Mark McLaughlin looks at penalties for tax return errors, and whether a taxpayer’s reliance on advice from a professional adviser is taking ‘reasonable care’ if that advice turns out to be incorrect and results in the error.
Errors are sometimes made in tax returns. This can result in HM Revenue and Customs (HMRC) seeking to impose penalties in respect of the errors. The calculation of penalties for errors, etc. is beyond the scope of this article, but there is guidance in HMRC’s Compliance Handbook manual (including a table of ‘standard’ maximum penalties at CH82120).
If the tax return error has resulted (for example) in a tax liability being understated, HMRC will generally consider whether the error was careless or deliberate. An error is ‘careless’ if it arises due to a failure to take reasonable care (FA 2007, Sch 24, para 3(1)(a)). Thus no penalty can be charged if the error arose despite reasonable care having been taken.
Is it ‘reasonable’ or not?
Unfortunately, there is no statutory definition of ‘reasonable care’ for these purposes. This has resulted in case law over the years on the distinction between reasonable care and careless (or negligent) behaviour.
For example, in Collis v Revenue & Customs [2011] UKFTT 588 (TC), the First-tier Tribunal commented: ‘We consider that the standard by which [reasonable care] falls to be judged is that of a prudent and reasonable taxpayer in the position of the taxpayer in question.’
HMRC considers that reasonable care depends on the particular taxpayer’s abilities and circumstances. However, HMRC generally expects higher standards of taxpayers with professional advisers.
Incorrect advice
However, has a taxpayer taken reasonable care in relying on professional tax advice, if that advice results in a tax return error? The answer seems to be ‘it depends’. For example, in Gedir v Revenue & Customs [2016] UKFTT 188 (TC), the First-tier Tribunal held that the taxpayer took reasonable care despite a tax return error. In reaching that conclusion, the tribunal noted the following ‘essential elements’:
- the taxpayer consulted an adviser he reasonably believed to be competent;
- he provided the adviser with the relevant information and documents;
- he checked the adviser’s work to the extent that he was able to do so; and
- he implemented the advice.
The tribunal noted the earlier case Hanson v Revenue and Customs [2012] UKFTT 314 (TC), and considered that the decision in that case sets out the correct basis for establishing whether a taxpayer who uses an agent to complete his tax return has taken reasonable care to avoid an inaccuracy in the return. In Hanson, the First-tier Tribunal considered that there was carelessness on the part of the taxpayer’s advisers. However, the taxpayer had taken reasonable care to avoid the error. In the circumstances, the taxpayer was entitled to rely on his accountants’ advice without the taxpayer consulting the legislation or any HMRC guidance.
On the other hand, a taxpayer’s reliance on professional advice does not represent a ‘get out of jail’ card in all circumstances. For example, in Shakoor v Revenue and Customs [2012] UKFTT 532 (TC), the tribunal found that an accountant’s incorrect advice was obviously wrong, and that the taxpayer realised, or ought to have realised, that it was obviously wrong, or so potentially wrong that it called for further explanation or justification. The taxpayer therefore incurred a penalty.
Practical Tip:
Taking a different view from HMRC on a technical point is not necessarily careless behaviour, if the taxpayer’s adviser’s view turns out to be incorrect. Provided that the view is reasonable, the adviser is entitled to advise the taxpayer on that basis. The First-tier Tribunal decisions in Gedir and Hanson on reasonable care do not create a binding precedent, but may be persuasive in cases where the taxpayer has made a tax return error concerning a point on which professional advice has reasonably been taken, and HMRC is contending that the error was careless.
