Gold medals for taking tax advice?

…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:

1. a reduction in penalties applied by HMRC for any errors contained in your tax return;
2. protection against the new “strict liability” criminal offences for offshore tax evasion outlined in the 2016 Finance Bill and confirmed in the 2016 Budget (which can result in a fine and/or up to six months imprisonment); and
3. shorter time limits within which HMRC can make an investigtation into your tax return and raise an assessment for additional tax?

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 [2016] 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:

• He had appointed a tax adviser with specialised knowledge of the field;
• He had provided the adviser with all relevant information;
• To the extent he was able, he had checked the work and advice of the adviser.

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 [2012] UKFTT 314 (TC).  This judgement established the following test for ‘reasonable care’ where an agent has completed an individual’s tax return:

1. The taxpayer should consult an adviser whom he reasonably believes to be competent;
2. The taxpayer should provide the adviser with all relevant information and documents;
3. The taxpayer should check the adviser’s work (to the extent he is able to do so); and
4. The taxpayer should implement the advice.

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. 

Conclusion

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…

Further information

Should you have any questions about the issues raised in this blog, please contact a member of our private client team.