Penalties under the new regime can be avoided for inaccuracies in tax returns, provided that ‘reasonable care’ has been taken. An area of possible contention in tax returns is asset valuations. How far must a taxpayer (or agent) go in order to demonstrate that reasonable care has been taken, where HMRC considers that an asset valuation is too low?
HMRC’s Inheritance Tax & Trusts Newsletter (August 2009) features a report on its Annual Probate Section Conference, which indicates that if instructions for the valuation of a property are given on the correct basis, any uplift in value subsequently agreed is ‘unlikely’ to attract a penalty. The ‘correct basis’ is defined as:
‘…a hypothetical sale in the open market under normal market conditions and marketed property with no discounts for a quick sale or for the time of year etc’.
It was suggested at the above conference that, in order to be confident that ‘reasonable care’ had been demonstrated, three valuations from different estate agents were preferable, or a professional (i.e. Royal Institute of Chartered Surveyors) valuation if a definitive valuation was necessary. Rather worryingly, HMRC said that this would only ‘go a long way’ to demonstrating reasonable care. HMRC stated that they would also look at what steps were actually taken, and would consider:
- Was professional advice sought?
- Were instructions given on the correct basis?
- Was the valuer’s attention drawn to particular features of the property (e.g. development potential)?
- Was anything unusual about the valuation questioned?
Clearly, this implies a high standard of care, and could perhaps be in response to the decision in Cairns v Revenue & Customs  UKFTT 00008 (TC), in which HMRC tried to impose a penalty on a solicitor who submitted a professional property valuation as part of an IHT return for a deceased person’s estate, which turned out to be too low. The Special Commissioner held that even if the return was incorrect, there was only minor negligence on the grounds that the professional valuation had been heavily qualified and provisionally estimated.
The above comments in the Trusts and Estates Newsletter and the Cairns case deal with asset valuations in IHT returns, but should also perhaps be considered in the context of tax returns for individuals and companies as well.
HMRC will shortly be introducing a series of ‘toolkits’ for agents, which will provide guidance on compliance risks, and ‘…to set out how agents can reduce the likelihood of mistakes occurring in the returns.’ The toolkits will cover risks in areas including CGT (land and property), CGT for trusts and IHT. It is understood that the use of these toolkits will constitute reasonable care, which therefore suggests that an error in a tax return in an area covered by a toolkit will not be careless for penalty purposes if the guidance in the toolkit has been followed properly.
HMRC states that using the toolkits will ‘…reduce the potential risk of an HMRC enquiry or inspection that could result after an error has been made’. This indicates that the toolkits will also make it more difficult for HMRC to make a discovery outside the normal tax return enquiry window. In the meantime, guidance is available on finality and discovery in self-assessment returns in HMRC Statement of Practice 1/2006.
The above article is reproduced from ‘Practice Update’ (September/October 2009), a tax Newsletter produced by Mark McLaughlin Associates Ltd. See the Newsletters section.