels the source of the unidentified deposits originated and aid an enquiry 'closure order'. – PJS.
Being savings from domestic frugality, the deposits are presumably not large. The client lives within her income, and proves it by showing a small surplus. The Inspector can only assess the deposits if he can demonstrate that living expenses at least equal the income from which they are funded. Even then he must first enquire as to the source, for they could be, inter alia, gifts, loans, bequests or (genuine) betting gains.
First of all it is suggested that a quick proving exercise be carried out, on the basis of the past year, by deducting from the sum of salary (net of withholdings) and sole trade profit the total of private expenditure, calculated on the following lines. As sole trade accounts are prepared, the practitioner's working papers already include an analysis of domestic overhead used to compute the recharge to the business for office space. Likewise an allocation will have been computed of the private use of the telephone and, if a car is used, of motor expenses. So private outgoings will be:
* The private ingredients of property overhead, telephone and motor expense.
* 52 weeks' worth of whatever the client declares to be the average kitchen shopping bill.
* Her estimate of annual expenditure on clothes, make up, and hairdressing.
* The cost of her last holiday, if one was taken.
* Actual payments of income tax and National Insurance contributions Classes 2 and 4 in the year.
* Anything else that her circumstances bring to light.
The surplus of unspent income for the year should match the deposits in the year. With this in reserve, ready for any detailed enquiry on those lines, the next step is to demand proof of the Inspector's allegations that the deposits represent income. Since no enquiries preceded the allegation, one suspects that he did not do any homework, and is on a fishing expedition. This is slovenly work and it should be the subject of a complaint to the District Inspector. – Man of Kent.
Extract from reply by 'G.J.F.':
To sustain an assessment, the Inspector must firstly be able to demonstrate a source. If the client states that her return is correct and complete, it will be up to the Inspector to issue an estimated assessment to the best of his judgment (section 29, Taxes Management Act 1970). The assessment will have to state:
(1) The date of issue and appeal period.
(2) The source and quantum.
(3) The year assessed.
(4) The name and address of the recipient.
'Michelle' is therefore advised to question seriously her client regarding the possibility of a secondary freelance source.
If the client is adamant that none such existed, the Inspector will have to name the source. He cannot simply raise an assessment because he thinks some additional money appears to have come from somewhere.
(Query T15,702) Michelle.
'Michelle' has every right to feel perplexed that the Inspector has pronounced himself satisfied with the self employed accounts and we wonder if:
(a) this opinion was given in writing; and
(b) whether the unidentified building society receipts were known to him at the time of stating that conclusion.
Part of any examination of accounts revolves around whether the amount available after expenses gives the proprietor enough money to meet his standard of living. In this case savings are part of that living.
'Michelle' also has to ask the client why she retained savings over the years in cash and suddenly decided to put the money in the building society. Then the best, if somewhat costly, form of defence would be to draw up capital statements for each of the years in question that savings accrued demonstrating: (i) cash receipts from all sources; (ii) annual living expenditure developed from an examination of weekly or monthly spending patterns, e.g. food, clothing, refit, etc. With such an exercise, the greater the detail the more credible the exercise will be. One year could be used as an example, e.g. current expenditure and then indexed back using retail prices. Provided a surplus sufficient to cover the deposits with a credible reason for the change in savings pattern could be established, either the Inspector will be satisfied or evidence for an appeal to the Commissioners will have been produced.
The threat of an appearance before the Commissioners may in fact draw the Inspector on which Schedule he feels the source of the unidentified deposits originated and aid an enquiry 'closure order'. – PJS.
Being savings from domestic frugality, the deposits are presumably not large. The client lives within her income, and proves it by showing a small surplus. The Inspector can only assess the deposits if he can demonstrate that living expenses at least equal the income from which they are funded. Even then he must first enquire as to the source, for they could be, inter alia, gifts, loans, bequests or (genuine) betting gains.
First of all it is suggested that a quick proving exercise be carried out, on the basis of the past year, by deducting from the sum of salary (net of withholdings) and sole trade profit the total of private expenditure, calculated on the following lines. As sole trade accounts are prepared, the practitioner's working papers already include an analysis of domestic overhead used to compute the recharge to the business for office space. Likewise an allocation will have been computed of the private use of the telephone and, if a car is used, of motor expenses. So private outgoings will be:
* The private ingredients of property overhead, telephone and motor expense.
* 52 weeks' worth of whatever the client declares to be the average kitchen shopping bill.
* Her estimate of annual expenditure on clothes, make up, and hairdressing.
* The cost of her last holiday, if one was taken.
* Actual payments of income tax and National Insurance contributions Classes 2 and 4 in the year.
* Anything else that her circumstances bring to light.
The surplus of unspent income for the year should match the deposits in the year. With this in reserve, ready for any detailed enquiry on those lines, the next step is to demand proof of the Inspector's allegations that the deposits represent income. Since no enquiries preceded the allegation, one suspects that he did not do any homework, and is on a fishing expedition. This is slovenly work and it should be the subject of a complaint to the District Inspector. – Man of Kent.
Extract from reply by 'G.J.F.':
To sustain an assessment, the Inspector must firstly be able to demonstrate a source. If the client states that her return is correct and complete, it will be up to the Inspector to issue an estimated assessment to the best of his judgment (section 29, Taxes Management Act 1970). The assessment will have to state:
(1) The date of issue and appeal period.
(2) The source and quantum.
(3) The year assessed.
(4) The name and address of the recipient.
'Michelle' is therefore advised to question seriously her client regarding the possibility of a secondary freelance source.
If the client is adamant that none such existed, the Inspector will have to name the source. He cannot simply raise an assessment because he thinks some additional money appears to have come from somewhere.
It's only words
It is common knowledge that Schedule 9 to the Finance Act 1988 (now Schedule 4 to the Taxation of Chargeable Gains Act 1992) provides a 50 per cent relief for certain gains related to transactions between 1 April 1982 and 5 April 1988.
In 1986 our client made a gift of a small number of his private company shares (acquired pre-1982) into a discretionary settlement in anticipation of a takeover of his family company. The net gain on transfer into the settlement was, let us say, £400. Applying the effect of the orthodox understanding of Schedule 9 to the Finance Act 1988 would result in the held-over gain being halved to £200 (the held-over gain).
In 1990, the company was taken over and the trustees received qualifying corporate bonds in exchange of sufficient value to give rise to a deferred gain of, say, £400,000 (the deferred gain).
At least one large firm of accountants felt that, under a certain reading of Schedule 9 to the Finance Act 1988, the 50 per cent relief could alternatively be applied effectively to halve the deferred gain to £200,000.
Faced with the choice of a saving of £200 or £200,000 (at whatever tax rates) it is easy to see why the trustees have acted on the unorthodox understanding of Schedule 9 to the Finance Act 1988.
We would be pleased to learn if any readers have used the unorthodox understanding successfully, if there really is a valid alternative understanding of Schedule 9 to the Finance Act 1988, or any other helpful suggestions.
(Query T15,703) Halved off.
The loophole suggested by the querist was generally accepted as available for disposals after 5 April 1988 and before 19 March 1991. However, section 101, Finance Act 1991 introduced amendments to the original legislation (now contained at Schedule 4 to the Taxation of Chargeable Gains Act 1992) closing the loophole in respect of disposals after 18 March 1991.
Paragraph 3 of Schedule 4 to the Taxation of Chargeable Gains Act 1992 states that 'This Schedule does not apply if the amount of the deduction would have been less had relief by virtue of a previous application of this Schedule been duly claimed'.
'Halved-off's' client would clearly have had the opportunity to claim the relief (£200) in respect of the disposal in 1990. The subsequent claim in respect of the later disposal (£200,000) is clearly higher and therefore falls foul of the amending legislation. In effect, the relief should be claimed in respect of the earliest possible disposal.
The relief must be claimed, and for trustees for years before 1996-97 within two years after the end of the year of assessment in which the disposal was made. Accordingly, the time limit for making the claim in respect of the disposal in 1990 expired on 5 April 1993. When the amending legislation was introduced, the Inland Revenue issued a press release (19 March 1991) indicating that it was prepared to extend the normal time limit to 5 April 1992 for those taxpayers who had not already claimed the relief on a relevant disposal and were already outside of the normal time limit for making such a claim. Clearly, following the amending legislation, there was an onus on 'Halved-off's' client's previous adviser to have followed up the previous advice to 'defer' the claim for relief until the later disposal. – Foxy.
The sequence of transactions exactly satisfies the conditions in paragraph 2(1) of Schedule 4 to the Taxation of Chargeable Gains Act 1992 and, were it not for subparagraphs (2) and (3), would attract halving of the gains in both 1986 and 1990. But if section 36 is invoked for the 1986 gift, it cannot be used for the takeover in 1990, so a choice arises.
As the provisions first emerged in Finance Act 1988, two years after the gift of shares, the parties were not prompted to spoil the 1990 position by claiming the relief precipitately. However, those options are now affected by time limit considerations. – Barham.
(Query T15,702) Michelle.
'Michelle' has every right to feel perplexed that the Inspector has pronounced himself satisfied with the self employed accounts and we wonder if:
(a) this opinion was given in writing; and
(b) whether the unidentified building society receipts were known to him at the time of stating that conclusion.
Part of any examination of accounts revolves around whether the amount available after expenses gives the proprietor enough money to meet his standard of living. In this case savings are part of that living.
'Michelle' also has to ask the client why she retained savings over the years in cash and suddenly decided to put the money in the building society. Then the best, if somewhat costly, form of defence would be to draw up capital statements for each of the years in question that savings accrued demonstrating: (i) cash receipts from all sources; (ii) annual living expenditure developed from an examination of weekly or monthly spending patterns, e.g. food, clothing, refit, etc. With such an exercise, the greater the detail the more credible the exercise will be. One year could be used as an example, e.g. current expenditure and then indexed back using retail prices. Provided a surplus sufficient to cover the deposits with a credible reason for the change in savings pattern could be established, either the Inspector will be satisfied or evidence for an appeal to the Commissioners will have been produced.
The threat of an appearance before the Commissioners may in fact draw the Inspector on which Schedule he feels the source of the unidentified deposits originated and aid an enquiry 'closure order'. – PJS.
Being savings from domestic frugality, the deposits are presumably not large. The client lives within her income, and proves it by showing a small surplus. The Inspector can only assess the deposits if he can demonstrate that living expenses at least equal the income from which they are funded. Even then he must first enquire as to the source, for they could be, inter alia, gifts, loans, bequests or (genuine) betting gains.
First of all it is suggested that a quick proving exercise be carried out, on the basis of the past year, by deducting from the sum of salary (net of withholdings) and sole trade profit the total of private expenditure, calculated on the following lines. As sole trade accounts are prepared, the practitioner's working papers already include an analysis of domestic overhead used to compute the recharge to the business for office space. Likewise an allocation will have been computed of the private use of the telephone and, if a car is used, of motor expenses. So private outgoings will be:
* The private ingredients of property overhead, telephone and motor expense.
* 52 weeks' worth of whatever the client declares to be the average kitchen shopping bill.
* Her estimate of annual expenditure on clothes, make up, and hairdressing.
* The cost of her last holiday, if one was taken.
* Actual payments of income tax and National Insurance contributions Classes 2 and 4 in the year.
* Anything else that her circumstances bring to light.
The surplus of unspent income for the year should match the deposits in the year. With this in reserve, ready for any detailed enquiry on those lines, the next step is to demand proof of the Inspector's allegations that the deposits represent income. Since no enquiries preceded the allegation, one suspects that he did not do any homework, and is on a fishing expedition. This is slovenly work and it should be the subject of a complaint to the District Inspector. – Man of Kent.
Extract from reply by 'G.J.F.':
To sustain an assessment, the Inspector must firstly be able to demonstrate a source. If the client states that her return is correct and complete, it will be up to the Inspector to issue an estimated assessment to the best of his judgment (section 29, Taxes Management Act 1970). The assessment will have to state:
(1) The date of issue and appeal period.
(2) The source and quantum.
(3) The year assessed.
(4) The name and address of the recipient.
'Michelle' is therefore advised to question seriously her client regarding the possibility of a secondary freelance source.
If the client is adamant that none such existed, the Inspector will have to name the source. He cannot simply raise an assessment because he thinks some additional money appears to have come from somewhere.
(Query T15,702) Michelle.
'Michelle' has every right to feel perplexed that the Inspector has pronounced himself satisfied with the self employed accounts and we wonder if:
(a) this opinion was given in writing; and
(b) whether the unidentified building society receipts were known to him at the time of stating that conclusion.
Part of any examination of accounts revolves around whether the amount available after expenses gives the proprietor enough money to meet his standard of living. In this case savings are part of that living.
'Michelle' also has to ask the client why she retained savings over the years in cash and suddenly decided to put the money in the building society. Then the best, if somewhat costly, form of defence would be to draw up capital statements for each of the years in question that savings accrued demonstrating: (i) cash receipts from all sources; (ii) annual living expenditure developed from an examination of weekly or monthly spending patterns, e.g. food, clothing, refit, etc. With such an exercise, the greater the detail the more credible the exercise will be. One year could be used as an example, e.g. current expenditure and then indexed back using retail prices. Provided a surplus sufficient to cover the deposits with a credible reason for the change in savings pattern could be established, either the Inspector will be satisfied or evidence for an appeal to the Commissioners will have been produced.
The threat of an appearance before the Commissioners may in fact draw the Inspector on which Schedule he feels the source of the unidentified deposits originated and aid an enquiry 'closure order'. – PJS.
Being savings from domestic frugality, the deposits are presumably not large. The client lives within her income, and proves it by showing a small surplus. The Inspector can only assess the deposits if he can demonstrate that living expenses at least equal the income from which they are funded. Even then he must first enquire as to the source, for they could be, inter alia, gifts, loans, bequests or (genuine) betting gains.
First of all it is suggested that a quick proving exercise be carried out, on the basis of the past year, by deducting from the sum of salary (net of withholdings) and sole trade profit the total of private expenditure, calculated on the following lines. As sole trade accounts are prepared, the practitioner's working papers already include an analysis of domestic overhead used to compute the recharge to the business for office space. Likewise an allocation will have been computed of the private use of the telephone and, if a car is used, of motor expenses. So private outgoings will be:
* The private ingredients of property overhead, telephone and motor expense.
* 52 weeks' worth of whatever the client declares to be the average kitchen shopping bill.
* Her estimate of annual expenditure on clothes, make up, and hairdressing.
* The cost of her last holiday, if one was taken.
* Actual payments of income tax and National Insurance contributions Classes 2 and 4 in the year.
* Anything else that her circumstances bring to light.
The surplus of unspent income for the year should match the deposits in the year. With this in reserve, ready for any detailed enquiry on those lines, the next step is to demand proof of the Inspector's allegations that the deposits represent income. Since no enquiries preceded the allegation, one suspects that he did not do any homework, and is on a fishing expedition. This is slovenly work and it should be the subject of a complaint to the District Inspector. – Man of Kent.
Extract from reply by 'G.J.F.':
To sustain an assessment, the Inspector must firstly be able to demonstrate a source. If the client states that her return is correct and complete, it will be up to the Inspector to issue an estimated assessment to the best of his judgment (section 29, Taxes Management Act 1970). The assessment will have to state:
(1) The date of issue and appeal period.
(2) The source and quantum.
(3) The year assessed.
(4) The name and address of the recipient.
'Michelle' is therefore advised to question seriously her client regarding the possibility of a secondary freelance source.
If the client is adamant that none such existed, the Inspector will have to name the source. He cannot simply raise an assessment because he thinks some additional money appears to have come from somewhere.
It's only words
It is common knowledge that Schedule 9 to the Finance Act 1988 (now Schedule 4 to the Taxation of Chargeable Gains Act 1992) provides a 50 per cent relief for certain gains related to transactions between 1 April 1982 and 5 April 1988.
In 1986 our client made a gift of a small number of his private company shares (acquired pre-1982) into a discretionary settlement in anticipation of a takeover of his family company. The net gain on transfer into the settlement was, let us say, £400. Applying the effect of the orthodox understanding of Schedule 9 to the Finance Act 1988 would result in the held-over gain being halved to £200 (the held-over gain).
In 1990, the company was taken over and the trustees received qualifying corporate bonds in exchange of sufficient value to give rise to a deferred gain of, say, £400,000 (the deferred gain).
At least one large firm of accountants felt that, under a certain reading of Schedule 9 to the Finance Act 1988, the 50 per cent relief could alternatively be applied effectively to halve the deferred gain to £200,000.
Faced with the choice of a saving of £200 or £200,000 (at whatever tax rates) it is easy to see why the trustees have acted on the unorthodox understanding of Schedule 9 to the Finance Act 1988.
We would be pleased to learn if any readers have used the unorthodox understanding successfully, if there really is a valid alternative understanding of Schedule 9 to the Finance Act 1988, or any other helpful suggestions.
(Query T15,703) Halved off.
The loophole suggested by the querist was generally accepted as available for disposals after 5 April 1988 and before 19 March 1991. However, section 101, Finance Act 1991 introduced amendments to the original legislation (now contained at Schedule 4 to the Taxation of Chargeable Gains Act 1992) closing the loophole in respect of disposals after 18 March 1991.
Paragraph 3 of Schedule 4 to the Taxation of Chargeable Gains Act 1992 states that 'This Schedule does not apply if the amount of the deduction would have been less had relief by virtue of a previous application of this Schedule been duly claimed'.
'Halved-off's' client would clearly have had the opportunity to claim the relief (£200) in respect of the disposal in 1990. The subsequent claim in respect of the later disposal (£200,000) is clearly higher and therefore falls foul of the amending legislation. In effect, the relief should be claimed in respect of the earliest possible disposal.
The relief must be claimed, and for trustees for years before 1996-97 within two years after the end of the year of assessment in which the disposal was made. Accordingly, the time limit for making the claim in respect of the disposal in 1990 expired on 5 April 1993. When the amending legislation was introduced, the Inland Revenue issued a press release (19 March 1991) indicating that it was prepared to extend the normal time limit to 5 April 1992 for those taxpayers who had not already claimed the relief on a relevant disposal and were already outside of the normal time limit for making such a claim. Clearly, following the amending legislation, there was an onus on 'Halved-off's' client's previous adviser to have followed up the previous advice to 'defer' the claim for relief until the later disposal. – Foxy.
The sequence of transactions exactly satisfies the conditions in paragraph 2(1) of Schedule 4 to the Taxation of Chargeable Gains Act 1992 and, were it not for subparagraphs (2) and (3), would attract halving of the gains in both 1986 and 1990. But if section 36 is invoked for the 1986 gift, it cannot be used for the takeover in 1990, so a choice arises.
As the provisions first emerged in Finance Act 1988, two years after the gift of shares, the parties were not prompted to spoil the 1990 position by claiming the relief precipitately. However, those options are now affected by time limit considerations. – Barham.
