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A trader purchased a van for cash, receiving an invoice from a person who believed he had good title to the vehicle.
After some use it subsequently came to light that the vehicle had been stolen several links back in the purchasing chain. The vehicle was then seized by the police and returned to the insurance company of the original owner.
A trader purchased a van for cash, receiving an invoice from a person who believed he had good title to the vehicle.
After some use it subsequently came to light that the vehicle had been stolen several links back in the purchasing chain. The vehicle was then seized by the police and returned to the insurance company of the original owner.
* Although the trader incurred the expenditure, did the vehicle ever 'belong' to him for the purpose of first year allowance or writing down allowance (section 11(4), Capital Allowances Act 2001), given that he may not have had good title in English law?
* If it did 'belong' to him, then its seizure represents a disposal for capital allowance purposes and so the question of disposal value arises. It can be argued that the disposal value is nil or, as it is a stolen vehicle and tainted, substantially less than its normal market value. However, I am aware the Revenue may argue full market value.
What are readers' comments on the above?
(Query T15,887) – Cricket.
It is most likely that the expenditure will not qualify for capital allowances, so the question of disposal proceeds does not arise. 'Cricket' is quite right to suppose that the car never belonged to the taxpayer, so it does not qualify for capital allowances (section 52(1)(b), Capital Allowances Act 2001).
It is an implied term of a contract for the sale of goods that the vendor has good title and can pass it on. The client therefore can ask for his money back from the vendor – this is supposed to pass the pain back up the chain to the person who actually stole the goods. Of course, it is likely that somewhere in the chain someone will have disappeared, or will not be able to repay the proceeds of sale. But it is not supposed simply to be the problem of the last person holding the parcel when the music stops, and this possibility could be explored. If the cost is recovered from the vendor, there is no tax issue.
If the cost is not – or not fully – recovered, the expenditure is analogous to 'abortive capital expenditure'. This is expenditure incurred with the intention of creating or acquiring an asset, but which does not in the end do so. It is certain that this does not qualify for capital allowances under general rules. There are two possible solutions:
* ICAEW Memorandum TR 637 (24 November 1986) suggests that there is a strong argument that such expenditure is not capital expenditure at all, so it should simply be treated as a revenue expense and deductible accordingly – it has not acquired an asset, or created a lasting advantage for the trade, even if that was its intention, so there is no reason to disallow it.
* Revenue Interpretation 10 (February 1992) points out that the rules for hire purchase assets (now under section 67, Capital Allowances Act 2001) give allowances to a person who has incurred expenditure on an asset under a contract 'providing that the person shall or may become the owner of the plant'. This would allow writing down allowances on bringing the asset into use, and disposal proceeds would then be deductible. RI 10 certainly applies to a situation where a person pays a deposit for capital assets and the supplier defaults without delivering them, but it might be argued that the contract for the sale of stolen goods is void, and therefore although the contract may have purported to provide that the purchaser would own the assets, there was never any possibility of this occurring. But a sympathetic Inspector might accept a claim for allowances using RI 10.
If writing down allowances are accepted under RI 10, it would be harsh of the Inspector to impose market value on a disposal. The table in section 61, Capital Allowances Act 2001 includes 'permanent loss of the plant or machinery otherwise than as a result of its demolition or destruction' – in such a case, the disposal value is the insurance proceeds or 'any other compensation of any description', rather than the market value of the asset. This would apply to the theft of a vehicle, which is analogous to what has happened here. It is true that such a disposal does not fall within section 63 ('cases in which disposal value is nil'), but it also does not fall within the circumstances in section 61 in which the disposal value is the open market value. – Castlegate.
I think we should look at the bad news first but finish off with some good news.
It is a basic rule of law that a person can only sell something if it belongs to that person. Consequently, the person selling the van did not have the right to sell it and so the trader never owned it. As a result, capital allowances are not due. The capital allowances computation must be re-worked showing the van as never being included into the pool. The mechanics of this may not be easy under self assessment if we have passed the time limit for amending the return. We may need to look to a discovery assessment by the Revenue and consider the validity of the assessment.
The trader is not able to claim capital allowances but incurred an expense. That expense was with a view to bringing into existence a capital asset and, as a result, a trading deduction cannot be claimed. I will not rehearse the cases on capital expenditure here, but they mean that there has been an expense that does not give rise to any tax relief.
Now, in theory, we come to the good news. The trader is entitled to claim the money back from the person who sold the van. In other words, there is a debt due from the person who sold the van. That person is entitled to claim from the person lower down the chain and so on. Since the expense was not allowed, the receipt will not be taxed. In most cases the chances of being paid back the money are likely to be remote.
If the costs of pursuing the claim and the lack of certainty of recovering the funds mean that the debt is to be written off, a deduction for the write-off should be allowed. Section 74, Taxes Act 1988 denies relief for a write-off of any debt except a bad or doubtful debt. There is no comment about whether it should be a capital debt or not. The other disallowances for a loss arising from outside the trade and capital withdrawn from the business would not seem to apply here. – JWG.
Extract from reply by 'Hodgy':
This is a question that I had to consider for a client some years ago. He had gone to the motor auctions to buy a van and been approached by a man who told him that he had brought a van to sell but had arrived too late. The seller was, of course, desperate for money and so if he would like to take a look at his van, he could give him a very good deal. The deal was struck and our client was delighted with his purchase. The delight turned to dismay when the police arrived several months later and took the van away as it had been stolen. He was not able to find the previous 'owner', let alone recover any money from him.
In this case the Inspector accepted that the client had not secured any enduring benefit from the purchase and so it could be deductible as a revenue expense as vehicle hire. I would suggest that 'Cricket' should prepare the tax return for his client on this basis and disclose the circumstances in the white space on the tax return.
Editorial note. This is obviously an unusual transaction not catered for in tax legislation. Readers, however, agreed that the 'loss' should be allowable either as a revenue expense or a bad debt written off.
