Mark McLaughlin points out a circumstance where an agent’s behaviour can have an unfortunate knock-on effect for their client.
Taxpayers generally engage agents to take some of the ‘taxing’ work away in the completion of tax returns and navigating through complexities of the tax system when events or transactions require expertise to reach the correct answer on their tax treatment.
Naughty agents!
Unfortunately, rather than being the solution to tax problems, occasionally, agents can be the cause! Those problems will invariably be accidental (as opposed to deliberate). However, in some cases, HM Revenue and Customs (HMRC) might consider serious sanctions against the agent. For example:
- ‘Dishonest tax agent’ penalties can be imposed on agents who engage in dishonest behaviour. Sanctions can include a penalty of up to £50,000.
- In extreme cases (e.g. following a criminal prosecution), HMRC might refuse to deal with the agent.
- If an agent is a member of a professional body and the agent’s behaviour breaches that body’s misconduct rules, HMRC can make a ‘public interest disclosure’ for the professional body to consider conducting disciplinary procedures against the agent.
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The use of existing criminal offences such as knowingly being involved in fraud or evasion of tax, and possibly imposing sanctions for money laundering offences.
In addition, HMRC could use the more common weapon of penalties for errors, if appropriate. The penalty regime for errors can apply if an error in a taxpayer’s document is attributable to ‘another person’, such as an agent.
It wasn’t my fault
In some cases, an agent’s behaviour can have adverse consequences for their client without affecting the agent directly. For example, HMRC could make ‘discovery’ assessments if a loss of tax, etc. was brought about by the agent.
For example, in The Magnet Partnership v Revenue and Customs [2022] UKFTT 288 (TC), the taxpayer partnership’s profits returned in its tax returns for 2004/05 to 2014/15 were precisely zero (regardless of turnover). The taxpayer’s agents had advised on setting up the taxpayer and three family partnerships, which commenced on 1 April 1999. None of those partnerships had a bank account. All income in each partnership was derived from the taxpayer. The partners in the taxpayer partnership had an annual meeting and decided how much each family partnership should receive for what was described as consultancy and design work.
Following enquiries, HMRC amended the partnership returns and issued discovery assessments for the relevant tax years. On appeal, the issues for the First-tier Tribunal (FTT) included: whether HMRC had made a discovery that profits on partnership statements were insufficient; whether the conditions applied to enable HMRC to use extended time limits to amend the family partnership statements; and whether the expenses claimed by the taxpayer were incurred at all, and if so, whether they were incurred wholly and exclusively for the purposes of its trade.
A statement by the taxpayer’s agent at the time indicated this partnership structure was a means of diverting profits from the taxpayer to family members. The FTT considered HMRC’s view that there had been a discovery and a loss of tax was objectively justifiable. Furthermore, there was no evidence (beyond evidence given by one of the partners) about what the family did and no evidence that the family partnerships had traded. The FTT concluded that all the sums paid to the family partnerships were drawings, which could never be deductible by the taxpayer.
Practical tip
As indicated, penalties for tax return errors can be charged on the taxpayer’s agent in some cases. However, in practice, this is relatively rare because agents are generally careful to avoid mistakes. HMRC acknowledges this point (in its Compliance Handbook manual, at CH84545): ’It is extremely unlikely that a tax adviser would be liable to this kind of penalty.’
