HMRC demand Receipts for machinery

jkilner

Hello
For many years, as a hobby I have made miniature cabinets.
My machinery has been purchase over several years and the few receipts I had have been thrown away as they were not guarantees and of no use or value.
After several years I began selling my cabinets and was concerned the hobby was now a business. After taking advice from the HMRC I declared my new business together with the assets (woodworking machinery) and submitted yearly tax returns.
My tax returns were submitted and in the third year I received a small refund against the machine value.
The HMRC have now two years later asked for receipts for the machinery purchased.
I have explained the receipts were no longer available for the above reasons. When I disposed of the receipts I did not believe I would need them for tax purposes. Despite attempting to contact a few sellers via old emails I have not been successful in obtaining any receipts.
I offered the HMRC to come to view the machines with no response
I photographed all machines showing a copy of their correspondence to confirm they were “real”. I attached the purchase price and the considerably higher replacement value.
The HMRC have responded with what I deem to be aggressive threats and they have dismissed all my offers to provide them with an acceptable value (purchase not replacement). They consider my efforts to demonstrate the value as irrelevant.
I am frankly worried and would appreciate any advice on how to progress with the brick wall the HMRC has built
Thanks in advance

Pennywise

So, you've brought some old, effectively second hand equipment into the business start up and are trying to claim tax relief on the original cost of it? You should have introduced them at their depreciated second hand value. I can't imagine that they'll have held their value from purchase nor gone up in value since purchase.

Just how many years is it between you buying this stuff and starting up the business?

HMRC don't need to see the invoice. They can ask for proof of purchase. If you've bought this stuff online, then you should be able to find old emails etc confirming the purchase - that's adequate proof of purchase. If you bought some via a credit card, you can produce the credit card statement as proof of purchase.

The HMRC inspector obviously doesn't believe the amount of your capital allowances claim for this equipment. That's his right and you have to provide adequate proof as to the existence, your legal ownership of it, and it's value.

Completely unrealistic to expect HMRC to come and look at the equipment. Why would they waste their time and money? Is it even proof - you could have borrowed it from someone else. It's up to you to prove purchase and to prove market value when introduced to the business.

Not sure how it could have caused a tax refund in year 3. The value of the equipment should have been brought in on day 1, so you should have been claiming capital allowances from year 1 onwards. It's only writing down allowance you can claim, so that's 18% p.a. against profits on a reducing balance basis. Was your income so much lower in year 3 than year 1 to cause this loss.

Unfortunately, this whole episode doesn't make sense from the data provided. You need to be a lot clearer as to what's gone on etc to get any useful advice here. Alternatively, probably a good time to engage an accountant to help you sort this out.

dori2o

Pennywise wrote: »

So, you've brought some old, effectively second hand equipment into the business start up and are trying to claim tax relief on the original cost of it? You should have introduced them at their depreciated second hand value. I can't imagine that they'll have held their value from purchase nor gone up in value since purchase.

Just how many years is it between you buying this stuff and starting up the business?

HMRC don't need to see the invoice. They can ask for proof of purchase. If you've bought this stuff online, then you should be able to find old emails etc confirming the purchase - that's adequate proof of purchase. If you bought some via a credit card, you can produce the credit card statement as proof of purchase.

The HMRC inspector obviously doesn't believe the amount of your capital allowances claim for this equipment. That's his right and you have to provide adequate proof as to the existence, your legal ownership of it, and it's value.

Completely unrealistic to expect HMRC to come and look at the equipment. Why would they waste their time and money? Is it even proof - you could have borrowed it from someone else. It's up to you to prove purchase and to prove market value when introduced to the business.

Not sure how it could have caused a tax refund in year 3. The value of the equipment should have been brought in on day 1, so you should have been claiming capital allowances from year 1 onwards. It's only writing down allowance you can claim, so that's 18% p.a. against profits on a reducing balance basis. Was your income so much lower in year 3 than year 1 to cause this loss.

Unfortunately, this whole episode doesn't make sense from the data provided. You need to be a lot clearer as to what's gone on etc to get any useful advice here. Alternatively, probably a good time to engage an accountant to help you sort this out.

Just to add, whilst they could come and look at the equipment, they would then need the expertise to put a value on the machinery.

Now there are many in HMRC, like me, who came from outside trades before joining (I am a sheet metal worker by trade), but in order to put a value on the 2nd hand/depreciated value then they'd have to have an experts view on how expensive these machines are, their importance to the skillset of the trade, and as such then determine the value as a second hand/depreciated item.

AS PW says if you paid for these machines with a credit/debit card, money transfer via your bank, paypal etc then you should be able to get the information from old bank/credit card statements/paypal purchase history.

If you paid in cash, then unfortunately it limits your options.

laticsforlife

Some things not mentioned;

No you generally don't need to keep receipts for longer than 6 years, but it is fair to have to keep them if you want to make some kind of long-term claim (like you have now).

I do suspect you've made a mistake in what you claimed, as to make a loss using Capital Allowances must (as the other posts suggest) mean a lot less income or a wrong high value in your accounts.

If you give a bit more detail we can advise what you should have been claiming, and you should then be a bit more knowledgeable when approaching the Inspector in your enquiry.

If you don't they will simply have no choice but to disallow the lot, and it'll be up to you to prove it at Tribunal (in 18 months time!), and without invoices you are already on the back-foot.

jkilner

laticsforlife - Thanks for the positive reply.
The main issue I have is the HMRC demanding the receipts. The machine value claimed is not in question but the proof of what and when I paid.
I have been more than honest with them and yes, all the machines were bought for Cash and when I purchased them I had no intention to start a business and equally no need to keep receipts.
I have correspondence with several of the sellers when I contacted them for viewing (which I can produce) but no follow up email sale records.
Please remember I purchased these machines for a hobby with no intention of opening as a business. Unfortunately as I now sell the cabinets I produce, I was deemed a business, despite making miniscule profits each year.
I have attempted to contact via email several of the sellers however they are either ignoring me or no longer using the address I am using.
I really do not know what else I can do. The key is that I have the machines, they have a value. ( which, due to the quality of machine has dropped very little).
I cannot be the 1st to have either destroyed receipts or lost them. Surely with all I have done and offered to do, the HMRC must have some facility to compromise? They seem to be completely inflexible.

laticsforlife

It may seem inflexible, and actually I'd warrant you might have a good reasoned argument at Tribunal, if you can prove ownership, value and usage.

Are you saying you brought into your accounts the second-hand value of the machinery when you started the business, as if you did then all I can see that you have to do is prove that valuation (and that you do actually own the stuff, which you say you've done).

Were only hearing one side but you do seem to be being reasonable, and the line 'They consider my efforts to demonstrate the value as irrelevant. ' seems just wrong to me, as it is exactly the value when you brought them into use in your business that matters, not what you paid for them.

dori2o

These's still information needed in order to give the best advice.

What did you pay for the machines?
How old where they when you paid for them?
What is their cost as new.

How long a period of time had passed between buying the machines and 'bringing them into the business'?

In your OP you make reference to the cost you paid for them and the cost to replace them? Exactly what amount have you shown on your tax return for the machinery and how did you come to that value? and how have you shown this value (i.e. have you shown the Writing Down Allowance or have you tried to claim it as Annual Investment Allowance?)

Finally, you say this is in the 3rd year, why has a refund situation happened in the 3rd year, has the income from the business dropped in this year? have you made a loss that you have carried back/offset against other income?

The answers to these questions will help gauge the situation as HMRC see it.

Marktheshark

If they were bought personally, then sell them to the business.
Write receipts, your own property is now an asset of the business.
Think of the business as a third party and you as an employee.

jkilner

dori2o
Thanks for the reply
I am confident that the values I claimed are realistic and are not the original price I paid. I could actually sell most of the equipment at a profit as I negotiated really favourable prices second hand.
It may be hard to understand however, the value of my high quality machines will depreciate little over the coming years as direct replacements are no longer well made or in some cases even available.
Replacement costs where available are far far higher.
My issue is how to persuade HMRC that the values I submitted are acceptable although receipts are no longer available. Until I get over this hurdle I am stuck.
What annoys me is that I was happy to be a hobby but to fund the expensive timber and fittings I now sell several cabinets each year. HMRC deem me a business.

dori2o

jkilner wrote: »

dori2o
Thanks for the reply
I am confident that the values I claimed are realistic and are not the original price I paid. I could actually sell most of the equipment at a profit as I negotiated really favourable prices second hand.
It may be hard to understand however, the value of my high quality machines will depreciate little over the coming years as direct replacements are no longer well made or in some cases even available.
Replacement costs where available are far far higher.
My issue is how to persuade HMRC that the values I submitted are acceptable although receipts are no longer available. Until I get over this hurdle I am stuck.
What annoys me is that I was happy to be a hobby but to fund the expensive timber and fittings I now sell several cabinets each year. HMRC deem me a business.

You haven't answered any of my questions and therefore I can't provide any further assistance.

If you want help on a forum (i.e. free advice) then you have to be more forthcoming with the facts as none of us can see what you have submitted and have very little information to go on.

If you're unwilling to provide additional information that more than one person has asked for, then may I suggest you acquire, and pay for, the services of an accountant.

jimmo

It seems to me that you have got off to a bad start with HMRC and whilst you think you are being more than reasonable, so too does the HMRC Enquiry Officer think the he or she is being reasonable. If the two of you can’t find some common ground the Enquiry will drag on and on at least until you end up facing each other at a First Tier Tribunal. If that’s the way its going to be I would really urge you to get professional advice sooner rather than later, particularly if you have no experience of appearing in court.
With regard to what you have posted on here, first and foremost, HMRC have not deemed you a business. You have done that. You make cabinets and sell them. That is trading and you are assessable to Income Tax on any profits you realise.
Secondly the fact that your trading activities has generated a tax refund can only mean that you declared a trading loss and also claimed to set that trading loss against your other taxable income.
You can only claim to set trading losses against other income where the trading loss arises from a business which is run on a commercial basis with a view to making a profit.
http://www.hmrc.gov.uk/manuals/bimmanual/BIM85015.htm
So, under Self-Assessment, you have claimed loss relief, effectively telling HMRC that your cabinet making business is a commercial enterprise but telling this forum it is a hobby.
Turning now to your Capital Allowances claims it is probably important for you to recognise that the purpose of the legislation is to take account of depreciation and, if your machinery is not depreciating that quickly you will end up with a Balancing Charge when you either sell the machinery on or close your business.
http://www.hmrc.gov.uk/manuals/camanual/CA23240.htm
I suppose that getting the maximum benefit out of capital allowances (and accepting the risk of a balancing charge in the future) is good practice for full time workers but do you really need to go there?
And finally, what you paid for your machinery is important. In situations such as yours Capital Allowances are limited by the price you actually paid.
http://www.hmrc.gov.uk/manuals/camanual/CA23030.htm
For a hobby business I really can’t see why this has become so complicated. You really need to think about where you are going with this.