The penalty rules for errors in tax returns, etc were originally introduced in Finance Act 2007, and have become relatively familiar to many tax advisers (and, unfortunately, to some taxpayers on the receiving end of a penalty!).
In broad terms, a penalty arises if (for example) an individual submits a tax return that contains an error resulting in a tax liability being understated, where the error was ‘careless’ (i.e. reasonable care was not taken) or deliberate by that individual (FA 2007, Sch 24, para 1).
Your fault, your penalty!
But what if an error in the individual’s tax return was caused by someone else? An additional provision in the penalty rules was introduced in Finance Act 2008, dealing with errors in a taxpayer’s tax return attributable to another person (FA 2007, Sch 24, para 1A).
The other person in the above scenario (referred to as ‘T’ in the legislation) is liable to a penalty broadly if the error in the taxpayer’s return was attributable to T deliberately supplying false information to, or deliberately withholding information from, the taxpayer with the intention of the return being incorrect.
It is possible for both the taxpayer and the ‘other person’ to be liable to a penalty in respect of the same error (FA 2007, Sch 24, para 1A(3)); more on this later.
Breaking new ground
The first reported case dealing with an ‘another person’ penalty of this kind was Hutchings v Revenue & Customs  UKFTT 9 (TC), where a beneficiary who was found to have withheld information requested by the deceased’s executors was liable to a penalty for the resulting error in the inheritance tax (IHT) return prepared by the executors in relation to the deceased.
In that case, the deceased (RH) made a lifetime gift to his son (CH) of funds held in an offshore account in around March 2009. RH died in October 2009. His executors wrote to various members of the deceased’s family, including CH. The letter asked the family to disclose if they had received any lifetime gifts from the deceased. CH did not reply to the letter.
The executors submitted an IHT return (form IHT400) in relation to the deceased’s death to HM Revenue and Customs (HMRC). The return made no mention of the cash previously held by the late RH, nor that the value in the offshore account had been transferred to CH seven months before his death. HMRC subsequently received anonymous information that CH had an offshore bank account. HMRC wrote to the executors, and also to CH and his accountant. The executors replied stating that before submitting the IHT return they had made enquiries with the family, but had not been provided with any information about lifetime gifts.
HMRC assessed CH to IHT on the basis that he had received a lifetime gift of the offshore funds, and also issued CH with a penalty (under FA 2007, Sch 24, para 1A) in respect of the error in the IHT return submitted by the executors. The appellant appealed against the penalty.
The First-tier Tribunal held on the facts and evidence that the omission of the gift from the IHT return was not the executors’ fault. With regard to the conditions for the imposition of a penalty on CH, the tribunal found that the inaccuracy on the IHT return was attributable to him; that CH withheld information from the executors; that the withholding of information was deliberate; and that CH intentionally did not answer the executors’ questions about gifts with the intention that the IHT return would not contain the information about the gift to him.
The FTT concluded that the prerequisites to a penalty under FA 2007, Sch 24, para 1A had been met. The appeal was dismissed.
Coincidentally, HMRC’s guidance on penalties includes an example of an incorrect IHT return submitted by an executor, which was caused by the deliberate withholding of information about a bank account, in that instance by the trustees of a settlement (see HMRC’s Compliance Handbook manual at CH81168).
It is interesting to note that HMRC’s example considers whether the executor who submitted the incorrect IHT return is also liable to a penalty for the error. As indicated above, a taxpayer may be charged a penalty for the same error. However, no penalty can be charged if the taxpayer took reasonable care to ensure that the information supplied by the other party was correct (CH81166).
In HMRC’s view, the executor in its example took reasonable care to check that the information given to her by the trustees was accurate and complete, because it was not possible for her to independently check if the details that the trustees gave her were correct.
What constitutes ‘reasonable care’ can be rather a moot point. The fact that HMRC is considering charging a penalty on another person for an error in the taxpayer’s return should not be seen as a ‘get out of jail’ card for the taxpayer; HMRC is likely to consider the question of penalties separately for both parties.
Before HMRC can charge another person a penalty for an inaccuracy in a taxpayer’s return, it needs to be established that the other person knew the consequences of their actions. In HMRC’s view “it is not a defence for T to state that if [the taxpayer] had conducted further investigation, they would have realised that T provided false information (or withheld pertinent information)” (see CH81167). However, note that the taxpayer may need to investigate further in order to have taken ‘reasonable care’ and avoid incurring a penalty themselves.
HMRC adds: “There is no requirement for T to have any motive for their action, but evidence that T has benefited financially as a result of the inaccuracy in P’s return or other document may add to the weight of evidence that T’s actions were deliberate.”
In the case of tax advisers, HMRC considers it “extremely unlikely” that an adviser would be liable to the ‘another person’ penalty under FA 2007, Sch 24, para 1A. This is on the basis that a tax adviser receives information (and gives advice based on that information), as opposed to the adviser giving information to the taxpayer in a manner that would fall within the conditions for a penalty under the above provisions (CH84545).
However, a tax adviser who engages in dishonest conduct can be subject to other sanctions, including a penalty of up to £50,000, the publication of the agent’s details, and a right of access by HMRC to the agent’s files (FA 2012, Sch 38). In certain circumstances, a tax adviser can be liable to prosecution for fraud.
Taxpayers who complete their tax returns by including information supplied by another person should ensure that they have taken ‘reasonable care’ in using that information. Remember that the ‘other person’ penalty provisions in FA 2007, Sch 24, para 1A do not relieve the taxpayer from this obligation for the purposes of avoiding a separate penalty in relation to the other person’s error in the return.
As for the ‘other person’ who is considering the deliberate supply of false information, or deliberately withholding information that would result in an incorrect tax return, the message is simple – don’t even think about it!
The above article was first published by Tax Insider (March 2015) (www.taxinsider.co.uk).