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KEY POINTS
- Cases of Cairns and Adams.
- HMRC must prove negligence.
- Alleged negligent conduct must be clearly specified
- Not all errors amount to lack of reasonable care.
No one is perfect, and tax, complicated as it is, has a habit of reminding us of this.
However, HMRC’s approach usually tempers any hasty condemnation of errors with the balanced view that can be found in the new HMRC Compliance Manual at CH81140:
‘People do make mistakes. We do not expect perfection. We are simply seeking to establish whether the person has taken the care and attention that could be expected...’
The reason for this is straightforward: in tax, it may sometimes be difficult to ascertain what is the correct answer. Furthermore, there may be a range of possible conclusions, any of which could reasonably be arrived at.
Where HMRC are in dispute with a taxpayer, the approach will be first to reach agreement on the tax liability and only then to consider whether submission of the return involved any lack of care.
The possibility of taking a different view from HMRC, or being wrong while acting entirely in good faith, will normally be recognised.
Most experienced tax practitioners will have seen cases in which, say, the client’s poor record-keeping led HMRC to claim that the client was negligent. Such cases are normally straightforward.
This article focuses on two recent Scottish tribunal decisions where HMRC asserted that there had been negligent conduct on the part of the tax advisers rather than the taxpayer.
It is of particular concern that, despite the implications that such a finding would have had for the professional firms concerned, in neither case did HMRC offer any real evidence as to why they felt able to make such assertions. The cases are Cairns (TC 8) and Adams (TC 48).
The writer advised Mr Adams throughout his appeal, a fact which may colour what it written here. Therefore the article should be seen as reflecting the author’s own views, rather than those of Deloitte LLP.
Cairns
HMRC sought the imposition of a tax-geared penalty on Gordon Cairns, a solicitor acting as the personal representative of the late Mr Webb.
Curiously, the late Mr Webb had at one time been the chief examiner with the Estate Duty Office of the Inland Revenue in Edinburgh.
In dispute was the inheritance tax liability on Mr Webb’s death, specifically in respect of a property, Stonefield, which had been owned by the deceased at the time of his death.
The property’s value at date of death had to be judged when submitting the inheritance tax return form, albeit that the property remained unsold.
As a preliminary point, the Special Commissioner dismissed the summons from HMRC seeking a penalty as it was ‘wholly lacking in specification’, in particular there had been ‘no specification whatsoever of how or in what respect Mr Cairns had acted negligently’.
The Special Commissioner criticised HMRC’s conduct in that the summons offended:
‘the almost universal principle that a person in the position of Mr Cairns is entitled to fair notice of the allegations being made against him and a reasonable opportunity to respond to them.’
The facts were not relevant, but the Special Commissioner considered them in case he was wrong on the penalty point. The valuation submitted (£400,000) had been obtained from qualified valuers nine months before death, but it was not considered likely to differ significantly from the value on death.
Mr Cairns thought it likely that the price at which Stonefield was ultimately sold would be agreed in due course to be the date of death value. The valuation had been heavily qualified as Stonefield was in very poor condition. It is difficult to value properties which are only realisable if a significant amount of money is spent, and reasonable views may vary widely.
Eventually after the property was sold, and a revised value equal to the sale price (£600,000) was agreed with the district valuer.
However, HMRC, having found that the valuation required amendment, considered that the original return had involved negligent conduct on the part of Mr Cairns, and sought a tax-geared penalty.
Burden of proof
Practitioners will be aware that cases of dispute with HRMC are normally found on the balance of probabilities with the evidential onus being upon the appellant. That onus however shifts to HMRC where it asserts that there has been ‘negligent conduct’ or ‘negligence’.
Mr Cairns gave evidence in support of his own conduct, with the Special Commissioners commenting that his evidence was credible and reliable and that he had seemed to have acted perfectly sensibly and reasonably throughout.
In contrast, the Commissioner commented with disapproval that HMRC had led no valuation evidence. Given that negligent conduct amounts to ‘more than just being wrong or taking a different view from HMRC’ (see AB v HMRC SpC 572) HMRC’s failure to lead any evidence in support of its assertion appears to have been fatal to its case.
Adams
The dispute in Adams related to statutory construction rather than, as in Cairns, facts.
Mr Adams sold his shareholding in the company MPM Adams Ltd in May 1999 for a mixture of cash, shares, and deferred consideration. At that time Mr Adams also made capital gains tax clearance applications.
Subsequent to this, Mr Adams submitted his 1999/2000 tax return declaring the capital gain arising on the disposal of his shareholding.
The return was submitted on the basis that TCGA 1992, s 138A applied so that the deferred consideration was not assessable until the year in which it was actually received, although nothing was ever sent to HMRC specifically stating that Mr Adams was making the election.
Some years later a new inspector, having enquired into a later year, sought to revisit the matter and to assess the deferred consideration in 1999/2000.
After lengthy correspondence, HMRC raised an assessment for the year ended 5 April 2000 in November 2006, well past the normal January 2006 deadline for doing so.
Such an assessment could be made only if the loss of tax was brought about carelessly or deliberately by the person to be assessed, or by another person acting on behalf of that person.
The tax treatment of the deferred consideration hinged, in part, on whether or not a valid election had been made under TCGA 1992, s 138A.
HMRC asserted that in the absence of such an election there would have been negligent conduct (albeit at no time did HMRC make entirely clear by whom).
In HMRC’s view the submission of an ‘incorrect return’ was prima facie neglect by either Mr Adams or his advisers as no person who had taken reasonable care to ensure that he was properly advised would have made the error that had led to the ‘tax loss’.
When selling his company in 1999/2000, Mr Adams had first been advised by one firm of advisers on the necessary tax clearances, and later by a second firm as regards the subsequent submission of his tax return.
It remained unclear whether HMRC asserted that Mr Adams himself had engaged in negligent conduct, or whether either (or both) of the first two firms of advisers had done so.
Moreover, given that the dispute revolved around a technical matter where statute was far from prescriptive, it was not agreed that the tax return was in any sense incorrect.
Legitimate grounds
HMRC acknowledged in correspondence that there were legitimate grounds for the taxpayer considering that a valid s 138A election had been made.
While the department’s published guidance as to what is considered best practice when making s 138A elections was explored at the hearing, it was acknowledged by HMRC before the Special Commissioners that their published notes and help sheets did not have any legal force, and that the matter had to be resolved on whether or not the return submitted conformed to statute.
Accordingly, following the issue of the assessment in November 2006, both Mr Adams and Deloitte, who were by then his advisers, made strenuous efforts to obtain clarification from HMRC as to who was considered to have been ‘negligent’ and why?
A number of requests were sent in writing and made in meetings. Mr Adams was keen to resolve the dispute and made himself available for meetings with HMRC.
It was agreed by all that he conducted himself in a straightforward fashion and that he had understandably relied upon the advice of reputable tax advisers at every stage of both the sale of his company and his subsequent submission of tax returns.
However, throughout the correspondence, under central guidance from HMRC’s Tax Administration Advisory, HMRC adhered to the view that statute did not require that the conduct itself be particularised.
Here, as in Cairns, such an approach would appear fatal to any litigation where it would be expected that HMRC would lead evidence both that the return was incorrect and, critically, why it had concluded that the error had arisen as a result of negligent conduct.
Despite repeated requests, HMRC remained of the view that they did not have to specify whether it was the taxpayer or the advisers who were guilty of negligent conduct, or what form the negligent conduct actually took. Even the serving of a freedom of information notice on HMRC before the hearing did not clarify matters.
Decision
When considering the validity of the s 138A election the Special Commissioners agreed with the appellant’s reliance upon Gallic Leasing v Coburn [1991] STC 699. In particular, where statute does not prescribe the precise form that an election should take, the requirement of a notice of election serves no other purpose than that of alerting the inspector to the fact that reliefs are being sought.
The Special Commissioners here found that any officer with sufficient knowledge of the law who received Mr Adams’ 1999/2000 tax return with the computation could not have been under any misapprehension that Mr Adams wished s 138A to apply.
As to whether there had been any negligent conduct on the part of Mr Adams, the Commissioners were unequivocal; once it was clear in November 2007 (some 16 months before the actual hearing) that Mr Adams had good reason to rely on advice, any allegation against him should have been withdrawn.
This left the question of whether or not HMRC could make any case against the advisers who were responsible for the clearance application or the advisers who submitted the tax return.
It is noteworthy that, despite a three-day hearing, the Special Commissioners were still unable to discern with clarity whether HMRC were making the allegation against the agent who completed the return, or the advisers who submitted the clearance application. They assumed the former.
Given HMRC’s failure to lead any evidence in support of their assertion of negligent conduct, the Commissioners had only to consider whether or not the legal concept of res ipsa loquitur could apply, i.e. that the nature of the error made it self-evident that some form of carelessness was involved.
This was plainly not the case, and Mr Adam’s appeal was upheld. The Commissioners said:
‘Even if we had concluded that there was no valid election we accept the submission of Mr Ghosh that the tax agents who completed the return and submitted it were entitled to consider that the return did comply with s 138A. The fact that the Revenue disagreed with them does not mean that they were guilty of negligent conduct.’
All change
HMRC have, over the last few years, devoted commendable efforts to establishing a new framework for powers and deterrents. It must therefore be hoped that the lessons to be learned from both the Cairns and Adams cases are taken on board.
All those involved in the tax compliance process recognise that errors occur. Where these are identified, HMRC should carefully consider their facts and circumstances, as not all adjustments to returns will involve an absence of reasonable care.
To assert default without presenting any evidence of the particular conduct failure will seldom find favour when the matter is litigated.
Craig Thomson is a senior manager in Deloitte’s tax risk and resolution practice and may be contacted at either 0131 535 7687 or by email.
