Company payments not 'on behalf' of owner

In Peter Lowe & Civic Environmental Systems Ltd v HMRC [2022] UKUT 00084, the Upper Tribunal (UT) dismissed the appellant's claim to deduct enhancement expenditure incurred by his company when calculating the gain on a property disposal. There was no evidence the payments were made on his behalf.

• Mr Lowe had a number of disputes with HMRC which ended up on appeal at the First Tier Tribunal (FTT).
• The FTT gave Mr Lowe permission to appeal in relation to the decisions made on his Capital Gains Tax (CGT) liability, Self Assessment tax return penalties and corporate loss carry back relief.
• The CGT liability was from the disposal of a commercial property belonging to Mr Lowe. He had claimed that certain items of Expenditure were deductible, where the expenditure had been incurred by another person.
• The property expenditure in question was split between costs paid by Mr Lowe and costs paid by his company Hadee Engineering Ltd (Hadee). 
• Mr Lowe argued that the payments made by Hadee were made on his behalf:
  • He had the legal obligation to pay for them as the works were undertaken for a property belonging to him.
  • There was no way Hadee had incurred the costs itself without ensuring Mr Lowe suffered the cost, actually or economically, by way of remuneration or dividend satisfied by Hadee paying for the works, incurring a debit to his Director's Loan Account, or by receiving less future remuneration.
• The UT held:
  • Whilst there may have been a wider argument as to contractual liability vs actual payment, there was insufficient evidence to prove that distinction existed here.
  • There was no evidence that Mr Lowe had suffered the cost of Hadee's payments and he certainly could not have received a benefit without incurring Tax liabilities. In fact, the UT was in agreement with HMRC that it was possible that Hadee had decided to incur the costs for its own business interests.
• Mr Lowe's third ground of appeal was that the FTT had erred in law construing the term 'on behalf of' in its narrowest form as referring only to payments made by an agent and not any payment made that he benefitted from. Neither party gave any case law authority on how the phrase should be interpreted and the UT held it has its ordinary meaning which implied the need for an agency relationship and that there was no error in law by the FTT.
• The UT also ruled that Hadee could not be considered an agent either. The relationship between Mr Lowe and Hadee, who undertook orders on behalf of Mr Lowe, was merely indicative of the fact that Mr Lowe was the director of the company. No further evidence was provided to show that Hadee was acting in the role of agent.

The appeal was dismissed.

With regard to the loss carryback issue the UT agreed with the FTT that when a carryback claim has been made and the profits for the earlier year are subsequently increased, the relevant return or any claim outside of the return must be amended, and in this case, the time limits had expired and the additional carryback claim could not be made.

Useful guides on this topic

CGT: Deductible expenditure
What expenditure is allowable for Capital Gains Tax (CGT)? What about loan interest, early redemption fees etc?

Director's Loan Accounts: Toolkit
HM Revenue & Customs (HMRC) do a director's loan accounts toolkit for advisers. This is our enhanced version with planning points. 

Pecuniary Liabilities
Where an individual incurs a liability personally but it is paid by their employer special rules apply. This is referred to as settlement of a Pecuniary Liability.

Making good Benefits in Kind
From 6 April 2017 onwards, if an employee wants to make good on a non-payrolled Benefit In Kind they will have to reimburse their employer with the cash cost of the benefit by 6 July in the following tax year.

Creating an office at home or converting part of a home into an office  
Many company owners work from home. This guide looks at how you may obtain tax relief on the cost of converting the spare room or building a deluxe summerhouse to serve as an office in the garden.

External link

Peter Lowe & Civic Environmental Systems Ltd v HMRC [2022] UKUT 00084