It’s hard to decide whether the First-tier Tribunal (‘FTT’) case of H & H Contract Scaffolding Ltd v HMRC [2024] UKFTT 151 (TC) displays mere carelessness or deep incompetence.
Not, we hasten to add, on the part of the taxpayer, but on that of HMRC, whose submission was described by the FTT, somewhat charitably, as ‘a confused document’.
H & H Contract Scaffolding Ltd (‘H & H’) had made a claim to R&D tax relief, using the services of a specialist adviser. It appears that, unbeknown to the company, the claim was not well-founded. HMRC sought to levy a penalty on the basis that the inaccuracy in the company’s tax return was attributable to the company’s carelessness.
H & H’s case set out its defence very clearly. It had used what it had reasonably believed to be a reputable and competent specialist R&D claims company which had exhibited at events organised by the scaffolding industry’s trade association and which had experience in acting for companies in the industry. H & H had provided full and accurate facts to the claims company and had checked the advice as far as was possible, having regard to the fact that this was a specialist and complex area. Unless there was an error obvious to a layman, it was reasonable to rely on the advice.
The FTT records that HMRC’s Statement of Response (‘SOR’) ‘asserts that the burden of proof is on [HMRC] to show that the penalty has been correctly calculated and that the burden then shifts to [the Company] to demonstrate that a “reasonable excuse” exists for the default. Secondly, the SOR asserts that reliance on a third party does not constitute a reasonable excuse and therefore [HMRC] do not accept that [the Company] has such a reasonable excuse.’
This displays truly astonishing ignorance of the law on the part of HMRC on both points.
First, if HMRC seek to charge a penalty, it is for HMRC to demonstrate that the taxpayer has been careless, not for the taxpayer to demonstrate that he hasn’t. For completeness we should add that there has been, since 2017, a rebuttable presumption of carelessness where tax avoidance is involved, but there is no suggestion that that applied in this case. ‘Reasonable excuse’ has nothing to do with it: either HMRC can demonstrate that the taxpayer has failed to exercise reasonable care or they can’t.
Second, relying on the advice of a professional adviser does not necessarily bespeak carelessness. On the contrary: demonstrating that you have acted upon the advice of a qualified and ostensibly competent professional is usually a strong indicator that you have taken reasonable care to get your tax right.
Inevitably, HMRC lost this case: they had simply produced no evidence to show that H & H had been careless; HMRC’s reliance on the mere existence of the inaccuracy as proof of carelessness got them nowhere.
Before this case got as far as the FTT, it will have passed through the hands of a number of officers at HMRC. We are entitled to ask – did none of them have a clue about the law in this area? If not, why not?
For more information about HMRC enquiries or R&D tax relief, please get in touch with your usual BKL contact or use our enquiry form.
