Self assessment errors: When the accountant is blamed
Jennifer Adams investigates the increasing importance HMRC is placing on agents' tax return preparation processes and considers how agents can reduce the risk of being blamed.
Picture the scenario: a taxpayer was under investigation for non-disclosure of foreign earnings. The enquiry settlement letter included the following paragraph which needs careful scrutiny:
"In order to help me consider the behaviour involved and establish the penalty position, I would ask that you please state what systems were in place for the filing of your tax returns i.e. did you provide your tax advisers with information/documents and ask them to prepare your returns, did you ask them to prepare your return and then supply them with information/documents which they asked for, did your tax advisers send you a copy of the intended return for you to check before authorising its submission, did you meet with your tax advisers to discuss your tax return before/during its completion to check what was being returned."
HMRC is clearly asking for a timeline and confirmation that the client had been proactive rather than inactive in supplying information to the agent (including the missing foreign earnings).
By asking this, HMRC wants to find out how careful the client was in the preparation of the return, which will determine the amount of penalty charged.
The procedure used by the agent is clearly being scrutinised. Whether the words used intend to open the possibility of placing the blame at the door of the agent is something is open to consideration.
The problem for the agent when determining the validity of any of the scenarios presented is that if the agent didn’t know about the income in the first place (as in this case) then it would be difficult to ask.
Anything in the Taxes Acts or HMRC manuals?
The enquiry letter also enclosed two Compliance Checks factsheets - CC/FS7 (Penalties for inaccuracies in returns and accounts) and, worryingly, CC/FS7 (Human Rights Act - with reference to 'criminal penalties').
Careless is defined for penalty purposes as a failure to take 'reasonable care' (FA 2007, Sch 24, para 3). Penalties for careless behaviour range from Nil to 30% depending on whether the disclosure was prompted or not.
If the taxpayer is deemed to have been careless then the 15% penalty is the usual percentage levied but should it be possible to prove that the taxpayer did take reasonable care then no penalty is levied.
There is no statutory definition of what constitutes 'reasonable care' but HMRC’s view is that it depends on the person’s particular abilities and circumstances, if, for example, a taxpayer who usually has simple, straightforward tax affairs encounters a transaction or event with which they are unfamiliar but does not declare the transaction, then HMRC may argue that they had not taken reasonable care unless they can prove that they carefully researched the correct tax treatment or (importantly) sought appropriate advice (CH81120).
In his settlement letter, the inspector is looking to attribute sections in the FA 2008 and the Compliance Handbook to the situation.
- "Where [the taxpayer] relies on any other person to do anything that is not a reasonable excuse unless [the taxpayer] took reasonable care to avoid the relevant act or failure.’(para. 20(2)(b), Sch. 41, FA 2008)."
- "Where a person has asked somebody else to do something on their behalf, that person is responsible for ensuring that the other person carries out the task. They cannot claim they had a reasonable excuse merely because the task was delegated to a third party and the third party failed to complete it. We expect the person to take reasonable care to explain to the third party what they require them to do, to set deadlines for the work and to make regular checks on progress, reminding where appropriate" (Compliance Handbook, CH 716400 Penalties for Failure to Notify: in what circumstances is a penalty payable: reasonable excuse: reliance on another person)
- The benchmark is 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. (Compliance Handbook CH 81125 Penalties for Inaccuracies: Types of inaccuracy: Reliance on another person)
HMRC’s Compliance Handbook includes examples of errors for which no penalty would be levied, (CH81131) as well as giving examples of careless errors (CH81145). The examples quoted are basic ones such as transposition of figures (no penalty) and instances where the taxpayer came up against a problem but didn’t seek advice such as whether VAT is reclaimable on the purchase of a van (penalty).
The focus is clearly on the actions of the taxpayer rather than those of his agent and so long as the taxpayer acted reasonably in relying on the agent, then they should not be penalised for any agent shortcomings.
HMRC will not usually accept that the taxpayer has acted reasonably unless they can show that they closely oversaw the agent's procedures at all stages (eg asking whether the return has been submitted and asking for proof).
Be aware that the burden is always on HMRC to prove that there has been 'careless' behaviour by the taxpayer.
In Shakoor v Revenue & Customs  UKFTT 532 (TC), the Tribunal held that if the advice of a professional such as an accountant is negligent, then that negligence is not imputed to the taxpayer; the question is whether it was the taxpayer who was negligent.
In this case, the Tribunal found that the taxpayer should have been aware that a declaration of capital gain needed to be made, should have realised that the advice was wrong or potentially wrong such to be questioned and as such the penalty was reduced from 70% (deliberate error) to 30% (careless error) as the agent had been retained to give professional advice rather than being asked just to submit a return.
The tax case that is particularly worrying for accountants is Gary Laithwaite v HMRC  UKFTT 0759 (TC) details of which were outlined in 'Accountant to blame in CIS appeal' where the builder’s reliance on his accountant was held to be a reasonable excuse for the errors in not submitting CIS returns.
The taxpayer did not operate the CIS deduction scheme and should have done. Although the accountant was not taken on to operate CIS, when he prepared the final accounts the accountant should have become aware that his client was not operating the scheme.
The Tribunal's stance was that this should have been pointed out to Mr Laithwaite but apparently it was not. In effect Mr Laithwaite assumed that not pointing something out meant that he was correct.
Replying to the letter
Should a similar letter as the above hit your desk, it would be advisable not to go into too much detail but just answer the questions set as clearly as possible, no ambiguity. Don't get involved with the 'blame game' if you were not at fault – you need to be wary that you will only be hearing one side of the story.
However, if you were at fault then first contact your professional indemnity insurer helpline for advice (this is what they are there for).
- Keep emails/back up emails. Make notes of any phone calls.
- Letter of engagement: Review to ensure that the onus is on the client to include and furnish all information and that if they are unsure then they should ask.
- Taxfiler has a schedule of last year's entries: Many accountants automatically send such listings to clients at the start of the tax year. Doing so will prove that you did ask for all the information.
- Note the final comment in the letter about meeting with tax advisers. If you don’t meet with clients then e-signing or paper signing must be mandatory. However the return is signed, always refer client to the Declaration comment on page TR8 box 22 of the return.
- Email a copy of HMRC acknowledgement of submission: This keeps the client in the loop and shows that you have done as requested.
- Invest in practice management systems whereby the client can securely transfer information
- And finally... an aggrieved client may seek recompense: Professional indemnity is a must.