Footballers facing tax fines: who is responsible for inaccurate tax returns?Alice McDonald
Professional sportspeople routinely rely upon accountants to accurately prepare and file their annual tax returns with HMRC. But who bears responsibility when HMRC seeks a penalty for inaccurate information in a tax return? The First-tier Tribunal’s (“FTT”) recent decision in Blackman v The Commissioners for Her Majesty's Revenue & Customs (2016)1 (“Blackman”) is a useful reminder that the mere fact that a taxpayer is a professional sportsperson, and relies upon accountants to prepare their tax returns, may not be sufficient to avoid a penalty for an inaccurate tax return.
This article examines Blackman and the related lessons for athletes. Specifically it looks at:
- HMRC’s Penalty Powers: The Legislative Scheme
- Blackman v HMRC
- Grounds of appeal
- Comment and tips for athletes
HMRC’s Penalty Powers: The Legislative Scheme
Under Schedule 24 of Finance Act 2007, HMRC has a range of penalty powers that it may apply in various scenarios, including where there is an inaccuracy in a tax return (Paragraph 1). Penalties are calculated as a proportion of the undeclared tax, by reference to whether the relevant inaccuracy was careless, deliberate but not concealed, or deliberate and concealed (Paragraph 1(2), 3-4).
Deductions may be applied for the taxpayer telling HMRC about the inaccuracy, helping HMRC to quantify it and giving HMRC access to relevant documents in order to fully correct it (Paragraph 9-10). The range of minimum penalties is set out at Paragraph 10 of Schedule 24.
Under Paragraph 18 of Schedule 24, a taxpayer who relies on an agent (i.e. an accountant) to complete and lodge his return is not liable for an inaccuracy penalty where the agent is responsible for the inaccuracy, and the taxpayer took “reasonable care” to avoid it. This was the defence that Mr Blackman sought to rely upon in his recent appeal against an inaccuracy penalty.
Blackman v HMRC
The appellant was a professional footballer who, during the relevant tax year (2012/13), had been transferred between three different football clubs and therefore had three separate periods of employment. He employed professional accountants to prepare and file his tax return for 2012/2013. However the filed tax return only included details for two of Mr Blackman’s three periods of employment, and therefore understated his income for that year. When HMRC raised this, Mr Blackman’s new accountants admitted that there had been a “glaring error” by his previous accountants, and that the third period of employment should have been included on the return.
HMRC amended the tax return to include the additional tax due on the undeclared income. They also sought to impose a penalty for filing an inaccurate tax return. The proposed penalty was set at 15% of the principal sum of additional tax due. This was the minimum penalty that could have been imposed for a careless (but not deliberate) inaccuracy where the discovery was prompted by HMRC.
Grounds of Appeal
Mr Blackman challenged the penalty. He argued that he was a professional sportsperson, and not a tax professional. All relevant paperwork he had received was sent through to his mother for her to send to the accountants, who he had appointed and relied upon to deal with his tax affairs. He was therefore entitled to treat the tax return produced by his accountant as accurate.
HMRC submitted that the responsibility for checking the tax return lay with Mr Blackman, and that as the inaccuracy was a careless one, it was to be assessed by reference to an objective standard.
The FTT began by acknowledging that the failure to declare the third period of employment on Mr Blackman’s tax return was a “glaring error”. They assumed for the benefit of Mr Blackman that the mistake was the accountant’s, and went on to consider whether he had taken “reasonable care” to avoid the mistake.
The FTT considered its decision in Hanson v Revenue and Customs Commissioners (2012)2 (“Hanson”). In that case, Mr Hanson was held to have taken reasonable care in relying on accountants when making a claim for Capital Gains Tax relief on the disposal of loan notes. He had relied on positive advice from his accountants that such relief was available, when in fact it was not. It was a matter which would not have been straightforward to a reasonable taxpayer. In reaching its decision in Hanson the FTT made the following observations:
- What is reasonable care in any particular case will depend on all the circumstances. This includes the matters being dealt with in the return, the identify and experience of the agent, the experience of the taxpayer and the nature of the professional relationship between the taxpayer and the agent.
- HMRC’s Compliance Handbook at CH84540 clearly states that a taxpayer cannot simply leave everything to their tax advisor. They have a duty themselves to take reasonable care, within their ability and competence, to ensure that what they are signing is correct. This includes:
- making sure the agent has all the relevant information;
- implementing the professional advice received, and not neglecting some vital step;
- checking the agent's work to the extent that they are able to do so;
- choosing an adviser who is trained and competent for the task in hand.
- There is a distinction between an error of omission, such as failing to declare income, and an error of misconstruing legislation. In the former case, a taxpayer will almost always be expected to identify the error. In the latter case, the possibility of a penalty may arise due to the agent’s carelessness, but the taxpayer's liability may be excluded on the basis that they took reasonable care but did not identify the error.
- A taxpayer must satisfy themselves that their agent has not made any obvious error. This may involve asking questions of their agent to understand the basis on which a particular entry has been made in their tax return. Where the matter is complicated and would not be straightforward to a reasonable taxpayer, and where advice has been sought which is within an agent's area of competence, the taxpayer is entitled to rely upon that advice.
The FTT considered that the guidance in Hanson was applicable to the case before it. It considered that the following factors were relevant:
- When his 2012/13 tax return was filed, Mr Blackman had been in continuous employment as a professional footballer for several years;
- Throughout his employment, at any one time, he was an employee of a single club. This was so even where he had been out on loan;
- He would have been filing self-assessment returns for each of those years in which his employment income was recorded;
- There had been at least one other tax year in which Mr Blackman had been employed by more than one club in succession (2008/9);
- There was no admissible evidence that he had not in fact understood his tax return;
- Mr Blackman was collating financial information, with the help of his mother, and was forwarding it to the accountants. From this the FTT took the impression that the role of the accountants was to complete the tax return fully and accurately, i.e. to act in an administrative capacity;
- The task being performed and which went wrong was the completion of the employment parts of a self-assessment return.
Having regard to the above, the FTT concluded that Mr Blackman had failed to take reasonable care to avoid the mistake in his tax return. It held that it was entirely reasonable to expect him to know and understand his employment history for the purposes of completing his 2012/13 tax return. Given that, “[t]ransfers are milestone events in the lives and careers of professional footballers” Mr Blackman could not possibly have forgotten or not known that he had been employed by three football clubs in 2012/13. If he had read his tax return with sufficient care, he could therefore have been expected to identify the “entirely obvious” error. The scenario was not complicated such that only a tax professional, and not a professional sportsperson, could have identified it. Although Mr Blackman had left school at 16, there was no evidence that his level of educational attainment or literacy meant that he was unable to read the tax return himself, and needed the tax return reading out to him.
Although there was no evidence about whether Mr Blackman had in fact read his tax return, or simply authorised it without reading it, the FTT proceeded on the basis he had read it and failed to spot the error. It noted that if he had not read the return, then that conduct, by its very nature, would without any doubt be careless.
The appeal was therefore dismissed. The FTT also went on to reject Mr Blackman’s appeal that HMRC had not considered a suspension of the penalty.
Comment and tips for athletes
The FTT in Blackman upheld a penalty against a professional sportsman who was obviously not a tax specialist and who had relied upon an accountant to prepare his tax return. At first glance that might seem rather unfair. However HMRC’s position has long been that where a taxpayer engages an accountant,
“they still retain responsibility for their returns, calculations and payments…any liability for penalties for late returns, late payments or any errors on paperwork legally remains with [the] client.” 3
So where does this leave professional sportspeople?
- The obvious starting point is to engage a reputable accountant who will be able to minimise any possibility of inaccuracies at first instance.
- Accountants should be mindful of reminding clients that they are ultimately responsible for any inaccuracies in their tax return, and must take reasonable care in checking it before it is filed. Simply relying on the fact that a return has been prepared by accountants will not by itself be a defence to a penalty if the sportsperson has not checked it. Although what is “reasonable care” will depend on the particulars facts, the decision in Blackman suggests that at the very least the sportsperson must read the tax return to check for any “glaring errors”.
- It is also suggested that before a tax return is filed, the sportsperson or his accountants should make a brief note of what checks the sportsperson has made.
If these steps are taken then even a sportsperson who knows very little about tax should be able to spot any obvious mistakes in their return such as missed periods of employment.
It is important to emphasise that the sportsperson will not be expected to have expert knowledge of taxation. The guidance in Hanson suggests that someone who is not a tax expert and relies on professional advice about complex areas of tax, for example a claim for Capital Gains Tax relief, cannot reasonably be expected to know whether that information in their tax return is inaccurate. This can obviously be distinguished from the facts in Blackman, where the inaccurate information was Mr Blackman’s employment history. This was basic information which he knew himself and could reasonably be expected to notice did not appear in his tax return.
It remains to be seen whether the decision in Blackman heralds a stricter approach to liability of taxpayers for errors by their accountants. However, a diligent sportsperson who has checked his tax return in advance of filing it should not automatically panic if faced with a potential penalty for an inaccuracy made by their accountant. If they have taken “reasonable care” in checking their tax return then the defence under Paragraph 18, Schedule 24 of the Finance Act 2007 will be open to them.
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- Tags: Finance Act 2002 | Football | HM Revenue & Customs (HMRC) | HMRC Compliance Handbook | Tax Law | United Kingdom (UK)
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About the Author
Alice McDonald is a barrister in the Commercial and Tax teams at St Johns Buildings, Manchester.
Alice advises and represents corporate clients and individuals on a variety of commercial law and tax law matters, including those with a public law element. She has particular experience in contentious tax disputes, having previously been employed at a leading tax litigation firm, where she worked on cases in the First-tier Tribunal (Tax), High Court and Court of Appeal.
As a keen runner and former rower Alice has a growing interest in sports law.