Take Advice From HMRC At Your Peril!

Should you rely on advice given by HM Revenue & Customs? James Bailey thinks not, and highlights an unfortunate recent tribunal case for the taxpayer.

You would think it was obvious – if you have a problem or a question about tax, why not ring up HMRC? They run the system, after all, so they ought to be able to answer your question.

Unfortunately, the reality is that the technical competence of the average person answering HMRC’s phones is likely to be very poor, and your chances of getting the right answer (or the best answer where, as so often with tax, there is more than one) are very slim.

There is worse to come. If you get the wrong advice from HMRC and act on it, you will not be protected from the consequences of your actions if they result in extra tax payable or a mistake in your tax return.

A recent tax tribunal case (Rotberg v HMRC [2014] UKFTT 657 (TC)) showed how worthless HMRC advice can be, and how dangerous it is to follow it. The case concerned a lady who made a large capital gain, and who was advised by her accountant that she could ‘roll over’ this gain by buying shares in a limited company. There are circumstances in which this is possible, but the company concerned has to be a special type of company and must have been authorised by HMRC to issue shares under the enterprise investment scheme (EIS). Unfortunately for Mrs Rotberg, the company she invested in was not an EIS company, so in fact the tax on her gains remained payable.

Mrs Rotberg had been advised by her accountant (whom the tribunal described as ‘negligent’) that she could roll over the gains, but the accountant had based his incorrect advice on a telephone conversation with a local inspector of taxes, who had confirmed (incorrectly) that Mrs Rotberg’s investment would enable her to defer paying capital gains tax. This is not the taxation equivalent of rocket science, and it is hard to see why the accountant and the tax inspector were both so ignorant of basic tax rules.

Part of the case for Mrs Rotberg, therefore, was that as a result of her accountant’s advice, based on the advice given to him by the tax inspector, she had a ‘legitimate expectation’ that the gains could be rolled over. ‘Legitimate expectation’ is a legal concept and in many cases it can result in a person who has been misinformed escaping the consequences of that misinformation, but the tribunal decided (‘without enthusiasm’, as they put it) that they had no jurisdiction to consider the doctrine of ‘legitimate expectation’, and so Mrs Rotberg had to pay the tax.

If she had been given proper advice at the right time, the gain could have been ‘rolled over’ into EIS shares, but by the time the case came to the tribunal, the time limit for this had passed.

Of course, we can sympathise with Mrs Rotberg, but the most important lesson lies in the fact that her accountant was described by the tribunal as ‘negligent’ in the advice he had given her. In other words, he was ‘negligent’ to rely on advice given by a tax inspector! If the tribunal considers it ‘negligent’ to ask a tax inspector for advice and then act on what he tells you, it is clear what they think of the typical level of competence in HMRC.

Never rely on asking HMRC for their advice. The answers you get will probably be wrong, and if they are, relying on them will not protect you from the consequences. Take advice from a competent and qualified tax adviser with a reputation to protect.