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Accountants should know better

Tax expert, Mark McLaughlin, highlights one reason why accountants must keep up-to-date with changes in legislation affecting their clients’ tax affairs

The tax world is fast-moving and complex. When it comes to filing tax returns (and generally), tax practitioners and unrepresented taxpayers have the unenviable task of keeping up-to-date with new legislation, relevant case law and changes in HMRC practice.

Errors in tax returns can arise for numerous reasons. For example, the taxpayer (or possibly their agent) may have been unaware of changes in tax law, resulting in incorrect tax return entries based on amended legislation.

Careless or deliberate

When it comes to deciding on an appropriate level of penalty where such errors result in tax underpayments, in most cases HMRC might be expected to conclude that the error was ‘careless’. However, anecdotal evidence from some practitioners indicates that in recent years, HMRC has been contending increasingly that tax return errors were caused by taxpayers’ deliberate behaviour, despite the errors arguably only being careless.

Most practitioners (if not taxpayers) will be aware that a deliberate tax offence is a more serious matter than a careless one, and can lead to prosecution. In other cases, deliberate behaviour could have various adverse consequences. 

For example, deliberate behaviour can have a significant impact on the level of penalties for tax return errors compared with carelessness (FA 2007, Sch 24, para 4). The ordinary time limit for a discovery assessment is four years after the end of the tax year to which it relates (TMA 1970, s 34(1)). 

However, if a discovery assessment is made to recover a deliberate loss of tax, the time limit is extended to 20 years (as opposed to six years for a careless loss of tax) (s 36 (1), (1A)). Certain penalties for deliberate behaviour (including tax returns errors) may result in the taxpayer being ‘named and shamed’ if the potential lost revenue exceeds £25,000 (FA 2009, s 94).

Taxpayers charged certain penalties due to their deliberate behaviour face the prospect of being placed in HMRC’s ‘managing serious defaulters’ regime, for a period of between two and five years.

What is ‘deliberate’?

The penalties legislation defines ‘careless’ behaviour as a failure to take reasonable care. By contrast, there are two categories of deliberate behaviour; ‘deliberate and concealed’, and ‘deliberate but not concealed’. The latter definition would probably apply in the context of most tax return errors resulting from a failure to keep up-to-date with changes in tax legislation.

HMRC seems to have a ‘black and white’ perception of deliberate behaviour. In its Compliance Handbook manual (at CH81150), HMRC states: 

“A deliberate but not concealed inaccuracy occurs when a person gives HMRC a document that they know contains an inaccuracy. It is not necessary to demonstrate that the person knew what the accurate figure was, only that they knew that the figure they put on the document was not accurate.”

However, in determining if a taxpayer’s behaviour was deliberate, it may be necessary to consider the taxpayer’s knowledge and capabilities. For example, in Auxilium Project Management Ltd v Revenue and Customs [2016] UKFTT 249 (TC) (a VAT case), the First-tier Tribunal commented: 

“The question is not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate. It is a question of the knowledge and intention of the particular taxpayer at the time.”

Ignorance of the law

In several cases, the tribunals have considered whether ignorance of the law is a reasonable excuse in a tax context. The conclusion in some cases has been that it can. 

For example, in Perrin v Revenue and Customs Commissioners [2018] UKUT 156 (TCC), the Upper Tribunal commented (in the context of ‘reasonable excuse’):

“It is a much-cited aphorism that ignorance of the law is no excuse, and on occasion, this has been given as a reason why the defence of reasonable excuse cannot be available in such circumstances. We see no basis for this argument. Some requirements of the law are well-known, simple and straightforward but others are much less so. It will be a matter of judgment for the First-tier Tribunal in each case whether it was objectively reasonable for the particular taxpayer, in the circumstances of the case, to have been ignorant of the requirement in question, and for how long.”

This comment suggests that it is not sufficient for taxpayers to bury their head in the sand. Indeed, in Clynes v Revenue and Customs [2016] UKFTT 369 (TC) (a VAT case), the tribunal commented: 

“Our view is that, depending on the precise circumstances, an inaccuracy may also be held to be deliberate where it is found that the person consciously or intentionally chose not to find out the correct position, in particular, where the circumstances are such that the person knew that he should do so. A person cannot simply escape liability by claiming complete ignorance where the person clearly knew that he should have taken steps to ascertain the position. We view the case where a person makes such a conscious choice not to take such steps with the result that an inaccuracy occurs, as no less of a ‘deliberate inaccuracy’ on that person’s part than making the inaccuracy with full knowledge of the inaccuracy.”

On that basis, it seems taxpayers who simply bury their head in the sand risk penalties based on deliberate behaviour if this results in a tax return error. However, does a failure to keep up-to-date with the tax legislation really amount to deliberate behaviour in this context?

Out of date

In Dolan v Revenue and Customs [2020] UKFTT 448 (TC), the taxpayer was a qualified accountant, but had not practised since 1997. On 9 July 2013, the appellant ceased to be a UK resident. He was unaware of the detailed tax rules on residency that applied in 2013/14, although he knew the rules that applied previously.

The taxpayer’s self-assessment return for the tax year 2013/14 included UK dividend income of £320,000 and stated that he was non-UK resident for that year. He did not tick the relevant box to confirm that his circumstances met the criteria for split year treatment (which it should have done as the amount of time the appellant spent in the UK during the year meant he did not satisfy the tests for automatic non-UK residence).

After HMRC opened an enquiry into the taxpayer’s self-assessment return for 2013/14, his representative stated that split year treatment applied and that the taxpayer received dividend income of £320,000 prior to leaving the UK in July 2013. HMRC considered the inaccuracy to be deliberate and the disclosure to have been prompted by their enquiry and considered a penalty percentage of 47.25% to be appropriate. 

The taxpayer appealed. The First-tier Tribunal found that the taxpayer did not know he should have taken steps to ascertain the correct tax position as he was under the mistaken belief that he already knew the correct position. As the taxpayer had not knowingly provided HMRC with an inaccurate document, the tribunal did not find the tax return error to have been deliberate.

However, the taxpayer had not checked the return or sought up-to-date professional tax advice before submitting the return. This did not meet the standard of a prudent and reasonable taxpayer, so the error was careless. The penalties were reduced accordingly.

Accountants, prepare for battle

In view of HMRC’s apparent inclination towards contending deliberate rather than careless behaviour in arguable cases, it seems that taxpayers and practitioners will need to be prepared to challenge such assertions about tax return errors, where appropriate. 

This can yield positive results in the right circumstances. For example, in Scott v Revenue and Customs [2016] UKFTT 599 (TC), the tribunal held that penalties for the under-declaration of income in the taxpayer’s tax return should be calculated by reference to careless and not deliberate behaviour.

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