“Reasonable Care” and Tax Avoidance Schemes
The submission of an incorrect tax return may result in a penalty if the error was the result of careless or deliberate behaviour. However, where an individual can demonstrate that they took “reasonable care” when preparing their return, then a penalty will not be charged.
Tax Avoidance Arrangements
Where you entered into a tax avoidance scheme which is later defeated by HMRC resulting in an incorrect tax return, the presumption is that you have not taken reasonable care and will therefore be subject to the penalty. This applies for returns or documents sent to HMRC after 16 November 2017 relating to the 2017/18 tax year onwards.
However, it you entered into the arrangement as a result of taking professional advice, then HMRC will generally agree that you took “reasonable care” and you will therefore not be subject to a penalty – unless the advice you received is classed as “disqualified advice”
What is “Disqualified Advice”?
Advice will be “disqualified advice”where one of the following conditions is met.
1) The advice is given by an “interested person”.
An individual will be an “interested person” where they participated in the arrangement/any transaction forming part of the arrangement.
An individual will also be an “interested person” where they were paid for facilitating the taxpayer to enter into the arrangement unless they had the appropriate expertise and they took into account the individual’s personal circumstances (see points 3 and 4 for further information).
2) There is an arrangement between an “interested person” and an adviser who provided the advice.
3) The advice is given by an adviser without the appropriate expertise.
The kind of factors that are taken into account when identifying whether an individual has the appropriate expertise includes:
- Do they have the relevant qualifications?
- Are they a member of an accredited professional body?
- Is their main business that of providing tax advice?
- What relevant professional experience do they have?
4) The advice did not take into account of the individual’s personal circumstances.
For example, where the advice merely sets out the legislation and does not apply the rules to the taxpayer’s circumstances, the advice will be “disqualified advice” and will not act as a defence against careless/deliberate behaviour.
5) The advice was not given/addressed to the individual.
Do your research!
It is important to note that the advice will not be “disqualified advice” provided that you can show that you took reasonable steps to identify if the advice would be disqualified, and that you reasonably believed that it would not apply.
With this in mind, prior to relying on any advice in relation to a tax avoidance arrangement, it crucial that you research the adviser carefully, check their website, obtain a second opinion from a trusted relevant professional (e.g. a tax consultants), or ask the adviser to provide evidence of relevant accredited qualifications.