The Advisors Duty of Care – What to do if your advisor has been negligent
The writer has specialised in bringing claims against professionals arising out of failed tax avoidance schemes for the last 15+ years. Recently that advice has centred around advice relating to property incorporation relief, the Loan Charge, EBT’s and Remuneration Trusts. However, recent discussions and issues have focused on claims relating to defective R&D tax advice. The purpose of this article is to address some of the relevant issues.
Background to this Article
Many companies are facing tax enquiries on their historic R&D tax credit claims with HMRC demanding repayment of tax credits, ranging from the small to the multi-million.
- Documents from HMRC show that in 2020/21 50% of all R&D tax relief claims were inaccurate.
- The most recent figures published by HMRC show that R&D tax reliefs claims in 2022/23 were worth £10.2 billion.
- HMRC announced, on 31 December 2024, that they would be opening a new R&D disclosure service for companies to voluntarily disclose claims where they have overclaimed R&D tax relief but were unable to amend their tax return (because it was too late to do so).
In a number of instances, the refusal of relief was attributable to the advice (or lack of advice) from the professional advisors. This often stems from the professional advising his client that R&D relief was available, when that was clearly not the case. The effects of that advice can be ruinous.
Where the advice of the advisor was negligent, the client can likely bring a claim against their advisor for damages for that negligent advice. Where the professional advisor is insured, the insurer will likely, if the claim is successful and within policy terms and limits, indemnify the advisor.
R&D Relief – What is it?
R&D tax relief was created to incentivise companies to invest in innovative projects involving science and technology to support growth and innovation in the UK economy. Until 1 April 2024, HMRC operated three schemes:
- the small and medium-sized enterprises (SME) scheme;
- the R&D intensive scheme (for loss making SMEs with a high R&D spend); and
- the R&D expenditure credit (RDEC) scheme.
For accounting periods beginning on or after 1 April 2024, a merged scheme has begun which replaces the SME and RDEC schemes (the R&D intensive scheme continues).
Financial Cost of Incorrect Tax Return – Recent Case Law
Two recent decisions highlight the considerable financial impact where tax relief is refused:
Tills Plus Ltd v. HMRC – 11 July 2024
- Tills Plus Ltd claimed £1.5 million worth of R&D expenditure (claiming an R&D Tax Credit totalling £665,000).
- The Tribunal concluded that Tills Plus had failed to prove the work achieved scientific or technological advancement so it did not qualify as ‘research and development’ and duly upheld HMRC’s rejection of the claim.
Flame Tree Publishing Ltd v. HMRC – 25 April 2024
- On 30 June 2020, Flame Tree Publishing (FTP) filed an amended Corporation Tax (“CT”) return for the accounting period ended 30 June 2018. By the amendment it claimed an enhanced deduction of £266,644 in respect of expenditure on R&D. HMRC enquired into the amended return, and on 1 July 2022, issued a closure notice refusing the claim.
- FTP appealed that decision. And lost. The Tribunal agreed with HMRC’s decision to reject their R&D tax relief claim because they did not meet the “qualifying” tests as per the BEIS Guidelines.
HMRC Crackdown
Figures published by HMRC state that 20% claims are now selected for enquiry. HMRC estimated that the level of error and fraud in R&D tax relief claims during 2022/23 was £1.1 billion.
The rules surrounding what is R&D are complex. Errors occur through genuine mistakes, for example, the computation of a claim, or by a misunderstanding the rules. A mistake does not automatically mean that the professional advisor has been negligent. For negligence to be proven requires evidence to show that, in layman’s terms, the advisor has not done his job to the standard required namely “that of the reasonably competent tax advisor”.
Whilst genuine errors arise, HMRC also considers that there is a significant element of fraudulent abuse within the regimes. HMRC is using several measures to tackle non-compliance as the cases above demonstrate. Penalties & Interest
If a company’s corporation tax return contained an error due to careless or deliberate behaviour, HMRC will consider penalties. The level of penalty will depend on the category of behaviour and whether the company came forward voluntarily. In addition, interest will likely be charged on any unpaid tax.
If the professional has been negligent, these will form part of the claim against the professional as will the fees charged by them for the negligent advice.
Duty of the Professional
Tax advisors, like all professionals, must discharge their duty of care to their client, that is, to provide tax advice that the reasonably competent tax advisor would have provided.
Giving advice which is wrong, does not make a professional negligent, if, the reasonably competent tax advisor would have given that same advice. However, getting it wrong, can often be a good indicator that there may have been negligence on the part of the professional.
The scope of a professional’s duty is set out in their engagement letter. If there is no engagement letter, then, in simple terms, the scope of the duty is determined by what the parties have agreed the tax advisor will do, or what he/ she has assumed were his/ her responsibilities.
If the actions (or inaction) of the professional were within the scope of what they had agreed, or assumed, they were responsible for, and those actions or inactions fell below the required standard (see above), then if those actions caused the losses suffered by the client, the professional may well be found to be negligent and an award of damages ordered. Given that regulated professionals need to be insured, any damages will commonly be paid by the relevant insurers, provided that the insured advisor is within the terms and limits of the policy (one issue that can arise is where advice regarding tax schemes is excluded within the policy terms).
Limitation Periods – How long do you have to bring a claim
The limitation period is a very complex area and is not easily condensed into a short article.
In simple terms, if the breach of contract (commonly the engagement letter), or the damage caused by the negligence, was more than 6 years ago, then you may be out of time to bring a claim. However, determining matters such as the date of breach and/ or the date of damage are seldom straight-forward. Therefore, it is imperative that you take legal advice to consider all material facts including limitation.
If the relevant matters/ events are approaching 6 years, then you should call us without delay.
Our Experience
We have advised a number of clients in relation to claims against their professional advisers and promoters after they engaged in tax avoidance schemes or other tax mitigation schemes/ strategies, including failed Property Incorporations, use of EBT’s, the Loan Charge, Film Schemes, Remuneration Trusts, EFRBS, SHIPS, and Contractor Schemes.
We have successfully recovered significant compensation from advisors and/ or promoters where the advice given was negligent, or a breach of their fiduciary duties, or, the promoters acted in breach of their statutory duties. No two cases are the same and careful consideration of matters such as the scope of the professionals duty, the steps taken, and ultimately, whether those steps were negligent must be undertaken. That will likely involve the role of a third party tax expert with whom we have very strong links.
If you want to discuss matters in greater detail, please contact Tom Maple on 0118 951 6200 or email [email protected].
Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.
