Limited company tax ruling puts onus on directors to not just hand it all to their accountant
Limited company directors cannot simply hire an accountant; hand over their financial information and rely on them to get their tax return right -- if they want to avoid penalties.
In issuing this verdict in favour of HMRC, a First-tier Tax Tribunal said that like any other taxpayer, directors must check the return themselves, in a “prudent and reasonable” manner.
Even if the return contains “technical matters”, the director – as the party responsible for submitting it accurately, must still check that the stated income totals are right, the FTT ruled.
Referring to Lisa McCann, a new PSC director, the tribunal said HMRC found that £13,029 in employment income and £16 in bank interest should have been declared on her tax return.
A student loan payment ought to have been paid too, but Ms McCann said she provided her accountant all details requested of her. She was “inexperienced,” so “trusted” the accountant.
Despite sounding sympathetic, top accountants say that both HMRC and the tribunal called it correctly, because despite acting “honestly and truthfully” (as was found), she was negligent.
“I would have to agree with the tribunal on this one,” reflected Jesminara Rahman, director of HMRC dispute advisory Tax Resolute UK.
“[McCann] declared £8,841 income and omitted £13,000 of her income on top. Surely she would have understood there would be tax to pay, instead she paid no tax as it was under the personal allowance.
“She must have known there was a tax position rather [than] no tax liability at all. Is that reasonable?”
'I've lost count'
“At the end of the day, it is the taxpayer’s responsibility to file the correct return,” agrees Helen Christopher, operations director at Genie Accountancy.
“We often have PSC directors who argue that they were not aware of what was expected or what they needed to do. I have lost count of the number of times they say, ‘but why have we engaged you?’”
Formerly of SJD Accountancy and Saffery Champness, Christopher added that similar cases have previously seen no HMRC penalties issued, so McCann was “a little unlucky.”
But she also didn’t help herself, and nor did her accountant, according to anti-corruption manager and forensic tax specialist Juan Carlos Venegas.
“The case was poorly handled by the taxpayer and the taxpayer’s accountant,” he said, seemingly referring to McCann not responding to her September 18th HMRC enquiry letter until October 30th, and her accountant not telephoning HMRC about it until November 28th.
In addition, “neither the appellant nor her agent contacted HMRC [after the November phone call placed to ask for a suspension of an HMRC penalty],” the judgment states. “A further reminder was sent on March 1st.”
'May seem unfair'
Contractor accountant Patrick Gribben reflected: “The taxpayer should be held accountable where returns are filed with inaccuracies and tax is underpaid.
“While it may seem unfair to ask a taxpayer to become a tax expert, the simplest answer is to place responsibility on the taxpayer who can then seek redress from their accountant if the inaccuracies are proven to be the result of negligence or mistakes made by that accountant.”
In the case, McCann said that if the penalty for her inaccurate return was upheld (as it was), then it should be suspended, albeit on the grounds she was no longer under self-assessment.
“Whether the HMRC penalty should be suspended is trickier to answer,” says Gribben, who heads up client services at InTouch Accounting.
“There is currently no chance of the taxpayer making the same errors again as they aren't under the self-assessment regime any longer, but that also means that HMRC cannot impose conditions on the suspension that the taxpayer can meet.
“Not being under the self-assessment regime any longer shouldn't necessarily exempt a taxpayer from paying a penalty. The purpose of a penalty is to deter certain behaviours and if they aren't enforced, then there is no threat!”
'It is for the accountant to educate, and specify'
In the end, the tribunal did not interfere with HMRC’s decision to not suspend the penalty, although the penalty had already been ‘substantially reduced’ (to £243), in recognition of McCann’s cooperation with the enquiry.
As to how limited company directors can avoid the same fate, Genie Accountancy said they must fully understand what is expected of them, including their legal responsibilities.
“But we also believe that it is for the accountant to educate their clients and to ensure that they do understand what is needed,” the firm’s Ms Christopher said.
“So anyone running a PSC should ensure they understand the self-assessment process and their requirements, but as a failsafe the accountant’s enquiries should be specific enough to ask for previous and other income and provide examples -- not just a generic request for ‘all relevant’ data.”