Checking your advisor hasn’t made mistakes

The case

J Callen v HMRC 2022 (C v HMRC) involved a tax avoidance scheme, an HMRC investigation and a discovery assessment . The avoidance scheme was complex but wasn’t the focus of the case. The main issue the First-tier Tribunal (FTT) had to consider was whether HMRC had the right to issue the discovery assessment after the normal deadline of four years had passed. It was only allowed to do this if C or his accountant, Mr Bevis (B), were careless (or made deliberate errors) in completing the tax return which resulted in insufficient tax being paid.

Was the accountant responsible?

There’s a distinction between, say, someone simply agreeing to fill in a tax form for you and them acting as your tax advisor. The written terms of B’s contract with C were clear that he was the latter.

Trap. There’s an important point here. If the accountant or tax advisor the company appoints is careless in completing the tax return you can’t claim protection from the discovery rules by saying it was their fault and not yours. The only exception is where they act contrary to your instructions.

Was the accountant careless?

This question was at the heart of HMRC’s case against C. In written evidence B stated that he was not a “high level” tax advisor. In completing C’s tax return he had simply followed the guidance, which included tax counsel’s opinion, provided by the firm which marketed the complex tax avoidance scheme (known as a “dividend strip“). More than that, B had entered HMRC’s declaration of tax avoidance scheme number in the correct section of C’s return. B argued that therefore he had not been careless as he had taken appropriate steps to report C’s tax position in accordance with the expert guidance.

Flaws in the argument

B had not checked if the tax rules had changed since the avoidance scheme had been devised. The scheme guidance made clear that it only worked if C was a “derivatives trader” (broadly, someone who speculates on how prices of assets will change). The evidence given by C did not support this and B should have realised. B had not made any attempt to consider C’s trading position, he had merely filled in C’s tax return using the figures provided by the scheme managers on the assumption the scheme applied.

The decision

In the end it wasn’t difficult for the FTT to decide that B had been careless on C’s behalf and therefore the extended time limit applied so HMRC was entitled to issue the disputed discovery assessments . This ruling is a blunt reminder that you can’t pass responsibility for your tax return to an accountant or other advisor and not be penalised if they make mistakes.

Tip. If your tax affairs are complex you need to ask questions of your accountant to satisfy yourself that they are up to speed with the issues.

Tip. If in doubt about information shown or omitted from a tax return, ask the accountant what steps they have taken to check the entries are correct and complete.