Tax can be a confusing area at the best of times, and many business owners can feel out of their depth when dealing with any tax issues outside of their normal, day-to-day business operations.
But some recent cases have highlighted the risks of not obtaining specialist tax advice when dealing with a company’s tax affairs, and of not taking reasonable care when placing reliance on your advisors.
Janet Bray Ltd v HMRC
In Janet Bray Ltd v HMRC [2024] UKFTT 787 (TC), the company in question was a consultancy business with a single director/shareholder, Ms Bray. An external firm provided accountancy services to both the company and to Ms Bray personally. When the accountants became aware of a tax scheme being promoted by Clavis Tax Solutions Ltd, they introduced the tax scheme to Ms Bray, who in turn then decided that her company would enter into the tax scheme.
The tax scheme was intended to provide the company’s employees with tax free sums via the use of an offshore Employee Benefit Trust (also known as an “EBT”). Ms Bray later admitted that she had not understood the particular tax mechanics involved in the scheme, and that she had relied on her advisers to know the detail of how it all worked. She also accepted that although she knew it was her accountants’ role to implement Clavis’ tax scheme, she had not checked what precisely her accountants understood about the tax and accounting aspects of the scheme.
Critically, she had not sought any independent tax advice on the scheme, and had instead relied on the assurances that she had been given by her accountants and Clavis, which included being shown extracts from a legal opinion obtained by Clavis, and being told that hundreds of people had already used the tax scheme.
The failure of the tax scheme
Like so many other EBTs (and the related Employer Financed Retirement Benefit Schemes, or EFRBSs), this tax scheme was eventually challenged by HMRC, and it failed to provide the anticipated tax benefits. As a result, HMRC also found that the company had submitted incorrect tax returns, and so issued determinations and financial penalties against the company.
The company sought to challenge the determinations and penalties imposed, on the basis that there had not been any “carelessness” in relation to the tax returns, or if there had been any “carelessness”, it had not been the cause of the relevant loss of tax. “Carelessness” on the part of the taxpayer needed to be established in order to justify the determinations and penalties imposed by HMRC.
The Courts’ approach to “carelessness”
The test for “carelessness” is an objective test, to be assessed by considering what a prudent and reasonable taxpayer in the same position would have done.
The company argued that because (i) Ms Bray knew that Clavis had obtained a legal opinion on the tax scheme from a specialist tax barrister, (ii) she had attended a presentation on the tax scheme, (iii) she had asked questions, and (iv) her accountant had assured her that the scheme seemed reasonable, she and the company could not be said to have acted “carelessly” when preparing the company tax returns.
However, the First-Tier Tribunal Tax Chamber (“FTT”) disagreed, finding that a reasonable taxpayer in Ms Bray’s position would have obtained independent specialist advice on this type of tax scheme. The FTT also found that if she had sought independent advice, a competent tax advisor would have identified the flaws in the structure of the scheme.
Therefore, not only was the failure to obtain competent tax advice “careless”, but this “carelessness” had also been the cause of the relevant loss of tax, because if a competent tax adviser had been involved then the errors in the company’s tax returns would not have been made.
A harsh decision?
Many may consider this to be a harsh decision, especially if you believe that a business owner should be able to rely on the assurances given to them by their trusted accountant in relation to a tax scheme that the accountant introduced to them. You may consider that the accountant owed a duty of care to their client to ensure that the tax scheme they were introducing to their client was an effective one.
However, recent cases have confirmed that the courts will take a very narrow view of what advice it is reasonable for a taxpayer to rely on. In my previous article ‘Don’t take my word for it’: Court rules negligent tax advisor did not owe a duty of care to investors I looked at a Court of Appeal case that confirmed that a taxpayer was not entitled to rely on a legal opinion provided by a specialist tax counsel (in fact, the same specialist tax barrister who had written the legal opinion shown by Clavis to Ms Bray in this case), because the tax barrister had produced the legal opinion for the tax scheme’s promotor, not for the potential investors. The fact that the barrister had consented to the legal opinion being shared with the potential investors did not mean that the barrister owed the potential investors any duty of care in relation to his advice.
Unreasonable reliance on advisors
Another recent FTT case, David Hill v HMRC [2024] UKFTT 00844 (TC), has emphasised that a lack of tax expertise does not automatically make reliance on advisors a reasonable excuse for a taxpayer’s non-compliance with HMRC notices.
In this case. the FTT ruled that although a taxpayer “is not required to second-guess their adviser, or to obtain multiple opinions, it is clear that they are required to take reasonable care in relying on their adviser”. This will be a fact-specific question in each case, but in this case, the FTT determined that the taxpayers had taken what was said at face value and had not read relevant correspondence and documents, and so there was no evidence that they had taken reasonable care in relying on their advisor.
Both of these recent FTT judgments, and the Court of Appeal decision discussed in my last article, reinforce the importance of obtaining your own, independent and specialist tax advice on any proposed tax arrangements, because you may not be entitled to rely on specialist advice provided to others (such as the scheme’s promotor), or on general assurances provided by your usual company accountant, and you will be required to take reasonable care when placing any reliance on what you are told by any of your advisors.
For more information on this or any other issue relating to tax disputes, please contact Michael Axe by emailing Michael or by calling him on +44 (0)1628 502448.
This article is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this article.