The case law involving ‘duty of care’ to clients is extensive and detailed. Rather than wade through all of the historic precedents (anybody remember Donoghue v Stevenson from their studies?) it is more interesting to contrast two recent 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.
The first case is from 2012 – Mr J R Hanson v Revenue & Customs  UKFTT 314 (TC) (26 April 2012). The basic details of the case 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 what it said was a careless inaccuracy in the tax return. The taxpayer appealed against the penalty.
The judge in the case ruled:
I have no hesitation in finding that there was carelessness on the part of (the accountants). They did not suggest otherwise. The entitlement to relief for CGT purposes in these circumstances was an area that a reasonably competent accountant ought to have been able to advise upon. It is then necessary to consider whether the appellant himself took reasonable care to avoid the inaccuracy.
I have come to the conclusion that the appellant did take reasonable care. He instructed an ostensibly reputable firm of accountants who had acted as his accountants for many years. The matters on which he instructed them were ostensibly within their expertise. He had no reason to doubt their competence or their advice that relief was available. They were in possession of all relevant facts. In the circumstances of this case the appellant was entitled to rely on (the accountant’s) advice without himself consulting the legislation or any guidance offered by HMRC.
I have found as a fact for the reasons given above that the appellant did take reasonable care to avoid the inaccuracy in his tax return for 2008-09. In those circumstances I cancel HMRC’s decision to impose a penalty and allow the appeal.
So, victory for the client and a clear ruling from the judge that the client could rely on the advice of the accountant.
Contrast this with the decision in a high profile case decided in July 2016: Blackman  TC 05218
This case involved a professional footballer who had also instructed a firm of accountants to prepare his tax return. Again the tax return had proved to be inaccurate and further tax was payable. HMRC also imposed a penalty due to the client not taking reasonable care to avoid the inaccuracy.
The background was that the footballer had been transferred several times during the relevant tax return period but one of the ‘employments’ had been missed off the return. The footballer accepted that this was incorrect but claimed that the penalty was unfair as he was not responsible for the inaccuracy. All of his financial information was given to his accountants therefore it was they who missed the income from his tax return. He was not a tax professional and so he should not be expected to understand a tax return and could therefore treat the accountants' work as accurate.
There were detailed arguments given for and against the appeal but a summary of the main points of the FTT ruling was:
Having taken account of the above, we consider that (the footballer) did fail to take reasonable care to avoid the inaccuracy and was therefore careless:
It is entirely reasonable to expect an individual to know and understand their employment history in a given tax year. There was no evidence in this case that (the footballer) did not know or understand his employment history in the year 2012-13.
(The footballer) would have been expected to identify the error. It was an entirely obvious one to anyone reading the tax return with sufficient care.
The scenario was not complex. This is a self-assessment return of an employed individual, in continuous employment throughout the whole year, and in a single employment at any one time. His tax affairs were correspondingly simple and straightforward. We do not consider that having three consecutive employments in one year amounts to such complexity that (the footballer) could not reasonably have been expected to identify the error.
Although the footballer may have left school at 16, there was no evidence that his level of educational attainment or literacy meant that he was unable to read the tax return himself, and needed the tax return reading out to him.
Accordingly, the appeal against the imposition of the penalty is dismissed. Also interesting to note is that, for various legal reasons, the first case decision above was not deemed to be binding on the decision in this second case.
So, defeat for the client and the accountants’ role in the matter left open.
Two similar cases with very different outcomes! In conclusion you should ensure:
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 you can order now
the client is made aware of HMRC’s official guidance which amongst other things states:
You and your client’s responsibility for penalties
When you are acting on behalf of a client, they still retain responsibility for their returns, calculations and payments. Your authorisation as an agent allows HMRC to deal with you on your client’s behalf, but any liability for penalties for late returns, late payments or any errors on paperwork legally remains with your client.
It is important the firm’s quality control policy for approval of accounts and tax returns by the client is clear and documented.
ACCA has also produced a factsheet which covers the issue of professional negligence.