Reasonable Care – Reliance on an Agent

By | 3 December 2012

The advice given by tax practitioners will invariably have an impact on their client’s tax return. Every practitioner hopes that their tax advice will be correct 100 per cent of the time. But what would happen if incorrect tax advice resulted in an error in the client’s tax return? Would the client be liable to a penalty in those circumstances?

The legislation dealing with penalties (FA 2007, Sch 24) broadly states that a penalty is payable where a person (referred to in the legislation as ‘P’) gives HMRC an inaccurate document such as a tax return, resulting in (among other things) an understated tax liability, where the error was careless or deliberate on the part of that person. An error is ‘careless’ if it is due to a failure by the person to take reasonable care.

The penalties legislation also includes provisions dealing with agents. These are contained in FA 2007, Sch 24, para 18, and state that a person is liable to a penalty if the document containing a careless error is given to HMRC on his or her behalf. However, the legislation also states that a person is not liable to a penalty in respect of anything done by an agent, where the person took reasonable care to avoid the error. So the question arises: is the taxpayer taking ‘reasonable care’ by relying on an agent’s tax advice? Some recent cases before the First-tier tribunal have considered this particular issue.

Relief not due

In one of those cases, Hanson v Revenue & Customs [2012] UKFTT 314 (TC), the taxpayer, Mr Hanson, disposed of some loan notes during 2008/09, resulting in chargeable gains for capital gains tax (CGT) purposes of over £1.25 million. Mr Hanson had been given a press article by a financial adviser, which suggested that UK holiday lettings could be used to mitigate a CGT charge. He already owned a holiday letting, so he sent a copy of the article to his accountants and consulted them for advice. His accountants indicated that a form of holdover relief would be available to mitigate the CGT charge on disposal of the loan notes. When preparing Mr Hanson’s tax return, the accountants disclosed the chargeable gains from the loan notes, but indicated on the return that a relief claim was being made. However, no further details of the relief claim was included on the return, and the computation which accompanied the tax return only showed the taxable gain after deduction of relief.

HMRC opened an enquiry into the tax return, and requested further information about the CGT relief being claimed. Mr Hanson’s accountants stated that the relief in question was rollover relief. HMRC replied that rollover relief was not available, because the loan notes were not qualifying assets. Following subsequent correspondence, the accountants accepted that no relief was available, so an additional CGT charge arose as a result of the invalid relief claim.

The tribunal judge, Jonathan Cannan, said that the penalty legislation dealing with agents was aimed at those professional advisers who assist taxpayers in completing their tax returns. He also said that the focus of whether a taxpayer has taken reasonable care will be whether he was reasonably entitled to rely upon his adviser, and what steps the taxpayer might reasonably be expected to take, given that he has instructed a professional adviser. Judge Cannan stated that what is ‘reasonable care’ in any particular case will depend on all the circumstances. In his view, those circumstances would include the nature of the particular matter, the identity and experience of the agent, the experience of the taxpayer, and the nature of the professional relationship between the taxpayer and the agent. He said that if the taxpayer ‘reasonably’ relies on a reputable accountant for advice in relation to the content of his tax return, he will not be liable to a penalty under Sch 24.

Carelessness by the taxpayer?

The tribunal considered that there had been carelessness on the part of Mr Hanson’s accountants, and that it was necessary to consider whether Mr Hanson himself took reasonable care to avoid the error. It was held that Mr Hanson did take reasonable care. He had instructed an ostensibly reputable firm of accountants, who had acted for him for many years. The advice given was ostensibly within their expertise, and there was no reason to doubt their competence or their advice that relief was available. In the circumstances of this case, Mr Hanson was entitled to rely on the accountants’ advice without himself consulting the legislation or any guidance offered by HMRC. His appeal was therefore allowed, and the penalty was cancelled.

One of the reasons given by the tribunal for allowing Mr Hanson’s appeal was that there had been no reason for him to doubt the advice which his accountants had given him. This is an important point, as indicated below.

In another case, Shakoor v Revenue & Customs [2012] UKFTT 532 (TC), the taxpayer, Mr Shakoor, disposed of two flats in July 2003. The disposals were not included in his tax return for 2003/04. HMRC subsequently raised a discovery assessment charging CGT on the disposals, and also imposed a penalty of 70%. Mr Shakoor appealed against the penalty.

The tribunal said that if the advice of a professional such as an accountant is negligent, that negligence is not imputed to the taxpayer. The question is whether the taxpayer was negligent. The tribunal referred to a previous case, AB Ltd v HMRC [2007] STC (SCD) 99, where it was held that a taxpayer who takes proper and appropriate professional advice with a view to ensuring that his tax return is correct, and acts in accordance with that advice (if it is not obviously wrong), would not have engaged in negligent conduct.

The tribunal considered that where a professional has acted in an advisory capacity, the taxpayer’s reliance upon that professional advice will usually lead to the conclusion that the taxpayer has not been negligent if that advice was taken and acted upon. However, this assumes that there is no reason to believe that the advice is wrong or unreliable, and also that the advice is not subject to substantial caveats.

Mr Shakoor’s accountant said that his advice was that the disposal of the flats would not result in a CGT liability. Mr Shakoor had not resided in either of the two flats at any time during his period of ownership. However, the accountant told the tribunal that he did not consider the gain on the flats to be taxable because it came within Extra Statutory Concession D49. Concession D49 deals with private residence relief where there is a short delay by the taxpayer in taking up residence in the property. However, in correspondence with HMRC, the accountant said that Extra Statutory Concession D37 was applicable instead (Concession 37 deals with private residence relief and relocation arrangements), and he contended that there had been a disposal of Mr Shakoor’s principal private residence, so that there was no CGT liability.

Mr Shakoor had noticed that his tax return contained no reference to his disposal of the flats, and he questioned this with his accountant, who told him that as the disposal was exempt, there was no requirement to disclose it in the tax return. Mr Shakoor said that he was happy to accept that explanation.

Obviously incorrect advice

The tribunal said that the accountant would, or should, be well aware that a disposal should be declared unless it is the taxpayer’s principal private residence, and is exempt from CGT. However, both the accountant and Mr Shakoor knew that Mr Shakoor had not lived in either of the flats for any period of time whatsoever. The tribunal found it surprising that a professional accountant should change his ground from relying on one inapplicable concession to another, equally inapplicable, concession. The tribunal found that the accountant’s advice was obviously wrong, and that Mr Shakoor realised, or ought to have realised, that it was obviously wrong or so potentially wrong that it called for further explanation or justification. The tribunal therefore concluded that the penalty was properly due. However, the tribunal addressed the level of the penalty (i.e. 70%), and decided to give some benefit of the doubt to Mr Shakoor, who (in the tribunal’s judgment) had been ill-served by his professional adviser. Based on information available, the tribunal decided to reduce the penalty to 30%.

There are some points worth noting from these cases. The first is that it is necessary to consider whether the taxpayer has taken reasonable care to avoid the error in the tax return. HMRC’s Compliance Handbook Manual includes guidance on reasonable care where an agent is acting (CH84540). It broadly states that a person cannot simply appoint an agent and delegate responsibility for their tax affairs: that is not taking ‘reasonable care’ in HMRC’s view. The guidance also states that a person has an obligation to choose an adviser who is trained and competent for the task in hand, and that they should check the advisers work or advice to the best of their ability and competence.

However, this puts the taxpayer in a difficult position. For example, how are they supposed to know whether their agent has the requisite knowledge or experience on a particular subject? It is interesting to note in the Hanson case, that the accountant described himself as a “High Street practitioner” and regretted not taking specialist advice from a tax consultant before advising his client. Perhaps a safe solution from the taxpayer’s point of view is therefore to ask the agent in advance whether they have the necessary knowledge or experience, before seeking their advice on a particular matter.

A further point to consider is the type of error or omission made by the agent. In the Hanson case, the tribunal judge pointed out that at one extreme, an agent may fail to declare a source of income. In those circumstances, the judge considered that the taxpayer will almost always be expected to identify the error. At the other extreme, the error might involve wrongly construing a complex piece of legislation. A penalty may still arise because of the agent’s carelessness, but the taxpayer’s liability to the penalty may well be excluded on the basis that he took reasonable care but did not identify the error. A similar point was made by the tribunal in the Shakoor case. Of course, in practice most errors will fall between these two extremes. However, the tribunal in the Shakoor case indicated that a taxpayer would not be protected by “shutting one’s eyes” to what was either or potentially incorrect advice.


The burden of proof is ultimately on HMRC to prove that there has been careless behaviour by the taxpayer. The Hanson case has perhaps made this burden rather more difficult for HMRC, although the Shakoor case illustrates that reliance on an agent does not provide an escape for the taxpayer in all cases.

Finally, it has been argued by one commentator that the penalty provisions in FA 2007, Sch 24 do not specifically protect agents from a penalty for making a careless error in a client’s tax return, based on the precise wording of the legislation. I have not seen HMRC argue this point before, but it is perhaps something to bear in mind.

The above article is reproduced from ‘Practice Update’ (November/December 2012), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past editions of Practice Update, see the Newsletters section.