Atkinson v Revenue and Customs (INCOME TAX/CORPORATION TAX : Penalty) [2016] UKFTT 387 (TC)
FTT-Tax
Atkinson v Revenue and Customs (INCOME TAX/CORPORATION TAX : Penalty)
[2016] UKFTT 387 (TC) · 2016-05-31
[29]‘prudent and reasonable taxpayer in the position of the taxpayer in question ’ would have have acted. 18. In my view, the Collis test is a modern and more concise reformulation, specific to tax cases, of the same test used in Blyth . The test in Blyth is not wrong but the test as expressed in Collis is easier for appellants to understand and is to be preferred for that reason. It is also no coincidence that it is virtually the same test as for ‘reasonable excuse’ where that defence applies to a statutory test. The question is whether the taxpayer acted as a careful taxpayer, in the same factual position as the actual taxpayer, and mindful of his tax obligations, would have acted. 19. It is trite law that ignorance of the law is no excuse: if being ignorant of the law was an excuse then that would only encourage people to remain in ignorance of it, rather than try to acquaint themselves with it. Nevertheless, the reality is that ordinary taxpayers, however mindful of the need to complete a tax return carefully and correctly, will not know tax law in any great detail. 20. In my view, a taxpayer does not act carefully if, being largely in ignorance of the applicable law, he simply ‘takes a view’ and claims the relief or expense without taking any steps to verify his entitlement to it. In this case, Dr Atkinson said he could not remember if he read the notes accompanying the tax return. In my view, a taxpayer carefully completing his tax return, would have read them. 21. The notes said: Improvement costs The cost to improve the value of an asset so long as that improvement is still reflected in the asset at the time of sale 22. In my view, no careful taxpayer, reading that, could have considered that the calling in of the guarantee was an improvement cost: and certainly not one that was still reflected in the value of the shares of the holding company at the time of their sale. In particular, I was given no reason to suppose that the calling in of the guarantee had in 2008 any effect on the value of the holding company and certainly none that it affected its value in 2012. My conclusion is that claiming the £30,000 deduction in the face of this indication in the guidance notes, and without taking any other steps to verify entitlement to the deduction, was not the act of a prudent and careful taxpayer and Dr Atkinson was therefore careless in doing so. 23. Dr Atkinson’s view is that his inability to afford tax advice counts in his favour: I consider that it does not prevent his actions being careless. A taxpayer in the same position as Dr Atkinson, in other words, a taxpayer similarly unable to afford tax advice, nevertheless would have read the notes to the tax return and would have read the note on improvement costs as it was specific to the claim being made, and would as a result not have made the claim. 24. Dr Atkinson’s submission is that HMRC ought to accept that making the claim was not careless, because they accept that his making of the entrepreneur’s relief was not careless (see §26 below). But I agree with HMRC that the two claims were factually different because, in so far as entrepreneur’s relief was concerned, the appellant’s accountant (on his instructions) had contacted HMRC to find out if he was entitled to the relief. No such advice was sought with respect to the claim that the calling in of the guarantee was an improvement expense: all Dr Atkinson had to go on was the notes to the tax return, and, as I have said, those indicated that he was not entitled to the claim. Acting carefully, he would not have made the claim, certainly not without querying it with HMRC or an adviser. 25. I find that he was careless in making the claim for the £30,000 deduction for improvement expenses. Was making the entrepreneur’s relief claim careless? 26. HMRC did not allege making the claim for entrepreneur’s relief was itself careless; I understood their position was that, as Dr Atkinson had instructed his accountants to query the position with HMRC and they had written to HMRC on 21 December 2012 but not received a reply by the due date of filing of the appellant’s tax return, it was not careless for the return to include the claim. 27. It was HMRC’s case was that the appellant was caught by paragraph 3(2) of Schedule 24 which provides: (2) An inaccuracy in a document given by P to HMRC, which was neither careless nor deliberate on [the taxpayer’s] part when the document was given, is to be treated as careless if [the taxpayer] –(a) discovered the inaccuracy at some later time, and(b) did not take reasonable steps to inform HMRC. 28. HMRC take this view because HMRC replied to the accountant’s query on 30 January 2013 and stated in that reply that entrepreneur’s relief was not available (for the reasons explained in my earlier decision, which were that he ceased to be a director more than three years before he sold the shares) and the appellant knew this in early February 2013. He knew this because by letter dated 5 February 2013 his accountants sent him a copy of HMRC’s letter and advised him to amend his return to remove the claim. 29. The appellant’s evidence was that at this point in time, despite the advice of HMRC and his accountant, he still considered that he was entitled to make the claim and wait for HMRC to challenge it. It was also clear from his evidence that by this time (early 2013) he had committed himself to using the money that would otherwise be paid in tax to start up a new business, and he knew that he could not afford to both start his new business and pay the tax, and this influenced his actions. 30. Dr Atkinson’s case was that, as an entrepreneur who had sold his shares, he considered he was a person Parliament had intended to benefit from the relief and he also referred to the parliamentary materials mentioned in the previous hearing and decision. But in my view, by the time he got HMRC’s opinion and his accountant’s advice, he was not only knew that he did not qualify, he had been told why he did not qualify (which was that he had ceased to be a director before he sold the shares). Does that mean he fell within paragraph 3(2)(a) and had ‘discovered’ the inaccuracy? 31. Discovery: There is no definition of ‘discovery’ and neither party made submissions on this to me. In the absence of submissions, I do not intend to attempt a comprehensive definition. But it must connote an awareness of the inaccuracy, and I do consider that it encompasses the situation in this appeal. While up to February 2016, I accept that Dr Atkinson was of the opinion that he was the sort of person the relief was intended to benefit, in early February 2013 he became aware that HMRC did not share this view and he became aware that that was because he did not meet the requirement of being a director immediately before the shares were sold. 32. Even though I accept he personally remained of the view that he ought to benefit from the relief, indeed he remained of the view that the rules ought to be interpreted to give him the benefit of the relief, nevertheless I find in early February 2013 he discovered the inaccuracy because he was told the actual reason why he was not entitled to the relief. At that point, he actually knew of the inaccuracy, even though he chose not to recognise it. 33. Reasonable steps? I consider that a failure to take ‘reasonable steps’ is the same as ‘carelessness’ in that it is a failure to do what a prudent and careful taxpayer would have done in the same circumstances. I do not consider that a prudent and careful taxpayer would have disregarded his accountant’s advice to amend his return in these circumstances. I consider Dr Atkinson’s failure to do so was a failure to take reasonable steps. He was therefore ‘careless’ within paragraph 3(2)(1) in respect of his claim to entrepreneur’s relief. Was disclosure prompted? 34. Unprompted disclosure is defined in paragraph 9(2) as disclosure:
“...made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the inaccuracy....”
Otherwise the disclosure is defined as prompted. 35. HMRC corrected the appellant’s tax return by way of closure notice following the opening of an enquiry. I consider that revealing the facts behind the disallowed claims to HMRC during the course of an enquiry, as happened in this case, is prompted disclosure because it is not disclosure at a time when the appellant had no reason to believe HMRC were about to discover the inaccuracy: clearly HMRC were likely to discover the inaccuracy during an enquiry. 36. Dr Atkinson’s position, however, is that he informed HMRC of the position before the enquiry was opened in that his accountants had written to HMRC about it on his instructions in their letter of 21 December 2012. There was some dispute about whether the Tribunal had a copy of this letter. Dr Atkinson’s position was that it was the letter in the bundle with a date of 13 August 2014: his inference was that when he asked his accountants for a copy of it during the enquiry, they printed out a copy with the current date on it rather than the date it was actually sent. Mrs Bartup did not take a view either way. 37. I think Dr Atkinson is right. The letter certainly reads as the letter to which HMRC’s letter of 5 February 2013 was a reply. It made no sense if it was sent in 2014. It does not matter in any event: the letter asks if in the circumstances of the appellant’s case he was entitled to entrepreneur’s relief. The letter does not inform HMRC that Dr Atkinson intended to make such a claim in his 11/12 tax return. It was therefore not disclosure of the inaccuracy in the 11/12 return. 38. While it was possible that if, later, an HMRC had looked at the letter of 21 December 2012 together with the appellant’s tax return of 30 January 2013, he may have inferred both that (1) such a claim was made in the tax return and (2) should not have been, the taxpayer had not actually disclosed these facts. Disclosure should be explicit and not rely on HMRC putting together two documents and making inferences. 39. I find disclosure was prompted as disclosure only actually occurred during the enquiry. Special circumstances? 40. As recorded in their decision of 13 October 2014, HMRC did not consider that there were any special circumstances in the appellant’s case and did not apply a further reduction. I can only interfere with that decision if it was flawed in the public law sense. 41. As HMRC did not specify in their decision which circumstances they took into account, their decision may be technically flawed in that it contains no reasons. It also means I cannot ascertain whether they took into account something they should not have done or failed to take into account something which they should have taken into account. 42. But even if the decision was technically flawed, I would not interfere with it as I do not consider that there are any special circumstances justifying a further reduction in penalty. 43. Dr Atkinson relied on his particular circumstances as amounting to special circumstances. Those were: (a) He was an entrepreneur who was forced out of the company he helped create in a boardroom coup, and was forced to (successfully) litigate against his erstwhile directors in order to realise his investment; as this meant he ceased to be a director long before his sold his shares, he was unable to claim entrepreneur’s relief although he would have been entitled to it had he sold his shares at the same time as he resigned as director; (b) His income had never been such that he was able to afford tax advice; (c) He had started up a new business in 2013 which had generated more in tax revenue for HMRC than at stake in his appeal; he had been unable to start up this new business until he received the money from the sale of his shares and would have remained unable to do so if he had paid the tax due on this sale. 44. So far as point (b) is concerned, an inability to afford professional advice is not a special circumstance. It is a common situation and clearly not intended by Parliament to excuse taxpayers from careless errors. If it were otherwise, only taxpayers who used agents to complete their tax returns could be liable to a penalty for a careless error. In any event, in this case, as I have already noted, the taxpayer was not short of advice: the problem was his failure to follow it. Either he did not read or ignored the advice in the capital gains tax notes which accompanied the tax return with respect to the claim on the calling in of the guarantee, and he outright ignored HMRC’s opinion that he was not entitled to entrepreneur’s relief and did not take his accountant’s advice to amend his tax return to exclude the claim. His inability to afford advice was neither the cause of the incorrect return nor did it justify a special reduction. 45. So far as point (c) is concerned, generation of further profit is not a good reason for failing to properly account for tax on earlier profits. Moreover, in using the money which should have been paid in tax, the appellant was using HMRC, whether or not he understood this at the time, as an unwilling lender of money. The fact that he put the money unwillingly loaned to him to good use is not a special circumstance justifying a reduction in penalty: the circumstances may be unusual but it would be against policy to reduce the penalty as it would encourage taxpayers to use HMRC as an unwitting lender of money. 46. So far as point (a) is concerned, it seems likely that had the appellant taken legal and tax advice at the time of the coup he may have been able to avoid ending up in the situation where his loss of directorship preceded his sale of the shares, thus resulting in his inability to claim entrepreneur’s relief he would otherwise have been entitled to. But while those circumstances may be ‘special’ in the sense of unusual, they do not justify a reduction in penalty. The penalty was for the inaccuracy in the return, and the unfortunate end to his first business venture did not cause nor justify the inaccuracy in the return. Suspension 47. HMRC’s case was that they were unable to suspend the penalty as paragraph 14(3) stated that they could only do so where compliance with a condition of suspension would help [the taxpayer] to avoid becoming liable to further penalties...for careless inaccuracy 48. HMRC’s decision letter records that they did not consider it appropriate to impose a criteria requiring Dr Atkinson to do as his accountant said following advice from HMRC. 49. Dr Atkinson did not claim that the penalty ought to be suspended and so I do not really need to consider this. In any event, I do not consider that HMRC’s decision was flawed or if it was, that there any grounds to reach a different conclusion. 50. In particular, I agree with HMRC that Parliament did not intend a condition of suspension to be something as general as, say, requiring the taxpayer to be more careful in future. Conditions were intended to be more specific and relate to something in the control of the appellant which was likely to arise again, so that the appellant could instigate an improvement and such improvement was likely to result in compliance in the future where otherwise there would be non-compliance. It also seems to me that suspension, which might result in the lifting of a penalty, was for the less serious end of careless penalties. 51. The specific facts leading to the inaccuracies in this case were unlikely to recur in the future so a specific condition (such as taking the joint advice of HMRC and his accountant) was not likely to lead to compliance in the future. In any event, I do not consider that this is an appropriate case for suspension as it is not at the less serious end of careless behaviour. The appellant’s evidence was that he preferred to claim the relief, and wait for HMRC to challenge it, as that was the only way he could fund his next business venture, even though (I find) he knew HMRC considered he was not entitled to it and had no real reason to suppose HMRC’s opinion was wrong. The penalty should not be suspended. Overall conclusion 52. As this was a decision in principle, I do not determine the amount of the penalty. But in principle the penalty is confirmed at 15% of the potential lost tax revenue with respect to the incorrect claims for improvement costs and entrepreneur’s relief in Dr Atkinson’s 2011/12 tax return. The two claims were made carelessly, and while he is entitled to the full deduction of 15% on the grounds of cooperation for prompted disclosure, thus reducing the penalty to 15%, he is not entitled to a further reduction for special circumstances, nor should the penalty be suspended. 53. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. BARBARA MOSEDALE TRIBUNAL JUDGE RELEASE DATE: 3 JUNE 2016