Self assessment – inaccuracy penalties for incorrect tax returns
Who takes responsibility for inaccuracy penalties?
The case law involving ‘duty of care’ to clients is extensive and detailed. We contrast two tax cases involving errors on tax returns. In both of these cases it was accepted that the returns were incorrect but when a penalty was charged the first-tier tribunal made different decisions on whose fault it was.
In J R Hanson v Revenue & Customs  UKFTT 314 (TC), the basic details were that the accountants indicated to the appellant that a form of holdover relief would be available to mitigate the CGT charge on disposal of some assets.
The client instructed the accountants to undertake the task of completing the tax return. The accountant accepted in evidence that the appellant was relying on his firm to complete the return correctly. HMRC launched an enquiry into the return and found no relief was available and the taxpayer was liable for further capital gains tax. HMRC also charged a penalty for a careless inaccuracy in the tax return.
On appeal, the taxpayer won on the grounds that carelessness was on the part of the accountants. The entitlement to relief for CGT in the circumstances was an area that a reasonably competent accountant ought to have been able to advise upon and it was considered that by instructing and relying on the expertise of the accountant, the client took reasonable care to avoid the inaccuracy.
In contrast to this, the decision in another case: Blackman  TC 05218 was that the client did not take reasonable care despite putting forward similar arguments of reliance on the accountant to complete the tax return.
This case involved a professional footballer who had been transferred several times during the relevant tax return period but one of the ‘employments’ had been missed off the return. The footballer argued that all of his financial information was given to his accountants therefore it was they who missed the income from his tax return. As he was not a tax professional, he should not be expected to understand a tax return and could therefore treat the accountants' work as accurate.
The footballer was found to have failed to take reasonable care to avoid the inaccuracy and was therefore careless as it was reasonable to expect an individual to know and understand their employment history in a given tax year. The footballer would have been expected to identify the error as it would have been obvious to anyone reading the tax return with sufficient care that income from an employment had been missed out. Accordingly, the appeal against the penalty for carelessness was dismissed.
The two similar cases had quite opposite outcomes and in fact for various legal reasons, the decision in the first case above was not deemed to be binding on the decision in the second case.
Clients should be made aware of HMRC’s guidance on the matter of penalties, which states that when an agent acts on behalf of a client, the client still retains responsibility for their returns, calculations and payments. The authorisation as an agent simply allows HMRC to deal with the agent on behalf of their client, but any liability for penalties for late returns, late payments or any errors on paperwork legally remains with the client.
It is important the firm’s quality control policy for approval of accounts and tax returns by the client is clear and documented. Practitioners completing tax returns for their clients in the coming months should ensure that a robust engagement letter is in place which clearly sets out the roles and responsibilities of both the firm and the client.
ACCA has recently updated its suite of engagement letters, which can be obtained from here: