May 27, 2020
Revenue & Customs Commissioners v Hicks  STC 254,  UKUT 12 (TCC).
In appeals to the First-tier Tribunal and Upper Tribunal, the alleged negligence of taxpayers and their accountants or other tax agents frequently has to be considered in relation to the time limits for “discovery assessments” under the Taxes Management Act 1970 (“TMA”). S. 36(1)-(1B) TMA allows HMRC to extend the time limit from four years to six where the loss of tax was brought about carelessly by the taxpayer or “another person acting on [the taxpayers]’s behalf”. “Carelessly” replaced “negligently” in the pre-2010 version of the legislation, and it is well-established that carelessness and negligence have effectively the same meaning in this context. Similar issues concerning the alleged carelessness of the taxpayer or his advisers often arise in appeals against tax penalties.
As the statutory test applicable in the tax tribunal is essentially one of negligence, there is an obvious overlap with the principles developed in the case law on professional negligence. Where the alleged carelessness is that of a tax adviser, the tribunal or court will have to ask what the scope of the adviser’s duty was, whether the adviser breached that duty, and whether the breach of duty (if made out) caused the tax default in question. Tribunal cases on the carelessness of accountants and other tax advisers therefore serve to illustrate how the court is likely to approach similar allegations in a professional negligence claim.
The Upper Tribunal (Morgan J and Judge Brannan) considered the alleged carelessness of a taxpayer, his accountant, and the promoter of a tax avoidance scheme in Revenue & Customs Commissioners v Hicks  STC 254,  UKUT 12 (TCC).
Mr Hicks enjoyed a very high income as a derivatives trader. In 2008-09 he participated in a tax avoidance scheme promoted by an Isle of Man company called Montpelier. Under the scheme the taxpayer would acquire dividend rights with the intention that the cost of the rights would generate a trading loss which could be set off against his existing trading income; but he would not pay tax on the dividend income because (on Montpelier’s interpretation) s. 730 of the Income and Corporation Taxes Act 1988 created a “loophole” to this effect. His accountant, Mr Bevis, included a claim for such trading loss in his 2008-09 tax return and claims to carry the loss forward to extinguish the taxable profits of his trade in the 2009-10 and 2010-11 returns. Mr Bevis had been highly supportive of the scheme and had prepared the returns on the basis of information provided by Montpelier, but he admitted that he did not have the technical expertise necessary to form an independent opinion on the scheme’s merits and had not previously advised clients in relation to marketed tax avoidance schemes. HMRC failed to open enquiries into the 2009-10 and 2010-11 returns and did not raise discovery assessments for those years until 30 March 2015. HMRC contended that the assessments were in time because Mr Hicks or a person acting on his behalf (Mr Bevis and/or Montpelier) had been careless for purposes of s. 36 TMA.
Mr Hicks challenged the assessments in the FTT. He apparently accepted that the scheme failed on substantive grounds, namely that (i) s. 730 did not have the effect that the income he received was not taxable and/or (ii) in any event, he was not entitled to deduct his expenditure on the dividend rights because it had not been incurred wholly and exclusively for the purposes of his pre-existing trade. Instead he argued that the assessments were out of time and/or were invalid for various other procedural reasons.
The FTT rejected HMRC’s attempt to rely on the extended time limit for careless errors. It held, in essence, that Mr Hicks had been entitled to rely Mr Bevis’ advice, and Mr Bevis in turn had been entitled to rely on the advice of Montpelier and counsel instructed by Montpelier.
HMRC successfully appealed against this decision. The UT decided a preliminary issue on which there had been conflicting first instance case law: who was a person acting on the taxpayer’s behalf for the purposes of s. 36 TMA? The UT held that the phrase only applied to someone who represented the taxpayer in relation to HMRC, rather than anyone on whose advice the taxpayer relied. The test therefore applied to Mr Bevis as Mr Hicks’ accountant and tax agent but not Montpelier as the scheme’s promoter.
The UT then set out the FTT’s relevant findings of primary fact (at§132) and considered four principal allegations of carelessness in the light of those findings (at §134-141).
- Construction of s. 730: Was Mr Bevis negligent to form the view that s. 730 had the effect that the dividend income was not taxable in Mr Hicks’s hands? Although in the UT’s view this was an improbable construction which is unlikely to be accepted by a tribunal or court, Montpelier had obtained counsel’s opinion in support of the construction and Mr Bevis was not careless in relying upon that opinion when it was shown to him.
- Deduction of expenditure: Was Mr Bevis negligent in forming the view that Mr Hicks was entitled to deduct his expenditure on the acquisition of the dividend rights? It was a fairly elementary matter of tax law to ask whether expenditure was incurred wholly and exclusively for the purposes of the taxpayer’s existing trade, and in fact counsel’s opinion had emphasised the importance of this issue to the success of the scheme. Mr Bevis ought to have known the nature of Mr Hicks’s pre-existing trade and that the expenditure on the dividend rights was not incurred in connection with it. He also ought to have checked whether Mr Bevis had established the necessary pattern of trading (i.e. being a dealer in the right to receive dividends) by the time he completed the 2009-10 and 2010-11 tax returns.
- Reliance on Montpelier: Mr Bevis was not entitled to rely on Montpelier’s advice that Mr Hicks was in “precisely the category of financial trader for whom the scheme worked to generate a tax loss”. Instead he ought to have established that Mr Hicks was a dealer in the right to receive dividends. In any case, it was not reasonable for him to be to rely on statements by a promoter seeking to sell the scheme to his clients without forming his own view on the merits of the scheme, if necessary by taking independent advice.
- Mr Bevis’s own advice on the scheme: Mr Bevis did not merely pass on advice of Montpelier and counsel; he advised Mr Hicks that the scheme stood “the best possible chance of success” and said that in Mr Hicks’s shoes he would enter into it himself. It was careless of him to give such advice when, as the FTT had found, he was not in a position to, or qualified to, form an independent opinion on the detailed workings of the scheme. Moreover, the advice he gave in relation to the deductibility of the expenditure on dividend rights was clearly wrong.
In taking on the role of a tax adviser, Mr Bevis was to be judged by the standard of a reasonably competent tax adviser giving advice to the taxpayer on the matter in question. As his advice fell short of this standard in respects (2)-(4), carelessness was made out.
HMRC also had to show that such carelessness caused the under-declarations of tax in Mr Hicks’s returns. This was clearly established as the returns had been completed by Mr Bevis, and had been signed off by Mr Hicks, on the basis of the errors identified above.
The FTT had erred in law by failing to identify the applicable standard of care and take into account all relevant evidence. The only possible conclusion on the basis of its findings of primary fact was that Mr Bevis’s conduct had fallen below the applicable standard of care. The 2009-10 and 2010-11 assessments were therefore in time under the six-year rule in s. 36 TMA.
The UT also briefly considered the allegation that Mr Hicks had been careless. He was held not to have been, in essence because he was entitled to rely on Mr Bevis’s advice (at §147-151).
There were also obiter dicta in relation to HMRC’s allegation that Montpelier was also guilty of carelessness (at §152-156). Montpelier’s comment that the scheme was perfect for derivative traders was said to have been wrong, and carelessly so. But as Montpelier was not a person acting on the taxpayer’s behalf for the purposes of s. 36 TMA, the subject was not discussed at length.
This decision illustrates that it is not good enough for an accountant or other tax adviser to base his advice unquestioningly on what he is told by the promoter of a tax avoidance scheme – not least because of the promoter’s obvious financial interest in the outcome. If the adviser lacks the experience or qualifications to give advice of his own on the merits of the scheme, he should either decline to give advice or should do so only after taking independent advice from a specialist in the relevant field.
The decision also illustrates the perils of relying on generic advice from counsel given to scheme promoters. As such advice will be based on a set of hypothetical assumed facts, it is essential to check that the advice is fully applicable to the actual facts and circumstances of the adviser’s own client. Therefore, whilst Mr Bevis was entitled to rely on counsel’s opinion on a point of pure law (the construction of section 730), he was negligent in failing to ensure that his client’s activities met the requirements for deduction of the losses generated by the scheme.