A special commissioner upheld the refusal of the taxpayers’ claim for loss relief for an irrecoverable loan against assessed capital gains where they had failed to show, on the balance of probabilities, that there was a qualifying loan between themselves and the company to which they had transferred their partnership assets.

Facts

The taxpayers appealed against closure notices issued by the tax inspector, refusing the taxpayers’ claim for loss relief for the year ended 5 April 2000 in respect of capital losses of £100,000 and £125,000 respectively. The loss relief was to be set off against the capital gains included in the taxpayers’ respective self-assessments for 1999–2000.

The taxpayers had been in partnership in the fashion retail clothing business. In September 1999 the taxpayers transferred their partnership business to a limited company which acquired the goodwill of the partnership valued at £250,000. The taxpayers maintained that the goodwill attached to the partnership business was gifted to the company pursuant to TCGA 1992, s. 165.

In August 2002 the tax inspector issued amendments to the taxpayers’ self-assessments for 1999–2000. The amendments were based on the inspector's finding that the taxpayers had made capital gains on the transfer of the partnership goodwill to the company. The taxpayers appealed against the amendments to their self-assessments and the appeal was heard by a special commissioner in March 2005. The commissioner dismissed their appeals ((2005) Sp C 483) with the result that the taxpayers’ claim for gift relief under TCGA 1992, s. 165 failed.

Following that decision, the tax inspector wrote to the taxpayers advising them that they would be liable for penalties for not reporting the disposal of the partnership goodwill. He also enclosed a calculation showing the amount of tax and National Insurance contributions due.

The taxpayers responded by submitting a formal claim under TCGA 1992, s. 2(2) in respect of a loss on their loan to the company. The representatives enclosed amended capital gains pages for the taxpayers 1999–2000 tax returns. The inspector gave notice that he was enquiring into their claim for capital loss. He requested additional information about the claim. In August 2005, the inspector closed the inquiry into the taxpayers’ claim, concluding that there was no capital loss to be deducted under TCGA 1992, s. 2(2) from the capital gain included in the taxpayers’ self-assessment returns for 1999–2000. The taxpayers gave notice of appeal against the closure notice.

Issue

Whether, and to what extent, any debt due to the taxpayers that arose as a result of their sale of goodwill to the limited company became irrecoverable in 1999–2000; whether relief would be precluded by TCGA 1992, s. 253(12); and whether any loss was to be deducted under s. 2(2) from the capital gains included in each taxpayer's self-assessment for 1999–2000.

Decision

The special commissioner (Michael Tildesley) (dismissing the appeal) said that in order for the taxpayers to establish that they had an allowable loss claim for 1999–2000 they had first to adduce evidence to satisfy the tribunal on the balance of probabilities that there was a qualifying loan between themselves and the company which met the requirements of TCGA 1992, s. 253.

The taxpayers’ evidence was that they did not loan the company the money to purchase the goodwill from the partnership but gifted the goodwill to the company. The taxpayers had stated that the original 1999–2000 accounts for the company which showed that the directors received consideration in their loan account were incorrect. According to the taxpayers the correct position was as stated in their revised accounts for 1999–2000 and the accounts for the subsequent years which showed no transfer of goodwill for consideration. The taxpayers produced no documents setting out the terms of the loan, and no board minutes recording the existence of a loan.

The taxpayers’ case was based upon their interpretation of the commissioner's decision in (2005) Sp C 483. They stated that the commissioner in that case had found as fact that the taxpayers had transferred the partnership goodwill for consideration, which thereby created a debt to them from the company. In the present appeal the taxpayers relied upon that apparent finding of fact to mount their case, even though their direct evidence contradicted the existence of the loan. However, the present tribunal was satisfied that the commissioner in the earlier case did not make a finding that a loan was created between the taxpayers and the company in connection with the transfer of partnership goodwill. The commissioner's decision to dismiss the taxpayers’ first appeal was not dependent upon a finding of fact that a loan relationship existed between the taxpayers and the company. Further it was not part of either the taxpayers’ or the respondents’ arguments in that earlier case that a loan existed between the taxpayers and the company. The taxpayers themselves acknowledged that they were not aware of the loan until after the release of the earlier decision. Thus there was no evidence before the commissioner in that case upon which he could have made a finding that a loan existed. The taxpayers’ case was implausible. On the one hand they were denying the existence of the loan, and on the other hand relying on their interpretation of the earlier decision which, they said, created a loan relationship between themselves and the company. The inconsistency between these two conflicting positions was so manifest that it resulted in the self-destruction of the taxpayers’ case. They had produced no evidence to substantiate the creation of a loan between the taxpayers and the company arising from the transfer of partnership goodwill to the company. Further the commissioner did not make a finding of fact in his decision that such a loan existed.

In all the circumstances, the taxpayer had failed to adduce sufficient evidence of the creation of the loan to establish on the balance of probabilities that such a loan existed. In those circumstances the Revenue's refusal of the taxpayers’ claim for loss relief would be upheld. In the light of those findings, it was not necessary to determine the legal points advanced by the parties including the legal requirements of s. 253.

(2007) Sp C 585.
Decision released 22 January 2007.