HMRC penalties: Reliance on negligent advice
We look at the First-tier Tax Tribunal decision in Waseem Shakoor v HMRC, which considered whether negligent advice from an accountant could be a defence to penalties imposed upon the taxpayer who relied upon that advice.
This was an appeal by Mr Shakoor against an assessment by HMRC to CGT in the sum of £49,014 plus a 70% penalty.
Mr Shakoor had purchased two properties in August 1999, neither of which he subsequently lived in. He sold both of the properties in July 2003 and realised a profit on the sales. However, Mr Shakoor did not declare the sales (or therefore the gains) in his self-assessment tax return, as his accountant had advised him that the gains were not taxable under the CGT principal place of residence exemption. As a result, upon discovery, HMRC sought recovery of the CGT and imposed a 70% penalty.
HMRC accepted that Mr Shakoor had not acted fraudulently but alleged that he had been negligent in failing to pay the CGT due.
Mr Shakoor argued that the penalty should be reduced to nil on the basis that he had relied upon the advice of his accountant and consequently had not acted negligently.
The Tribunal considered the decision in AB (A firm) v HMRC  wherein it was established that a taxpayer who takes proper and appropriate advice to ensure that his tax return is correct, and subsequently acts in accordance with that advice (provided it is not obviously wrong), will not be considered to have acted negligently. The Tribunal concluded that this remained the correct approach and went on to conclude that if an accountant providing tax advice acts negligently then that negligence should not be imputed to the tax payer.
However, the Tribunal also considered the case of Wald v HMRC  where a 10% penalty was imposed on a taxpayer who had (albeit honestly) negligently failed to declare expenses on his tax return, which had been prepared by his accountants.
In distinguishing the two cases, the Tribunal concluded that where a tax payer simply retains an accountant as an agent or functionary, and not as a ‘professional adviser’, the accountant’s negligence is unlikely to be a defence. The Tribunal considered the scenario where a taxpayer fails to meet a deadline for filing a tax return due to the negligence of their accountant; in that case the accountant will simply be carrying out an administrative task and the taxpayer will not be able to rely on the accountant’s negligence as a defence.
On the other hand, the Tribunal suggested that where a professional adviser is retained to provide professional advice based on the best of his skill and professional ability, this may provide the taxpayer with a defence, in accordance with the decision in AB (A firm) v Wald.
In this instance, Mr Shakoor admitted that when his accountant provided him with the tax return he noticed that there was no reference to the disposal of the properties. However, Mr Shakoor argued that when he had questioned this with his accountant, his accountant told him that the gain was exempt from CGT and he did not therefore seek any further clarification from his accountant.
Accordingly, the Tribunal held that Mr Shakoor knew he had not resided in either property and there must therefore have been, at the very least, reasonable doubt in his mind that the principal place of residence exemption could apply. The Tribunal considered that ultimately this was a case of “shutting one’s eyes to what either was or ought reasonably to have been seen as incorrect advice”.
On that basis, the Tribunal held that Mr Shakoor should pay a penalty of 30% as an appropriate assessment of his relative and relevant culpability.
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