Is relying on your accountant a reasonable excuse for failure to meet your tax obligations?

The perils of just handing over all relevant information and requested details to your accountant and expecting them to just ‘get on with it’-- and by ‘it’ I mean your accounting -- was flagged up to limited company contractors back in 2020, in McCann V HMRC.

But a number of FTT rulings both before and after the McCann case are reinforcing this stance -- namely, that relying on your tax adviser as your ‘reasonable excuse’ for failing to meet your tax obligations as a PSC director won’t wash, writes Jesminara Rahman of Tax Resolute UK.

What does HMRC say is a reasonable excuse?

Let’s start with tax legislation. Unhelpfully, there is no legal definition of “reasonable excuse,” so this term is continuously tested by case law.

Although, for your reference, HMRC defines a reasonable excuse as “something that stopped you meeting a tax obligation that you took reasonable care to meet.”

To reassure contractors, it is the case that the taxpayer is not expected to have a technical understanding of tax legislation and is entitled to rely on their ‘agent’ (an accountant or tax adviser) for tax guidance.

Would you pass the ‘double-reasonableness test’?

Even before the McCann case, in Hanson v HMRC [2012], the tribunal stated: “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.” The emboldening here was the court’s, not mine, but I’d probably emphasise ‘reasonably’ too, such is the significance.

Indeed, be aware, both a tribunal and HMRC will apply the test of what a ‘reasonable’ taxpayer exercising ‘reasonable’ due diligence would have done in the circumstances.

To guide you on what passing this ‘double-reasonableness test’ might look like in practice -- or more accurately, might not look like, we can turn to Mohammed Hafeez Katib v HMRC [2019].

In this case, the taxpayer knew the accountant was incompetent, and even provided full communications as evidence of the incompetence.

Yet does it make sense, or does it sound reasonable that if you realised your accountant was incompetent, you went ahead and continued to rely on said-accountant, anyway? Yes; agreed, probably not very reasonable!

Cursory enquiries? Not enough

In another case, Uddin v Revenue and Customs [2023], the taxpayer put forward that he had been misled by his agent.

The tribunal judge, potentially unimpressed, stated: “The cursory and general enquiries he [the taxpayer] made were insufficient to displace the general rule that the taxpayer should bear the consequences of the representative’s failings”.

So because Uddin did not take further, ‘non-cursory’ steps to ensure that the accountant was carrying out his role and doing what he should have done, the status quo didn’t change.

In the Uddin case, the taxpayer could not provide evidence of his communications and this appeared to the judge that the communications were perfunctory, brief. Again contractors ought to ask themselves -- is this what a reasonable person would do? So, especially if there is a large tax bill at stake, don’t be cursory.

‘What a reasonable person would do’ is key

In fairness to Uddin, him being misled was a relevant consideration and his account was not challenged, as HMRC never cross-examined him. Still, the tribunal judge stated that Uddin’s general enquiries did not displace his responsibility to meet his tax obligations, and ruled that the taxpayer “had not done what a reasonable person in his position would be expected to do.”

For my own part, I have represented tribunal cases such as Rashid v Revenue and Customs [2020], where we were able to demonstrate that the taxpayer had communicated with the accountant. The accountant had in turn engaged three tax specialists successively. In the case, we can clearly see that the taxpayer took steps to ensure that an appeal was submitted on a timely basis (even though it ultimately was not).

In another case where I represented the taxpayer, Eunoia Initiatives v Revenue [2021], the judgment makes clear that the taxpayer had been in frequent communications with HMRC in trying to resolve the dispute, and therefore the taxpayer was actively engaging with their tax affairs. The judge ruled in the taxpayer’s favour, because she carried out actions that a reasonable person would be expected to carry out.

So, should you rely on your accountant to carry out your tax obligations?

No you shouldn’t, not blindly. There needs to be some active engagement on your part -- the taxpayer, because ultimately it is the taxpayer’s legal responsibility. And it is the taxpayer who foots the tax bill not the accountant.

Therefore, the taxpayer has to discharge their responsibility in demonstrating that they had for example provided all the information and documents to the accountant, and that they had actively communicated with the accountant.

Ignorance of the law is not an excuse either if the taxpayer does not understand what was going on or blindly relied on their agent. The taxpayer still has to demonstrate what steps they took to understand the consequences.

In a nutshell? The accountant is providing a service for which the taxpayer is paying for, therefore it is reasonable that the taxpayer will ask questions for clarity and for assurances that the accountant is carrying out their tax obligations on their behalf. If the tax obligations are not being met for whatever reason by the accountant, then the risk is all on the taxpayer.