Couldn’t careless? Reasonable care and the role of professional advisers
This article was first published by Tax Journal on 15 February 2023.
Whilst taking professional advice will usually mean a taxpayer has taken reasonable care, not taking advice does not necessarily mean a taxpayer has been careless.
The former Chancellor, Nadim Zahawi, agreed that he had been 'careless' in the completion of his tax return for 2017/18, allegedly in relation to a CGT liability connected to the disposal of shares in his former company, YouGov. The issue of 'carelessness,' or what constitutes 'reasonable care', comes up regularly in a tax context. The answer will almost always turn on the facts of a particular case; but given the complexities of the UK tax system, a taxpayer taking competent professional advice should generally be considered to have taken reasonable care.
"No penalties for innocent mistakes"
The penalties regime is designed to 'encourage' voluntary compliance by taxpayers with their tax obligations. Suffice to say that the tax system in the UK is far from straightforward. If a taxpayer takes reasonable care, but gets something wrong nonetheless, whilst they will have to pay any tax that they ought to have paid (with interest), they will not be penalised for their error. That, though, begs the question, what does taking 'reasonable care' involve?
The focus in this article is on penalties imposed under Schedule 24, Finance Act 2007, the main source of HMRC's powers to impose penalties for errors and inaccuracies in documents submitted to HMRC, and all references below are to Schedule 24, unless otherwise stated.
In deciding whether a taxpayer has been careless within the meaning of para.3(1)(a), the standard to be applied is that of a prudent and reasonable taxpayer in the position of the taxpayer (see: David Collis v HMRC  UKFTT 588 (TC) and Rowland v HMRC  UKFTT 741 (TC)). That reasoning derives from the seminal case on common law negligence of Blyth v Birmingham Waterworks Co  20 JP 247, where it was held that negligence was “the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do”.
Generally speaking, a taxpayer will be considered to have taken reasonable care if they keep accurate records and entrust their affairs to a competent professional advisor (see: Cannon v HMRC  UKFTT 859 and Carrasco v HMRC  UKFTT 731 (TC)). As the Tribunal said in Cannon:
"21. … 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…
25. In our judgement when a person seeks appropriate professional advice from somebody who is a professed expert in the applicable discipline, it will almost always be reasonable for the person who has sought out such advice to rely upon that advice provided only that that person has selected a seemingly competent professional adviser…" (emphasis added)
In Hanson v HMRC  UKFTT 314, the Tribunal found that reasonable care is taken where the adviser consulted is reasonably believed to be competent and is provided with the relevant information, the adviser’s work is checked to the extent possible, and the advice is implemented (see ). The analysis will turn on "all the circumstances" of the case. The more complex a taxpayer's affairs, the more likely it is that 'reasonable' care will only be taken where a more diligent enquiry is made. That being said, even implicit reassurance from an advisor can be sufficient (see: HMRC v Bella Figura Ltd  UKUT 120 (TC)). If a taxpayer is suffering from special difficulties at the time their return is filed, that will also inform the objective question of reasonableness (see, by way of example: Udlaw Ltd v HMRC  UKFTT 52 (TC) at -) and indeed may, in any event, be relevant to the additional requirement to consider whether any "special circumstances", under para.11, apply. Additionally, where an advisor has misadvised, their negligence or carelessness is not automatically to be imputed to the taxpayer (see para.18(3)).
Whilst taking professional advice will usually mean a taxpayer has taken reasonable care, not taking advice does not necessarily mean a taxpayer has been careless. There will be instances where a taxpayer, whose affairs are perhaps less complex, will be able to take reasonable care by carrying out other checks. Simply 'taking a view', though, is unlikely to be sufficient (see: Atkinson v HMRC  UKFTT 0387 (TC) at ). Similarly, there will be instances where relying on third-party advice is acceptable. The authors are aware of HMRC seeking, in the context of penalty appeal cases, to rely on the decision in MClean & ors v Thornhill  EWHC 457 (Ch), for the proposition that a taxpayer cannot take reasonable care unless they instruct an advisor directly themselves. Thornhill was a claim for professional negligence and concerned whether counsel owed a duty of care to taxpayers who had participated in a tax avoidance scheme. The High Court held that there was no duty of care in circumstances where Mr Thornhill KC had included a disclaimer of responsibility within his opinion to the promoter. The absence of a duty of care does not however automatically invalidate all attempts to rely on third party advice. As ever, that will turn on the facts of each specific case.
An area often overlooked by HMRC in penalty cases is 'causation', which poses a 'but for' test. In particular, the alleged acts of the taxpayer concerned (be they commission or, more often, omission) must actually cause the error in the return and concomitant loss of tax (see: Bayliss v HMRC  UKFTT 500 (TC) at ). In practical terms, this requires HMRC (and pausing here, it is HMRC that bear the burden in penalty cases) to prove that the omission of the taxpayer actually led to an error in a return. It is not sufficient for HMRC to simply assert that a taxpayer should have done something and therefore they are liable to a penalty. In Bella Figura, HMRC failed to discharge the burden which was on them to establish causation. Although the FTT had identified the failure to obtain specific advice as a careless omission by the taxpayer, the UT held on appeal that the FTT failed to consider what would have happened if the taxpayer had asked its advisers whether the arrangements implemented were effective so as to avoid charges. This was a relevant consideration because, if the advisers had replied positively, this might well have demonstrated that the taxpayer's carelessness did not cause the loss of tax. In short, the 'but for' test would not necessarily have been met – it was not clearly the case that, but for the taxpayer not seeking specific advice, there would have been no loss of tax.
Careless is not deliberate
Increasingly, HMRC are attempting to label a potentially careless error as 'deliberate', perhaps in order to extend the usual limitation period to 20 years as well as to enable greater penalties to be imposed. The seriousness of that term should be acknowledged by HMRC (see: Bayliss at ). A deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely on it as an accurate document. That is a subjective test. The question is not whether a reasonable taxpayer might have made the same error or even whether the taxpayer failed to take all reasonable steps to ensure that the return was accurate. What is relevant is the knowledge and intention of the particular taxpayer at the time (see: Auxilium Project Management v HMRC  UKFTT 249 (TC)).
HMRC often rely on the decision in Clynes v HMRC  UKFTT 369 in support of their contention that a taxpayer has acted deliberately. It is necessary to examine the facts of that case in some detail in order to properly understand its application. In particular, the taxpayer in Clynes was a qualified accountant of whom a higher degree of knowledge and competence was expected, and indeed he had extensive experience in acting as a director of multiple companies. For this reason, the Tribunal's indication that "depending on the precise circumstances, an inaccuracy may also be held to be deliberate where it is found that the person consciously or intentionally chose not to find out the correct position, in particular, where the circumstances are such that the person knew that he should do so", must be understood in context. As has been confirmed by the Tribunal in numerous other cases, the line between careless and deliberate conduct should not be blurred (see: Portview Fit-out Limited v HMRC  UKFTT 0447 at ).
The recent decision of the Upper Tribunal in Booth v HMRC  UKUT 00217 (TCC) is worth considering in relation to what constitutes a deliberate inaccuracy. HMRC have argued that following Booth they do not need to establish intent on the part of the taxpayer in order to impose penalties for deliberate conduct. However, the facts of that case require careful scrutiny. In particular, the taxpayer in that case was found by the FTT to have been 'Kittel dishonest' – i.e. the taxpayer knew, or should have known, that its transactions were connected with VAT fraud. That finding was not appealed by the taxpayer. The taxpayer then argued, in the context of separate penalty proceedings, that it had not been dishonest. The Upper Tribunal's finding that it was not necessary to plead or prove dishonesty to establish that a taxpayer’s conduct was deliberate, should be read in that specific context. It remains necessary for HMRC to establish that the taxpayer intended HMRC to rely on a document that they knew to be inaccurate. This requirement preserves the reasoning of the Supreme Court in HMRC v Tooth  UKSC 17 at .
Although outside the scope of this article, it is worth mentioning two additional points: (i) by the insertion of para.3A, by Finance (No. 2) Act 2017, where a taxpayer has used tax avoidance arrangements, an error will be presumed careless (with certain advice being 'disqualified'); and (ii) penalties for careless behaviour can be suspended under para.14 and HMRC should not fetter their discretion when considering whether to suspend a penalty, for example, because it relates to a 'one off' error (see: Testa v HMRC  UKFTT 151 (TC)).
Some final thought
When will a taxpayer be careless for the purpose of penalties? Generally speaking, taking advice from a competent professional advisor will amount to taking 'reasonable care'. A taxpayer does not need to embark on a forensic examination of complex tax issues, where they have obtained appropriate assurances from a competent professional adviser on the accuracy of their return. Whether the recent criticism of Mr Zahawi is justified or not, it is worth remembering that whilst HMRC do not appreciate taxpayers taking a filing position which is contrary to their stated view of the law, disagreeing with what HMRC consider to be the appropriate tax treatment does not, in itself, constitute carelessness. Given that 'failure to take reasonable care' is responsible for 20% of the UK's 'tax gap', this is not an area where HMRC are likely to concede ground lightly, albeit the current state of the authorities can fairly be described as being supportive of honest taxpayers.