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Tax Insider Lite asks, what happens when mistakes are made by the professionals hired to help prepare your tax return?

Introduction

Our tax system is based on “Self Assessment”. In other words, it is the responsibility of the taxpayer to make a correct return of his or her (or its) income and gains, and to pay the tax on them.

The system is insanely complicated, so that for anyone who runs their own business or company, it is virtually impossible to produce a correct tax return without professional help – and even with such help, mistakes can still be made.

The system is also underpinned by quite savage penalties for errors in returns. The penalty for “failure to take reasonable care” in completing and submitting a tax return is up to 30% of the tax understated as a result of the mistake.

But My Accountant Does it for Me...

If you go to a tax adviser or accountant and ask them to prepare your tax return for you, and they make a mistake, then surely you cannot be blamed – and charged a penalty?

HMRC’s own guidance on the subject says that they will accept that a taxpayer who appoints an agent to prepare his return for him will have taken “reasonable care” (and thus escape a penalty if his return is incorrect) provided:

• He appoints an agent competent to deal with his tax affairs
• He gives that agent all the relevant information, and
• He checks the return as far as he can before it is submitted

The first two conditions present little difficulty. Provided your tax adviser is a Chartered Accountant or, even better, (I am biased because this is my own professional qualification) a Chartered Tax Adviser, you are entitled to assume they are competent to deal with your affairs and it goes without saying that you should give them all the relevant information.

The Catch!

The problem comes with the requirement to check the return before it is submitted. I was recently called in to advise on a case where the taxpayer’s return had made an incorrect claim for Business Asset Taper Relief resulting in a significant underpayment of Capital Gains Tax.

Taper Relief, now no longer with us, was a hideously complicated tax relief made even more baffling because during the ten years it existed the rules were changed in a major way at least three times. The error made by the accountants who prepared the return was entirely understandable – indeed, I was able to find a case in our files where a tax inspector had made exactly the same error when reviewing another tax return.

Check and Check Again...Yourself!

The client involved was a wealthy gentleman over 90 years old, who employed an in-house accountant to look after his business affairs, and this accountant had checked the return prepared by the independent firm of accountants, and told the taxpayer it was correct. The elderly gentleman had therefore signed the return.

HMRC would not accept that this was evidence of “reasonable care” on his part because the old gentleman admitted that he had relied on his own accountant to check the return and had not done so himself (not that he would have spotted the mistake if he had, so fine a technical point did it involve). HMRC therefore refused to back down on the penalty.

Practical Tip

In my firm, we like to get the client in for a meeting wherever possible so that we can talk him through the return before he signs it. The main purpose is to discuss the progress of the business and tax planning opportunities, but the notes of the meeting also serve as evidence that the client has checked his return before signing it, and if there are any technical errors (not that we would ever make such errors, of course!), the client can plead “reasonable care” and escape a penalty.

About The Author

Tax Insider publishes monthly newsletters and reports for everyone with an interest in responsible tax saving, including professional advisers, business owners, entrepreneurs, property investors and other UK taxpayers.

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