Another week and another case involving a failed tax avoidance scheme.

This time, perhaps more worryingly, HMRC were arguing that the return was submitted fraudulently or negligently by the taxpayer and therefore sought the extra penalties that would be due in such circumstances. This shows a new aspect of the targeting of anti-avoidance schemes and suggests users of schemes could expect the costs of failure to rise higher, whether in penalties or fees for defending them.

Ultimately, the taxpayer won in this case. Of particular interest was the fact that the Tribunal found that relying on the advice of a trusted accountant was helpful in suggesting that he had not acted negligently. It appears the courts confirm that obtaining suitable professional advice is worth paying for in the long run!

Mr Bayliss participated in a scheme marketed by Montpelier Tax Consultants (Montpelier). The scheme involved a Contract for Differences (CFD) and was sold as generating a £539,000 capital loss for Mr Baylis in 2006–07. It was agreed by all the parties that the scheme had failed and additional tax was due, however the taxpayer appealed against penalties raised by HMRC on the basis that ther return was submitted fraudulently or negligently.

The Tribunal determined that in accordance with established case law, in order to prove fraud HMRC had to prove that the appellant did not have an honest belief in the correctness of the return. The Tribunal was persuaded on the basis of the evidence and facts that Mr Bayliss did believe that his tax return was correct and so there was no fraudulent behaviour.

On the question of negligence, the Tribunal felt that the correct test was that set out in Blyth v Birmingham Waterworks Co (1856), that of ‘the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do’. They also considered the test in Anderson (decʼd) [2009], ‘to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done’.

HMRC used a number points to support their argument that Mr Baylis was negligent, including that:

  1. the transaction did not stand up to commercial scrutiny and the appellant failed to check the commercial reality;
  2. the appellant had not kept copies of the documentation, whereas a reasonable person would have done so;
  3. It was a complex financial transaction and the appellant should have obtained proper independent financial advice, but he relied on informal advice.

The Tribunal agreed with HMRC that some of the taxpayer’s behaviour could have been deemed to be careless, but on balance found that HMRC had not done enough to prove that the appellant was negligent in filing an incorrect return.

Interestingly, they felt that relying on his accountant was helpful in this respect, stating “We are persuaded that the appellant relied fully on Mr Mall, a chartered accountant on whom he had relied for a number of years, and on what he believed (based on Mr Mallʼs recommendation) to be Montpelierʼs expertise.”

The tribunal allowed the appeal on the basis that HMRC had not proven that Mr Bayliss acted fraudulently or negligently in submitting an incorrect return.

In the recent case of J Day & A Dalgety, two taxpayers had sold three properties that they owned together. The case concerned negligence and penalties for carelessness, as they did not include any details of capital gains relating to the property sales on their returns.  They argued that this was because the gains were below the annual exemption and therefore did not realise that they needed to be included.

One of the taxpayers also claimed that one of the houses sold was their only or main residence and that Private Residence Relief (PRR) should have been available.

HMRC raised discovery assessments and levied penalties for carelessness on both taxpayers, which they appealed.

The First-tier Tribunal agreed that the taxpayers had been careless in not including details on the returns.  The taxpayers made a number of errors in their calculations, including attempting to deduct mortgage fees, claiming they were deductible under TCGA 1992, s 38(1)(c).  However, the tribunal found that such costs were not included in the list of “incidental costs” in s 38(2) and were therefore not allowable.

In terms of the PRR claim, the tribunal found that the first taxpayer had not lived in the property with any degree of permanence or continuity as required by the relevant case law (Goodwin v Curtis [1998] STC 475).  No notice had been given to HMRC or to his employers that he had moved house and no invoices were addressed to him at the property.

The Tribunal dismissed the taxpayers’ appeals, agreeing with HMRC that both taxpayers had been negligent in preparing their tax returns by not including details of the property disposals.

It is important to ensure that proper care is taken with filing self-assessment tax returns and all relevant sources of income or gains are included where required in order to mitigate the risk of penalties.    Eaves and Co would be happy to assist if you or your clients have any concerns.

The question of what constitutes a ‘discovery’ continues to cause disagreements between HMRC and taxpayers.  A further case on the matter was recently heard by the Upper Tier Tribunal.  Interestingly, the question of negligence on the taxpayer’s part was also considered.

Facts

The taxpayer appealed against the First-tier Tribunal’s decision to uphold a ‘discovery’ assessment.   HMRC were also cross-appealing one part of that decision.

Mr Sanderson filed his 1998/99 tax return in February 2003. He claimed losses of around £2m to set against a chargeable gain of £1.8m.

These losses arose as a result of an avoidance scheme in which he had participated, claiming the benefit of Trust Fund losses in the Castle Trust scheme under TCGA 1992, s. 71(2). Some limited additional information in relation to this claim was given in the ‘additional information’ box on the return.

HMRC had been investigating the Castle Trust scheme since 1999 through the Special Compliance Office and Special Investigations Section. In July 1999, HMRC had a list of the users of the scheme, but Mr Sanderson’s return was not submitted until 2003.  By that point the scheme was found to be ineffective, and its capital losses were reduced to nil. Mr Sanderson was informed of this by the scheme promoter in January 2004.  On contacting his accountants he was advised to do nothing.

In late 2004 the Inspector became aware that Mr Sanderson’s return had been filed and raised a discovery assessment in January 2005. The normal enquiry window for the return had closed on 30 April 2004 which all parties agreed.

The First-tier Tribunal (FTT) had found that there had been a ‘discovery’ by HMRC and that an officer could not reasonably have been expected, on the information made available to him, to have been aware of the insufficiency.  However they determined that the insufficiency of tax was not attributable to negligent conduct on the part of the taxpayer or anyone acting for him.

Both the Taxpayer and HMRC were appealing against the decisions against them in the FTT.

Decision

The taxpayer claimed HMRC knew about his participation in the scheme before he submitted his return and as they had decided the Castle Trust scheme was not effective before he filed, they should have been aware of tax insufficiency before the enquiry window closed.

The Upper Tribunal found that the return did not contain enough information to make an HMRC officer aware that there was a tax insufficiency by itself, despite the fact that it would have alerted a hypothetical official to the fact the taxpayer was taking part in the scheme.

The discovery assessment was therefore valid, and Mr Sanderson’s appeal was dismissed.

However, on the question of negligence, the Upper Tribunal found in favour of the taxpayer.  They did not accept HMRC’s contention that the taxpayer’s adviser was negligent in advising to do nothing further on discovering that the Castle Trust scheme was ineffective.  Interestingly, the judge noted there was “no statutory provision imposing an obligation on a taxpayer to tell HMRC about something in a filed return that he subsequently finds to be erroneous.”

The recent High Court case of Mehjoo v Harben Barker has attracted a lot of attention both in the media and amongst accountants, regarding specialist tax advice.
 
According to some media reports, the case means that accountants are required to advise on complex tax avoidance schemes, but the reality is slightly more subtle than that.
 
Mr Mehjoo was born in Iraq in 1959 and his parents were of Iranian origin. His accountants were aware of this background as they had acted for him for a number of years, including his first tax returns in the 1980s.
 
The case therefore revolved around whether the accountants had been negligent in failing to notice his non-domicile status and the impact this would have on his UK tax position on making a gain.  The case found that a reasonably competent accountant would have known it was important to consider Mr Mehjoo’s domicile status in the context of his tax affairs.
 
In October 2004 his accountants considered the CGT position on Mr Mehjoo selling his shares in a company. Neither the firm’s general practice partner, nor the tax partner appeared to have considered the non-domicile status or the impact this could have.
 
The accountants claimed that they were not required to give tax planning advice due to the terms of their engagement letter, unless they were specifically asked to do so.  This was found to be not the case, in part due to the fact that they had provided such advice on a number of occasions without express instruction.
 
The judge therefore found that the accountants had been negligent in not considering the fact that Mr Mehjoo was non-domiciled, and that as this was outside of their area of expertise, they should have sought specialist tax advice or advised Mr Mehjoo to do so himself.
 
Tax is complicated, and the ever increasing tax legislation means it is harder than ever to keep up-to-date.  The key message for accountants is that they need to know enough to know that there is a problem, and seek out relevant specialists to assist.  Please feel free to contact us if you feel you may need specialist tax advice for your clients.