Navigating Tax Compliance: Is Relying on Your Accountant a Valid Excuse
Posted on 1st October 2023 at 15:01
Is Relying on Your Accountant a Reasonable Excuse for Failure to Meet Your Tax Obligations?
It's a common scenario for many individuals and businesses alike. You hire an accountant to handle your finances, including tax obligations, and you trust them to take care of everything. After all, isn't that what you pay them for? Well, as it turns out, simply handing over all your financial information to your accountant and expecting them to work their magic isn't always a foolproof strategy. In fact, recent legal cases have highlighted the perils of relying solely on your accountant to meet your tax obligations.
The McCann V HMRC Case
One of the most significant cases that brought this issue to light was the 2020 McCann V HMRC case. In this case, limited company contractors were made aware of the potential consequences of relying solely on their accountants for their tax matters. The verdict in the case suggested that depending on your tax adviser as your sole 'reasonable excuse' for failing to meet your tax obligations as a Personal Service Company (PSC) director may not hold up in the eyes of the law.
What Constitutes a 'Reasonable Excuse'?
To better understand this issue, it's essential to delve into what the term "reasonable excuse" means in the context of tax law. Unhelpfully, there's no clear-cut legal definition of this term, which leaves it open to interpretation and continuous testing in various cases. HMRC, however, defines a reasonable excuse as "something that stopped you meeting a tax obligation that you took reasonable care to meet."
It's important to note that taxpayers are not expected to possess an in-depth technical understanding of tax legislation. They are entitled to rely on their accountant or tax adviser for guidance. But here comes the catch: what constitutes "reasonable care" and "reasonable reliance"?
The 'Double-Reasonableness Test'
Even before the McCann case, in Hanson v HMRC (2012), the tribunal highlighted that "If a taxpayer reasonably relies on a reputable accountant for advice in relation to the content of his tax return, then he will not be liable to a penalty." However, it's worth emphasizing that both the tribunal and HMRC apply the test of what a 'reasonable' taxpayer exercising 'reasonable' due diligence would have done in the given circumstances.
A case that sheds light on what passing this 'double-reasonableness test' might look like, or rather, what it might not look like, is the Mohammed Hafeez Katib v HMRC case (2019). Here, the taxpayer knew their accountant was incompetent and even provided evidence of this incompetence. Despite this knowledge, the taxpayer continued to rely on the same accountant. This raises the question of whether it's reasonable to rely on an incompetent accountant when you're aware of their inadequacies.
The Importance of Diligence
In yet another case, Uddin v Revenue and Customs (2023), the taxpayer claimed to have been misled by their agent. However, the tribunal judge ruled that the cursory and general inquiries made by the taxpayer were insufficient to absolve them of responsibility for their representative's failings.
The key takeaway here is that taxpayers must take substantial and non-cursory steps to ensure their accountants are fulfilling their roles. A taxpayer should ask themselves if their actions align with what a reasonable person in their position would do, especially when significant tax liabilities are at stake.
Communication is Key
In some cases, the taxpayer's level of engagement and communication with both their accountant and tax authorities plays a significant role. For instance, in Rashid v Revenue and Customs (2020), the taxpayer demonstrated active communication with their accountant, who subsequently engaged multiple tax specialists. The taxpayer took steps to ensure an appeal was submitted on time.
Similarly, in Eunoia Initiatives v Revenue (2021), the taxpayer had frequent communications with HMRC in an attempt to resolve a dispute. These actions, in the eyes of the judge, demonstrated the taxpayer's active engagement with their tax affairs and worked in their favor.
The Bottom Line
So, should you blindly rely on your accountant to handle your tax obligations? The answer is a resounding no. While accountants provide a valuable service, it's crucial for taxpayers to actively participate in the process. After all, it's the taxpayer who bears the responsibility for meeting their tax obligations, not the accountant.
Ignorance of the law is not an excuse either. If a taxpayer does not understand what's happening or blindly relies on their agent, they still have to demonstrate the steps taken to understand the consequences. In essence, the taxpayer is paying for a service, so it's entirely reasonable to ask questions for clarity and seek assurance that the accountant is fulfilling their tax obligations on their behalf. If the accountant falls short for any reason, the ultimate risk rests with the taxpayer.
Share this post: