[2012] UKFTT 532 (TC)
TC02208
Appeal number TC/2011/00490
Capital
gains tax. Penalty. Negligence of professional adviser- whether attributable to
taxpayer. Distinction between professional adviser acting as a functionary and
acting in a true professional advisory capacity.
FIRST-TIER TRIBUNAL
TAX CHAMBER
MR
WASEEM SHAKOOR Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
Revenue
& CUSTOMS Respondents
TRIBUNAL:
JUDGE GERAINT JONES Q. C.
SONIA GABLE
Sitting in public at 45 Bedford Square, London WC1 on 27 June 2012.
Mr Maas for the Appellant
Mr Shea, instructed by the
General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2012
DECISION
1. By
his Notice of Appeal dated 14 January 2011 the appellant, Mr Shakoor, appealed
against an assessment to capital gains tax in the sum of £49,014 plus a penalty
levied thereon at 70%. At the hearing before us it was common ground that the
capital gains tax was payable and in fact had been paid, but the penalty
remained the subject of the appeal.
2. Page
1 of the bundle produced by the respondent contains a list of agreed facts. It
is agreed that the appellant purchased two flats at Platinum House, Harrow in
August 1999 for the sum of £327,500; same being a purchase "off
plan". It is agreed that the appellant disposed of his interest in those
properties in July 2003 for the sum of £475,000. It is agreed that the
appellant did not reside in either flat at any time whatsoever. The appellant
did not refer to the purchase or sale of either flat in his self-assessment tax
return for the fiscal year ended 5 April 2004 which he completed and signed on
3 July 2005. The last date for the respondent to make an enquiry under section
9A Taxes Management Act 1970 was 31 October 2006. The present assessment and
the penalty thereon have arisen by way of a discovery assessment.
3. At
the outset of the appeal Mr Maas argued that the penalty imposed, at 70%, was
too high and should be reduced to nil. He pointed out that this is a case in
which the respondent has not alleged fraud but has alleged negligence. He
contended, correctly, that the onus is upon the respondent to establish such
negligence. He told us that it was accepted that the respondent was entitled to
issue a discovery assessment under section 29(5) of the 1970 Act. He went on to
say that it was the appellant's case that insofar as there was any negligence
involved in this matter, it was the negligence of the appellant's agent, his
accountant, Mr Mandani.
4. Mr
Maas then referred us to the decision of this Tribunal in Wald v HMRC
[2011] UKFTT 183 (TC) supposedly in support of that proposition. In our
judgement paragraph 15 of that Determination sets out that an appellant will
remain responsible if there are errors in the tax return due to the negligence
of his retained accountant whilst acting on his behalf. The Tribunal points out
that it may well be that the taxpayer has some recourse against the accountant;
but that is a separate matter. Thus it does not support Mr Maas’ submission.
5. Mr
Maas also made reference to the decision of the Tribunal in AB v HMRC
[2007] STC (SCD) 99, a case involving complicated facts concerning the
deductibility of various expenses when computing profits. However, for our
purposes the case also involved the issue of penalties in respect whereof the
Tribunal (Sir Stephen Oliver QC and Dr. N. Brice) held that :
“105. We are of the view that the question whether a
taxpayer has engaged in negligent conduct is a question of fact in each case.
We should take the words of the statute as we find them and not try to
articulate principles which could restrict the application of the statutory
words. However, we accept that negligent conduct amounts to more than just
being wrong, or taking a different view from the Revenue. We also accept that a
taxpayer who takes proper and appropriate professional advice with a view to
ensuring that his tax return is correct, and acts in accordance with that
advice (if it is not obviously wrong), would not have engaged in negligent
conduct.”
6. We
consider the approach taken in AB to be the correct approach. A taxpayer
is only liable to a penalty if he has been negligent. There are few who would
gainsay the proposition that tax law can be complicated and difficult for
taxpayers to understand and, thus, it is only to be expected that, from time to
time, taxpayers will resort to professional advice. The purpose of resorting to
professional advice is that one normally expects to be able to rely upon it,
whether that professional advice is taken from a lawyer, an accountant or a
medical practitioner. We consider it difficult to understand how a taxpayer can
be negligent if, perceiving the need for professional advice on a matter of
difficulty or in a situation where the taxpayer is in doubt as to the proper
approach to be taken, he then seeks, and relies upon properly considered professional
advice.
7. In
our judgement, if the advice of a professional, in the sphere of tax matters
usually an accountant, is negligently provided, that negligence is not to be
imputed to the taxpayer. The question is whether the taxpayer was
negligent. He cannot be principally or vicariously liable for the negligence of
his professional adviser unless the factual circumstances in which the advice
is given indicate that a matter is fraught with difficulty and doubt, with the
professional adviser giving no more than his honest opinion about which side of
a sometimes difficult line, the facts of a particular case happen to fall. It
is contrary to the very notion of negligence (that is, a failure to take
reasonable care) that the person who perceives there to be doubt or difficulty
and then sets out to take the advice of a professional person whom he believes
will be able to resolve that doubt or difficulty, can be said to be negligent
if he then relies upon that properly provided advice (even if it turns out to
be wrong).
8. Accordingly,
we decline to follow the reasoning in paragraph 15 in Wald, as it seems
to us to be counter-intuitive to speak about a taxpayer being negligent when he
has placed his affairs in the hands of an accountant or sought specific advice
on a specific matter and the professional adviser has then been negligent in
providing that advice.
9. In
our judgement, the two different decisions to which we have referred are
probably reconcilable on this basis. If a taxpayer claims that his accountant
has been negligent, for example, by failing to meet a deadline for filing a
return or undertaking some and other administrative task, then the negligence
of the accountant will not usually provide a defence to a penalty because the
accountant is simply acting as the taxpayer's agent or functionary in filing
the document that needs to be filed by a particular deadline. In other words,
he is acting as an agent or functionary for his principal; but not as an
independent professional adviser. However, in a situation where a professional
adviser is not retained simply to act as a functionary, but is retained to give
professional advice based upon the best of his skill and professional ability,
he is not then a functionary or agent for his principal. He is a professional
person acting under a retainer to give professional advice upon an identified
issue. He is bound to provide that advice to the best of his professional skill
and ability, whilst taking reasonable care in and about preparing and giving
that advice. In other words, he is acting as a true professional, rather than as
an agent or functionary.
10. In our
judgement, where an accountant acts as an administrator or functionary, he is
acting as the taxpayer’s agent and his default (whether negligent or not) will
usually provide a taxpayer with little opportunity to claim that he is not in
default of a particular obligation. However, when a professional acts in a
truly professional advisory capacity, the situation is otherwise and reliance
upon properly provided professional advice, absent reason to believe that it is
wrong, unreliable or hedged about with substantial caveats, will usually lead
to the conclusion that a taxpayer has not been negligent if he has taken and
acted upon that advice.
11. We heard
evidence from Mr Mandani who relied upon his witness statement dated 11 June 2012
as his evidence in chief. When Mr Mandani was cross examined, he said that he
had advised the appellant, during several telephone calls, that his disposal of
the properties referred to above did not give rise to a capital gains tax
liability. He was unable to refer to any Attendance Notes of any telephone
conversations during which any such advice was given and recorded. He said that
he had looked for Attendance Notes, but found none. Mr Mandani said that he
knew that the appellant had not lived in either flat as they would have been
uninhabitable, at least until a Certificate of Practical Completion had been
issued.
12. Strangely, Mr Mandani
told us that he did not consider the gain upon the sale of the flats to be
taxable because it came within Extra Statutory Concession D49, which appears at
page 179 of the Tribunal Bundle. He went on to say that it was his
understanding that the respondent recognised that a taxpayer may not be able to
occupy a property, but could nonetheless have one or two years within which to
complete a proposed purchase. He said that he did not inform the appellant that
the sale transaction might give rise to a taxable event.
13. Mr Mandani went
on to say that he based his advice to the appellant upon the Extra Statutory
Concession D49 and gave no consideration to the issue of capital gains tax
relief under the relevant statutory provisions. He said that he did not discuss
the Extra Statutory Concession with the appellant or refer to that particular
provision when speaking with his client.
14. On 9 December
2009 the respondent wrote to the appellant's accountant indicating that the
disposal of the flats may well have given rise to a taxable event. The annex to
that letter asked the appellant, by his accountant, to say on what basis, if
any, he believed that capital gains tax might not be due or that any reliefs
might be due.
15. On 3 June 2010 the
appellant’s accountants wrote to the respondent and argued not that Extra
Statutory Concession D49 was applicable; but that Extra Statutory Concession
D37 was applicable. It was also contended that the disposal had been a disposal
of the appellant's principal private residence and so not liable to capital
gains tax.
16. When Mr Mandani
was asked why he had changed tack from relying upon Extra Statutory Concession
D49 to D37 he said “I took a strategic decision. I just felt D37 was more
applicable at the time.” He acknowledged that D37 and D49 apply to quite
different factual circumstances.
17. The appellant
gave evidence in accordance with his witness statement dated 9 June 2012. In
that statement he says that he had previously sold property which gave rise to
a capital gains tax liability, “as advised by Mr Mandani”. His statement
emphasises the extent to which he relies upon Mr Mandani and he says that when
he was sent his tax return for the year ended 5 April 2004, he noticed that it
contained no reference to his disposal of the flats at Platinum House. He says
that he questioned this with his accountant, who told him that as the disposal
was exempt from tax, there was no requirement to refer to it in the tax return.
He said that he was happy to accept that explanation.
18. The explanation
referred to in paragraph 17 above itself gives rise to a difficulty because, as
an accountant, Mr Mandani would or should be well aware that the fact of a
disposal should be declared unless it is the disposal of a principal place of
residence, and is exempt from capital gains tax. The exemption applies only if
the relevant property has been a taxpayer’s residence throughout the period of
ownership (with one or two exceptions which are not relevant for present
purposes). Mr Mandani knew that the appellant had not resided in either of
these flats for any period of time whatsoever. There was no sense in which it
could sensibly be said that the appellant had “resided” in either flat.
19. We regret to
have to say that we did not consider Mr Mandani to be a satisfactory or
reliable witness. We find it, to say the least, surprising that a professional
accountant should have changed his ground from relying upon one obviously
inapplicable Extra Statutory Concession to another equally inapplicable Extra
Statutory Concession. We find it most surprising that there is no advice
proffered to the appellant in writing or, at the very least, any Attendance Notes
of advice orally given at the telephone.
20. In our judgement
both Mr Mandani and the appellant knew that the appellant had not resided in
either flat for any period of time whatsoever. At the very least, each of them
appreciated that there must be doubt as to whether the principal place of
residence exemption could apply. As the appellant says in the penultimate
paragraph of his witness statement, he queried with Mr Mandani the omission of
his disposal of the flats from his tax return. His evidence is that when he
queried it he was informed that it was exempt from tax; but he makes no
reference to any reasoned explanation being given in support of that opinion.
21. We do not accept
that a chartered accountant could have taken substantially differing views as to
whether the disposals of these two flats could be exempt from capital gains tax
by reference to two very different Extra Statutory Concessions. Even if we
were to accept that that was the thought process adopted by Mr Mandani, it
would indicate significant doubt on his part.
22. We regret to
have two say that we do not accept the evidence given by Mr Mandani that, at
the time when the appellant's relevant tax return was filed, he had actively
addressed the issue of whether the disposals were exempt and, if so, on what
basis. We arrive at that conclusion given the changing bases (see above) upon
which Mr Mandani has sought to justify the advice that he claims was given at
the time when the tax return was filed. We proceed on the basis that it is more
probable than not that, as the appellant says in his witness statement, he
queried the omission from the tax return of the disposal of the flats because
his state of mind was that those disposals would give rise to some capital
gains tax liability. We find that this was raised with his accountant, who,
without any proper basis for so doing, may have given the appellant some cause
to believe that the disposals need not be referred to; but, as we find, in a
perfunctory and unreasoned fashion that could not have been considered
persuasive or authoritative by a client who, as we find, realised that the
disposals may well give rise to a capital gains tax liability.
23. We find that the
advice, if such advice was given by Mr Mandani, was obviously wrong and that
the appellant realised or ought to have realised that it was obviously wrong or
so potentially obviously wrong that it called for further explanation or
justification. It is notable that nobody suggests that Mr Mandani gave any
explanation to the appellant as to why the disposals should be exempt from
capital gains tax or why they need not be referred to in the tax return. Given
that the appellant plainly believed that the disposals may well give rise to a
capital gains tax liability, it defies belief that he did not seek an
explanation from his accountant as to why, or on what basis, any exemption, and
which exemption, could be relied upon by him. This was, as we find, a case of
shutting one's eyes to what either was or ought reasonably to have been seen as
incorrect advice - if, indeed, any such advice was actually given – a matter
upon which we entertain significant doubt.
24. Nonetheless,
whilst there are several unsatisfactory aspects to the evidence given by Mr
Mandani and the appellant, we do not consider that the totality of the evidence
justifies us finding that the evidence that the appellant was given some advice
to the effect that the disposals would not give rise to capital games tax
liability, is an ex post facto invention. We find that the advice that
was given was no more than some kind of off the cuff comment, wholly unreasoned
and such that the appellant knew or ought reasonably to have known was very far
from being a considered and reasons piece of professional advice from somebody
who had properly considered and/or researched the applicable provisions.
25. In the foregoing
circumstances we conclude that a penalty is properly due as we find that the
appellant cannot bring himself within the principle that we take from paragraph
105 in the decision of this Tribunal in AB (above).
26. The assessment
of the penalty gives rise to a difficulty. We start from the position that a
penalty is properly payable, but in circumstances where the appellant's
negligence (not that of his accountant) has been his inappropriate and eager
reliance, upon advice which, if given, could have given him no confidence
whatsoever that it was a properly thought through and reasons professional
opinion on the issue upon which the appellant required advice once he had
raised the point that his tax return contained no reference to his disposal of
the apartments at Platinum House.
27. We have to weigh
the various levels of culpability that arise. We take the view that the
appellant was content to take a chance on the basis that his accountant had
given him comfort, albeit in the rather dubious circumstances that we have
recounted above. The assessment of a penalty is not a precise science but
involves assessing relative and relevant culpability. In arriving at our
conclusion we give some benefit of the doubt to the appellant who, in our
judgement, has been ill served by his professional adviser. On the basis of the
evidence available to us our overall assessment is that the penalty should be
30%.
28. Whether the
appellant was or was not given firm advice that the disposals were exempt from
tax, we are in no doubt that that was advice that the appellant must have
realised was open to significant, if not substantial, doubt.
29. 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.
Decision.
Penalty reduced to 30%.
GERAINT JONES
Q.C.
TRIBUNAL JUDGE
RELEASE DATE: 22 August 2012
