Gabelle Tax Analysis: No penalty due if the adviser was careless

The First-tier Tribunal (FTT) case of Hanson v HMRC, which was published on 6 June 2012, highlights that in certain circumstances the adviser’s failure to take reasonable care should not necessarily mean the client should be penalised under Finance Act 2007 Schedule 24-the new penalty regime.

More specifically, paragraph 18 provides that no penalty is chargeable on the taxpayer when a document given to HMRC on the taxpayer’s behalf is found to be inaccurate and HMRC is satisfied that whilst the adviser was negligent the taxpayer did take reasonable care.

The FTT considered the adviser’s failure to correctly report the chargeable capital gain made by Mr Hanson on the disposal of loan notes in the 2008-09 tax year. The main facts established by the FTT were that:

  • At the time of the disposal of the loan notes the advisers considered whether any form of relief was available for CGT purposes and concluded Entrepreneurs Relief was not available;
  • Mr Hanson consulted his advisers as to whether UK holiday letting property could be used to mitigate the CGT liability, as he had acquired such a property;
  • The advisers confirmed that a form of holdover relief was available;
  • Mr Hanson relied on his advisers to complete his 2008-09 tax return and relief was claimed to mitigate the CGT based on the form of holdover relief; and
  • The tax return did not provide details of the relief being claimed, as stated in the guidance notes.

HMRC opened an aspect enquiry into the 2008-09 tax return to specifically review the capital gains tax (CGT) position on the disposal of the loan notes. The officer asked for the CGT computation and an explanation of the relief claimed. The advisers initially asserted that Entrepreneurs Relief was available (despite the fact that the advisers had already ruled this out) and after further correspondence they accepted that there was an additional tax liability.

HMRC charged a penalty on Mr Hanson on the basis that the 2008-09 tax return was incorrect because a false claim was made for relief against the CGT and that the inaccuracy was attributable to carelessness.

In this case, the FTT determined that Mr Hanson did take reasonable care - he used a competent professional adviser, provided the adviser with all the relevant information, checked the advice to the best of his ability and submitted his return on the basis of this advice. The appeal was therefore allowed and the penalty reduced to nil.

The key points to remember are that Mr Hanson:

  • was deemed to have taken reasonable care to ensure the advice he received was correct;
  • could not be expected to know the types of relief or understand the complex conditions to be met to make the relief claim; and
  • sought professional advice from his accountant, who confirmed relief was available and completed his tax return on this basis.

What is also clear is that the inaccuracy in the return was not obvious to Mr Hanson. For example, if the total chargeable gain reported on the return was incorrectly entered in the sum of £100,000 instead of £1m then the FTT will almost certainly have not allowed the appeal as it was obvious the reported gain was incorrect. The FTT’s decision was based on the fact that Mr Hanson had taken reasonable care.

Whilst the appeal was allowed and Mr Hanson not fined for submitting an incorrect return, his advisers were still left in the uncomfortable position of admitting to the FTT that they were careless. If specialist advice had been sought at the time the gain was made and this advice followed up then in all likelihood Mr Hanson and his advisers will have avoided the disruption and costs of the enquiry and FTT hearing and may also have potentially mitigated the tax liabilities.

John Hood is a Director at Gabelle LLP. He can be contacted at john.hood@gabelletax.com or via TaxDesk on 0845 4900 509.

Noel Hankinson is a Tax Investigation Consultant at Gabelle LLP. He can be contacted at noel.hankinson@gabelle.com or via TaxDesk on 0845 4900 509.