Establishing reasonable excuse and reasonable care in cases where clients have taken advice can be tricky and HMRC can be resistant. The recent decision of the Upper Tribunal in Bella Figura should help.
HMRC officers seem increasingly reluctant to accept that clients have taken reasonable care or have a reasonable excuse as a result of taking professional advice. In particular, I’m finding that requests are being made for copies of specific written advice in respect of the particular point at issue to substantiate the client’s position. There are likely to be various reasons for this but I suspect the focus on historic advice taken for the purposes of the Requirement to Correct provisions is a major factor. In any event, for that reason, I found the recent UTT decision in Bella Figura [2020] UKUT 120 (TCC) really helpful in articulating some key principles.
Although the decision deals with a relatively niche issue, the application of the unauthorised payments regime for pension schemes to a loan from a SIPP, the principles addressed are of wider interest.
It was alleged that an unauthorised payment arose because the loan did not satisfy various conditions required by s179 FA 2004. The detail of those provisions is not particularly important, but the tax consequences of such an unauthorised payment are pretty eye-watering. The loan was charged to tax as follows -
A charge on the value of the unauthorised payment at 40% (the unauthorised payment charge),
An unauthorised payment surcharge at 15% of the value of the unauthorised payment (the unauthorised payment surcharge), and
A scheme sanction charge of 40% of the value of the unauthorised payment (which is reduced to 15% if the unauthorised payment charge is paid).
The first and second charges are levied on the employer and the third charge on the scheme administrator. In this case, the employer and the scheme administrator were the same entity, Bella Figura Ltd (‘BFL’).
The tribunal politely skipped around the first issue which needed to be addressed, whether the scheme sanction charge assessment was properly made in accordance with the assessing provisions. The relevant provisions are really confusing if they’re considered in any detail so the tribunal succinctly dealt with the issue by not looking at them in too much detail.
This left the issue of wider interest, which was whether the assessments for the unauthorised payment charge and surcharge were raised in time. The two assessments were raised more more than 4 years but less than 6 years after the tax year in which the charges arose, and HMRC alleged that they were made in time because the loss of tax had been brought about carelessly by BFL. The scheme sanction charge was assessed within the normal 4 years so the time limit point did not therefore arise.
BFL had taken advice on the drafting of the loan agreement from a specialist adviser and was aware that the loan needed to meet specific criteria in order to avoid it being treated as an unauthorised payment. In essence, BFL argued that reasonable care had been taken as a result. However, no specific written advice was provided to the effect that the terms of the loan met the requirements of s179 FA 04. The FTT found, in a decision which the UTT described as ‘tough’ that in the circumstances BFL had failed to take reasonable care. However, the UTT recognised that it was reasonable for BFL to have taken implicit assurance the the loans would meet the statutory conditions on the basis that they had specifically requested that a professional adviser prepare the agreement. The UTT made a particularly helpful analogy with a solicitor instructed to carry out a house purchase;
“By analogy, a person who instructs a lawyer to act as the purchaser of a house might be said to obtain implicit advice to the effect that the documents will operate to convey title simply from the fact that the lawyer prepares the documents and identifies no problem with them.”
This is a particularly helpful articulation of the nature of professional advice received which a taxpayer needs to show has been taken to substantiate reasonable care or a reasonable excuse. It’s often the case that a client will have taken advice in order to ensure they meet their tax obligations in a broad sense without addressing every potential pitfall or area of uncertainty. Clearly, every case is different and different facts lead to different conclusions, but this articulation of ‘implicit’ assurance will be really helpful where clients have relied on advice to ensure compliance but have not perhaps engaged with all of the nuances.
In addition, and again helpfully, the UTT also asked the theoretical question of what would have happened had BFL actually sought specific assurance from their adviser that the conditions of s179 FA 04 were met. The tribunal felt it was certainly possible that BFL would have been advised that the provisions were met. On that basis, the tribunal held that the necessary causal link between BFL’s carelessness and the loss of tax was not established. HMRC objected to this reasoning on the basis that no evidence had been led to address this point, so for example the terms of the retainer between BFL and its adviser had not been provided. The tribunal dealt with these objections by emphasising that the burden or proof to demonstrate the necessary causation fell on HMRC. Again, although not a new point, this a useful articulation for practitioners who are dealing with similar arguments.
Finally, and again somewhat niche, the UTT was also required to consider whether it was just and reasonable for the scheme sanction charge to be applied under the provisions at s268 FA 2004. Section 268 provides a general power to set aside a scheme sanction charge and unauthorised payment surcharge where it is just and reasonable to do so. In this context, it is worth bearing in mind that the loan was repaid in full and therefore no actual loss arose to the scheme and in addition that excessive tax relief had not been claimed. The tribunal concluded that because the unauthorised payment charges had not been assessed in time and therefore fell away, it would not be just and reasonable for BFL to escape tax altogether, and therefore the scheme sanction charge should apply. However, helpfully for those dealing with unauthorised payments on a more regular basis, the tribunal also commented that, had the assessments been made in time, it would not have been just and reasonable for BFL to be subject to the scheme sanction charge or the unauthorised payment surcharge. As a result, the tribunal was comfortable that BFL’s liability should have been limited to 40% in any event.
