Mark McLaughlin warns that HMRC may sometimes accuse a taxpayer’s adviser of being careless, which can have unfortunate consequences.
The normal ‘window’ for HM Revenue and Customs (HMRC) to open an enquiry into an individual’s tax return is 12 months after the day on which the return was delivered.
However, if this enquiry window has closed because the time limit for opening an enquiry has expired, HMRC may use its ‘discovery’ powers to assess ‘closed’ years. The ordinary time limit for HMRC to make a discovery assessment (for income tax and capital gains tax (CGT) purposes) is four years after the end of the tax year to which it relates. However, a discovery assessment where the tax loss was brought about carelessly may generally be made up to six years after the end of the tax year. For cases of lost income tax or CGT involving an ‘offshore matter’ or ‘offshore transfer’, the assessment time limit is 12 years; and where the tax loss was brought about deliberately, the time limit is 20 years.
Is it ‘careless’?
Where the ordinary four-year time limit for a discovery assessment has passed, HMRC might contend that a tax return error was careless (or possibly deliberate), even though it was arguably neither. There is no statutory definition of ‘careless’ for discovery assessment purposes.
The discovery provisions refer to the loss having been brought about by the person who is the subject of the assessment. However, the reference to the ‘person’ extends the meaning to a person acting on the taxpayer’s behalf.
Acting on the taxpayer’s behalf?
What does “acting on the taxpayer’s behalf” mean? HMRC’s Enquiry manual (at EM3232) refers to the First-tier Tribunal’s definition in The Trustees of Bessie Taube v HMRC [2010] UKFTT 473 as:
“…a person who takes steps that the taxpayer himself could take, or would otherwise be responsible for taking. Such steps will commonly include steps involving third parties, but will not necessarily do so. Examples would in our view include completing a return, filing a return, entering into correspondence with HMRC, providing documents and information to HMRC and seeking external advice as to the legal and tax position of the taxpayer. The person must represent, and not merely provide advice to, the taxpayer”.
This definition has been approved in subsequent cases (e.g., HMRC v Hicks [2020] UKUT 0012).
‘Careless’ adviser
More recently, in Callen v Revenue and Customs [2022] UKFTT 40 (TC), the taxpayer (JC) participated in a tax avoidance scheme. However, the scheme did not work. HMRC raised a discovery assessment for 2009/10 on 30 March 2015, on the basis that the loss of tax was brought about carelessly.
On appeal, the First-tier Tribunal (FTT) noted that JC’s accountant had barely any experience of marketed tax avoidance schemes. He did not carry out any research regarding the relevant tax legislation or Counsel’s Opinion produced for the scheme’s tax consultants. JC’s accountant did not review any scheme documentation. The tax return preparation process simply involved JC’s accountant asking the tax consultants what figures to put in the boxes. The FTT concluded that the accountant carelessly brought about the insufficiency in JC’s tax liability.
Practical tip
The lesson from Callen (which does not set a binding precedent) seems to be that a taxpayer’s agent should undertake their own due diligence about the efficacy of tax planning arrangements offered by third-party tax consultants, to reduce the risk of a challenge by HMRC based on careless behaviour.
