CG34: ATT forces Revenue re-think on allowable expenses. Article by John Kimmer, President of the Association of Taxation Technicians, published in the April 2001 edition of "Tax Adviser".CG34: ATT forces Revenue re-think on allowable expenses.
As a direct response to representations made by the Association’s Technical Committee, the Inland Revenue are issuing revised guidance to their staff in connection with the costs of obtaining valuations for post-transaction valuation checks (the ‘CG34 procedure’) and their deductibility in computing the gain.
The current Revenue Capital Gains Manual at CG15261 states that;
‘Disallowable expenses include those incurred in obtaining post transaction valuation checks (see CG16615) and the costs of appeals (or contributions to such costs).’
CG 16615 states;
‘The costs incurred by a taxpayer in obtaining a post transaction valuation check are not deductible in computing the gain or loss on the relevant disposal.’
The allowance of costs from the computation of a capital gain is governed by TCGA 1992, s. 38. Included amongst the permitted deductions are ‘costs reasonably incurred in making any valuation or apportionment required for the purposes of the computation of the gain, including in particular expenses incurred in ascertaining market value where required by this Act.’ (s. 38(2)(b)).
The question of valuation costs was considered in Couch (HMIT) v Caton’s Administrators (70 TC 10) where Morritt LJ in the Court of Appeal said;
‘A person who has realised a chargeable gain is obliged to make a return of such gains computed as required by the relevant legislation. At the material time this was provided for by s. 12(l) and 8(1) of the Taxes Management Act 1970. In order to comply with that duty the taxpayer may incur expense in obtaining valuations or ascertaining the market value for the purpose of computing, as required by the relevant legislation, his liability to capital gains tax. It is not disputed that the costs and expenses incurred in performing those tasks for the purpose of discharging the statutory duty to make a return are allowable deductions.’
He later went on to say:
‘In my judgment it follows that where reference is made in s. 32(2)(b) to a valuation or an ascertainment of market value it is not a reference to the final and indisputable valuation or ascertainment which may only emerge after extensive litigation. I conclude that the costs and expenses which a taxpayer may deduct pursuant to s. 32(2)(b) in respect of any particular disposal are limited to those which he incurs in complying with his obligations under s. 12 of the Taxes Management Act 1970 and do not extend to costs incurred in negotiating over or contesting his liability to capital gains tax arising out of that disposal.’
The decision was therefore that the reference to a valuation or ascertainment of market value in TCGA 1992, s. 38 was not to the final and indisputable valuation. It was a reference to a taxpayer’s initial valuation made in order to complete his return, which might or might not be accepted by the inspector. Subsequent costs incurred in negotiating that value were not deductible.
The Revenue guidance to staff was clearly at odds with the statute and case law and they have agreed to revise the offending paragraphs in the Capital Gains Manual to make it clear to their staff that the expenditure incurred obtaining the valuation (but not, of course, the costs of subsequently negotiating that valuation) are to be allowed as deductions in computing the gain. As it may take some time for this revised guidance to be distributed, members may need to draw the attention of local offices to this change of guidance.
The Association also made representations on the need for eliminating the delays currently being experienced with the whole process and the apparent lack of liaison between districts and the Shares Valuation Division or District Valuer. It also put forward a suggested service standard under which the Revenue would commit to dealing with applications under CG34 by specific deadlines or, in default, waive interest and surcharges in the event late agreement of the liability. Unfortunately, the Revenue did not feel able to consider this innovative proposal. Instead it merely undertook to re-emphasise existing guidance on the need to give priority attention to forms CG34.
Nevertheless, I am particularly pleased that this submission has produced a positive response from the Inland Revenue. When I became President of the Association in July 1999 I took as my theme ‘Working together to make the tax system work’. I believe this response proves that by putting forward constructive suggestions when pointing out failings in the present system there is a much better chance of securing the
The ATT's Technical Committee intend to monitor the situation over the coming months to see if there has been any real change in practice. Later this year Committee Chairman Peter Gravestock will be inviting members to write in with their own recent experiences.
The full text of the Association’s representations and the Revenue’s response are as follows:
A review of the CG34 procedure
- The CG34 procedure was first introduced for individuals and trustees with effect from the start of self assessment, 1996–97, and the procedure has now been extended to companies with the commencement of Corporation Tax Self Assessment (CTSA). After three years' experience of the procedure it is now appropriate to consider how this is working in practice, identify any shortcomings in the practical aspects of the procedure and suggest ways in which the procedure can be improved.
- At the outset it is appropriate to state that the concept of the procedure is brilliant. If it works as designed, it should provide taxpayers with the facility to agree any valuation required for capital gains tax purposes in advance of submission of their SA Return and payment of the tax due to avoid the uncertainty of a later challenge to any value used in the computation. This, in turn, should remove the possibility of an increase in the gain calculated, the tax due and interest and surcharges which might otherwise arise. However, for the procedure to be effective, it must work within the time constraints imposed by the deadline for filing the SA Return, 31 January following the end of the year of assessment concerned. If the procedure is incomplete by that deadline, for whatever reason, it has failed the taxpayer who has chosen to use it.
- The CG34 requests a certain amount of basic information in respect of the disposal and the valuation(s) required. In addition to details of the valuation to be agreed, the taxpayer is required to submit a copy of any professional valuations obtained together with a computation of the capital gain considered to arise. The completed form CG34 together with the appropriate supporting computation, valuations etc. must be submitted to the district dealing with the taxpayer’s SA Returns.
- As indicated for the procedure to be effective, it must be completed efficiently. The first point of difficulty experienced in many cases is that the receipt by the district of the CG34, and supporting document(s), does not immediately start the valuation procedures. In fact, experience suggests that, on receipt, the district frequently takes no action, apparently being unsure what it should do. In many cases several months elapse before the necessary action is taken, e.g. refer the matter to Share Valuation Division (SVD) if the valuation required is of private company shares or to the appropriate District Valuer if a property valuation is required. It is submitted that this problem could bc overcome if each district were to have one or two dedicated officers who initiated the appropriate referrals immediately upon receipt of a form CG34.
- From the various cases dealt with in practice, it is not clear what information is forwarded on to the valuer, SVD or District Valuer, out of the detailed information submitted with the CG34. There would not appear to be any logical reason why information provided with the CG34 should not be forwarded in some form or other to the Valuer. Experience suggests that all relevant information is not being supplied to the valuer. For example, a report from a District Valuer which begins ‘I have assumed that the property was let at 31 March 1982’, when the computation submitted with the CG34 clearly showed that the property was owner occupied at 31 March 1982 is, to say the least, not helpful. Also, when this occurs five months after the CG34 was submitted to the district, it demonstrates an unacceptable delay in making progress. This sort of problem should be overcome if copies of all supporting documentation is sent to the valuers with the request to consider the value suggested.
- The writer’s main experiences of this procedure have related to property valuations and negotiations with District Valuers. The example referred to in (5) being the worst experience of the CG34 procedure. However, other aspects of that case demonstrate other shortcomings in the procedure from a practical paint of view. The professional valuation submitted with the CG34 was prepared by a national firm of valuers of the highest reputation. Their valuation at 31 March 1982 was in the region of £90,000. The District Valuer originally suggested under £20,000, clearly a ridiculous figure given the evidence submitted. Despite the time constraint on the submission of the SA Return, the District Valuer could not be persuaded to give the matter urgent attention, his view being he had three months to respond to any letter received, and neither did he accept that his first attempt was in anyway unreasonable. The value was ultimately agreed at a figure very close to the professional valuation submitted, but not until some time after 31 January. The extra time which had to be spent to resolve this matter was very considerable and should not have been necessary. A ‘sanity check’ between the two valuations should have resulted in the District Valuer’ questioning what he was proposing as the value and, hopefully, would have achieved the required agreement at a much earlier time. It is suggested that the Inland Revenue should agree with the Valuation Offices that valuations referred to them under the CG34 procedure should be given not only priority attention, but also appropriate care should be exercised to avoid the sort of problem highlighted above. It may be appropriate for the District Valuer to be given authority to discuss the value direct with the taxpayer’s tax adviser or property valuer before reporting back to the District where the District Valuer cannot agree the value submitted within a tolerance of, say, five per cent.
- Information obtained from colleagues suggest that the same problems of delay in districts arise where share valuations apply. Also, there is a considerable amount of time necessary to agree a share valuation with SVD, even where the submission to SVD is under the CG34 procedure. Frequently the valuation is not agreed by the deadline for submission of the SA Return.
- There appear to be conflicting statements within the Capital Gains Manuals with regard to the costs incurred by the taxpayer in using this procedure. In particular at CG16615, it states that the costs of obtaining a posttransaction valuation check, both those applicable to the original request and also those relating to subsequent negotiations, are not allowable in computing the gain or loss arising. This also implies that the costs of obtaining the valuation are not allowable. This appears to be confirmed by the last sentence in CG15261. However, the valuation submitted with the CG34 has only been obtained for the purposes of computing the capital gain, but is submitted early, as requested if the CG34 procedure is used, in order to agree the valuation in advance of submission of the Return. It seems that the costs of obtaining the valuation for the purpose of calculating the capital gain fall within the provisions TCGA 1992, s. 32(2)(b), and are therefore allowable, regardless of whether or not the CG34 procedure is used to agree the valuation in advance of submission of the Return. A clarification of the Revenue view would be helpful.
- If this procedure is to work effectively, then it must be given priority at all stages, as indicated in the Capital Gains Manual at 16608. It is easy to see how modest delays at each stage of the procedure can easily result in an unacceptable amount of time to complete the whole procedure. This can be broken down into the following individual steps:
(a) Receipt by district of form CG34 with all supporting documentation.
(b) Submission of request to consider value proposed to the District valuer or SVD as appropriate.
(c) Receipt by District Valuer, or SVD, of request to consider the value suggested, consideration of value suggested and report back to district.
(d) Receipt of report by district and advice to taxpayer, or tax adviser, of the value suggested.
It is submitted that at each stage of the procedure, priority attention is required to ensure that the objectives are achieved for the majority, if not all, of the taxpayers who choose to use this procedure to ensure certainty of their capital gains tax liability when submitting their SA Return.
- In order to provide taxpayers and tax advisers with some guarantee that the procedure will be operated with the necessary efficiency, we believe that the following should be adopted by the Revenue as standards of service which must be provided:
(a) all forms CG34 submitted must be acknowledged within six weeks from the date of submission, indicating the name of the officer within the district who is responsible for ensuring that the procedure is completed within a stated timescale, and
(b) if a form CG34, with all required information, is submitted by 31 July following the end of the tax year of disposal, the Inland Revenue will guarantee to deal with and respond to the valuation submitted by 31 December of that year, i.e. one month before the deadline for the submission of the relevant Tax Return. If this is not done, it should be agreed that interest and surcharges on any additional tax payable as a result of ‘late’ agreement of the valuation should not be charged.
The revenue’s response
We have now completed our consideration of the effectiveness of the Post Transaction Valuation Check service, and had the benefit of comments from our colleagues in Shares Valuation and the Valuation Office Agency.
A number of points made in your paper, ‘A review of the CG34 procedure,’ are consistent with our own findings. We already had plans to revise the guidance in the Capital Gains Manual and we will now be taking this forward in the light of our own findings and your comments and guidance to the officers in Shares Valuation and the Valuation Office Agency will be supplemented where required.
We propose to revise our guidance
- To emphasise more strongly that priority attention is to be given at all stages in the post transaction process and that any specific time references are to be treated as maximums rather than minimums or norms.
Of course it is fair to point out that there is always the possibility that particular circumstances may be present in an office which will make compliance with such guidance difficult and human error can never be ruled out, but we would expect to see a general improvement in the position overall.
- To indicate that a copy of the form CG34 must be attached to the valuation request sent to the valuer (a recent revision of form CG20, used for valuations of land sent to the District Valuer, already includes this requirement) together with any additional information supplied to the Tax Office.
- To indicate that the receipt of form CG34 should be
specifically acknowledged by the Tax Office.
You have referred to the question of the costs of obtaining a valuation and submitting a post transaction valuation check request on form CG34. I can tell you that we have already made arrangements to revise the guidance in paragraphs CG15261 and CG16615 to make the position clearer. I do not think the revised paragraphs have yet been published so I attach copies of the revised text for your information.
We are grateful for your interest and suggestions. We do not agree with everything you say, and some suggestions with which we might agree are not possible or practicable in current circumstances, but I can assure you that we are committed to making the service a success and will be keeping its operation under constant review.
The revised guidance
15261 The costs reasonably incurred in making any valuation or apportionment necessary for making a capital gains computation are allowable deductions. This applies whether the costs are incurred for the purposes of rendering a return or for the purposes of a post transaction valuation check (see CG 16615).
However, any expenses incurred after a valuation or apportionment has been made are not allowable as they are not incurred for the purpose of computing the gain. (Caton’s Administrators v Couch 70 TC 10). Disallowable expenses include the cost of resolving any disagreement between the taxpayer and the Revenue. This is so whether the disagreement is resolved by negotiation or litigation. In the latter instance, all costs of appeals (and contributions to such costs) will be disallowed.
Costs of negotiation
16615 The costs reasonably incurred by a taxpayer in making any valuation or apportionment submitted for a post transaction valuation check are allowable deductions but any costs incurred in actually making the submission or in furthering subsequent negotiations are not deductible in computing the gain or loss on the relevant disposal.
A fuller explanation of whether valuation costs are or are not allowable as deductions in computing a gains is given at CG 15261.
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