Blame the accountant – again!
Exactly a year ago, we came up with a little item which provoked quite a sizeable postbag. We suggested that, sometimes, a businessman might be able to reduce the amount he pays over to the Revenue by arguing that he has an incompetent accountant. (Or, as his accountant might more succinctly put it, that there was an “unfortunate, genuine error” on his part!)
Some readers seemed disbelieving but – guess what – a tax battle on this very subject has just taken place. In the summer. And the Revenue lost.
That is why we revisit the topic here. As we shall show, having an “incompetent” accountant – or at least one who is prepared to shoulder the blame – can, sometimes, be “a good thing”.
Here’s a précis of what we said last year.
Penalties for incorrect tax returns
This is what the Revenue say to their tax inspectors who discover that a taxpayer has submitted an incorrect return. (We quote from their Enquiry Manual.)
1. To make... a discovery... assessment you must be ready to prove that there has been a loss of tax arising from fraudulent or negligent conduct by a taxpayer or a person acting on their behalf.
2. If you claim a penalty... you must be able to show that the return, etc., was submitted fraudulently or negligently by the taxpayer.
Note in particular that, at 2 above, there is no suggestion of a penalty being charged when the return has been submitted (fraudulently or) negligently by “a person acting on their behalf”.
So, we concluded that
-
If, as a taxpayer, you have acted reasonably and have engaged an accountant to act for you then, provided that you have given all the information to the accountant, the Revenue cannot charge penalties on any tax underpaid.
They can recoup the tax (plus interest) from you of course, but there can be no penalties.
In short, you should blame your accountant.
Indeed, we took this one stage further. We argued that your accountant should actually offer to take the blame (if this can be supported by the facts.) That way;
– you don’t lose out – you simply pay the extra tax you should have paid in the first place (plus interest on the money you’ve had the use of in the meantime)
– and your accountant doesn’t lose out either – he can hardly be sued by you because, in the end, you’ve done no more than to pay the correct amount of tax, so you’ve suffered no financial loss.
It’s a win/win situation. The only people to lose out are the Revenue: they can collect penalties if the error is yours, but not if it’s the fault of your accountant.
Now to the recent tax case. In fact, it did not involve a penalty for submitting a return incorrectly, but rather a surcharge for the late payment of tax.
Surcharges for late payment
Readers will be aware that, if tax is paid late, the Revenue have more than one weapon in their armoury. Firstly, they will charge interest – of course – but, in addition, they may be able to levy a surcharge. If the tax is paid more than 28 days late, the amount of the surcharge is 5% of the unpaid tax. This doubles to 10% if the tax is still unpaid after six months.
The surcharge is automatic but, if the taxpayer has a “reasonable excuse” for the late payment, he can appeal against it; and, if successful, the surcharge can be set aside.
We are certain that readers will know where we are going with this one. In the recent tax dispute, the taxpayer – a Mrs Rowland – had engaged a firm of accountants. Indeed, they were tax specialists. They needed to estimate how much tax should be paid by Mrs Rowland. She accepted their advice but, in the end, their estimate proved to be woefully short. Hence the heavy surcharge.
When Mrs Rowland appealed, the Revenue dug in their heels. They argued that there was no excuse for her to rely on someone who was negligent! She countered by saying that she did not have the requisite specialist tax knowledge herself, and that it was reasonable for her to engage and place reliance on a firm of accountants.
As we have already indicated, the case was won by Mrs Rowland. It was held that there was no reason for her to believe that the accountants would act otherwise than correctly and that, therefore, she had “reasonable excuse” for not paying the right amount of tax at the right time. The surcharge was quashed.
Conclusion
Our recommendation here will sound perverse.
On day one of the induction course for accountants, solicitors and other professional advisers, we are taught this cardinal rule:
-
Protect yourself. That is, make sure that if things go wrong you are able to say, with justification, that “it’s not my fault because...”.
Assuming that this culture gradually becomes engrained in you, you’ll minimise the chances of being sued and, therefore, minimise your professional indemnity insurance premiums.
But what we are now suggesting is that, sometimes, accountants should do an about-turn. They should change their mindset.
When the Revenue are seeking from a client,
-
a penalty for an incorrect tax return, or
-
a surcharge for late payment of tax,
the accountant should (almost) rush to say “it is my fault!” The client will be eternally grateful – he should avoid the penalty or surcharge. So there’s no financial loss to him. And as a result, from the accountant’s point of view, the prospect of a lawsuit – and/or an embarrassing call to the professional indemnity insurers – should evaporate.
Mind you, for many of us, it won’t be easy to change the habit of a lifetime!
Robert Bond has been a practising chartered accountant for over 20 years.
P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.