Tax return omissions tied to accountant’s tragedyby
A taxpayer subject to a Code of Practice 9 investigation has won their appeal, with the first tier tribunal finding that the omissions in his tax returns were not deliberate, but rather the result of a terrible family tragedy suffered by his accountant.
Charles Collier had been involved in property development for over 40 years. His tax affairs were complex, with multiple income sources, including from partnership income, employment income, as well as dividends, rental income and interest. His income in the relevant years was regularly in the six figures, sometimes in the millions.
As a child, Collier was diagnosed as dyslexic, with a reading age of 12. As a result, he relied on the services of a small group of trusted professionals for business purposes.
One of the core professionals Collier relied upon during the appeal period was a chartered accountant and chartered tax adviser, referred to as PC. PC had been involved with Collier’s tax affairs since the late 1980s and had prepared and submitted the relevant tax returns on behalf of Collier and the partnership.
However, following a terrible family tragedy in 2006 in which he lost his son, PC suffered a decline in the standards of his professional work, including regular absences from the office. Although the drop in quality of work was understandable given PC’s circumstances, late preparation and filing of accounts became the norm.
In light of the circumstances and Collier’s long-standing relationship with PC, Collier was reluctant to terminate the relationship. However, after much deliberation, the decision was made to gradually move work away from PC. By October 2011, a new adviser (Young & Co) had taken over all the accounts.
Subsequent evidence showed that there had been tax irregularities while Collier’s returns had been prepared by PC.
Young & Co noted that PC’s records were extremely messy and not very organised. Over the years under appeal, there had been several omissions and errors, including undeclared rental income, an undeclared capital gain of some £30,000 in 2006/7, as well as six undeclared commissions within Collier’s partnership accounts, one of which amounted to nearly £312,000 for the accounting year to 31 October 2007/tax year 2007/8.
Many omitted figures stemmed from Collier’s Bank of Scotland account. PC was aware of the account, that the account was used for both business and non-business transactions, and had been provided with that account’s bank statements.
In December 2012, HMRC issued Collier with a Code of Practice 9 investigation, as it suspected tax fraud had occurred.
By May 2017, HMRC issued Colier various assessments and penalty determinations covering tax years 2006/7 to 2010/11. Similarly, in April 2021, HMRC issued amendments to partnership tax returns for various accounting periods ending between 31 October 2006 and 2010, as well as penalty determinations and assessments to Collier and his wife, in their capacity as partners in the partnership. Both Collier and the partnership appealed [TC09004].
The taxpayers did not dispute that amounts that should have been included in the relevant returns had been omitted. Rather, they argued that the omitted amounts occurred as a result of negligent conduct and/or were brought about carelessly. In other words, they argued that HMRC’s assessments and amendments were out of time, having been made more than six years after the end of the year of assessment to which they relate.
Collier asserted that at all times he had acted in good faith, and believed his tax returns to be correct when they were submitted. While the professional problems he had experienced with PC were inconvenient and time consuming, Collier believed such issues were only timing related.
The fundamental issue for the first tier tribunal (FTT) to consider was whether the assessed loss of tax was brought about deliberately.
The FTT found Collier to be a credible witness and accepted his evidence, including Collier’s submission that the amounts involved in this case were not sufficiently significant in absolute terms or in relative terms (considering Collier’s overall business activities) so as to demonstrate that it would have been apparent to him (taking his dyslexia and reading age into account) that the returns contained omissions that required correction.
Further, the FTT was not satisfied that Collier had a suspicion, firmly grounded and targeted on specific facts, that the returns contained omissions: he did not have “blind-eye knowledge” that demonstrated he deliberately brought about the loss of tax.
Ultimately, the FTT accepted Collier’s submission that the omitted amounts occurred as a result of negligent conduct and/or were brought about carelessly. The assessments and amendments, having been made more than six years after the end of the relevant year of assessment, were therefore out of time and invalid. Consequently, the penalty assessments and determinations were also invalid.
The appeal was allowed.
Broadly, in respect of the time limits for making assessments and amendments as applicable in this case, HMRC ordinarily have four years after the end of the year of the relevant assessment (section 34 TMA 1970).
However, where a loss of tax is brought about carelessly, the time limit is extended to six years (section 36(1)), which is further extended to 20 years where a loss of tax is brought about deliberately (section 36(1A)).