This month’s Chartered Accountants Tax Case Digest looks at the first disputed case of HMRC using its powers under Schedule 38 Finance Act 2012 to apply civil sanctions against a tax agent for his dishonest conduct when acting for a client.

This legislation took effect from 1 April 2013 and enables HMRC to take steps against dishonest conduct by tax agents. These civil powers are an alternative to criminal prosecution.

Dishonest conduct is defined as doing something dishonest with a view to bringing about a loss of tax revenue, whether or not that loss actually occurred. These powers are one form of potential alternative to criminal prosecution for dishonest conduct by tax agents.

Schedule 38 provides for HMRC to pursue such conduct in three stages:

1) the issuing of a conduct notice, which if appealed and confirmed by the Tribunal;

2) enables HMRC to apply to the Tribunal to obtain the tax agent’s files; and

3) charge a civil penalty of up of to £50,000 and publish certain details of those dishonest tax agents in certain circumstances.

Background

Mr Rodgers acted as a Tax Agent for his client Mr Ferguson for both income tax and VAT.

In September 2015, HMRC met with Mr Rodgers and his client as part of HMRC’s enquiry into Mr Ferguson’s income tax self-assessment and VAT returns. In the course of that meeting, Mr Rodgers told HMRC that he had tried to help reduce his client’s VAT liability by creating false purchase invoices on his own computer that he could use to support claims of business expenditure that Mr Ferguson had not actually incurred. He had done this at his own suggestion, in order to help out his client by easing his tax burden.

Hence, Mr Ferguson’s business records included a number of false purchase invoices for expenditure which he never in fact incurred. These enabled him to boost both his input VAT and understate his trading profits between 2011 and 2015. HMRC calculated an overall understatement in the region of £22,000.

HMRC confirmed that it would not be seeking criminal prosecution against Mr Ferguson. However, as a result of Mr Rodger’s admission, the matter was referred to HMRC’s Agent Compliance Team, which investigates tax agents’ conduct, who held a subsequent meeting with Mr Rodgers regarding his behaviour. Following a number of meetings, calls and correspondence between Mr Rodgers and HMRC, HMRC issued a conduct notice to Mr Rodgers.

Mr Rodgers appealed against HMRC’s determination that he had engaged in dishonest conduct. The determination was given to him in the conduct notice issued to him.

His grounds for contesting the conduct notice were:

• He had been given unequivocal assurances that he would not be prosecuted, so that the issue of the conduct notice was a breach of a promise; and
• Although he assisted his client to understate his tax liabilities, his actions in so doing were not deliberate or dishonest.

Mr Rodgers did not attend the FTT hearing, so the FTT was unable to question him more closely, particularly on the second claim.

Decision

The FTT was satisfied on the balance of probabilities that Mr Rodger’s actions in creating false invoices for his client, Mr Ferguson, in order to attempt to reduce his client’s tax liability constitute dishonest conduct while acting as a tax agent. HMRC had satisfied the burden and standard of proof required.

The Appellant gave no oral evidence nor explanation as to how his conduct could be conceived of as honest or not deliberate. No reason was given for his actions other than to assist his client to untruthfully understate his tax liability to HMRC. Multiple invoices were created by the Appellant on his computer. They were false in material regard purporting to evidence supplies and the incurring of VAT and expenses for income tax that had not taken place.

By any objective and ordinary standards, irrespective of the Appellant’s beliefs, in deliberately doing so the Appellant’s mental state is properly characterised by HMRC as dishonest. In those circumstances the test of dishonesty as set out in Ivey & Genting Casinos [2017] UKSC 67 was met.

This was serious dishonesty as the total of the tax understated by Mr Ferguson as a result of the false invoices knowingly created by the Appellant was around £22,000. There were serial invoices with sophisticated and misleading alterations.

The nature of the Appellant’s job as a tax adviser was to ensure that his clients submit knowingly accurate responses to HMRC. To create and submit documents knowing them to contain false information and with the intention that HMRC would rely on them to calculate tax liability, with the potential or likely consequence of the right amount of tax not being paid to the exchequer, would be characterised as dishonest by any ordinary standard.

While it was not necessary to make any finding about the Appellant’s subjective mental state, his belief or understanding, as to whether what he was doing was dishonest, it is difficult to conceive of any tax agent not understanding or believing that acting in this way would be dishonest.

Therefore, the Tribunal rejected both the submission that he acted honestly and that he believed he was acting honestly.

For the above reasons the Appellant’s appeal was dismissed.

The full judgment in this case is available from: http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j10579/TC06617.pdf