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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.​

14th Jan 2020
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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).

Tax cases

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 [2012] 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 [2014] 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).

Recommendations

  • 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.
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Replies (14)

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By SXGuy
15th Jan 2020 07:16

Very worrying. I understand the need to assertain whether they supplied a tax adviser with all the information in order to work out if the tax payer was deliberate or not with not declaring something but the way it is worded does suggest passing blame to the tax adviser and that does worry me.

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By Ian McTernan CTA
15th Jan 2020 10:48

They are just getting ready for the next penalty regime, which will be to fine people with advisers and then the advisers the same amount, as HMRC don't like represented taxpayers and would prefer to only tell taxpayers how much tax to pay with no one ever querying the vast number of mistakes they make.

Hmm, might need more coffee this morning...

Thanks (3)
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By Sonia_vat
15th Jan 2020 10:49

Coming from a former HMRC background, and having experience in this, I would suggest that all advisors keep notes and records of discussions and advise given to clients. As soon as penalties are issued, the clients are all quick to blame the advisor, they will quickly say that verbal information was given, or records provided but ignored. Advisors should ensure that notes are kept! Great advice! Maybe engagement letters or a verbal statement that says it’s the client responsibility to deal with anything outside the aspect you are doing and you won’t accept responsibility for anything associated with other tax aspects.
The concern is always that HMRC places the penalty or a portion of the penalty on the advisor. Keeping good records can avoid it. Although there were times when I did think it was completely down to the fact the advisor was useless, probably over worked, under paid, or just not paid that errors were made by them.

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By dgilmour51
15th Jan 2020 10:56

What I find fascinating is the vacillatory nature of HMRCs stance...
on the one hand
"... 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 ..."
it is assuming that the taxpayer will know more than the 'expert' help

on the other hand
"...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."

And how would they "checks the adviser’s work or advice to the best of their ability" ?
No use trying to read the statute, rules or advices from HMRC if only they knew what to look for, the obscurity of which being the reason they went to an advisor in the first place!
So perhaps get a second adviser - whose work we then have to check.

Methinks the simple answer is to make HMRC have a duty of care in the advisements they give and for them to have an occasionally answered HelpLine to which these checks can be addressed.

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Hallerud at Easter
By DJKL
15th Jan 2020 11:54

People do suffer brain freeze over financial matters- some clients will likely never understand accounts and tax and that does make them unsettled (prefer that to scared)

Accountants do have to appreciate this point with their clients, in the same way when I go into a meeting with a group of construction professionals I am usually the technical idiot asking inane questions and not fully understanding the answers, clients of accountants can be similar- I have a very clever brother in law, qualifications in his field coming out of his ears, he just does not really understand accounts, finance, savings products, pensions et al- it happens.

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By johnjenkins
15th Jan 2020 14:06

HMRC are just trying to go from "careless" to "deliberate". They are trying to avoid any confusion as to what might or might not have happened in their constant strive to have everything black and white.

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Replying to johnjenkins:
By SteLacca
15th Jan 2020 15:02

Have you read the varied tax legislation. By and large, black and white it ain't.

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Replying to SteLacca:
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By johnjenkins
16th Jan 2020 10:18

Therein lies the problem. We all know that business isn't black or white, however much HMRC try and make it so.

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By whitevanman
15th Jan 2020 15:43

I don't believe there is really anything new in all this. The purpose of the questions quoted in the OP (and no doubt we could all think of more) is to establish what happened, what the client did and whether in all of that (s)he did what a reasonable person would. It is certainly not for HMRC to apportion blame.
You need look no further than many of the posts on Aweb to see what they may be getting at. How many posts lack basic facts? And yet some people still offer an opinion! If the client tells you a property was sold in the year. There are many questions you need to ask. Just as importantly, the client needs to answer them, fully and truthfully. If told that, by some magic, there will be no tax, (s)he needs to ask questions to satisfy themselves that the answer reflects the facts, failing which the agents understanding should be corrected. It is not about the client being an expert or employing a second or third expert etc. It is simply asking that, when required to complete a return, the client takes all reasonable steps to ensure it is correct and complete. If the client simply gives you his records and then signs the return without checking it, that is not the action of a reasonable person and the client may well come liable for a penalty.
As others have said, keeping records of discussions etc is essential to convince the client that it is not your fault (again, we all know how that will work out!) and perhaps more importantly, to safeguard your own position.

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Replying to whitevanman:
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By johnjenkins
16th Jan 2020 10:24

In some cases the attitude is, rather pay the penalty than have the hassle. Sometimes the Accountants fees will be more than the penalty. It can boil down to costs. The question that should be asked is:- are some clients willing to pay for a professional service or are they content with a mediocre one and pay a penalty occasionally?

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Replying to johnjenkins:
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By whitevanman
16th Jan 2020 13:27

Agreed, but if the accountant chooses to provide a mediocre service, I would suggest (s)he has no complaint if blamed by the client when HMRC pursue a penalty that works out greater than the fees "saved".

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Replying to whitevanman:
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By johnjenkins
16th Jan 2020 13:40

Therein is the point I am making. If a client can't or won't pay for a professional service they will go to a (in my book) non-Accountant (a number cruncher who just puts stuff together without asking the relevant questions). So, unfortunately (in my view due to over techie) we have a situation where clients have the option. Years ago this option wasn't available. You can see by the adverts. "Click a button and your tax return is checked for errors". This crap has to stop.

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Replying to johnjenkins:
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By Gone Sailing
16th Jan 2020 13:45

Als0 "Congratulations, your bank account is reconciled" takes no account of the several dozen unreconciled transactions going back to way back when.

Also the QBO app with a GPS tracker which posts mileage without the option to drill and review the journeys.

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By Gone Sailing
15th Jan 2020 17:04

Several clients now considering 'going it alone' with one of the online accounting and tax filing offerings.

No doubt they will get stuck at some point and not be prepared to wait for HMRC to answer the phone.

So I'm mulling over the pros and cons of retaining my tax agent status as their 'in case of emergency break glass' scenario.

Then there's the consideration of my responsibility if they file erroneously or worse.
Any thoughts?

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