The Magnitsky Clause Part 1: Profiting from the suppression of whistleblowers – what does it mean for business?
…well, not exactly. But, if you can demonstrate that you have taken “reasonable care” in completing your tax return, you could obtain (arguably) the next best thing:
The term “reasonable care” is relevant to any person who incorrectly declares his tax liability, leading to an underpayment of tax, and it has historically been quite difficult to define. The recent case of Gedir v HMRC  UKFTT 188 (TC) has, however, shed further light on the court’s interpretation of this term which should be of interest to anyone who files tax returns.
Gedir v HMRC
The facts and application of law in Gedir v HMRC were complex. Mr Gedir was working as a non-UK resident at Bear Sterns and, in the midst of the financial crisis in 2008, he moved to Goldman Sachs in the UK. Mr Gedir subsequently left Goldman Sachs and received a leaving payment in the tax year 2010/11.
Mr Gedir engaged a tax adviser with particular expertise in employment income to complete his tax return for that year. The question was whether ‘Foreign Service relief’ would be available in relation to the leaving payment received in 2010/11.
Mr Gedir was advised that, whilst the position was unclear, it was an acceptable filing position to claim the Foreign Service relief. Mr Gedir looked into this a little himself and also consulted colleagues who were in a similar position and adopting the same stance. Accordingly, the relief was claimed in Mr Gedir’s tax return for 2010/11.
HMRC raised an enquiry into Mr Gedir’s tax return and determined that the relief was not available, resulting in additional tax due.
HMRC also levied a penalty of 16.5% for alleged carelessness. Mr Gedir appealed this penalty on the grounds that he had acted with “reasonable care”, because:
HMRC contended that Mr Gedir did not take reasonable care because his tax advisers had warned that the position was unclear and, therefore, Mr Gedir should have consulted another tax adviser and/or asked HMRC for advice.
The FTT found in favour of Mr Gedir in line with the case of Hanson v HMRC  UKFTT 314 (TC). This judgement established the following test for ‘reasonable care’ where an agent has completed an individual’s tax return:
Whilst the fourth bullet point was not applicable to Mr Gedir’s case, he fulfilled the remaining criteria and therefore he had exercised “reasonable care” in filing his tax return. There was, therefore, no need for Mr Gedir to take further steps, even though he was aware the law was unclear.
The FTT commented that it is not unreasonable where there is a grey area in tax law – as is often the case – for a taxpayer to adopt the interpretation which is most favourable to him, provided it is a reasonable position to take (backed up by professional advice). It is unnecessary to consult another adviser, not least as there is no guarantee that the alternative adviser will come up with the correct (or a better) opinion. There is also no obligation to consult HMRC because, like the taxpayer, HMRC will most likely adopt the view which is most favourable to it.
Gedir v HMRC confirms that if a taxpayer takes professional advice following the criteria set out in Hanson v HMRC he will have taken “reasonable care” in filing his tax return. Hence if an individual’s affairs are or become particularly complex, he should consult an experienced professional and take all possible steps to understand the content of the tax return. This will offer the taxpayer further protection against penalties, immunity from the new strict liability criminal offences and also shorter time limits within which HMRC can raise assessments (although, admittedly, no gold medals). It is, however, worth bearing in mind that the Gedir case establishes the court’s current interpretation of “reasonable care” and this may be challenged in the future. Watch this space…
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