Mark McLaughlin looks at whether reliance on professional advice can prevent penalties if tax planning involving avoidance arrangements goes wrong.
HM Revenue and Customs (HMRC) will generally seek to impose penalties on taxpayers who (for example) have made tax return errors resulting in their tax liabilities being understated. However, it is important to note that HMRC cannot impose penalties for errors where the taxpayer has taken reasonable care.
Unfortunately, the tax legislation does not define ‘reasonable care’. However, following recent changes, the law now specifies certain circumstances where the taxpayer cannot rely on reasonable care as a defence against penalties.
It didn’t work!
Taxpayers often point to professional advice as demonstrating that reasonable care has been taken, where reliance on that advice has resulted in the tax return error.
However, following legislation on ‘errors related to tax avoidance arrangements’ (in FA 2007, Sch 24, paras 3A, 3B), it is now more difficult to rely on professional advice as a reasonable care defence.
In broad terms, where the taxpayer receives advice relating to failed tax avoidance arrangements, they will not be able to rely on that advice to demonstrate that they have taken reasonable care to avoid an inaccuracy arising from their use of those arrangements in certain circumstances.
The ‘wrong’ tax advice?
Consequently, the tax return error will be presumed careless (if it was not deliberate), unless the taxpayer satisfies HMRC (or the tribunal) otherwise.
In considering whether reasonable care was taken to avoid the inaccuracy, HMRC (or the tribunal on appeal) must not take into account any evidence that the taxpayer relied on ‘disqualified advice’. This is defined as advice where any of the following apply:
- the advice was given to the taxpayer by an ‘interested person’ (i.e. another person who participated in the arrangements or any transaction forming part of them, or who received any fees, etc., for facilitating the person entering into the avoidance arrangements);
- the advice was given to the taxpayer as a result of arrangements between an ‘interested person’ and the adviser;
- the adviser did not have appropriate expertise for giving the advice;
- the advice took no account of the taxpayer’s individual circumstances;
- the advice was addressed to, or given to, a different person.
However, advice is not disqualified under the first three bullet points if, when the tax return was given to HMRC, the taxpayer had taken reasonable steps to find out whether the advice was disqualified, and reasonably believed that it was not. In addition, advice is not disqualified under the first bullet point if the person giving the advice (and who received any consideration as mentioned above) had the appropriate experience for giving it, the advice took account of the taxpayer’s personal circumstances, and at the time when the question whether the advice was disqualified arises the avoidance arrangement satisfies certain conditions (in FA 2007, Sch 24, para 3A(7)(c)).
The rules are adapted accordingly for personal representatives of a deceased person.
‘Avoidance arrangements’ are generally defined (in FA 2007, Sch 24, para 3B) as those where in all the circumstances it would be reasonable to conclude that obtaining a tax advantage was a main purpose of the arrangements. However, this general rule is subject to an exception if the arrangements accord with established practice, and HMRC had indicated its acceptance of that practice when the arrangements were entered into.
In addition to arrangements falling within this general definition, if certain conditions are met some arrangements are always taken to fall within that definition. Those conditions include where the arrangements are DOTAS (disclosure of tax avoidance scheme) arrangements (within FA 2014, s 219(5), (6)).
There is also a ‘disqualified advice’ exception from a reasonable excuse defence against penalties for failing to correct relevant offshore tax non-compliance by the statutory deadline of 30 September 2018 under the ‘requirement to correct certain offshore non-compliance’ rules, which are beyond the scope of this article.
The above rules for errors relating to avoidance arrangements apply when considering what is reasonable care for tax return errors, etc., relating to such arrangements in a document submitted on or after 16 November 2017, which relates to a tax period that began on or after 6 April 2017 and ended after 15 November 2017. For earlier periods, professional advice relating to avoidance arrangements is subject to the same considerations about whether reasonable care was taken as other types of inaccuracies.
HMRC’s published guidance offers reassurance that taxpayers who can demonstrate that they acted on professional advice from a person with appropriate expertise, which takes account of their personal circumstances, will normally be able to demonstrate that they have taken reasonable care (see HMRC’s Compliance Handbook manual at CH81122). Disqualified advice as outlined above should not be relied upon. If ‘caught’ by these rules, the onus will be on the taxpayer to show that they took ‘reasonable care’ to avoid the inaccuracy to prevent the possibility of a ‘careless’ error penalty.
This article was first printed in Business Tax Insider in May 2018.