POOR MR SOTO...

 

BLOG 231

POOR MR SOTO …

  

… Let down by his accountant (it appears) and let down again by the First-tier Tribunal.

 

Mr & Mrs Soto ran a nursing home.  Mr Soto’s first language is not English.  He is also deaf and has health problems.  Their accountant advised them to incorporate the business.  They had no idea what this involved but trusted the accountant implicitly.  They told him to go ahead.  Unfortunately, he does not seem to have explained to them how a company operates.  They simply carried on as before, making all the receipts and payments through their personal business account.  During the period under enquiry, Mr & Mrs Soto also bought an investment property which they intended to hold personally.  As the expenses in relation to this property were paid out of their joint business account, the accountant incorporated it into the company’s books.  The result was that the company’s accounts showed a large overdrawn loan account.

 

HMRC wanted not only the tax but, of course, penalties.  They claimed that the company had deliberately submitted false information.  The Tribunal judge pointed out that “The definitive assessment of what amounts to deliberate behaviour was provided by the Supreme Court in HMRC v Tooth which has confirmed that HMRC must demonstrate an intention to mislead HMRC.  The Supreme Court did not definitively determine whether a taxpayer who was reckless as to whether HMRC were misled would also qualify as deliberate behaviour”.  At her previous role of 25 years with a Big Four firm of accountants, the judge had commented on the Tooth decision.  “In particular, the Court held against HMRC and confirmed that a deliberate inaccuracy is a statement which, when made, was deliberately inaccurate.  It is therefore not a statement which was made deliberately and which was in fact inaccurate.  There must, in other words, be an element of intentionality”.

 

The Supreme Court actually said, “Deliberate is an adjective which attaches a requirement of intentionality to the whole of that which it describes, namely “inaccuracy”.  An inaccuracy in a document is a statement which is inaccurate.  Thus, the required intentionality is attached both to the making of the statement and to its being inaccurate”.

 

Back to poor Mr & Mrs Soto.  The Tribunal held that his “failure to actively engage with his responsibilities as a director of a limited company and his blind and unequivocal reliance on his accountant was reckless …  Becoming a director of a limited company brings with it a range of financial duties which it is important to understand.  Mr Soto made no effort to understand what incorporation meant for the business or for him …  To absolve that responsibility, which rests with him, because he relied on Dashia & Co would create a loophole for unscrupulousness because no one would then ever be responsible to taxpayers generally for gross and obvious mistakes in accounts …  On that basis the Tribunal considers that a penalty on the basis of deliberate behaviour is made out”.

 

I hope that I am not the only one who finds this seriously disquieting.  The legislation does not refer to recklessness.  In another Supreme Court case, decided in 2021, Burnett & Grant v International Company of Hanover Ltd, where the Appellant submitted that “wilful” may include recklessness, the Court said, “First, the starting point is the natural meaning of “deliberate” act.  This connotes consciously performing an act intending its consequences.  It involves a different state of mind to recklessness …  Secondly, while the natural meaning of wilful includes deliberate, wilful is capable of having a wider meaning, depending on the context …  Fourthly, Mr McBrearly has not been able to show us any case in which “deliberate” had been held to include recklessness” and later, “I reject the argument that “deliberate acts include recklessness””.

 

Of course, a Tribunal judge cannot be expected to know everything that the Supreme Court says.  But it is a huge leap from a Supreme Court statement that “deliberate must involve an element of intentionality”, to a conclusion that deliberate does not have to involve any element of intentionality if the act can be labelled reckless.

 

I am also worried that the Tribunal did not acknowledge that the legislation itself distinguishes between acts of an agent and that of his principal.  It is only the latter that can be penalised.  The Tribunal seems to me to defy Parliament as well as the Supreme Court in holding Mr Soto responsible for errors by his accountant by regarding him as reckless.  His recklessness (if it is such; I suspect that 80% of directors of small companies, like Mr Soto, have no idea of their statutory responsibility but rely on their accountants, and I find it hard to equate following normal practice with recklessness) relates to not understanding his duties, and it is not that lack of understanding which leads to the loss of tax – and for a penalty to arise, the inaccuracy must lead to the loss of tax.

 

ROBERT MAAS