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EIS tax case hangs on uncompleted HMRC forms
iStock_smolaw_Unfinished papers

Accountants implicated in ‘careless’ EIS tax case

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A doctor claimed Enterprise Investment Scheme (EIS) relief for a number of investments over a three-year period, but it later emerged that none of the investments qualified for the relief.

7th Mar 2023
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In the case of HMRC vs Dr Rizvi (TC08731) the first-tier tribunal was faced with two questions: had the doctor been careless? If not, then had his advisers?

Background

Dr Syed Rizvi was an NHS consultant with more than 40 years’ medical experience. Since 1993 his tax affairs had been handled by McKenzie Knight & Partners Ltd (“MK”). As Dr Rizvi explained, “When people come to him as a doctor, they ask for his expert opinion and he gives it to them, and he doesn’t expect (and generally isn’t asked) to explain why. He takes the same approach with his accountants.”

In 2015, EIS promoter Ben White acquired control of MK and introduced clients including Dr Rizvi to investments promoted by his firm, White & Co. At the tribunal hearing HMRC officer Joe Rawbone mentioned that HMRC was conducting a criminal enquiry into Ben White, but there was no suggestion that Dr Rizvi was complicit in any way.

Between April 2016 and November 2017, Rizvi subscribed for shares in five such companies, and claimed carry-back EIS relief in his tax returns for 2014-15, 2015-16 and 2016-17.

In each instance, White applied for HMRC clearance, but had not obtained it - so the investments failed to qualify for tax relief. HMRC issued discovery assessments on 12 March 2021 to recoup £254,826 of tax relief granted in Rizvi’s self-assessments.

Extended time limits

The age of the assessments put the onus on HMRC to prove the loss of income tax was due to carelessness, for which the assessment window is six years rather than the standard four-year limit set out in TMA1970 s34. 

For the assessments to be valid, HMRC would need to persuade the FTT that either Rizvi himself or MK on his behalf had been careless in the preparation of his tax returns.

Was Rizvi careless?

To support its argument, HMRC drew the tribunal’s attention to the tax return completion notes, which say that the taxpayer must receive an EIS3 Enterprise Investment Scheme Certificate to relief from a specific company investment.

This point was echoed in the memoranda issued by each company, which all stated: “Investors in the Company will be able to claim EIS Reliefs on receipt of EIS Compliance Certificates, which will be issued to Investors by the Directors following each Investment and after approval by HMRC.”

Since White did not (indeed, could not) issue forms EIS3, HMRC suggested that Rizvi had not “followed the steps a reasonable and prudent taxpayer would have”, else he “would have known he was ineligible to claim EIS relief”.

However, Judge Mark Baldwin felt that the issue was not quite so straightforward.

“We are with Dr Rizvi on this point. McKenzie Knight had looked after him for well over 20 years and had done so well. They were appropriately qualified to look after his tax returns…

“It does not seem to us to be imprudent or unreasonable for a taxpayer to assume that a well-qualified firm of accountants would make sure that any formal requirements needed before a particular tax position could be adopted (here, a relief claimed) had in fact been obtained… 

“In the case of Dr Rizvi’s EIS investments, these forms had always come through McKenzie Knight. It was not careless of Dr Rizvi to assume that the accountants preparing his tax return would deal with mechanical, administrative tasks such as making sure that any required paperwork had been obtained.”

In the judgment of the FTT, Rizvi himself had not been careless.

Was McKenzie Knight careless?

Turning to the accountant, HMRC argued that McKenzie Knight was at least careless in advising or making the returns on Dr Rizvi’s behalf, without taking reasonable care to ensure Dr Rizvi was entitled to claim the relief.

The judge agreed: “Checking whether there was an EIS3 is a relatively mechanical, undemanding exercise. The need for it is obvious. It should be at the forefront of the mind of any firm whose clients make EIS investments, even more so in the case of a firm like McKenzie Knight … where that firm promoted EIS opportunities actively to its clients. 

“Even a firm which did not ‘sell’ EIS opportunities and simply prepared tax returns for individuals should have been aware from the material produced by HMRC (if not from their study of the primary legislation) how important holding an EIS3 was.”

In fact, the tribunal held that “to allow a client to make a claim for EIS relief without making sure that the client held a valid EIS3 is carelessness of a high order”.

Conclusions

Dr Rizvi’s appeals were dismissed, and he is now liable for the tax.

He can, of course, seek compensation from MK. Being in possession of a clear judgment from a competent tribunal that the firm had displayed “carelessness of a high order” would almost certainly be of assistance.

Replies (15)

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By richard thomas
08th Mar 2023 10:08

On a similar, but not identical, point see the just published decision in Robson v HMRC [2023] UKFTT 266 (TC). This was on the question whether a discovery assessment was possible to recoup EIS relief which the claimant accepted was not due and which had been claimed by a dodgy company on his behalf by submitting the claimant's return. Oddly the decision does not mention McCumiskey which was on the same point.

I think that both McCumiskey and Robson are wrong - having found that the return was not made by the appellant because he knew nothing about it, it follows that an in time discovery can be made under s 29(1) without bothering to consider s 29(4) and (5).

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Replying to richard thomas:
By Ruddles
08th Mar 2023 17:01

"As s29 TMA requires the filing of a return ..."

That would appear to be a rather fundamental error.

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Replying to Ruddles:
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By richard thomas
08th Mar 2023 17:13

Indeed. It would really hamper a lot of HMRC investigations if it were true.

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Replying to richard thomas:
Ray McCann
By Ray McCann
08th Mar 2023 20:15

Richard, unusually I find myself in disagreement with you. I don’t see that the Civil code is engaged at all, there has been no return lodged by the taxpayer and consequently no claim by the taxpayer.

On that basis none of s29(1) a, b, and C of are met and no discovery assessment can be made.

It also must follow that the taxpayer was not the beneficiary of any fraud so that in simple terms there is nothing that can be recovered from him (assuming obviously that he is not complicit).

We are living in very strange days in which HMRC will not discuss a client’s affairs with a very eminent KC without a signed letter of authority but somehow it is happy to repay thousands in dodgy circumstances!

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Replying to RayM55:
By Ruddles
08th Mar 2023 20:23

Where does it say in s29 that a return or claim is required?

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Replying to Ruddles:
Ray McCann
By Ray McCann
09th Mar 2023 07:12

There has to be something that is capable of being corrected by a DA, in my view there is nothing in this case that can be, whether a Return is a requirement is thus irrelevant on the facts here, although I would agree that a DA can be made even if there was no Return.

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Replying to RayM55:
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By richard thomas
08th Mar 2023 21:56

Ray

I should perhaps just have said that in principle a DA can be made and that Jenny was wrong to say that filing a return means it can’t be.

The Tribunal has frequently said that section 29(1) sets a low bar, equivalent to “having reason to suspect”, and that the test there is subjective unlike that in s 29(5) with our old friend the “ordinarily competent Inspector” from Olin.

In the subjective view of the officer there was a suspicion that there was tax loss: the question once that is accepted is whether there is objectively a tax loss. I agree with Jenny in [61].

What I disagree with her about is what she says in the last sentence of [81]. She should having held that no valid return was made gone on to consider whether there was a tax loss within subsection (1)(a), (b) or (c).

Interestingly [28] shows that in one year at least there was a tax loss of £4,600.60 arising otherwise than on account of the EIS claim. Section 29(1)(a) is in point, and the DA could have been justified to the extent that it recovered that sum.

But for that, I agree that there was no amount of income tax that ought to have been assessed.

However I think it is arguable that subsection (1)(c) is applicable, whether or not the claim was fraudulent and the return invalid. Relief was given and it was excessive.

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Replying to richard thomas:
Ray McCann
By Ray McCann
09th Mar 2023 07:17

Richard, yes, I published an article in Taxation some years ago in which, amongst other things, I made the point that the rules would be more easily understood if “discovers” was replaced by “suspects”.

The facts here are unusual and do lead to an unusual outcome, Joe Rawbone is on the case and we have confidence!

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By Moo
08th Mar 2023 10:38

' At the tribunal hearing HMRC officer Joe Rawbone mentioned that HMRC was conducting a criminal enquiry into Ben White'
One has to wonder whether poor Dr Rizvi may have also lost his investment in these companies.

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Replying to Moo:
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By Hugo Fair
08th Mar 2023 11:41

"poor Dr Rizvi"?
Well I guess he may be now (although I doubt it) ...

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Replying to Hugo Fair:
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By farrcorfe
08th Mar 2023 12:15

And judging by the sums involved I guess Dr. Rizvi is not an NHS consultant.

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Replying to farrcorfe:
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By vstrad
08th Mar 2023 12:35

Not just an NHS consultant.

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Replying to vstrad:
the sea otter
By memyself-eye
08th Mar 2023 13:45

Truly, cowboys are adept at lassoing the fattest cattle!

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By indomitable
08th Mar 2023 13:46

Seems rather obvious that the accountants should have checked there was an EIS certificate issued by the company. This is basic.

Incidentally can't find Mckensie Knight & Partners on the web - they don't appear to have a website and it appears a company called MCKENZIE KNIGHT & PARTNERS LIMITED was dissolved on Dec 2022, all looks very murky to me, so looks very unlikely he would get any compensation from MK.

The claim should clearly never have been made and a warning to the general public that not all accountants are competent

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Replying to indomitable:
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By Postingcomments
09th Mar 2023 13:56

Tax advisers in the north west were aware of Ben White's operations years before HMRC plucked up the botheredness to take a look.

I've seen some of the EIS offerings and I wouldn't have been convinced to invest the money from down the sofa, let alone anything more substantial.

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