How much reliance can you place on your tax adviser?

This question is very topical for taxpayers, particularly those who used aggressive tax avoidance arrangements. Mr Andrew Thornhill QC was sued by the users of tax avoidance schemes on the basis that he had reviewed the arrangements and stated they would confer a tax advantage.

The court reviewing the case stated that the barrister “did not owe any duty of care to the schemes’ investors”¹. The full decision can be read here.

The basis of the decision was that Mr Thornhill was instructed by Scotts, promoters of the schemes, to advise on the tax impliations of the arrangements. He was never instructed by any of the claimants and in signing the agreement to invest, the taxpayers had also confirmed that “it was, and is, my responsibility to obtain appropriate advice,recommendations and assessment, as referred to above, from an independent financial adviser or other suitably qualified person.” This means that the investors who relied on Mr Thornhill’s analysis on the basis that he was Scotts’ adviser are now realising almost 20 years on that they were not entitled to do so.

One of the points the judge made was that the investors were business people and they had a certain level of knowledge in relation to finance and tax. They were not solely reliant on the advice from Mr Thornhill. We cannot say whether the judge’s decision would have been different had the investors been (e.g.) laypeople or whether this was simply mentioned to support his decision.

The result unfortunately supports HMRC’s case that taxpayers cannot be said to have taken reasonable care if they didn’t take separate advice, addressed directly to the taxpayer and which was specific to the taxpayer’s own affairs. Unfortunately, this also raises the question of when taxpayers should be aware of when the advice or opinion they are relying on is or is not sufficient. This is ironic considering people tend to rely on advice from a professional when they are not sure what the position is in the first place! How one is meant to identify – based on little to no understanding of the issues at hand – whether the advice is correct or dependable is confusing at best.

Implications of not taking separate advice

If tax avoidance arrangements are found not to work, not only are the investors required to pay taxes found to be due, but there is also the potential for penalties to apply.

Penalties for inaccuracies in a tax return are legislated for in Schedule 24, Finance Act 2007. Penalties are a standard amount within certain threshold depending on whether a taxpayer was careless or deliberately filed an incorrect return. Where a taxpayer took reasonable care, penalties are £nil. Until relatively recently (Finance Acto No., “reasonable care” included taking advice from a tax professional. contained within the tax legislation such that reliance on an adviser or reliance on advice is not counted as a “reasonable excuse” if the advice is “disqualified” or is “provided by a certain interested person” (Sch 24, FA 2007). The decision for Mr Thornhill effectively supports HMRC’s implementation of these penalties and the department’s interpretation of whether advice was taken.

An “interested person” is defined as

a) a person, other than P, who participated in the avoidance arrangements, or

b) a person who for any consideration (whether or not in money) facilitated P’s entering into the avoidance arrangements.

Advice is “disqualified” if any of the following applies—

(a)the advice was given … by an interested person;

(b)the advice was given … as a result of arrangements made between an interested person and the person who gave the advice;

(c)the person who gave the advice did not have appropriate expertise for giving the advice;

(d)the advice took no account of [the taxpayer]’s individual circumstances;

(e)the advice was addressed to, or given to, a person other than [the taxpayer].

Unfortunately, the legislation applies at the time penalties are considered, rather than looking at the applicable legislation at the time the arrangements were entered into (i.e. the time that the advice was taken/givem). HMRC are applying penalties for inaccurate returns on this basis and clients should be made aware of the potential impact on their total liability.

In the Thornhill decision, the judge reviewed noted that the following paragraphs were contained within the information provided to potential investors:

“

(a)“This document has been prepared on the basis of current UK tax legislation and Inland Revenue published practices, concessions and interpretations. If these change, or if the levels and bases of taxation change as a result of amendments to the law, the performance of the investment may be adversely affected. Such changes may be applied retrospectively.”

(b) “The Inland Revenue does not give advance rulings on any of the tax issues referred to in this document. The availability of tax reliefs depends on the Inland Revenue’s acceptance of the Partnership accounts and tax computations and compliance with detailed rules.”

(c) “The Inland Revenue has the right to inquire into any loss relief or interest relief claims made by any Member.”

(d) “An individual’s tax position depends on his or her particular circumstances and there is no guarantee that the Inland Revenue will agree that described in this document will be applicable to that individual.”

What can clients do?

For structures that were implemented in the past, clients should remember that advice is only valid if it is current and takes into account their specific circumstances. They are advised therefore to routinely (I would suggest annually, especially for more complex planning) request a review of previous advice, from an independent adviser, to confirm that the advice is valid and/or that the structure in place still produces the expected result. The review should be undertaken bearing in mind any legislation changes since the advice was first provided, together with a consideration of changes in best practice and HMRC approach.

1https://www.step.org/industry-news/england-and-wales-scheme-promoters-tax-advisor-not-liable-investors-their-losses

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