This is an updated version of a previous case study of September 2020.

Mistaken tax advice given in innocence

An individual approached us at SME Strategies in some despair. He and his wife had been given tax advice by a previous accountant to move rental properties into his and his wife’s personal names and out of the company which owned the properties. The company was wholly owned by the individual and his wife. The rationale by the accountant was to avoid double CGT (ie CGT on the properties when they were sold and a further charge to CGT when the shares in the company were sold). The advice though was to allow the rental income to continue to be reported in the company (via a management charge) and thus for the rental income to continue to suffer Corporation Tax (at 19%) rather than the marginal (40%) rate of Income Tax of the individuals. This advice was incorrect but in innocence and in good faith the individuals acted on the clear advice of their accountant.

As any tax accountant will know, a company should only charge for bona fide services rendered for properties they do not own and this should be under a proper agency agreement (which there was not in this case). Given that the shareholders of the company were the owners of the properties, it was likely that the non-arm’s length nature of the relationship between the company and the property owners personally would inevitably be scrutinised by HMRC.

But history catches up on us  

Some years later, the individuals changed accountants (when they sold their main business). The new accountants spotted the error in the tax advice. Significant repairs to the old tax returns were made by the new accountants for both the individuals and the company going back many years. Owing to the length of time involved, much of the Corporation Tax for which a repayment claim was made was denied as it was out of time. This meant that the repairs caused several years of rental income to be subject to both Income Tax and Corporation Tax. These repairs cost the client tens of thousands of pounds in additional Income Tax. The individuals, unsurprisingly, were very unhappy.

So where to next?

The client knew of SME Strategies and approached us for our thoughts. After an assessment of the issues, we agreed to be appointed as advisers to both the individuals and to the company to see what remedy could be obtained for our new but disillusioned clients.

Battling with insurers

A formal claim was made under the Pre-action Protocol for Negligence Claims to the first set of accountants for losses arising from incorrect tax advice. The Protocol sets out the required procedure to be followed by the parties in a professional negligence dispute before court proceedings are issued. Unfortunately, either by intent or ignorance, insurers to the accountants failed to grasp the error in the tax advice given. Despite an expert report that we had commissioned by a senior tax accountant, the insurers still refused to accept any liability for losses.

Taking the accountant to the High Court was going to incur significant legal fees. Time had also elapsed before SME Strategies were asked to help and this introduced a further element of risk. The last straw for the client though was when insurers threatened the clients with a counter-claim if the claim was not dropped. Any remaining doubt in the clients’ mind about pursuing a case vanished at such a preposterous attitude by insurers. So egregious was the matter that the client decided definitely to pursue legal action.

After careful thought, a strategy for pursuing legal action was identified which managed the inevitable risk when David (an individual small client) takes on Goliath (a national insurance company with London lawyers). Legal action was commenced, and it was only at this point on the eve of a Court hearing that insurers, for the first time took the matter seriously. An out of court settlement was reached. Neither the insurers nor their lawyers came out of it with very much distinction.

Then back to HMRC

The matter of the tax repairs (going back many years) made by the second set of accountants was then reviewed. The fact that the matter went back many years meant that the claim for repayment of Corporation Tax was denied as it was out of time and this resulted in double taxation. In UK tax law, double taxation on the same profits is not meant to happen. There is a little-known relief that can be used to avoid this happening known as Special Relief (under Para 51BA Schedule 18 FA 1998). It is used where “In the opinion of the Commissioners it would be unconscionable* for HMRC to seek to recover the amount which has been charged by a determination or refuse to repay it if it has already been paid.” We prepared a claim for Special Relief.

In addition, despite the client demonstrably taking reasonable care (by acting on unambiguous written tax advice), repairs were made to self-assessments going back many years when the HMRC tax manual says that repairs are needed to go back only four years if the client has taken reasonable care.

HMRC Income Tax offices and HMRC Corporation Tax offices do not usually interface. Getting this complex matter before a Senior Inspector at HMRC who could see the full picture was not an easy task. However, we assembled a set of four papers which together explained the whole position but separately covered Income Tax, Corporation Tax and Special Relief as appertaining to this matter. After some false starts with HMRC, eventually a Senior Inspector did review the whole matter and five years’ worth of assessments were cancelled and tax and interest were repaid.

The second set of accountants then graciously offered to make financial amends to the client for errors in their overzealous repairs.

Outcome

We worked with the clients for two years on this matter. At the end of this long struggle for tax justice, the clients are still out of pocket, but they are £50,000 less out of pocket than they might have been had they not pursued both justice for incorrect tax advice and HMRC for overpayment of repairs. Nothing can compensate them for their time, hassle and intimidation with which they were subjected to by insurers to the first accountant. The clients experienced these insurers as unprofessional. However, the clients take comfort that their efforts were finally not in vain.

Client testimonial

“Huge thanks to David for helping us with a sensitive and tricky matter surrounding our rental properties on which we had previously received incorrect tax advice. This required our personal and business tax returns to be corrected and large amounts of additional tax to be paid to HMRC to correct the mistakes. This has resulted in a significant dispute with former advisers. David’s knowledge, diligence, patience and tenacity is appreciated beyond words. We were very impressed and more than delighted with the care, attention to detail and professionalism he showed us. David was satisfied that we had a strong case and his experience and encyclopaedic knowledge was put to good use to present a very detailed and robust case to the insurers.

 David was aware what information was required and how to obtain it. In many instances he was able to pre-empt a good number of the counter arguments the insurers hoped to use, to try to avoid paying compensation, for their client’s incompetence. At all times David made us aware of what was and was not possible and the likely outcome depending on the tactics used. We were able to use informed decisions as to how to progress, and all the costs involved.

David then successfully helped us make a detailed claim for Special Relief and a review of previous repairs to our self-assessment returns going back many years. This resulted in a significant repayment of tax to us.

 We pursued this case not just for compensation to put right financial wrongs we had been done, but out of principle. The outcome exceeded our expectations. We could not recommend David and SME Strategies more highly.

 David (and I mean our David) beat Goliath.” 

 Mr and Mrs M, Business owners, Essex

[ * Debate can sometimes occur around the meaning of “unconscionable” and so we gave HMRC authority for our belief that to deny Special Relief in this matter this matter was unconscionable. The First-tier Tribunal case of John Clark v HMRC [2015] UKFTT 0324 (TC) considered the meaning of the term ‘unconscionable’. The tribunal noted there was only limited case law dealing with this point. But it accepted that “unconscionable”, in accordance with the judgment in William Maxwell v HMRC [2013] UKFTT 459 (TC) should mean ‘completely unreasonable, unreasonably excessive, or (as added by we would add) inordinate, or outrageous.

We also note Judge Redston’s comments at paragraph 95 of her decision in Donald F Currie v HMRC [2014] UKFTT 882 (TC) and her references to the Oxford English Dictionary where the term is defined as meaning “not in accordance with what is right or reasonable … unreasonably excessive … grossly unfair, especially to a weaker party … acting without regard for what is right.”’]

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