Caution - Not All Accountants Can Be Trusted
I had been checking HMRC online services for days, waiting for the moment when the Inspector would finally amend the client’s tax charge to reflect the adjustments we’d been haggling over for just over two years and which we’d finally agreed a month ago. I clicked into the online record to see a revised tax balance – now overpaid by £50,000 instead of £35,000 owing to HMRC. I rang the client with genuine excitement and told him to expect an early Christmas present in the form of a large tax repayment. The client was pleased but I think I was bubblier and more exuberant than he was! The last few years had been something of a roller-coaster ride for sure.
By way of background, the client approached us just over two years ago. He is a successful property investor and has a company with several investment properties. He also has a personal property portfolio and we are looking at the usual tax planning opportunities, however, towards the end of our first meeting, he made a throwaway comment about HMRC chasing him for a large tax bill. He had told me that his existing accountant (referred to as 'agent') had been letting him down by missing filing deadlines and not telling him what tax to pay, but apparently, she had been dealing with an HMRC enquiry and had repeatedly assured him everything was fine.
It took a few weeks to get hold of the enquiry correspondence from the client and, it has to be said, a very helpful Inspector at HMRC. The agent wouldn’t respond to any calls or emails (and some two years later, we are still waiting to receive some of the client’s tax and accounts information!). The case was pretty shocking in terms of negligence on the agent’s part. HMRC had enquired into the client’s 2014 tax return and asked for some detailed but basic information about a number of the rental expenses together with supporting invoices. The case had started well enough with the agent providing an analysis and breakdown of the expenses but then, inexplicably, she stopped responding to HMRC’s letters. After several months of failing to respond to letters or information notices, and incurring penalties for the client, the Inspector took the decision to issue a closure notice. Without any meaningful information to work on, the Inspector disallowed around 90% of the rental expenses and, I assume, was expecting an appeal and a higher level of cooperation.
For reasons that I don’t know, the agent never submitted an appeal and the closure notice became final. The Inspector then had to consider the penalty position and, in the absence of any cooperation, he decided the client was guilty of deliberate behaviour (which carries a much higher penalty range than careless behaviour) and limited the penalty mitigation to the bare minimum. Bizarrely the agent appealed against the penalty determination on the grounds that it was excessive and asked for the appeal to be listed for the Tribunal! Notwithstanding this very strange tactical decision, when we roll forward another year we find that the agent ignored all correspondence and directions from the Tribunal with the eventual result that a judge discontinued the proceedings. What a complete mess!
I discussed the case with the client who was completely at a loss as to why his accountant (now ex-accountant) would mislead him to this extent. I wondered if she had been taken ill or maybe she was struggling to cope with her practice, but the client assured me she was still working and fit as a fiddle! I knew at some stage that I would need to discuss if the client wished to consider a professional negligence claim against his former agent, but he must have read my mind. He told me that he would not consider suing her because he wasn’t that sort of person which I thought was very magnanimous, although perhaps a touch misguided. I’m not sure I could be so gracious if someone had landed me a combined tax bill and penalties of more than £150,000. The question was what, if anything, could be done about it.
The reason for writing this blog isn’t simply to revel in a success! It is to make the point that there is sometimes a way forward in HMRC cases even if it isn’t obvious from the beginning. I started by contacting the Inspector who had dealt with the case to get copies of some of the correspondence, and subsequently to explain that I intended to submit a late appeal application based on the woeful performance of the agent and the fact that she had wilfully lied to the client and told him to ignore HMRC’s correspondence. The Inspector’s response was amazing. He recalled the case immediately and told me he had always been troubled with the conclusion. He didn’t think for a minute that some 90% of the rental expenses would be disallowable, and he only issued the closure notice to prompt the agent into cooperating. I was going to talk about the legal framework for late appeals and suggest I could apply to the Tribunal to consider the application if necessary, but the Inspector said he would accept the late appeal as it was the right thing to do. The first result to us and hats off to HMRC for being so reasonable and pragmatic.
The next stop was to contact the Tax Tribunal to get copies of the correspondence and directions. We then made an application to set aside the Judge's decision under Rule 38(1) on the grounds that (a) it would be in the interest of justice to do so and because the relevant conditions under Rule 38 were satisfied. The conditions under Rule 38 are too long to list here but broadly they relate to procedural irregularities. The Tribunal indicated they would consider the application and asked HMRC what its views were. HMRC did not object so we had now managed to open both doors.
At this stage, I remember being more than just a little delighted and the client set about trying to locate as many of the invoices as he could going back to 2013/14. He arrived at the office several weeks later with several ring-binders full of invoices which accounted for around 60% of his expenses and I arranged for these to be scanned and sent to HMRC. We had a few hiccups in the beginning because the original Inspector had been promoted and wouldn’t be dealing with the case. He told me it had been allocated to a relatively new officer to HMRC who, I realised quite quickly, had no experience of dealing with cases that require a bit of flexibility and pragmatism. Despite our opening exchanges going well enough, the Inspector (who we’ll call Mr Newby) decided to limit the allowable expenses to the receipts and invoices.
It would have been easy enough to agree to the newly allowed expenses and close the case. The client would have saved quite a lot of tax and I had a strong feeling that we could negotiate the deliberate penalty down to carelessness and get this suspended. But in my bones, I knew the result was still unfair so, with the client’s agreement, we decided to dig in for the long haul. We told Mr Newby that we would be writing out to various lenders and businesses to get copies of all the “missing” invoices (loan interest, management charges, electricity bills, Gas safety certificates, council tax etc). I asked him
how we could consider the question of the old agent’s fees (the client couldn’t find an invoice), and whether he needed bank statements to verify bank charges. I also pointed out that the original accounts and return did not include any travel costs although the client managed many of the properties without an agent. I proposed we introduce mileage of 10,000 at 45 pence per mile and I also suggested that our accountancy fees for re-preparing the 2013/14 accounts should be allowed.
Within a week Mr Newby came back to me and offered a compromise. Some of the repairs bills were capital in nature and not allowable as a deduction from rental profits. If we agreed to add these back he would allow all the other costs, reclassify the penalty as careless and suspend the penalty.
It was the result that the client should have got several years before. In the end, we didn’t need to get the Tribunal to reopen proceedings as the penalty charge would have been cancelled anyway but it’s still a great example of not giving up and always looking to negotiate with HMRC. Credit must also be given to HMRC and the Tribunal for helping to achieve an equitable and fair result.