Tribunal rejects Revenue's claim that taxpayer has a duty to verify professional advice

6 September 2012

The First-Tier Tax Tribunal's decision in the recent case of Hanson v HMRC is provoking professional comment.

In the case, the taxpayer submitted a tax return completed by his accountants, Clarke Broome Fleming (CBF). The return claimed capital gains tax (CGT) relief on the sale of loan notes Hanson had received as part of the consideration for selling his business.

Later, HMRC launched an enquiry into Hanson's affairs. It found that he was not entitled to this relief, and duly required him to pay the extra CGT. However, it also decided that he had not taken ‘reasonable care’ when submitting his return, and imposed a further penalty of GBP14,000 on him.

Hanson appealed against the penalty on the natural grounds that the statutory phrase ‘reasonable care’ could not entail checking that his accountants had given him sound professional advice. HMRC defended its position on the basis that an error by an advisor was still the responsibility of the taxpayer.

‘HMRC's argument was extended as far as an assertion that it was the taxpayer's responsibility to ensure that the advice he had received was correct,’ commented George Bull, Senior Tax Partner at Baker Tilly.

The tribunal judge, Jonathan Cannan, found for the taxpayer, who himself had taken reasonable care even though it was now clear there had been carelessness on the part of the accountancy firm.

Cancelling the penalty, Cannan noted that Hanson had instructed a reputable firm of accountants who had acted as his accountants for many years. ‘The matters on which he instructed them were ostensibly within their expertise. He had no reason to doubt their competence or their advice that relief was available. They were in possession of all relevant facts. In the circumstances of this case the appellant was entitled to rely on CBF's advice without himself consulting the legislation or any guidance offered by HMRC’ (Hanson v Revenue & Customs, 2012 UKFTT 314 TC).

However, the judge did not give a blanket get-out-of-jail-free card to all taxpayers who take professional advice. Clients must ensure they make sure what they are signing is correct, at least within their own ability and competence: ‘An ordinary person cannot be expected to challenge specialist professional advice on a complex legal point. But they ought to be able to recognise the complete absence of a major transaction.’

‘As things stand there appears to be no provision for anyone to be charged penalties if an accountant makes a merely careless error which results in understatement of a client's tax liabilities,’ noted experts at BKL Tax. ‘It would appear that a client would in many cases be off the hook for penalties even if the accountant habitually made errors in the client's favour.’

This loophole must be galling to HMRC, commented BKL, though in principle there are other provisions it could try to use. These include Taxes Management Act 1970 s99 which covers ‘knowingly incorrect’ returns, and the penalty provisions of Schedule 24 of the 2007 Finance Act.

 

Sources

 

BAILII

BKL Tax

 

 


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