Just Who Can You Rely On?

Don’t put your trust in HMRC

A recent First Tier Tax Tribunal ruling in the case of K Rotberg v HMRC (July 2014) serves as a warning to those who seek to rely on the advice of HMRC when organising their tax affairs.

Mrs Rotberg had made three substantial disposals of shares totalling over £4.2 million, in the family businesses, Jobsite Ltd and Auto Online Ltd, between January 2000 – March 2004. With the exception of £1 million, all of the sale proceeds were reinvested in another family concern, El Shaddai Business Development Ltd.

No capital gains tax had been paid on the first two share sales as Mrs Rotberg’s accountant had advised that the disposals qualified for ‘roll over relief’. The relief works by allowing a capital gain to be deferred where the sale proceeds are used to acquire another qualifying asset.

Unfortunately, the accountant had, to quote the First Tier Tax Tribunal judge, “limited experience in the application of the relevant reliefs” and his advice to his client relied upon a telephone conversation he had with HMRC shortly before the first share sale took place.

He had asked an Inspector of Taxes at a local office in Chichester if the proceeds of a sale of shares in an unquoted company used to buy shares in another unquoted company would qualify for ‘roll over’ relief and was told it would. Wrong!

It seems that whilst the Inspector of Taxes had talked about ‘roll over’ relief, what he was really referring to was Enterprise Investment Scheme reinvestment (or deferral) relief. Had this relief be claimed at the time then Mrs Rotberg would not have been faced with a large capital gains tax bill but by the time everything came out in the wash it was too late to make such a claim.

The Tribunal even exonerated the HMRC official by saying, “only a brief and general conversation” had taken place and that he could “not be regarded as having understood that what was sought was a considered ruling.”  Instead the accusative finger was firmly pointed at the accountant who was criticised by the judge for relying on a telephone call to HMRC in giving such important advice to his client and for not adequately checking the legislation himself. As the Tribunal pointed out, shares are ‘conspicuous by their absence’ from the ‘roll over’ relief provisions. The accountant was therefore ‘negligent’.

As part of her arguments, Mrs Rotberg contended that as a result of HMRC’s incorrect advice given to her accountant she had a ‘legitimate expectation’ that the gains could be rolled over. ‘Legitimate expectation’ is a legal concept which, if proven, can result in a person who has been ill informed escaping the consequences of that wrong advice.

The Tribunal however declared that it had no jurisdiction to apply the public law principle of legitimate expectation but came to this conclusion “without enthusiasm”. The judge also added that HMRC’s misinformation about ‘roll over’ relief must be a “matter of considerable regret” for the department.

Whilst the accountant in this unfortunate case had indeed failed his poor client, nevertheless if we can’t rely on HMRC to understand its own tax system and laws then that is a very sad state of affairs indeed. The Tribunal here clearly signalled that even if HMRC give negligent advice it is of no matter and will not be accepted as a reasonable argument for escaping the consequences.

Tax advice of any substance should therefore be sought from a competent professional and, if necessary, get a second opinion if there are large amounts of tax at stake. Whatever you do, don’t trust the taxman’s word!