Relying On an Expert Not Enough

May 12, 2014

Relying On an Expert Not Enough

When a couple entered into an artificial tax-saving scheme which subsequently failed, they placed the blame firmly at the door of the Isle of Man tax consultancy that had advised them.

The scheme involved the purchase of a £400,000 'capital redemption policy', which led to an artificial capital loss being created. This was set against taxable capital gains made in the same year with the net effect (so they thought) that the couple's Capital Gains Tax (CGT) liability would be eliminated. The scheme was disclosed to HM Revenue and Customs (HMRC) under the Disclosure of Tax Avoidance Schemes (DOTAS) procedure, which requires that tax avoidance schemes being relied on by taxpayers be disclosed to HMRC.

HMRC argued against the scheme, claiming that it was a sham to create artificial losses for CGT to set against real gains. The eventual outcome was that the Court of Appeal accepted that the scheme was a sham and it failed. The CGT the couple had sought to avoid was therefore payable.

The next step in the saga was the charging of penalties and interest by HMRC for the negligent submission of an incorrect tax return.

The couple argued that they knew nothing about tax and had relied absolutely on the tax consultants.

However, the First-tier Tribunal (FTT) was not swayed and would not accept that a taxpayer can place all the blame at the door of their professional adviser for an incorrect tax return being submitted. However, the FTT did reduce the assessable penalty from 25 per cent to 10 per cent because the DOTAS procedure had been followed.

Relying on a professional adviser may not be enough to absolve a taxpayer from their legal responsibility to make a correct and complete tax return.