Carrasco & anr v HMRC [2016] UKFTT 0731 (TC)

Analysis

Mrs Carrasco inherited a London property known as 33 Smith Terrace, Chelsea in June 1988 (‘the property’). She subsequently vested the property in herself and her husband Javier Carrasco by way of a Deed of Gift.

The property was let to tenants from June 1998 to late June 2010. In 2010 it was put up for sale. Exchange of contracts took place on 25 May 2010, and completion took place on 23 July 2010. The appellants moved into the property on 29 June 2010 and resided there until 22 July 2010.

In April 2012, and upon professional advice, the appellants executed a principal private residence (‘PPR’) election on to the effect that the property was their PPR until 22 July 2010. On the same date they elected another London property known as 22 Favart Place as their PPR with effect from 30 June 2010.

Following the sale of the property, each appellant filed self-assessment returns in which they declared their appropriate capital gains for capital gains tax (‘CGT’) purposes, but reduced those gains by excluding the gain attributable to the rise in property prices over the immediately preceding three year period. The respondents undertook an enquiry into the appellants’ returns and raised assessments disallowing the reduction referable to the PPR deduction.

The appellants appealed the CGT assessments subsequently raised by the respondents. They eventually withdrew this element of the appeal, but maintained their appeal to associated penalty assessments raised by the respondents in the sum of £16,918.78 as to Mrs Carrasco, and £6,647.58 as to Mr Carrasco.

It was not disputed that the self-assessment forms filed by the appellants contained inaccuracies, and the FTT, upon the unchallenged evidence as to a misunderstanding on the part of their professional advisors, found that this inaccuracy had arisen as a result of carelessness within the meaning of para 18(2) Sch 24 of the Finance Act 2007 (‘the 2007 Act’;). The principal issue was whether, for the purposes of para 18(3), the appellants had taken reasonable care to avoid inaccuracy in their respective tax returns.

Held:

1. 1) It was more probable than not that the appellants had placed reliance upon the professional accountancy and tax advice that they had received from their retained accountants. That advice was to the effect that provided that they resided at the property for some period of time prior to its sale (by which they understood sale to be contemporaneous with completion) the three-year CGT exemption would be applicable.
2. 2) The exemption provisions were sufficiently technical and obscure as to fall outside the working knowledge of the average man in the street and to be a matter upon which it was entirely reasonable to expect a layperson to seek and take appropriate professional advice which he/she would then rely upon when ordering his/her tax affairs and completing returns. Tax laws and tax rules are generally complex and convoluted. The average man could not reasonable be expected to have a working knowledge of tax legislation.
3. 3) This was not a case where the appellants’ accountants and tax advisors acted as mere functionaries to undertake filing or a routine administrative task instead of it being undertaken by the appellants themselves. This was a case where their tax returns were instead based upon advice given by their advisor at a time when he was cogniscant of the facts surrounding the letting, sale and occupation of the property.
4. 4) The very purpose of obtaining professional advice against a full disclosure of pertinent facts, was to gain advice as to how one should proceed, whether it be by reference to medical treatment, legal matters, accountancy or tax matters or a multitude of other matters where the input of true expertise is appropriate before a person could make an informed decision on how he/she should proceed. The computation of capital gains tax applicable to each appellant fell into that category.
5. 5) When a person sought appropriate professional advice from somebody who was a professed expert in the applicable discipline, it will almost always be reasonable for the person who has sought out such advice to rely upon that advice provided only that that person has selected a seemingly competent professional adviser, unless there are factors to the knowledge of the recipient of the advice which indicate to him/her that it ought not to be relied upon. Such factors would have to be reasonably obvious rather than subtle or such as might only be picked up by a fellow professional.
6. 6) The appellants’ appeals were therefore to be allowed.

JUDGMENT G JONES QC: [1] This is an appeal by Mr and Mrs Carrasco severally against penalty determinations made against each of them by the respondents. It is appropriate that we first set out the history of the present appeal. It began as an appeal against Capital Gains Tax assessments relating to the appellants’ respective …

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