The recent First-tier Tribunal decision in Hanson v CIR is thought-provoking. It’s about penalties where a person’s tax return is wrong because of an error made by someone on whom the person was relying. In the case in question, the taxpayer was told by his accountant, a general practitioner, that he could claim a particular tax relief (though in fact he didn’t fulfil the criteria); relying on that advice he claimed it; HMRC enquired, found that the relief was not available and invited the client to pay a penalty of around £14,000. The nub of the case was the question whether the client had fulfilled his statutory duty to take “reasonable care” to avoid inaccuracy in his return. If he had, no penalty was exigible.
The Tribunal held that unquestioning reliance on an accountant isn’t taking “reasonable care”. So (for example) missing off sources of income or gains is likely to be culpably careless even if you’ve told your accountant about all of them and it’s your accountant’s fault they were left off – you are expected to do what checks you reasonably can and even a layman can count how many sources of income he has. But if you ask your accountant if you’re entitled to a tax relief and he says you are, you’ve probably taken reasonable care. We say “probably” because we can envisage that if you are told something which is inherently unlikely you would probably be expected to double-check there had been no misunderstanding and a failure to do so would probably be unreasonable.
This raises interesting questions about unscrupulous advisers being tempted to tell clients what they want to hear, on the premise that, should HMRC enquire, the client would be protected from penalty by the adviser’s confessing to his own carelessness. Although there is absolutely no suggestion whatsoever that this happened in the Hanson case or that the accountant in that case deliberately claimed a relief to which the client wasn’t entitled, 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. There is of course a separate penalty provision at TMA 1970 s99 which covers “knowingly incorrect” returns but this is something of a “nuclear option” for HMRC and the burden of proof is heavy: there is a world of difference between filing returns knowing them to be incorrect and mere carelessness (even habitual carelessness). 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; a lacuna which must be galling to HMRC.
Or is there?…
The penalty provisions at FA 2007 sch24 apply where a person (“P”) “gives HMRC a document” which understates tax because of an inaccuracy which is attributable to P’s carelessness. It does not, in terms, say that the understatement in question has to be of P’s own tax. So there seems no legal reason why an accountant whose carelessness leads to a loss of tax on the part of a client could not be issued with a penalty notice under the usual rules. We have not seen it happen yet but few would bet against it. So the “get out of jail free” card afforded by Hanson may yet prove to be something less than the unqualified benefit it appears to be…