Finance (No 2) Act 2017 created the concept of an “Interested Person” .
The concept is relevant to both Requirement to Correct and Failure to Correct regimes.
The concept is specifically relevant to reasonable excuse.
What is Reasonable Excuse?
Reasonable excuse is not defined, however, HMRC consider the following do not create a reasonable excuse:
- Advice given by someone that does not have the appropriate expertise to give it
- Advice that fails to take account of the taxpayer’s relevant circumstances
- Advice is not addressed, or given, to the taxpayer
- Advice given in relation to “avoidance arrangements” by an “interested person”
Who is an “Interested Person”?
Schedule 18 Paragraph 23 (5) Finance (No 2) Act 2017 defines an “Interested Person” as:
“Any person who participated in the relevant avoidance arrangements or any transaction forming part of them, or
Who for consideration facilitated the taxpayer entering into the relevant avoidance arrangements“.
What is an “Avoidance Arrangement”?
HMRC’s view is any arrangement where the main purpose, or one of the main purposes, of the arrangement is to obtain a tax advantage is an avoidance arrangement..
HMRC cite the following as examples:
- Creating a trust to hold assets
- Participating in a tax avoidance scheme
- Advising someone how to structure their affairs to become non-resident in the UK
- Structuring the sale of an assets to reduce the chargeable gain that arises
- Advising how assets may be passed to others to reduce an IHT liability
Example where Reasonable Excuse Applies
Taxpayer is unsure of domicile status and seeks advice from appropriately skilled adviser.
Position thoroughly reviewed with conclusion taxpayer is not UK domiciled.
Taxpayers’ affairs are structured in line with the advice and which also accords with practice and guidance at the time.
Taxpayer does not make a Requirement to Correct amendment.
HMRC successfully challenge the domicile position some years later resulting in a Requirement to Correct amendment that should have been made by the taxpayer.
Taxpayer makes a claim for reasonable excuse.
HMRC accept the claim. The advice (whilst incorrect) was appropriately given, followed and was not disqualified as relating to avoidance arrangements.
Example where an Interested Person Disapplies Reasonable Excuse
Facts are as above albeit the taxpayer seeks advice to set up an offshore trust to hold assets and investments.
HMRC successfully challenge the taxpayer’s arrangement.
Result is additional tax being due on the assets and investments in the offshore trust.
Taxpayer claims reasonable excuse as he followed advice.
Claim fails as firm providing the advice is an “Interested Person”.
The taxpayer has therefore Failed to Correct without reasonable excuse and would be liable to the harsher Failure to Correct penalty regime.
Anyone seeking to make a Requirement to Correct amendment can contact me at firstname.lastname@example.org, or Paul at email@example.com, to explore their options.