Ancient Greeks sought guidance from the Delphic oracle. Unfortunately, her guidance was on occasion notoriously difficult to interpret.
Ironic, therefore, (or perhaps appropriate) that the First-tier Tribunal case of Delphi Derivatives Ltd [2023] UKFTT 722 (TC) was essentially about how advice (this time given by a tax adviser of impeccable credentials rather than by a middle-aged priestess high on fumes) was to be construed.
The judgement extends over 76 pages and 270 paragraphs. Although it ranges widely, the key point is a simple one. And the decision is potentially worrying.
The company entered into a tax scheme which turned out not to work. As a result, the company’s tax returns proved to be incorrect. HMRC charged penalties on the basis that the inaccuracy in the returns had been attributable to carelessness – that is, failure to take reasonable care to secure that the returns were accurate.
The company had (wisely) not relied upon the advice given by the scheme promoters. It had asked another accountant (who had no axe to grind and who charged a proper fee for his advice) what he thought.
The chosen adviser, Mr Peter Tucker, was more than merely competent. A Chartered Accountant and Chartered Tax Adviser (‘CTA’), he had been specialising in tax for 30 years and was a member of the Council of the Institute of Chartered Accountants in England and Wales (‘ICAEW’) and of the Tax Committee of its Tax Faculty. He had previously been consulted by the company on other schemes and advised that they be rejected – advice which the company had followed. Neither a lightweight nor a hired gun, then.
As you would expect, Mr Tucker looked into the scheme very carefully and obtained sight of copious documents including the Counsel’s opinion provided to the promoters by the eminent Andrew Thornhill KC.
Mr Tucker was not prepared to say that the scheme was a copper-bottomed dead cert. Nor was he prepared to say that it was a non-starter. He identified a number of possible areas of risk. The overall evaluation was that ‘Whilst the scheme seems to be most effective any aggressive tax planning will always be open to attack from HMRC’ and the conclusion was that ‘This scheme appears to have a stronger chance of success than many more convoluted schemes’.
Mr Tucker could have left it there; but, being a cautious man, he added: ‘considering the amount you may wish to place in these arrangements I would recommend that the matter be put before Independent Tax Counsel.’
All in all, the advice was such as one would expect to get from a person of Mr Tucker’s credentials. Indeed, the FTT commended it as ‘thorough in its scope, professional in its recommendations, clear and concise in naming the risks, sagacious in delineating the extent of endorsement, and befitting as a letter of this nature for which Delphi would have been charged a fee to obtain the advice’.
Quite. So why was the company found to have failed to take reasonable care?
HMRC latched on to the fact that Mr Tucker had not unequivocally endorsed the scheme but had identified a risk that it might not work and had recommended seeking Counsel’s opinion. The company had failed to follow that advice and had therefore failed to do what a prudent and reasonable taxpayer would have done.
The FTT agreed. It’s worth reproducing their exact words:
The question for the Tribunal is what a prudent and reasonable taxpayer – intent on fulfilling its obligations to render accurate returns to account for all its tax liabilities – would have done when faced with such advice as given by Tucker by letter dated 7 August 2008 which concluded with an unambiguous lack of endorsement of the Scheme due to the certainty of a risk in being found to have underdeclared its tax liabilities.
The substance of Tucker’s advice and his conclusion demands a response from a prudent and reasonable taxpayer intent on meeting its obligations to render correct returns to account for its tax liabilities – but the appellant did nothing in response whatsoever. It is in this regard that we conclude that the appellant fell short of the standard of being a prudent and reasonable taxpayer by taking no action to address the possible areas of risk raised in Tucker’s letter in order to enable itself to meet the obligations in rendering accurate and complete returns to account for all its tax liabilities.
Whilst one obvious action to take by a prudent and reasonable taxpayer on receiving Tucker’s advice would be to obtain independent counsel’s opinion as recommended, that was by no means the only response open to Delphi on receiving Tucker’s advice. For the avoidance of doubt, we conclude that the appellant had failed to take reasonable care to avoid inaccuracy not because it did not obtain independent counsel’s opinion per se, but because it took no action whatsoever to address the certainty of a risk (namely the Scheme failing and tax liabilities owing) that was cogently explained and plainly stated in the advice letter of 7 August 2008.
That’s all very well: but the FTT fails to set out what exactly the company should have done. Even assuming that the promoters would have been prepared to disclose full details to independent tax counsel, it’s highly unlikely that Counsel would have given any more certainty as to success or failure than Mr Tucker had given. And, if not Counsel, what other ‘action to address the certainty of a risk’ could the company reasonably have taken?
The fact is that it is seldom if ever possible for a competent and conscientious tax adviser (or Counsel) to sign off that any tax avoidance strategy is bound to succeed. It’s a source of understandable irritation to clients that the best that can honestly be said is often ‘it’s got a better-than-average chance of working but there are reasons why it might not’. But tax returns are binary: they have to be made on the basis either that the scheme works or that it doesn’t, so the poor taxpayer is obliged to jump one way or the other.
It is to be hoped that HMRC will resist the temptation to interpret the Delphi decision as giving carte blanche to impose penalties in every case in which returns are filed on the basis of professional advice falling short of unconditional endorsement.
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