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Dentist A had been in practice for 30 years when he entered into an expense sharing arrangement with dentist B, to whom he sold half of the practice premises, in 1999. In 2002, dentist A ceased in practice and put a value of £10,000 on the equipment fixtures and fittings, which he left in situ, as dentist B could not afford to buy them, and this value was used in his final capital allowances computation.
At that time, I advised dentist A to obtain a professional valuation of the equipment, etc., but he declined.
Dentist A had been in practice for 30 years when he entered into an expense sharing arrangement with dentist B, to whom he sold half of the practice premises, in 1999. In 2002, dentist A ceased in practice and put a value of £10,000 on the equipment fixtures and fittings, which he left in situ, as dentist B could not afford to buy them, and this value was used in his final capital allowances computation.
At that time, I advised dentist A to obtain a professional valuation of the equipment, etc., but he declined.
In 2004, dentist A sold the equipment, etc., to dentist B for the substantially higher sum of £25,000. At the same time, the other half of the practice premises was sold to dentist B for £100,000.
Dentist B is happy that the £25,000 was a fair price so he would not agree to any adjustment and in any case stamp duty was paid on the figure of £100,000.
As no equipment, etc., was purchased by dentist A after he had ceased in practice, I wonder whether the £10,000 figure was deliberately depressed by him, as he had been surprised to find that he would have to have an 'exit' value taken into account.
Dentist A can come up with various reasons why the figure of £10,000 was justified, mostly centred around the need, otherwise, to dismantle the equipment and possibly store it, as well as the problems of finding buyers who may only want certain items. Clearly, with hindsight, it would have been better if a price had been agreed between the parties in 2002, even if the consideration was deferred.
My question is whether I must insist that dentist A approaches HMRC to declare an increase in his income for 2002-03, even if that is within his power, (and then whether I should make a report to the NCIS) or whether he is able to just forget about this windfall. If he can forget about it, and bearing in mind that the equipment, etc, was sold for less than it cost, is his capital gains tax base cost the £10,000 or the actual cost?
Query T16,676 — Painless.
Reply by Thicket:
On his retirement, A has permanently ceased his trade as a dentist and Painless is correct to bring in market value as proceeds in his plant and machinery pool for capital allowances (see CAA 2001,
s 61). At that time, market value was estimated to be £10,000 and this seems to be capable of justification. There is no requirement for a professional valuation. HMRC appear to have accepted the computations as submitted and it is to be assumed that the valuation was adequately disclosed in the tax return so as to prevent a Langham v Veltema [2004] STC 544 discovery assessment being made.
Now, two years later, A has sold the equipment and fixtures to dentist B and Painless seems to be unnecessarily anxious about wanting to reopen the 2002 cessation accounts. Surely the best way to deal with this is by way of an income tax charge as a post-cessation receipt? This would bring into tax an amount of £25,000 less £10,000, i.e. £15,000 in 2004 under Schedule D, Case VI as was (now ITTOIA 2005, Pt 2).
The client should not complain; after all, he is being taxed on the profits arising from his profession; indeed, additional expenditure may have been incurred since cessation for which relief may now be claimed. This seems far preferable to reopening the final 2002 accounts for a possible understatement of profits.
Reply by The Dude:
I think that the first thing to do here is analyse exactly what happened. Dentist A was in business until 2002, when he ceased. At that time, the market value of the plant and machinery would have to be brought into account in the cessation capital allowances computation in accordance with CAA 2001, s 61.
If it is felt that there was no justification for the figure of £10,000 or if that figure is considered to be incorrect, then an amended tax return should be submitted and there will presumably be additional income tax/Class 4 National Insurance liabilities, together with an interest charge and potentially, but hopefully not, a penalty charge.
However, could the value of £10,000 at that time be justified? For example, was there no demand for second-hand equipment? Presumably there would have been removal and delivery costs and perhaps dentist B had no need for the equipment at that point on the basis that he had sufficient equipment, etc. to service his own clients? Perhaps in the intervening years B's business has expanded — he may now have a new partner — and more equipment is needed? In that event, one would argue that the 2002 valuation was correct.
The position then is that dentist A has now sold tangible moveable property that are wasting assets. These assets are business assets up to the date of A's retirement and, by virtue of TCGA 1992, Sch A1 paragraph 5 (1A), they are business assets from 5 April 2004 because they are being used in dentist B's business. For the intervening period, however, they would appear to be non-business assets (as does the share of the freehold), unless dentist B was operating through a limited company. Normally, such chattels that are wasting assets are exempt from capital gains tax under TCGA 1992, s 45(1). However, that exemption will not apply if the assets have, to some extent, been used in a trade, profession or vocation and have been — or could have been — the subject of a capital allowances claim (s 45(2)). I was tempted to wonder if the fact that the assets have ceased to be business assets somehow takes them out of this section and that they lose the 'stigma' of business use/capital allowances claims. But from the wording of s 45(3) this would not appear to be the case as it includes a scenario where 'an asset … has been used for the purposes of a trade, profession or vocation for part of that period [of ownership]'. In such circumstances the gain is allocated between business and private proportions, with the former being subject to capital gains tax.
Assuming that this second, capital gains tax, scenario can be justified, the first thing will be to identify the individual fixtures and fittings. If the disposal values were less than £6,000, they will be exempt from capital gains tax under the chattel exemption of TCGA 1992, s 262 (see HMRC's Capital Gains Manual at CG15450) unless seen as a 'set'. Those for which the disposal consideration exceeds £6,000 will require a capital gains tax computation. The acquisition cost to be taken into account would seem be the relevant proportion of the £10,000. Any part of the expenditure allowable as a deduction in computing the profits of the trade for income tax purposes is apparently excluded by TCGA 1992, s 39(2), although this does refer to assets which 'had at all times been, held or used as part of the fixed capital of a trade'. I am unsure as to the implications of the subsequent non-business period, but I suspect that once the sale proceeds of the assets are 'divied up' between individual assets this may prove academic.
