Taxpayer appeal upheld following HMRC’s attempt to impose penalty for careless inaccuracy
Paragraph 1 of Schedule 24 to the Finance Act 2007 states that a penalty is payable where a document contains a ‘careless’ inaccuracy. Paragraph 3 of the same Schedule says that an inaccuracy is careless if the inaccuracy is due to failure by the person to take reasonable care.
Since HMRC alleges carelessness, the burden is on it to prove carelessness by the appellant.
In H&H Contract Scaffolding Ltd v The Commissioners for HMRC [2024] UKFTT 151 (TC), HMRC believed that it had identified one such case. HMRC attempted to charge a careless penalty to the appellant scaffolding company (H&H) for its claim, which HMRC did not accept qualified. H&H appealed and, in a judgment handed down by the First-tier Tribunal (Tax) in February, its appeal against the penalty was upheld. The eligibility of the R&D tax credit claim was not considered by the Tribunal.
Key point
HMRC failed to meet the burden of proof to demonstrate “carelessness”
Background
H&H, a scaffolding company, appointed Legal Rooms (LR) to make an R&D claim on its behalf. H&H researched LR’s expertise in providing R&D tax advice before appointing them. Relying on the advice from LR, H&H’s accountant submitted a Corporation Tax return for the tax period ended 30 June 2019, which included an R&D tax credit for £40,194 and a figure of £490,774 for R&D enhanced expenditure.
HMRC opened a check into that return, looking at the R&D claim. As part of that process, it requested various pieces of information and explanations from H&H.
H&H and LR exchanged correspondence on the claim, which included an R&D compliance report, produced by LR. In reliance on that, H&H answered questions put by HMRC as to how the R&D claim was prepared. However, HMRC subsequently progressed to notification of the penalty assessment for careless inaccuracy on the basis that the company had failed to take reasonable care when making the claim. HMRC also issued a closure notice for the R&D tax credit claim.
H&H appealed the penalty, but not the closure notice.
Submissions
The appellant provided detail in their grounds of appeal as to why they believed there was no carelessness. They referred to various sections of HMRC’s own Compliance Handbook to show they fell within HMRC’s own version of what was not careless.
HMRC provided, using the Judge’s wording, a “confused” Statement of Reasons which was incorrect in respect of where the burden of proof lay. It was also misguided in saying that reliance on a third party could not constitute a “reasonable excuse”.
HMRC went on to say that the company was careless because it could not show that its claim qualified for R&D. In effect, it was saying that the company was careless because there was an inaccuracy. HMRC’s statement provided no further insight on why it believed the inaccuracy to be careless. The Tribunal said on this point that it is incumbent on HMRC to set out why the taxpayer had been careless.
Decision
The Tribunal allowed H&H’s appeal, determining that the inaccuracy found in the claim was not careless. It was unable to accept that the mere existence of an inaccuracy determined the accuracy to be careless, and HMRC produced no other reason why it believed there to be a careless inaccuracy.
As an aside, the Tribunal said that, even if they were wrong, and the burden of proof fell on the company because HMRC were alleging a Paragraph 18 penalty in that the company’s agent, Legal Rooms, had been careless (which HMRC had not alleged), H&H had proved, on the balance of probabilities, that it had taken reasonable care to avoid an inaccuracy and the facts asserted in its “Grounds of Appeal” and declared to be true by its director were, on the balance of probabilities, established as facts.
HMRC did not produce sufficient evidence to controvert those facts. H&H had shown: “that it did what a prudent and reasonable taxpayer in the position of the taxpayer in question would do.”
Key takeaways from H&H Contract Scaffolding Tribunal
This was a decision that dealt with HMRC’s penalty regime, rather than the validity of H&H’s R&D claim. It does, however, reinforce the need to take reasonable care when preparing an R&D claim and to engage competent professionals with the requisite skillset and experience.
Final word
There has been a series of R&D cases over the years that HMRC has won because the appellant has failed to meet the burden of proof by providing evidence from a relevant ‘competent professional’. In this case, where the burden of proof fell on HMRC, it had failed itself to provide sufficient proof.
As with any case before the Tribunal, whichever side of the fence you are on, evidence is king. The first act of anyone litigating in the First-tier Tribunal should be to ask themselves ‘on whom is the burden of proof?’ The second act should then be to test whether they can meet that burden on the balance of probabilities.
View the full tribunal transcript.
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In this podcast, we discuss the facts and key takeaways from four R&D Tax Tribunals: H&H Contract Scaffolding, Flame Tree Publishing, Get Onbord Ltd and Tills Plus Ltd.
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