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Penalties - new approach?

We have almost reached deadlock with HMRC over a "main residence" claim. They have ignored most of our arguments and are simply repeating that there was not sufficient "permanence" for an election. I don't really want to get into the details as my point relates to penalties. In 25 years I have never know HMRC to look for penalties on a point of interpretation, which they themselves have said is "on balance". My client is tempted to go to the First Tier Tribunal but the tax is not substantial and he sees that it is a subtle point of fact and law. But he refuses to pay a penalty and I am sympathetic. HMRC have been offered, verbally that he would accept their case as long as penalties were not sought.  They have refused this offer and said that in order for them to decide if penalties are appropriate they need to know:

"For what reason did you consider that PPR and Lettings relief was due

What advice were you given by your advisor (sic) whilst completing the return

What information/documents did you provide to your advisor relating to the completion of the return

Did you consult any HMRC guidance or helpsheets? If so please confirm what you looked at"

We are a long established firm of Chartered Accountants and I am also a CTA and have never been asked this before. It seems outrageous for HMRC to ask this type of question.  Any advice urgently sought.

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09th May 2012 16:08

Check your PI policy

HMRC are simply trying to ascertain if your client acted on your advice. If they were unrepresented taxpayers who read the helpsheets then they would be treated more sympathetically however as they used the services of a professional (a CTA in fact) they will be held to a higher standard.

Basically, HMRC get to point the finger directly at you. Welcome to the brave new world.

 

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09th May 2012 17:02

Thanks (I think!).  But on

Thanks (I think!).  But on what basis (technically, e.g legislatively) are they entitled to get information as to advice given to clients? Especially where there is no prima facie case that any error or carelessless/negligance is present. It's more than a "brave new world" if HMRC are entitled to get access to this information when the only point at issue was a complex technical one, which they have agreed is very complex. Given this and the subtle and technical arguments that have ensued it's obvious that there is no way this could be considered careless or negligent in any way - it is simply a reasonable interpretation of difficult law. If this is now allowed it is a huge and worrying sea-change and I think I might retire!

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09th May 2012 17:15

I suspect that this approach may have always been the case - HMRC were inclined to give unrepresented tax payers more leeway but the new penalty regime has codified this into practice.

In many cases, this was the natural progression of enquiry cases anyway - client usually blames the agent. If the client attaches no blame to you, then you are not any worse off.

 

 

 

 

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09th May 2012 22:53

I've recently see this although I only know bare facts but a client in my firm has had a similar turning down recently of both PPR & LR.

Inspector seems to feel that it's the "quality" of the residence rather than the "quantity" that deems PPR relief being given. What that means in the real world, I don't know, but in our opinion, the house was quite clearly his home for a given time.That's all I do know, but perhaps it is a new stance with HMRC in borderline PPR cases.

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10th May 2012 12:46

Thanks for that.

I'd be interested to know what happened in your case (obviously!).  We are minded to go to the Tribunal except for the cost. Any pointers gratefully received!

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By ACDWebb
10th May 2012 13:18

Presumably

they are looking to determine where the case falls on the scale of return errors and to what degree mitigation within the band might fall.

From HMRC website -

Penalties for errors on returns, payments and paperwork

So you / the client will looking to make a case that all reasonable care was taken in arriving at the decision that PPR & Lettings relief were due - so that at worst the client falls in the lowest level 0-30% - and that as the issue is apparently a knife edge one it was reasonable for him to make such a claim on the return (?with a White Space note explaining the reasons?), the penalty should fall at the bottom end, for which you propose 0%

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10th May 2012 13:33

Thanks

So is it the case now that if you don't agree with HMRC's opinion on the technical arguments in a complex case you have to accept that there was an "error". Surely a (reasonable and well-argued) disagreement about interpretation and application of case law is not an "error". In the old days you would speak to HMRC, explain that you do not agree to their interpretation but would agree to concluding the case with no penalties, given the technical disagreement. Everyone benefits as it gets a quick conclusion, HMRC get their tax without any allegations of "errors" or "carelessness", which clearly did not take place here. It looks as if the only way to challenge the appropriateness of a penalty is to continue challenging the technical argument. How can this be a fair or practical system?

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25th May 2012 23:25

So far out of line

irmcleish wrote:

So is it the case now that if you don't agree with HMRC's opinion on the technical arguments in a complex case you have to accept that there was an "error". Surely a (reasonable and well-argued) disagreement about interpretation and application of case law is not an "error". In the old days you would speak to HMRC, explain that you do not agree to their interpretation but would agree to concluding the case with no penalties, given the technical disagreement. Everyone benefits as it gets a quick conclusion, HMRC get their tax without any allegations of "errors" or "carelessness", which clearly did not take place here. It looks as if the only way to challenge the appropriateness of a penalty is to continue challenging the technical argument. How can this be a fair or practical system?

They are often giving people no choice except to go to tribunal, knowing this is the only way to enforce the tax payers rights, they also know that most of the time people will not do so, for fear of costs if they lose, basically state sponsored terrorism to raise extra funds.

 

Regards

 

MtF

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10th May 2012 14:00

carelessness

I think all HMRC are trying to do is establish how much care was taking before the claim was made.

 

Not everyone gives PPR the consideration you may have done, professionally represented or not. Many assume everyone is due one house "tax free" or fail to understate the complex nature of the relief - which incidentally re comment further above - has always been one of quality. My suspicion is that HMRC are, in the light of the growth in buy to lets, looking far more closely at PPR and whether houses are genuinely exempt or not. I would consider it totally in order for HMRC to impose a penalty where someone just assumed the relief was due when they had owned more than one property and had not taken the trouble to check the rules. I don't think it's about penalties on technical disputes; it's about people choosing not to acquaint themselves with the rules so they can get away with a tax free gain. And I would guess there are a VERY large number of individuals who were not due the relief who have had it by default. 

 

[HMRC should also IMHO be looking much more closely at houses bought done up and sold too - CGT or trading?]

 

Looked at in this context you really have no choice but to argue your client took informed and considered advice. In such a situation I would consider 0% penalty due and go to appeal if HMRC do not agree.

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By ACDWebb
10th May 2012 14:24

One might even say

that they were not careless, as they did take advice on the matter and it has come down to a matter of interpretation, which with a view to concluding matters without bothering the tribunal the client will accept.

An error that was not careless does not incur a penalty - see CH81120

As I understand it, if you can prove it was not careless, just a matter of interpretation, particularly if the claim was covered by White Space notes explaining the reasoning behind the claim, then no penalty should be relevant, rather than one mitigated to 0%.

It is that bit of the argument you are into now I suppose

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11th May 2012 17:59

If your client has complied with para 18 of SP1/06 and flagged-up on the return that a view different to HMRC's had been taken (in order to gain protection from a discovery assessment) then I find it hard to see that there has been any carelessness by your client.

Regardless of that point, when it comes to penalties the normal burden of proof in taxation is reversed: HMRC have to prove carelessness etc. The taxpayer does not have to prove his innocence. Therefore ask the Inspector why he thinks your client was careless.

Taking advice from a suitably qualified and experienced professional on a complex area of the law is prima facie evidence that your client took reasonable care in completing his tax return. It is for the Inspector to demonstrate that this first sight view is wrong.

 

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By Taxcon
18th May 2012 11:25

solution?

This sounds like an eminently suitable case to submit for the Alternative Dispute Resolution pilot, if there is no appealable decision issued yet.  PRR is always a fact-heavy issue (as are penalties) and independent review may well get you where you need to be or at least help you and your client to understand HMRC's case better and get you better prepared for a Tribunal hearing.  Don't be put off by the fact that you will get a Revenue-trained facilitator - so far in the pilots not one complaint of bias has been made - they really do act objectively.  Search for ADR on the Revenue website and make an online application - if you're not in one of the target geographical areas apply anyway - they want cases to review.  They won't take the case if there is an open appeal though, in this phase of the pilot.

If there is a penalty for careless inaccuracy (and I'd have thought there is no carelessness if your client acted on the basis of sustainable advice at the time) prepare the ground for an application for suspension.  Penalties are also an area  where ADR is valuable, so bear that in mind if HMRC are intransigent or unreasonable.

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18th May 2012 12:29

Beware

I had a case with HMRC & they adopted a similar approach half way through when they suddenly alleged neglect.The gist is that they seek to win a case by any means & the route they are choosing is that there is neglect by a taxpayer "or someone acting on his behalf".In extreme cases they will allege professional negligence if it frightens you off & means they will win. The days of reaching a reasonable & fair conclusion are long gone.In my case, they went to a Tribunal Hearing & withdrew their claim for penalties on the first morning of the hearing.A deal would have been done months before if they had dropped their claim then.

My advice is do not trust HMRC & be suspicious of their motives in all cases.

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HMRC guidance or helpsheets

"Did you consult any HMRC guidance or helpsheets? If so please confirm what you looked at" 

This quote from the OP reminds me of a comment made at a seminar I attended recently.  With the increase in the number of HMRC Toolkits, a suggestion was put forward that in the future HMRC might refer to these and try to use them as a stick to beat both represented and unrepresented taxpayers alike, along the lines of "if you'd read what we said to do, this wouldn't have happened". 

I can understand why they might want to put these help sheets out there, but surely that is what they are - to be used as a guide?  Clearly, HMRC believe everything they produce is factually correct and cannot be challenged in any way!

 

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By EGo
22nd May 2012 17:12

Toolkits

Ianthetaxman says 'a suggestion was put forward that in the future HMRC might refer to these and try to use them as a stick to beat both represented and unrepresented taxpayers alike, along the lines of "if you'd read what we said to do, this wouldn't have happened'.

IMHO any such reference to tookits should be refuted. Toolkits are merely an additional piece of guidance and do not replace the legislation and case law. HMRC (eventually) agreed that whether you use a toolkit is irrelevant to deciding reasonable care - and that whether a taxpayer took reasonable care is based upon the facts of each case - that is in the intro to toolkits.

We must not let anyone give or receive the impression that the use of toolkits is compulsory. Otherwise we'll be ruled by HMRC's interpretation of the law. 

 

 

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Toolkits
@EGo - I would agree with you, this was a comment made at a tax update course. The speaker made reference to this issue but was doing so I believe to alert us that this was the route HMRC might go down, and this is an example of one such case.

I would agree that all the facts should be looked at rather than simply accepting what HMRC guidance says; after all, it is just that. It will be interesting to see how these types of cases proceed.

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25th May 2012 16:07

Same experience

Just concluded a case with the same situation. HMRC agreed no penalty but included a paragraph to our client: "Should the question of Capital Gains Tax come up in future I would suggest looking at some HMRC Guidance or consult (sic) HMRC on the matter before completing your return"    ......I'm still fuming, but biting my tongue, (if that makes sense)

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25th May 2012 23:29

Unprofessional and unethical

mirrored wrote:

Just concluded a case with the same situation. HMRC agreed no penalty but included a paragraph to our client: "Should the question of Capital Gains Tax come up in future I would suggest looking at some HMRC Guidance or consult (sic) HMRC on the matter before completing your return"    ......I'm still fuming, but biting my tongue, (if that makes sense)

Yes they are telling your client that you are an idiot, and that if they want to work out how many sheep they have they should ask the wolf to count them next time.  They no longer have any shame or standards.

MtF

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