Cannon: Tax barrister not careless in relying on advice received from his accountant

In Cannon v HMRC [2017] UKFTT 859 (TC), the First-tier Tribunal (FTT) has held that a tax barrister was not careless in relying on tax advice received from an accountant he retained to provide professional advice on specified issues.

Background

HMRC imposed penalties, under Schedule 24, Finance Act 2007, on  Mr Patrick Cannon, a tax barrister, in respect of errors contained in his tax return. Specifically, Mr Cannon claimed sideways loss relief against his income in respect of losses realised by a fledgling furnished holiday letting business. 

Mr Cannon's accountants claimed the relief despite the fact he had not carried on the rental business for the requisite time period, in the mistaken belief that the required period could be pro-rated to take into account businesses that commenced part-way through a tax year.

Mr Cannon appealed. 

FTT decision

The appeal was allowed. 

HMRC placed much reliance on the fact that Mr Cannon is a tax barrister who ought, in its view, to fully understand and be able to navigate the relevant legislation.

It was argued on behalf of Mr Cannon that his behaviour was neither deliberate nor careless. He had simply relied on his professional advisors to assist him. He believed that he had been singled out for special treatment by HMRC because of the nature of his practice. As evidence of this, he pointed to a meeting which took place with  HMRC in August 2012 at his chambers. Mr Cannon alleged that during this meeting to discuss informal tax advice concerning SDLT legislation, one of the HMRC officials present issued a veiled threat that he should stop offering to his clients advice on tax mitigation strategies involving SDLT. 

With regard to this allegation, the FTT commented:

"The independent Bar is not “independent” for no good reason. The ability of citizens to appear before an independent judiciary, independent of the executive and organs of state, whilst being represented by legal representatives, such as barristers who represent clients before Courts and Tribunals without fear or favour (provided a sufficient fee is paid), is an important part of the largely unwritten constitutional mechanism upon which democracy and the rule of law operate in this country."

The FTT also accepted that HMRC's approach to Mr Cannon's tax affairs had been overzealous, commenting: 

"The initial decision to categorise one relatively modest fee being put into the wrong accounting year, as a deliberate error, feeds our conclusion that Mr. Charles was being overzealous and that such zealotry no doubt fed the appellant’s belief that he was being pursued as a consequence of not abiding by Mr. Valentine’s request [to cease giving advice on tax mitigation strategies] …".

The FTT concluded that Mr Cannon honestly believed that sideways loss relief was available and, furthermore, was not 'careless' in relying on the advice he received from his accountants that pro-rating applied, as the accountants had been engaged to provide professional advice in an area of law in respect of which they held themselves out as having appropriate expertise. 

The fact that Mr Cannon is a tax barrister did not mean that he could not rely on advice received from his accountants in an area for which he claimed no expertise.

Whilst the FTT accepted that the negligence of an agent engaged to undertake routine tax filing, or administrative work, can be imputed to the taxpayer, taxpayers will not normally be regarded as negligent when relying on substantive tax advice obtained from an appropriate professional adviser. The FTT said:

"A taxpayer is only liable to a penalty if he has been negligent. There are few who would gainsay the proposition that tax law can be complicated and difficult for taxpayers to understand and, thus, it is only to be expected that, from time to time, taxpayers will resort to professional advice. The purpose of resorting to professional advice is that one normally expects to be able to rely upon it, whether that professional advice is taken from a lawyer, an accountant or a medical practitioner. We consider it difficult to understand how a taxpayer can be negligent if, perceiving the need for professional advice on a matter of difficulty or in a situation where the taxpayer is in doubt as to the proper approach to be taken, he then seeks and relies upon properly considered professional advice."

Comment

This decision is interesting in two principle respects.

First, the FTT has confirmed the position in respect of taxpayers seeking to rely on professional advice when submitting their returns. Taxpayers will not normally be regarded as negligent when relying on substantive tax advice received from an appropriate professional adviser. This is the position even where the taxpayer concerned has general tax expertise. 

Second, the FTT gave a robust indication that taxpayers should not be subject to (or be given reason to be believe that they are subject to) unfavourable treatment by HMRC due to their personal circumstances. Mr Cannon declined HMRC's 'invitation' to cease offering advice on tax mitigation arrangements and the FTT confirmed he was entitled to do so. The issue of the right to seek and receive independent legal advice may become significant in the context of the recently introduced 'enabler' legislation. The rule of law is a fundamental British value and it is to be hoped that the tax tribunals and courts will continue to defend this important principle. 

A copy of the decision can be viewed here.