Mr Glucose is a director and owns the entire share capital of two companies, Industrial Cider Limited (ICL) which manufactures industrial cider, and Glucose Properties Limited (GPL) which owns various let residential properties.
Mr Glucose has engaged Brown, Jones and Smith LLP, Chartered Accountants (BJS) to prepare the companies’ accounts and to audit them, to act as his own and the companies’ tax agents and to ‘provide taxation advice on request from time to time’ in respect of his own and the companies’ affairs. Accounts are made up to 30th April in each year.
On 1st January 2009, Mr Glucose invests £900,000 in ICL and claims enterprise investment capital gains tax deferral relief on his investment under TCGA 1992, s 150C.
From 1st August 2009, ICL employed Mr Glucose’s son, Carbon, for one month during his first vacation form university as a marketing consultant paying him £5,700, an amount which was chosen as being just below the earnings threshold.
On 1st December 2009, Mr Glucose telephoned Mr Brown of BJS for advice in respect of a proposal that GPL should sell (‘the property transaction’) a building (the ‘property’) to Mr Glucose for £1 million.
He asked to be advised whether the property transaction would have to be disclosed in GPL’s accounts and if there would be any adverse tax consequences in respect of it. He was advised that the transaction should be disclosed and that, if the selling price was less than the market value of the property, there would be a benefit in kind charge under ITEPA 2003, s 206.
On the 30th January 2012, HMRC opened an enquiry into Mr Glucose’s return for 2009/10 and in the course of that enquiry the Valuation Office arrived at a final value for the property at the date of the property transaction of £1,200,000. the inspector issued a closure notice assessing a benefit in kind of £200,000 and a capital gain of £900,000 accruing under TCGA 1992, Sch 5B para 4 on the basis that the sale of the property by GPL to Mr Glucose at an undervalue was a return of value within Sch 5B para 13(2)(g), treated as having been made by ICL by reason of Sch 5 para 13 (10).
He therefore increased Mr Glucose’s income tax assessment by £80,000 ((£1,200,000 – £1,000,000) @ 40%), and raised a capital gains tax assessment of £162,000 (£900,000 @ 18%). The inspector also raised a penalty for the careless error in the tax return of £72,600 ((£162,000 + £80,000) @ 30%).
Mr Brown of BJS, having considered the inspector’s letter, rang Mr Glucose, explained the assessment to him and admitted that he had overlooked that, if it took place at an undervalue, in addition to being a benefit in kind the property transaction would also be treated as a return of value by ICL leading to a clawback of all of the EIS deferral relief claimed within the previous three years. He advised Mr Glucose that he might be able to avoid the capital gains tax charge by replacing an amount equal to the undervalue of £200,000 in the company.
Mr Glucose’s solicitors subsequently issued proceedings for breach of contract and negligence claiming damages on the basis that BJS were engaged to provide taxation advice on the consequences of the property transaction, their advice was negligent, that Mr Glucose had relied on that advice in taking the decision to proceed with the property transaction, that he would not have proceeded had correct advice been given and that he had suffered damage of £314,00 (£162,000 + £80,000 + £72,600) plus interest as a consequence.