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‘Careless’ accountant did not understand tax scheme

The upper tribunal found an accountant didn’t take reasonable care when he failed to understand or critically appraise the tax avoidance scheme he reported on his client’s tax returns.

24th Jan 2020
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John Hicks used a tax avoidance scheme (the Montpelier dividend strip scheme) in 2008/09 which generated significant trading losses that he carried forward to set against his profits arising in 2009/10 and 2010/11.

This scheme was correctly declared under the DOTAS rules on his 2009/10 and 2010/11 tax returns.

In December 2010 HMRC opened an enquiry into the 2008/09 return asserting that no trading loss arose.

On 15 March 2015 HMRC issued discovery assessments in respect of the 2009/10 and 2010/11 tax returns. The time limit for issuing a discovery assessment is four years from the end of the tax year, or six years if it can be shown that the taxpayer, or someone acting on their behalf, was careless in completing the return.

No discovery assessments can be raised if the taxpayer has made sufficient disclosures to HMRC. A statutory review found that Hicks had made sufficient disclosures, so HMRC had to rely on the fact that Hicks, or a person acting on his behalf, was careless to justify the discovery assessments being raised inside the six-year period.

FTT conclusion

The FTT established that the carelessness had to relate to the tax returns and not be an abstract carelessness. It found that Hicks and his advisers had taken reasonable care over the tax returns so the discovery assessment for 2009/10 was out of time.      

Upper tribunal

The upper tribunal looked at the facts in a new light and was particularly critical of Mr Bevis who acted as Hick’s accountant throughout the period covered by the returns.

Bevis was Hick’s main point of contact in the firm Chapple Cole, which had recommended the Montpelier scheme to Hicks in 2008. Bevis left that firm in 2009 to set up his own accountancy firm (Precision), and Hicks followed him to become a client of Precision. 

The upper tribunal considered the following actions or inactions of Bevis were careless, which brought about the insufficiency of tax:

  • he gave encouraging advice to Hicks about whether he should use the scheme, although he did not have expertise in this area of tax.
  • he relied entirely on information from the scheme promotors in order to draft disclosures regarding the scheme on Hicks’ tax returns, as he didn’t have the technical expertise to form an independent opinion on the detailed workings of the scheme. It was not reasonable for Bevis to do this.
  • Bevis did not inform Hicks that he did not have expertise or experience in the area of tax legislation the scheme relied upon.
  • Bevis did not check with Hicks when completing his returns whether Hicks had established the necessary pattern of trading in dividends for the scheme to work.

In conclusion, Bevis’ acts and omissions amounted in law to carelessness in relation to the completion of the relevant tax returns completed on behalf of Hicks.

The upper tribunal allowed the discovery assessments to stand for both 2009/10 and 2010/11.

Implications for advisers

Bevis did not give evidence at the upper tribunal and was not represented, so the findings of the tribunal may seem a little harsh as he was not there to explain his actions.

We should also bear in mind that the tax professions’ view of the use of tax avoidance schemes has turned 180 degrees since 2008. In November 2016 Mark Lee reported that the code of conduct for tax advisers (PCRT) had been amended to tackle the creation and promotion of tax avoidance schemes.

The 2019 version of PCRT explicitly states that members must not create, encourage or promote tax planning arrangements or structures that:

  • Set out to achieve results that are contrary to the clear intention of Parliament in enacting legislation; and /or
  • Are highly artificial or highly contrived and seek to exploit shortcomings with the relevant legislation

Warning

If you are preparing tax returns today for clients who have used tax avoidance schemes over the period of the return, you need to be very sure that you understand the operation and implications of that scheme. If you feel out of your depth you should seek specialist advice about the scheme and how it should be reported.  

Non-compliance with the terms of the PCRT could lead to you appearing before the tax disciplinary board, or similar disciplinary panel for your own professional body.

Replies (12)

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By mkowl
27th Jan 2020 10:11

how about when you do that, then the tax scheme provider does a runner and leaves the accountant to pick up the pieces. Then we still get blamed as the last man standing !

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Replying to mkowl:
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By johnjenkins
27th Jan 2020 10:34

How about not advising of "schemes". There is a big difference in setting out your stall to pay the least amount of tax as opposed to setting up schemes that may include "artificial" movements.

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By towat
27th Jan 2020 10:38

Surely the reason for using a third party specialist tax firm is that you do not have the necessary expertise required to understand the scheme, it seem very harsh to blame a general practitioner for not having the expert knowledge needed to report. You wouldn't ask your GP to perform heart surgery.

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By justsotax
27th Jan 2020 10:46

what a weird conclusion....so 'specialist tax avoidance ', which no doubt was supported by 'expert' tax barrister opinion and respective tax specialists....provide information to complete Return to 'general' tax adviser and he gets landed with the blame?! Does this mean in future that if you need to get a consultant or use a tax advice helpline then you too fall foul of the law.....ridiculous.....

(* Sympathy does ebb away a little if it is true that the guy involved did indeed encourage the client to look into this type of scheme....but then what part did the client play).

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Replying to justsotax:
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By flightdeck
27th Jan 2020 17:54

I am betting the client played a very big part - he wanted to avoid paying as much tax as possible. Because, you know, you can also decide not to avoid tax.

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By Ian McTernan CTA
27th Jan 2020 10:47

So Chapple Cole recommended the scheme, but Bevis is singled out? Bullet nicely dodged there.

This case shows that anyone recommending these tax schemes to clients needs to understand the law around them- as we all know by the time HMRC get around to busting the scheme the scheme promoters with their guarantees, legal opinions, etc will have disappeared into the sunset with a wad of cash, and you, the tax adviser, will be left to carry the can.

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By Justin Bryant
27th Jan 2020 13:18

But it's not that bad is it? This was only a problem here coz it caused an extended DA period. It did not cause penalties for carelessness.

The answer re penalties & reasonable excuse re reliance on an advisor is, in short, that assuming the scheme is not DoTAS grandfathered (and assuming TAAR/GAAR aren’t in point), HMRC now have to force a DoTAS disclosure to negate the RE reliance on an advisor defence (re tax schemes and other tax mitigation planning at least). See:

https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch81123

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By chronus
27th Jan 2020 12:31

Here is an an extract from the UTT `s decision on why the hapless Mr. Bevis was negligent.

"137. We will next consider whether Mr Bevis was negligent in forming the view that Mr Hicks was entitled to deduct the expenditure which he did deduct. It was a fairly elementary matter of tax law to ask whether expenditure on the acquisition of dividend rights was wholly and exclusively for the purposes of the taxpayer’s existing trade. Mr Bevis knew, or certainly ought to have known, the nature of Mr Hicks’ preexisting trade and therefore knew, or certainly ought to have known, that the expenditure in this case was not wholly and exclusively for the purposes of Mr Hicks’ pre-existing trade. In any case, the importance of the point was spelt out in paragraph 11 of Counsel’s Opinion which was provided to Mr Bevis. Mr Bevis took the view that it did not matter if the expenditure was not for the purposes of Mr Hicks’ preexisting trade if he went on to establish a relevant trade where it could be said that the expenditure was for the purposes of that trade. However, Mr Bevis took no action to investigate whether Mr Hicks had established the necessary pattern of trading when completing his 2009/10 and 2010/11 tax returns. Mr Bevis therefore included the expenditure without having formed the view that, on the facts as to Mr Hicks’ trading, the expenditure was properly deductible".
I would have thought one need not necessarily be a tax expert accountant to know the rules about deductible expenses. Is not that the sort of thing most of us are confronted with frequently.

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Replying to chronus:
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By johnjenkins
28th Jan 2020 09:06

Expenses for training for a trade prior to commencing is not allowable, however expenses for training whilst trading is. Similar scenario.

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By rememberscarborough
27th Jan 2020 16:13

Again we come back to an idiotic tax system whereby if the accountant's previous employer had recommended the scheme it would be allowed but because he did it's not. The simple fact is that the scheme itself should be the deciding factor not the accountant. Strikes me this is more about jobs for the boys than the actual validity of the tax scheme...

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By James Bevis
06th Feb 2020 16:36

Firstly, I have no qualms in admitting that this is myself being referred to in this judgement and I am very grateful for the positive and supportive comments provided by my peers
This article may be based on the documentation issued by the court hearing but factually is not 100% correct as I was advised that I was not required to be present in court as this hearing was to determine whether the previous hearing (which was successful for my client) had the applied the statutes that currently exist in law correctly and not to re-assess the previous judgement.
I can categorically state that I never at any point did not make it clear to all parties that I did not have experience in this matter, hence the scheme providers confirming all tax returns were completed in line with the requirements before submission to HMRC in all years.
Also, if you read the documentation in full you will see that it was previous employer that advised and encouraged entry into the scheme, I personally was not in attendance at the meetings with Montpelier so how could I form any genuine opinion?
This article also fails to point out that the matter due to the judge deciding to start the case from scratch which was not the grounds of appeal, is going back to court again in the near future
I am extremely disappointed that what appears to be lazy journalism here with no regard to an individuals business and reputation by allowing content, facts and truth get in the way of a few News of the World style headlines
Im sure if the shoe was on the other foot, they would want more courtesy shown

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Replying to James Bevis:
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By chronus
07th Feb 2020 09:58

I have every sympathy for you and am sure this is shared by all our colleagues in the profession.
However it is through such misfortune that lessons have to be learned, mistakes and errors, especially by professionals from whom high standards are expected. The aviation industry perhaps represents the epitome of human failings. Accordingly accident investigation in this industry is an essential part of ensuring that we learn from them and try and avoid them in the future.
Journalism is an essential part of this process. In this instance whilst agreeing that the headline of "careless accountant" is undeserving, yes perhaps a lesser adjective may have been more appropriate, nevertheless it seems to have had the desired effect of grabbing attention, certainly mine, in extremis. Not out of some perverse curiosity, but wholly for "there but for the grace of god".
I wish you and your client every success in the forthcoming appeal. I trust you and your counsel will consider the appointment of an accountant as expert witness to express an opinion on your conduct in this matter. That being the ultimate question which we all need to ask to ourselves, " had it been me, what would I have done".
If you need any help on the expert witness aspect, please do feel free to get in touch.

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