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Carelessness and tax avoidance: the new rules

Wednesday September 2018

If HMRC find that your tax return understates your tax liability, you can expect them to raise the question of penalties:  but only if the inaccuracy was either deliberate or due to your carelessness.  To put it another way, if you take “reasonable care” to get your tax right, you cannot become liable to pay a penalty even if, despite your efforts, the tax return turns out to be wrong.  Happily, the onus is on HMRC to show that you have been “careless”, not on you to show that you haven’t.

Taking “reasonable care” means, broadly, doing whatever a reasonable person genuinely doing his or her best to comply with the law would do.  If you’re uncertain about something, taking a wild guess or relying on what the bloke at the pub told you isn’t taking reasonable care: taking (and following) advice from someone who is ostensibly competent normally is.

However, there is now a very important caveat where “avoidance arrangements” are involved.  This applies to tax returns for 2017/18 and subsequent years.

Where “avoidance arrangements” prove not to have the intended effect (with the result that your tax return relying on their efficacy is incorrect), you will be treated as having taken “reasonable care” only if any advice on which you have relied meets all of the three following conditions, namely:

  • The advice was given to you neither by an “interested person” (defined as, broadly, someone participating in or facilitating the planning arrangements) nor by someone introduced to you by an interested person.  So, for example, where you have been sold a tax planning scheme, you can’t rely on advice given by the person who sold it to you.
  • The person giving the advice had appropriate expertise (thus denying you reliance on the advice of the bloke at the pub).
  • The advice was addressed specifically to you and took account of your individual circumstances (thus denying you reliance upon, for example, a generic Counsel’s opinion made available to participants in a scheme).

Where you are simply unsure of the correct treatment of a particular transaction or situation (whether a gain is chargeable to tax, for example, or whether a particular expense is tax-deductible) and there is no element of avoidance involved, the law remains as it always has been:  if you have done whatever a conscientious reasonable person would do (which might depend on all the circumstances, including the nature of the uncertainty and the amount involved) you have not been careless.

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