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KEY POINTS
- P11D not received and removal expenses omitted from tax return.
- Was the Tribunal decision ‘fair and just’?
- A comparison of TMA 1970, s 29 with s 95.
- Does an agent’s error mean that the taxpayer is negligent?
I like tax cases. Applying the law to a specific set of facts brings it alive, and not infrequently highlights interpretations that had not occurred to me.
But occasionally, one comes across decisions that seem clearly wrong. One such is the recent decision of the First-tier Tribunal in Wald v HMRC (TC01052).
This is a penalty case. Dr Wald was paid removal expenses of £14,617 by his employer, but he did not show the excess over £8,000 on his 2006/07 tax return.
Just to recap, there is a limited exemption from tax for removal benefits and expenses in ITEPA 2003, s 271 et seq, with the exemption being subject to a limit of £8,000 in s 287.
HMRC accepted that, at the time he filed that return, he had not received a P11D. However, they felt that this did not excuse him from not having realised that the excess was taxable and they imposed a 10% penalty for negligence.
The case was actually argued by a friend of mine, Robin Summers, and it came to my attention via an email from Robin that someone forwarded to me. Robin clearly feels hard done by.
He took the case on a pro bono basis, because he felt that Dr Wald had clearly not been negligent.
For what it is worth, neither do I – although negligence is a question of what a reasonable person would have done in the same situation, and that is obviously a fairly subjective test. Wald was the first case Robin has taken before the First-tier Tribunal; I hope his concerns do not put him off taking further cases.
Fair and just
My first worry about the decision is the Tribunal’s comment that ‘at the hearing the parties were unable to refer the Tribunal to relevant case law specifically on the meaning of the word “negligently” in TMA 1970, s 95. The Tribunal indicated to the parties at the end of the hearing that it would undertake its own consideration of relevant case law. The Tribunal left open the possibility that it might… afford the parties a further opportunity to make submissions on relevant cases identified… Bearing in mind the overriding objective in rule 2 of the Tribunal’s Rules, the Tribunal has decided not to do so. The relevant cases are readily accessible, and could have been addressed by the parties at the hearing if they had so desired.'
The overriding objective in rule 2 is ‘to deal with cases fairly and justly’. It does not seem fair to me for a Tribunal to decide a case on the basis of its own research without giving the parties an opportunity to comment on this.
Indeed, the rule goes on to say that fairness includes ‘ensuring… that the parties are able to participate fully in the proceedings’.
However, someone else pointed out to me that fairness also includes ‘dealing with the case in ways which are proportionate to the importance of the case’, so it may be that I am being unreasonable.
I think it a shame, though, that the Tribunal was not prepared to attach to its decision a list of the cases that it has taken account of, even if only to seek to educate future appellants.
Readily accessible
As neither HMRC nor the taxpayer was represented by a lawyer, I would also question the contention that ‘the relevant cases are readily accessible’.
The attention of the Tribunal was actually drawn by the parties to: Blyth v Birmingham Water Works Ex D 1856, 11 Ex 781, which, to my mind, is the leading case on negligence; and to King v Walden [1996] STC 382, which was in part a TMA 1970, s 95 case and which in turn refers to Salmon v General Commissioners for Havering 45 TC 77, which I think is the leading case on s 95.
My real concern is that if the Tribunal is going to do its own research, it should do it properly. The Tribunal decided that ‘the obligation to file a correct tax return is on the taxpayer… If the appellant relies on an accountant to prepare and file a tax return on his behalf, then the appellant will be responsible if errors in the tax return are due to negligence by the accountant acting on his behalf’.
It quotes two Tribunal cases in support of this statement. The only problem is that these are both TMA 1970, s 29 (discovery) cases, not s 95 ones. Does this matter? Surely negligence is negligence?
Well, s 29 (as it read in 2006/07) referred to the situation being ‘brought about negligently by the taxpayer or a person acting on his behalf’ whereas s 95 said, ‘If a person negligently delivers any incorrect return… he shall be liable to a penalty’.
There is no reference whatsoever there to a person acting on behalf of the taxpayer.
Taxpayer and agent
Unlike Robin, I do have the relevant cases readily accessible, because I have Tolley’s Case-Link on my computer. I keyed in ‘negligence’ together with ‘penalty’ and it threw up 15 court cases and seven Tribunal cases.
I can see nothing in any of these cases to indicate that negligence by an agent attracts a penalty on the taxpayer.
Indeed, while I can see a logic in Parliament expecting HMRC to collect tax due, so negligence by a taxpayer’s agent should not prevent their doing this, I can see no logic in Parliament seeking to punish a taxpayer for the acts of someone else. Indeed, I doubt that such punishment would be compliant with the Human Rights Act.
Furthermore, even HMRC say that ‘a person who goes to an apparently competent professional adviser, gives the adviser a full and accurate set of facts, checks the adviser’s work or advice to the best of their ability and competence and adopts it… will have taken reasonable care to avoid inaccuracy’ (Compliance Handbook, CH84540).
Dr Wald appears to me to have complied with that. In addition, the first HMRC consultation document on ‘Working with Tax Agents’ issued in April 2009 states (at paragraph 3.9) that ‘a taxpayer who goes to an ostensibly competent professional adviser, provides a full and accurate account of the facts, checks that advice to the limit of his or her ability and competence, and then… signs the return prepared on that basis has not been negligent.'
Nevertheless, from the cases that the Tribunal looked at, it decided that ‘the Tribunal does not find it necessary to determine precisely whether the omission… was due to an omission on the part of the appellant personally or on the part of the accountant’.
It is wholly unclear to me on what basis it could have reached such a decision in the light of the extensive case law on s 95.
Guidance and advice
There is nothing in the Tribunal decision to indicate what Dr Wald, who is an American, told his UK accountants.
I suspect that he did not say that he had received the removal expenses; such an item would not be taxable in the US and I doubt that he could have been expected to think that it was taxable in the UK either.
Worryingly, the Tribunal did indicate that it felt that a reasonable person who engages a professional accountant to complete his tax return would nevertheless personally read the 20-plus pages of guidance notes that HMRC issue with the return.
Leaving aside that where a return is filed electronically by an agent HMRC do not actually send the guidance notes to the taxpayer, I personally find such a contention incredible. I do not expect my clients to read the HMRC guidance notes and am shocked to discover that the Tribunal seemingly expects them to do so.
However, I believe that one of the Tribunal members hearing the case was a chartered accountant, who I think is in public practice, so that is presumably what he expects from his own clients.
I hope that he is exceptional in this regard. I have never in 45 years of practice come across another accountant that expected his clients to do this. I will myself fight any case in which HMRC put forward such a proposition in relation to my clients.
Why appeal?
Please remember that the penalty at issue was £264, so why did Robin, who I stress did not prepare the return, take on the case on behalf of the taxpayer and take it to the First-tier Tribunal, all on a pro bono basis?
Robin says the answer is more fundamental than the case. No matter what the adverts say, tax is taxing for taxpayers and very often they find it and HMRC very intimidating. When HMRC get it wrong, they can get it very wrong and in such situations someone must say ‘stop’.
Robin’s view is that something went horribly wrong with HMRC here. Dr Wald had, within a week of the inspector’s letter being sent notifying him of the error, traced a copy of the P11D and within a further week he had paid the tax outstanding.
He therefore did what a ‘reasonable man’ should do when he finds a mistake: remedy it.
Having started a formal enquiry, HMRC seemed unable to stop it. After Dr Wald remedied the mistake, the department’s compliance officer thought that there was no £8,000 deduction for moving expenses and had tried to levy tax on the whole lot.
The enquiry then moved to one inspector and then another who – despite internal advice during one of the peer reviews that said, ‘I am presuming we accept that Dr Wald is in the compliant majority and would not have made the mistake if he had been aware that it was wrong’ – did not take advice from his superior that it would be acceptable to close the case with no penalty.
Even the internal HMRC review system, which is meant to ensure fewer cases go to the Tribunals, did not stop it. And all for a penalty of £264.
The result was the involvement of a compliance officer and two different Inspectors, 16 HMRC letters to the agent, numerous telephone calls, a Tribunal statement of case and a further two years and four months. I shudder to think about the cost to the public purse.
HMRC’s Enquiry Manual at EM5214, ‘Penalties – Formal Determination – Cost-Effectiveness’, says, ‘A balance has to be struck between the cost to our limited resources and the necessity to police compliance and prevent the non-compliant minority gaining an advantage over the compliant majority.’
Robin took the case because, as he said at the Tribunal, ‘HMRC has lost a sense of perspective in not closing this case many years ago and as a result a taxpayer has been treated shoddily by a Government department that owes him more’.
I am sure he is right and do not disagree, but perhaps that is a matter for his MP or the adjudicator.
Conclusion
One final thought. While I would personally have accepted a 10% penalty for negligence, I am a bit concerned that the Tribunal upheld HMRC’s 10% charge as being ‘consistent with HMRC guidelines’.
While that may be right, the role of the Tribunal under TMA 1970, s 100B is not to follow HMRC’s non-statutory internal guidelines: it is to determine the appropriate penalty. HMRC guidelines may be a good starting point, but Parliament has given a discretion to the Tribunal and it surely cannot trammel that discretion by following HMRC guidelines.
If Parliament had wanted it to do that it would surely have said so.
Even HMRC do not seem to slavishly follow their guidelines (indeed it would be wrong to do so because they cannot exercise a discretion in such a manner).
The National Audit Office recently revealed that the average penalty in cases of suspected serious tax fraud was 20% (whereas the guidelines would indicate a 30% minimum).
In the context of a 20% tariff for serious fraud, a 10% penalty for not reading guidance notes might be regarded as harsh.
Robin Summers can be contacted via email.
