Johnson and Johnson: careless despite white space disclosure
The complexity of the modern tax code can leave tax agents unsure of how to complete their clients’ tax returns. A common approach is to file using the ‘best case’ scenario for clients, but then include a separate disclosure to HMRC that explains the possible uncertainty. Such disclosures are known as ‘white space’ disclosures. The idea is that the filing position secures the best immediate tax result for clients, while the white space disclosure protects them from the various downsides – penalties, extended HMRC deadlines, increased scrutiny – if the filing position is wrong.
However, the First-tier Tribunal has reaffirmed in Johnson and Johnson v HMRC  UKFTT 156 (TC) that such white space disclosures can have little impact. If, on a proper analysis, the ‘best case’ position was clearly wrong and it was careless to adopt it, agents disclosing to HMRC that they are unsure of the position is unlikely to help. This is the case even if a white space disclosure is made in ‘good faith’ and the agent is personally unsure of the correct position. If an agent ought to know the correct position but fails to file on that basis, a white space disclosure is unlikely to prevent the agent from being careless, with all the consequences that brings.
In reality, this outcome is not surprising: the self-assessment regime has always put the onus on the taxpayer to get things right and requiring tax agents and tax advisers to uphold appropriate standards is a cornerstone of today’s tax environment. Put simply, the white space is not a shortcut that allows tax agents to avoid the consequences of their negligence.
Further information on the specifics of the case is set out below, including the key takeaways.
Negligent agent unassisted by a white space disclosure
Johnson and Johnson tells the story of a tax agent (i) failing to undertake a full factual review of the circumstances relating to a payment received by their client, (ii) reviewing some but not all of the relevant guidance from HMRC, and (iii) incorrectly filing a tax return on the basis that payment was not taxable, but providing a white space disclosure to provide more information in case that position was wrong.
The FTT stressed that the agent had acted in ‘good faith’ when making the disclosure and that, in the agent’s mind, the relevant tax rules were ambiguous. The FTT also noted that the white space disclosure could have been sufficient to put HMRC on notice of the potential underpayment of tax. But all of this was ultimately irrelevant.
The FTT analysed what any adviser taking reasonable care would have done when completing the tax return. The FTT found that the adviser should have undertaken a full review of the facts and available HMRC guidance, have then understood that there was no ambiguity in the rules, and filed the return on the basis that the payment was taxable (without the need for any white space disclosure). In short, the agent had been careless when completing the tax return, and it was found that the inclusion of a white space disclosure as a way of hedging his bets could not change that.
HMRC entitled to rely on the extended six-year discovery assessment timeframe
The immediate consequence for the client was that HMRC could rely on the extended six-year time limit for issuing a discovery assessment to collect the unpaid tax (TMA 1970 s 36(1)). This was crucial, as HMRC issued an assessment over five years after the original tax return had been submitted and so would have been out of time were it not for the agent’s carelessness.
Broadly, HMRC is able to issue discovery assessments to taxpayers in circumstances where either:
- the taxpayer or their agent carelessly or deliberately brought about the loss of tax, for which HMRC has a six or 20 year deadline respectively to issue the assessment (TMA 1970 ss 29(4) and 36); or
- HMRC did not have enough information available during the initial 12-month enquiry period to begin investigating the taxpayer, in which case HMRC has a four-year deadline to issue the assessment (TMA 1970 s 29(5)).
In this case, the agent tried to argue that, given the white space disclosure, it was actually HMRC’s failure to open an enquiry during the 12-month enquiry period that brought about the loss of tax.
As the FTT explained, given their finding that the agent had been careless, the first ground for issuing an assessment had already been satisfied and it was this carelessness that ‘caused’ the loss of tax. Consequently, HMRC’s knowledge based on the white space disclosure – which would primarily be an issue for the second ground in any event – was irrelevant, and the suggestion that HMRC had ‘caused a loss of tax’ by failing to open an enquiry was robustly rejected.
The FTT regarded the agent’s submission – that the white space disclosure provided sufficient information, in accordance with SP 1/06, for an HMRC officer to appreciate that the self-assessment in the taxpayers’ tax returns was insufficient – as misconceived. That statement was made in the context of what the hypothetical officer knew (posited in TMA 1970 s 29(5)), not in the context of a careless agent (which is relevant to TMA 1970 s 29(4)).
Key takeaways: taxpayers unlikely to avoid extended timelines for agent carelessness
When considering assessment deadlines, there are no carve-outs for situations where a client has taken reasonable care but their agent has not. This contrasts sharply with the position for tax penalties, where a taxpayer with a careless agent can still avoid a penalty if the taxpayer can show that they personally took reasonable care (FA 2007 Sch 24 para 18(3)).
This distinction is understandable from a tax administration perspective: while HMRC does not want to lose out on tax that would have been paid but for an agent’s carelessness, it at least recognises that the end taxpayer should not bear a further financial penalty. But it does leave the large numbers of taxpayers who use agents, often those with more complex affairs, in a difficult position.
If an agent is negligent – which a client will often be unable to spot – there is little the client can do themselves to ensure that their affairs are actually treated as settled within the normal four-year time period, and it can be even more difficult for taxpayers who regularly seek advice from their tax agent:
- If a tax agent is careless, HMRC is likely to try to rely on the six-year extended assessment deadline and may seek further penalties.
- Taxpayers who ask their tax agents for advice that goes beyond standard tax return services can be at a specific disadvantage, as HMRC may start from the position that any carelessness in advice provided by tax agents permits them to rely on the extended assessment timeframes. In fact, it should only be when the agent is acting in their capacity as agent (rather than as an adviser) that the extended timeframes apply. But in practice HMRC does not always see that distinction, despite its own guidance suggesting it should (see HMRC’s guidance Reasonable care: tax returns and other documents, at ly/2EHUmis). This means that taxpayers who seek their advice from tax advisers who are distinct from their tax agents are often put in a better position – if only because they do not need to demonstrate that distinction – with little justification.
- If an agent considers it necessary to make a white space disclosure about a filing position to protect their position, taxpayers may need to scrutinise the position more closely and understand the basis for that disclosure with their agent. In particular, would the agent be prepared to file the return without the white space disclosure? If not, then a taxpayer might be well-advised to question their tax agent further. Such oversight is generally good practice, but it does beg the question of the point at which HMRC will accept that clients have done enough and can simply rely on the professionals that they should be able to trust.
- If an agent’s carelessness does lead to HMRC being able to rely on extended timeframes or impose additional penalties, the taxpayer may have little option but to consider professional negligence proceedings against their agent. That is highly unwelcome for all concerned. It can also be difficult for the taxpayer to recover underlying tax that was properly due (as this is something the taxpayer should have paid regardless of their agent’s carelessness), but they can often recover any extra fees, penalties, and interest. It is therefore in everyone’s interests to engage at an early stage to minimise any potential liabilities. Given the ever-increasing complexity of the UK tax rules– and HMRC’s continuing focus on the conduct of agents these issues are only likely to become more common, and it seems inevitable that the number of professional negligence claims in this area will grow.
This article was first published in the Tax Journal on 22 July 2022.