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September 4, 2014
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Testing the Evidence for Property Income – Stembile Chinyanga v HMRC (TC03643)

Facts of the Case

Mrs Chinyanga took out a mortgage to buy a property.  The ground floor of the property was let by her to a company of which she was a joint shareholder.  The company carried on a nursery business from the ground floor.

The initial plan had been for the company to obtain a mortgage for it to buy the property, but the building society had refused a loan to the corporate.  So it had been purchased by Mrs Chinyanga personally.

In 2008 a simple agreement was signed between the company and Mrs Chinyanga for annual rent for the ground floor of £18,500.  However, after discussions with her co-shareholder, Mrs Chinyanga agreed for lower payments of rent to be made by the company as the nursery business was not performing as expected.

First Tier Tribunal Hearing

HMRC had assessed Mrs Chinyanga to income from UK property based on profit derived from an annual rent of £18,500 (as set out in the original agreement).

In the Tribunal hearing, to complement this, HMRC also argued that any rent that was detailed in the agreement which had not been settled was not a bad debt, but that it was still due.  If there was a bad debt it was not an expense incurred wholly and exclusively for Mrs Chinyanga’s property business because it was to prop up the nursery business.

The Tribunal found that if the only evidence had been the initial agreement then they would have held that the rent due was that as set out in the Agreement.

However, all the other evidence available (notes of meetings, payments made and correspondence re mortgages) convinced the Tribunal that the real agreement was that Mrs Chinyanga would receive enough cash to break even each month.  This was because the property had in essence been purchased for the purposes of the nursery business.

Therefore the Tribunal discarded the written Agreement and the taxpayer was successful in their appeal.

Had the written agreement accurately reflected the terms of the deal then it seems unlikely that this would have progressed to tribunal.  So whilst the case went in the taxpayers favour it also highlights the need for accurate and up to date documentation - particularly where the parties are connected.

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