David Whiscombe comments for BrassTax on a change of legislation for penalties for carelessness in avoidance arrangements.
If HMRC find that your tax return understates your tax liability, you can expect them to raise the question of penalties, but only if the inaccuracy was either deliberate or due to your carelessness. To put it another way, if you take “reasonable care” to get your tax right, you cannot become liable to pay a penalty even if, despite your efforts, the tax return turns out to be wrong. Happily, the onus is on HMRC to show that you have been “careless”, not on you to show that you haven’t.
Taking “reasonable care” means, broadly, doing whatever a reasonable person genuinely doing his or her best to comply with the law would do. If you’re uncertain about something, taking a wild guess or relying on what the bloke at the pub told you isn’t taking reasonable care: taking (and following) advice from someone who is ostensibly competent normally is.
Thus, historically, if you have filed your tax return on a basis that someone who ostensibly knows about these things credibly assures you is correct, then you have taken reasonable care and you are safe from penalties.
However, there is now a very important caveat where “avoidance arrangements” are involved. This applies to tax returns for 2017/18 and subsequent years.
The definition of “avoidance arrangement” is very wide – arrangements where “it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes.” This includes, for example, planning that is disclosable under the DOTAS (“Disclosure of Tax Avoidance Schemes”) rules or is countered under the General Anti-Abuse Rule, but even quite routine planning may fall within the very wide scope of the definition.
Where “avoidance arrangements” prove not to have the intended effect (with the result that your tax return relying on their efficacy is incorrect), you will be treated as having taken “reasonable care” only if any advice on which you have relied meets all of the three following conditions, namely:
- The advice was given to you neither by an “interested person” (defined as, broadly, someone participating in or facilitating the planning arrangements) nor by someone introduced to you by an interested person. So, for example, where you have been sold a tax planning scheme, you can’t rely on advice given by the person who sold it to you.
- The person giving the advice had appropriate expertise (thus denying you reliance on the advice of the bloke at the pub).
- The advice was addressed specifically to you and took account of your individual circumstances (thus denying you reliance upon, for example, a generic Counsel’s opinion made available to participants in a scheme).
There are a couple of circumstances in which reliance on advice which falls short of these conditions can nonetheless count as taking “reasonable care” and thus absolve you from penalties.
The first is where the advice is disqualified because it fails to meet one or both of the first two conditions, but you reasonably believed that it did meet them, having taken reasonable steps to satisfy yourself on the point. This would protect you where you have relied on advice from someone who professes to have expertise and to be disinterested but is subsequently found to have misled you on either count.
The second is that you may rely on advice given by an “interested person” where the planning, although amounting to “avoidance arrangements”, is not disclosable under DOTAS or the VAT or indirect taxes equivalents; is not countered by the General Anti-Abuse Rule; and is not the subject of a “Follower Notice” (explained on our website here). Such advice, if it is to be relied on, must still meet the second and third conditions above.
Finally, note that all of this applies only in the case of “avoidance arrangements”. Where you are simply unsure of the correct treatment of a particular transaction or situation (whether a gain is chargeable to tax, for example, or whether a particular expense is tax-deductible) and there is no element of avoidance involved, the law remains as it always has been: if you have done whatever a conscientious reasonable person would do (which might depend on all the circumstances, including the nature of the uncertainty and the amount involved) you have not been careless.