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Achieving a successful outcome in a tax investigation: case study

Achieving a successful outcome in a tax investigation: case study

We were recently approached by a firm of accountants in the Midlands to assist with settling a long running dispute with HMRC. The fact pattern was simple, but nonetheless interesting.  A Bermudan resident company had been established in 1997 (with corporate directors) to hold UK rental property.  The shareholders of the company were also non-UK resident, but were born in the UK and had spent their formative years in the UK.  At the request of the shareholders, a UK based accountant (who was a long-standing adviser to the shareholder family) was appointed to prepare non-statutory accounts for the company.  For reasons that remain unknown, the UK accountant failed to recognise or advise the company of the requirement to declare its UK rental profits to HMRC.  No such returns were submitted for the following 22 years.

HMRC discovered this in 2019 and immediately issued a protective discovery assessment for 1999/00.  In doing so they clearly expected to recover tax, interest and penalties for the maximum 20 year period allowed for “failure to notify” (FTN) offences.  Whilst the rental profits were relatively modest, the total liabilities over 20 years would likely have been well in excess of £100,000. 

Various correspondence ensued with HMRC, but nothing could be agreed – hence our engagement.  As always, our first step was to properly establish the facts, consider the relevant legislation, and consider any relevant case law.  Our next step was to anticipate how HMRC may react to our arguments and consider how we could proactively counteract their concerns, even before those concerns had been raised.

Having done so, we responded to HMRC with the following key points:

  1. Whilst the FTN legislation generally allows for a 20 year assessing time limit, that is not the case if there is a “reasonable excuse” for the FTN and it is remedied quickly upon becoming apparent to the taxpayer. Based on the 2018 Christine Perrin case, which overturned HMRC’s longstanding approach that ignorance of the law is not a reasonable excuse, we contended that the (non-UK resident) company was guilty of nothing more than ignorance of the need to file UK tax returns.  In those circumstances, the result would be the “normal” 4 year assessing window would apply, and no penalties would be charged.  It is worth noting that it was far from clear we would win this argument, but we considered it was important from a tactical perspective for this to be at least our starting position.     
  • Anticipating HMRC’s reaction to the argument, we also noted that in FTN cases, HMRC must  be able to demonstrate negligence (now carelessness) by the taxpayer or “someone acting on their behalf” if they are to successfully assess 2008/09 and prior years.  HMRC were clearly aiming at the UK accountant in terms of negligence.  As we pointed out however, the 2011 case of Bessie Taube clarifies that, broadly, someone is only acting “on behalf” of the taxpayer if they represent the taxpayer in communications with HMRC.  Quite clearly the UK accountant had done nothing of the sort here; he had never communicated anything to HMRC.
  • In light of the above, and to achieve a swift and pragmatic outcome for all parties, we suggested HMRC should assess 2009/10 onwards only, and should levy no penalties for any of these years on the basis of a reasonable excuse.

Following a call with HMRC to discuss the proposed terms to resolve matters, a contract settlement was issued to formalise the basis for settlement.   The company saved over £70,000 in tax, interest and penalties.  The firm that referred the case to us told us their client – whose ultimate liability was less than 30% of what they were warned it could be – was delighted with the outcome.

HMRC spent 2 years trying to collect tax for the “full” 20 year period in this case.  What this case demonstrates, if nothing else, is that a careful review of all of the relevant legislation (and not just the headlines), a robust understanding of the case law around the Taxes Management Act, the involvement of a Tax Investigation specialist, and simply even a fresh pair of eyes looking at a case can massively improve (and speed up) the final outcome for a client.

If you are entrenched in an enquiry or investigation with HMRC, please feel free to contact us to see how we can assist.