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My client owned a fish and chip shop and sold it as a going concern last year. Unfortunately, neither he, nor, more importantly, the solicitors acting for him, contacted me with regard to the apportionment of the selling price. The property was purchased 25 years ago for £14,000, with £1,000 representing plant and equipment. The old frying range was not changed, and only minor additions were made to the plant over the years and the final written down value was £122.
My client owned a fish and chip shop and sold it as a going concern last year. Unfortunately, neither he, nor, more importantly, the solicitors acting for him, contacted me with regard to the apportionment of the selling price. The property was purchased 25 years ago for £14,000, with £1,000 representing plant and equipment. The old frying range was not changed, and only minor additions were made to the plant over the years and the final written down value was £122.
The solicitors chose to apportion the selling price of £85,000 to give £10,000 value to plant and equipment, involving my client in a significant balancing charge. The remainder of the capital gain is, of course, covered by retirement relief. Are there any circumstances in which I could argue with the Inland Revenue that the supposed selling price of the plant and equipment is nonsensical and so far from reality that it should be ignored, and a proper market value used instead? I have made my client aware of the possible recourse against his solicitors.
(Query T15,801) – Friar.
Subject to any election under section 59B, Capital Allowances Act 1990, section 150 allows sale proceeds to be apportioned on a just and reasonable basis regardless of how they are apportioned in any agreement. Section 150 is usually seen as an anti-avoidance section to adjust proceeds where someone has artificially inflated an amount to obtain relief (or deflated an amount to avoid a balancing adjustment). However, the section does not require a direction by the Inland Revenue and simply states that proceeds shall be deemed to be the amount allocated on a just and reasonable basis. Section 52, Taxation of Chargeable Gains Act 1992 also allows an apportionment on a just and reasonable basis.
Therefore 'Friar' can argue, or rather seek the Inland Revenue's agreement to an apportionment that does not follow the sale agreement. However, should 'Friar' do this?
'Friar' should remember that a sale and purchase of anything involves two parties, the seller and the buyer. The purchaser may want a higher cost for the plant to claim allowances. The purchaser may be willing to pay for a working piece of equipment. Any agreement with the Revenue is likely to involve an approach to the other party to make sure that proceeds and acquisition costs are the same.
Furthermore, is the value so far adrift? The total price has increased from £14,000 to £85,000. If the plant has continued on the same lines, it would be worth £6,000. Machinery does not usually increase in value but this equipment seems to have survived 25 years. It may be worth more than the written down value because the purchaser will not have the disruption of having to instal a new range with the consequent customer comment that 'these chips don't taste the same'.
'Friar' should also check the legislation and the facts. In order for a claim to be successful, the client must have suffered a loss. What is the loss? A balancing charge is restricted to the original cost. If the original cost was £1,000, the balancing charge cannot exceed £1,000. Any excess will be a capital gain, to be covered by retirement relief. This is exactly what 'Friar' is trying to achieve. I must admit I am having some difficulty in checking the figure for plant. If it was acquired 25 years ago, 100 per cent first year allowances would have been due and, even if first year allowances had not been claimed, the written down value would be only £1.
In summary, 'Friar' can use different figures in the computation and can suggest to his client that he attempts to claim from the solicitor. 'Friar' must answer several questions first. Is the valuation so far adrift from a commercial valuation? Was the solicitor the one who suggested the apportionment? Has the client suffered a loss? If 'Friar' is to assist the client against the solicitor, is 'Friar' ready for the costs that may be incurred in making a claim where no loss may have been suffered? – J.W.G.
Before involving his client in a dispute with the Inland Revenue and the purchaser of his shop, 'Friar' should step back and consider what loss the apportionment has caused.
Section 26(1)(a), Capital Allowances Act 1990 states that the disposal value to be brought into the capital allowances computation is the net sale proceeds, i.e. £10,000. Using the basic rule, there is a balancing charge of £9,878.
However, section 26(2) then modifies the basic rule by stating that the disposal value shall not exceed the original purchase price of the asset disposed of. The equipment cost £1,000 and there have been 'only minor additions'. If we assume that the minor additions total £1,000, then the disposal value will be restricted to £2,000 and the balancing charge will be reduced to £1,878.
What happens to the difference between the original cost of £2,000 and the actual proceeds of £10,000? The excess is treated as a capital gain, but as the gain on the other assets is apparently covered by retirement relief, the contemporaneous disposal of the equipment should similarly qualify.
Given that the balancing charge has been reduced substantially, 'Friar' should consider if it would be in his client's interest to open a dispute for a relatively small amount of tax. The professional fees could well exceed the potential tax saving.
Before firing off a demand to the solicitor on behalf of his client, 'Friar' might do well to discuss the negotiations with his client. 'Friar' is very focused on the tax effect of the apportionment for the client, but there may have been other issues of which 'Friar' is unaware. The purchaser could have indicated that unless the figure for equipment was at least £20,000, there was no deal, and 'Friar's' solicitor was very pleased to bargain the purchaser down to a figure of £10,000. A meeting with the client could identify such issues.
However, if the solicitor has been at fault, the substantial reduction in the balancing charge by restricting the disposal value to cost and the knock-on reduction of the additional tax payable may help to persuade the solicitor to make an ex gratia payment. – Hodgy.
Extract from reply by 'Lane':
In defence of the solicitor, it may be said that if the range and other plant was not annexed to the premises, the apportionment (if defensible) could have saved stamp duty.
In Fitton v Gilders & Heaton 36 TC 233 a dispute led to an apportionment being made (on appeal) at the discretion of the General Commissioners, who declined to be bound by the parties' 'second thoughts', put forward as being more 'just' (as required by statute) than their original proposals. Again, in Wood v Provan 44 TC 701 the re-jigging of values was ineffective.
However, the purchaser is unlikely to be able to sustain capital allowance claims based on an inflated price of £10,000, so efforts should be made to negotiate a revised apportionment, subject to the concurrence of the relevant tax districts.
It would be too costly to seek a formal ruling at a hearing before Commissioners.
Editorial note. There were ten replies to this query and nine to T15,803, which caused much head scratching as regards which to choose for publication. Respondents whose replies were not selected on this occasion should not therefore be discouraged.
