This is the concluding part of our trilogy looking at aspects of the decision of the First-tier Tribunal (‘FTT’) in James Keighley and Primeur Ltd v HMRC [2024] UKFTT 30 (TC). (If you missed them, Part One and Part Two are available here.) In this note we look at how (and whose) ‘carelessness’ was relevant to the outcome.
Recap: Primeur Ltd (‘Primeur’) filed tax returns which incorrectly claimed tax relief on amounts written off on the failure of an associated company to pay its debts.
There are often consequences to the filing of incorrect tax returns involving the assessment of the tax underdeclared and the imposition of penalties.
Once the period within which HMRC may open an enquiry into a tax return has expired (as it had in this case) tax may be assessed only if certain conditions are fulfilled. One of the conditions (there are alternatives) is that the understatement of tax has been brought about by the carelessness (or deliberate behaviour) of the taxpayer or ‘a person acting on behalf of’ the taxpayer.
Primeur had had advice from a well-known firm of accountants. Unfortunately, the firm’s report completely failed to identify, much less report on, the particular provision (the ‘unallowable purpose’ rule) which denied Primeur relief for the amount written off. The FTT considered that ‘The objectively prudent and reasonable adviser which found itself in the position of [the firm], with [the firm’s] expertise and experience, would have considered unallowable purpose in the context of the proposed loan repayments, and would have reflected that consideration in its report.’
On that basis, the FTT held that the loss of tax had been brought about by ‘a person acting on behalf of’ Primeur with the result that the tax could be assessed.
However, case law has established that ‘acting on behalf of’ connotes something more than merely giving advice. It means:
“…a person who takes steps that the taxpayer himself could take, or would otherwise be responsible for taking. Such steps will commonly include steps involving third parties, but will not necessarily do so. Examples would in our view include completing a return, filing a return, entering into correspondence with HMRC, providing documents and information to HMRC and seeking external advice as to the legal and tax position of the taxpayer. The person must represent, and not merely provide advice to, the taxpayer” (Trustees of Bessie Taube v HMRC [2010] UKFTT 473, endorsed by the Upper Tribunal in HMRC v Hicks [2020] UKUT 0012)
It’s perfectly possible (indeed, likely) that the firm’s relationship with Primeur was such that (in addition to giving – or failing to give – advice on the loan relationship matter) it was generally ‘acting on behalf of’ Primeur. But the failure of the FTT to identify the requirement (and to consider whether it was so acting when it gave the flawed advice) is a curious omission which may vitiate the FTT’s decision if there were to be an appeal to the Upper Tribunal.
Carelessness is also relevant to the question of penalties. A taxpayer is liable to a penalty if a document containing a careless inaccuracy is given to HMRC by the taxpayer or on the taxpayer’s behalf. But (in contradistinction to the position as regards assessing) a taxpayer is not answerable for the carelessness of an agent if it can be shown that the taxpayer ‘took reasonable care to avoid inaccuracy’.
The FTT considered that Primeur ‘was party to advice given by a highly reputable firm of accountants and was entitled to rely on that advice. That advice was that it could take a tax deduction as aforesaid, which the company then did in its tax returns.’ That the advice had been wrong, even negligently wrong, was irrelevant: Primeur had taken the reasonable care required of it by the law. It had not acted carelessly, and no penalty was due.
So, in summary, careless as regards assessing but not careless as regards penalties.
For more information on business tax, the loan relationship rules or how to respond to an HMRC enquiry, please get in touch with your usual BKL contact or use our enquiry form.
