Tax Update - 10 September 2012

1. General news

   1.1. HMRC compliance checks

   HMRC has published a series of factsheets to help taxpayers understand compliance checks. These factsheets provide an overview of the main stages of a compliance check.

   www.hmrc.gov.uk/compliance/factsheets.htm

   1.2. Tackling tax avoidance

   HMRC has issued a brief on tackling tax avoidance. This indicates the tax gap (the difference between what is owed and what is collected) is around £35bn. It includes a section defining tax avoidance as follows:

   "Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law.

   Tax avoidance is not the same as tax planning. Tax planning involves using tax reliefs for the purpose for which they were intended. For example, claiming tax relief on capital investment, saving in a tax-exempt ISA or saving for retirement by making contributions to a pension scheme are all legitimate forms of tax planning. While such actions may reduce the total amount of tax paid, they are not tax avoidance, because they involve using tax reliefs in the way that Parliament intended when it passed the relevant legislation.

   A small proportion of taxpayers actively seek opportunities to avoid paying tax, and promoters of avoidance schemes often market them with promises of large savings and underplay the risks. HMRC relentlessly challenges tax avoidance and has a highly-successful record of defeating avoidance schemes in the courts.

   Taxpayers who enter into tax avoidance schemes can face years of uncertainty and cost as HMRC takes them through the courts, and run a high risk of having to pay the tax plus interest in the end.

   If a scheme relies on concealment or providing false information to us, it will amount to tax evasion and may attract serious sanctions, ranging from financial penalties to a criminal conviction."

   www.hmrc.gov.uk/about/briefings/briefing-avoidance.pdf

2. Private Clients

   2.1. Penalties and negligence of professional adviser

   In the case of Waseem Shakor (TC02208) the First-tier Tribunal considered whether negligence of a professional adviser was attributable to the taxpayer.

   Mr Shakor had disposed of properties at a profit but no capital gains were reported on the tax return, apparently on the advice of his accountant. HMRC subsequently imposed a penalty of 70% and Mr Shakor appealed.

   Mr Shakor gave evidence that he had queried why the gain was not reported on his tax return and his accountant told him the disposal was exempt and therefore did not need to be reported. The tribunal considered the decisions made in other cases as follows:

5. Mr Maas also made reference to the decision of the Tribunal in AB v HMRC [2007] STC (SCD) 99, a case involving complicated facts concerning the deductibility of various expenses when computing profits. However, for our purposes the case also involved the issue of penalties in respect whereof the Tribunal (Sir Stephen Oliver QC and Dr. N. Brice) held that:

   "105. We are of the view that the question whether a taxpayer has engaged in negligent conduct is a question of fact in each case. We should take the words of the statute as we find them and not try to articulate principles which could restrict the application of the statutory words. However, we accept that negligent conduct amounts to more than just being wrong, or taking a different view from the Revenue. We also accept that a taxpayer who takes proper and appropriate professional advice with a view to ensuring that his tax return is correct, and acts in accordance with that advice (if it is not obviously wrong), would not have engaged in negligent conduct."

6. We consider the approach taken in AB to be the correct approach. A taxpayer is only liable to a penalty if he has been negligent. There are few who would gainsay the proposition that tax law can be complicated and difficult for taxpayers to understand and, thus, it is only to be expected that, from time to time, taxpayers will resort to professional advice. The purpose of resorting to professional advice is that one normally expects to be able to rely upon it, whether that professional advice is taken from a lawyer, an accountant or a medical practitioner. We consider it difficult to understand how a taxpayer can be negligent if, perceiving the need forprofessional advice on a matter of difficulty or in a situation where the taxpayer is in doubt as to the proper approach to be taken, he then seeks, and relies upon properly considered professional advice.

7. In our judgement, if the advice of a professional, in the sphere of tax matters usually an accountant, is negligently provided, that negligence is not to be imputed to the taxpayer. The question is whether the taxpayer was negligent. He cannot be principally or vicariously liable for the negligence of his professional adviser unless the factual circumstances in which the advice is given indicate that a matter is fraught with difficulty and doubt, with the professional adviser giving no more than his honest opinion about which side of a sometimes difficult line, the facts of a particular case happen to fall. It is contrary to the very notion of negligence (that is, a failure to take reasonable care) that the person who perceives there to be doubt or difficulty and then sets out to take the advice of a professional person whom he believes will be able to resolve that doubt or difficulty, can be said to be negligent if he then relies upon that properly provided advice (even if it turns out to be wrong).

8. Accordingly, we decline to follow the reasoning in paragraph 15 in Wald, as it seems to us to be counter-intuitive to speak about a taxpayer being negligent when he has placed his affairs in the hands of an accountant or sought specific advice on a specific matter and the professional adviser has then been negligent in providing that advice.

9. In our judgement, the two different decisions to which we have referred are probably reconcilable on this basis. If a taxpayer claims that his accountant has been negligent, for example, by failing to meet a deadline for filing a return or undertaking some and other administrative task, then the negligence of the accountant will not usually provide a defence to a penalty because the accountant is simply acting as the taxpayer's agent or functionary in filing the document that needs...