Tax: Don't become a cobbler's bairn

Studying recent Tribunal cases which have addressed the concept of ‘reasonable excuse’, Donald Drysdale reflects on the standards expected of accountants and tax advisers.

Three cases on NRCGT

Non-resident capital gains tax (NRCGT) was introduced from 6 April 2015 and is now providing a host of First-tier Tribunal decisions about reasonable excuse.

Rachel McGreevy

In Rachel McGreevy v HMRC [2017] UKFTT 690 (TC06109), the taxpayer lived in Australia. She sold a UK dwelling that had been her principal private residence, so no CGT was payable.

Although the completion date was not clearly established, she believed the disposal took place in 2015/16.  She knew about NRCGT and planned to report the disposal on her 2015/16 self assessment return.  When she came to prepare this she found that an NRCGT return should have be submitted within 30 days after the sale.

Ms McGreevy was notified of late filing penalties of £1,600 and appealed on grounds that she had a reasonable excuse – being unaware that separate NRCGT return had been required. HMRC rejected this but, on review, cancelled daily penalties that had been charged.  They upheld the remaining penalty of £700, and the taxpayer appealed.

HMRC provided the Tribunal with only brief details of NRCGT guidance on their website, and no information about what it may have said on original publication – when they said the taxpayer should have been aware of it.  The judgment contains a detailed analysis of shortcomings in HMRC guidance.

The Tribunal overturned the penalties on grounds that it was more likely than not that there had been no NRCGT disposal in 2015/16.  In case HMRC were to appeal this, the Tribunal also pronounced on whether the taxpayer had a reasonable excuse for late filing.

Regarding HMRC’s contention that ignorance of the law cannot be a reasonable excuse, it accepted this only in commonplace situations.  Given the complexity of NRCGT and poor guidance from HMRC, it held that the taxpayer had a reasonable excuse for late filing.  It also found that there were special circumstances – penalties not in accordance with the compliance intention; absence of communications from HMRC; and lack of proportionality.

Robert Welland

In Robert Welland v HMRC [2017] UKFTT 870 (TC06265) the circumstances were similar. The taxpayer, living in Thailand, sold three UK dwellings and accepted that they fell within NRCGT in 2015/16.  The gains were within his annual exempt amount so no CGT was payable, and he didn’t realise that he had to report them ahead of submitting his 2015/16 self assessment return.

Disagreeing with McGreevy, the Tribunal didn’t regard NRCGT as particularly complex. Taxpayers aware of NRCGT should have sought advice, and shortcomings in HMRC’s guidance didn’t create a reasonable excuse.  The Tribunal upheld the view that ignorance of the law can’t be a reasonable excuse, while encouraging Mr Welland to appeal to the Upper Tribunal as a test case seeking a binding ruling on this.

The Tribunal reduced the penalties on grounds of special circumstances, finding that the taxpayer’s three disposals in quick succession had prevented him from learning from his non-compliance.

David and Jennifer Hesketh

In David and Jennifer Hesketh v HMRC [2017] UKFTT 871 (TC06266) it was much the same story.  The taxpayers lived in Singapore and jointly sold a dwelling in London in 2015/16.  They faced late filing penalties of £400 each, daily penalties having been cancelled.

On failure to make a return, reliance on any third party may be a reasonable excuse if the taxpayer took reasonable care to avoid the failure (FA 2009, Sch 55, para 23).  The Tribunal noted that there was no such reliance in this case: the Heskeths’ solicitor did not advise them on NRCGT and said it was outside the scope of her instructions; and they emailed their accountants asking for advice but had not followed up when the email was mislaid.

The Tribunal found no reasonable excuse. It regarded HMRC’s consideration of special circumstances as flawed, but on review found none.  The penalties were upheld.

Reliance on a third party

Had the Heskeths obtained professional advice on NRCGT, they might have been able to establish a reasonable excuse.

In Patrick Cannon v HMRC [2017] UKFTT 0859 (TC06254), the taxpayer (a practising barrister specialising in SDLT) sought advice on aspects of his income tax affairs.  He subsequently appealed against several penalties raised against him for alleged irregularities.

The Tribunal observed that UK tax laws are generally complex, often convoluted and frequently changed.  The average individual can’t be expected to have a detailed working knowledge of the intricacies surrounding even the most common taxes.  Nonetheless, Mr Cannon did not argue that his ignorance of the law was a reasonable excuse; instead, he quoted his reliance on a tax adviser.

The Tribunal noted that a third party engaged to file a return or perform some other routine administrative task acts as a mere agent, not an independent professional adviser.  The agent’s negligence – for example in failing to meet a filing deadline – will rarely protect the taxpayer from penalties but might give the taxpayer grounds for claiming compensation from the agent.

Where a taxpayer seeks professional tax advice on particular issues from an adviser who holds themselves out as having appropriate expertise, the adviser must advise to the best of their professional skill and ability whilst taking reasonable care in and about preparing and giving that advice.  Unless there is reason to believe that such advice is wrong, unreliable or hedged about with substantial caveats, the taxpayer who relies on it should be regarded as having taken reasonable care.

Mr Cannon had relied on tax advice, even though it was found to be wrong.  In arguing their case, HMRC asserted that a taxpayer with expertise in one specialist area of tax law should have been able to find his way around other areas of legislation affecting his personal affairs. The Tribunal rejected this and largely overturned the penalties, holding that the taxpayer had taken reasonable care.

Could it have been you?

Like all the taxpayers referred to above, you might be faced with an uphill struggle trying to prove that you have taken reasonable care in aspects of your tax compliance.  If you deal with your tax affairs alone, unrepresented by a tax agent or adviser, you might find it hard to escape from penalties.

To establish reasonable care, you might need to demonstrate why you took a particular position on a return or a claim.  You might need to exhibit the legislation or guidance on which you relied – not always easy when both are changing periodically.

It is possible (though by no means certain) that an unrepresented taxpayer might encounter some degree of sympathy and understanding on seeking an internal review by HMRC or taking an appeal to the First-tier Tribunal.  However, attitudes towards a qualified accountant or tax adviser might be less forgiving.

Don’t be a cobbler’s bairn.  Unless you’re accustomed to handling clients’ disputes with HMRC and taking cases to Tribunal, it may not be easy for you to remain objective while pursuing a dispute about your own tax affairs.  Sometimes a more successful outcome may be achieved by engaging an independent qualified professional to pursue a review or appeal on your behalf.

Article supplied by Taxing Words Ltd