Tax Advice Negligence – Can I Sue My Accountant?

Tax Advice Negligence – Can I Sue My Accountant?

11:20 AM, 4th April 2017, About 5 years ago 17

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My wife and I jointly own a portfolio of 42 properties. 

We recently sought advice on incorporation from an independent tax adviser who, interestingly, referred us to Property118 and suggested we look into BICT to avoid refinancing. I have to admit to being instantly hooked.

Our reasons for considering incorporation are:-

  1. We want to start transferring shares in our business to our children as part of our succession planning
  2. There are some properties in the portfolio which no longer provide us with good returns. We would like to sell these and replace them with others. Incorporation would re-set our base costs to enable us to trade these properties without incurring tax on capital gains.
  3. We pay substantial mortgage interest of circa £250,000 a year. The restrictions on finance cost relief will hit us hard.
  4. We want to use retained profit to reduce our exposure to finance. At the moment we pay the additional tax rate of 45% but would only pay 19% incorporation tax rate in a corporate structure to do exactly the same thing. Also, corporation tax rates are scheduled to reduce to 17% by 2020.

Our tax adviser is confident that we would qualify for incorporation relief to offset 100% of our capital gains by exchanging equity in our business for shares in the NewCo.

Having looked into BICT it is now also clear that we can avoid the costs of having to refinance.

The problem is SDLT.

Our tax adviser has shown me the legislation which would have resulted in no SDLT being payable if HMRC had recognised us as a partnership.

Furthermore, I understand this would have been a simple task for our accountants to have done by obtaining a Unique Tax Reference number for the business, submitting annual partnership returns and transferring the allocated profits to our self-assessment returns.

The outcome is that if we incorporate now we will incur an eye watering six figure SDLT bill.

If we obtain a partnership UTR now we have been advised to wait three years prior to incorporation so as not to fall foul of anti avoidance legislation. This would cost us an extra £93,750 in tax purely as a result of the restrictions on finance cost relief. This is not to mention the lost opportunities associated with trading some of our properties, succession planning,

Our accountant is clearly ‘on the back foot’ and has written to HMRC to own up to his mistake. He is hopeful that HMRC will forgive him, possibly issue a small fine and backdate their acknowledgement of the partnership. I hope he’s right but I am not convinced.

To our way of thinking, our accountant has been negligent.

My question therefore is; would my wife and I be likely to get anywhere by claiming our losses against his Professional Indemnity insurance?

The second part of my question is, assuming we have a case; should we incorporate and crystallise our losses in the form of SDLT now (which is our preferred option), or should we try to quantify our losses both ways and make a claim on that basis? Presumably the other side would argue either way?

Just to be clear, we are going to give our accountant an opportunity to redeem himself, However, if HMRC decide to be awkward then I don’t see that we have much choice other than to move to another accountancy firm and to launch a claim to recover our losses.

I look forward to reading all responses, particularly from lawyers.

David



Comments

by PaulM

10:44 AM, 5th April 2017, About 5 years ago

I had a very similar situation to "David" which indeed resulted in a change of Accountant for us also.

We (my wife and I) have operated as a "Partnership" using the same definition provided by Mark Smith earlier (Point 2) since 2009, but didn't formerly create an LLP until Apr 16. We incorporated on 6th March 17 the day before the budget just in case the rumoured restriction on CGT relief was introduced.

Fortunately we currently don't have any borrowing so S24 wasn't our concern, but succession planning and being able to re-base line the portfolio value was.

Presumably you can move straight forward to Incorporation now and limit your exposure to S24 costs, so is it worth going after your old accountant at all? I had a very similar conversation as you did, but to try and prove their engagement brief was "advise" based rather than just "execution" was impossible to do. I know what I thought it was, but proving that is a very different matter.

by Mark Alexander

11:18 AM, 5th April 2017, About 5 years ago

Reply to the comment left by "Paul Mullally" at "05/04/2017 - 10:44":

Hi Paul

The plan I have recommended to "David" and his wife is to ask the new accountant to seek advance voluntary clearance for all incorporation reliefs.

This will entail them PROVING to HMRC they have been operating their BUSINESS as a PARTNERSHIP for many years. Thankfully they have overwhelming proof of this. Time will tell.

It will also be interesting to see whether HMRC decide to take any action against the accountant.
.

by PaulM

11:49 AM, 5th April 2017, About 5 years ago

Hi Mark,
I also asked about seeking advance voluntary clearance but was advised that it would take months to do and that it wasn't really needed as by definition and previous operation, we qualified. I agree though it would definitely be a "bells & whistles" approach and I would have liked it, but time didn't allow it especially when it was rumoured about removing the CGT Relief in the last budget.

I'd be amazed if the Accountant approaches HMRC as they mentioned. I think I'd be staying quiet if I were him and hope their client just moves elsewhere!

Regards...Paul.

by Mark Alexander

11:56 AM, 5th April 2017, About 5 years ago

Reply to the comment left by "Paul Mullally" at "05/04/2017 - 11:49":

I completely understand why you took that commercial decision Paul and many people do. However, it would be remiss of me not to recommend clearance.
.

by Kate Mellor

10:32 AM, 8th April 2017, About 5 years ago

The problem I am having is that my accountant keeps insisting that whilst he has no problem in agreeing that my husband & I operate as a property business, we are not eligible to formally register it with HMRC & submit Partnership returns. He insists that we are not a "Trading" business (which is correct obviously) and property partnerships are not eligible for the above. Is he out of touch with the latest thinking on this, as it is looking that way to me...

by PaulM

11:56 AM, 8th April 2017, About 5 years ago

Yes and No. He will know how much time you invest in the "Property Business". By definition, just owning property that you rent out is not a business, but if you invest say 20% or more of your working week operating and managing it, then it could be.

For example, if you own a couple of properties and have them fully managed by an agent, then your accountant is right. However, if you use the agents to just source the tenants, then you manage everything yourselves from there on and expend 20% or more of your working week, then you are a property business.

Only you will know the true answer to this plus you'll need to be able to substantiate it if required.

by Mark Alexander

13:22 PM, 8th April 2017, About 5 years ago

Reply to the comment left by "Kate Mellor" at "08/04/2017 - 10:32":

Hi Kate

It's all about the time you spend managing your business. Say, for example, you own two properties and let them via an agent; it is unlikely that you would qualify as a "business".

Case law (HMRC vs Ramsay) suggests that you would be considered a business if you spend 20 hours or more per week doing what you do. That said, nobody is going to time you so it's all rather subjective. The question to ask yourself is that if you were standing in Court in front of a judge, could you explain why, what you do, is a business?

HMRC's manual PIM1030 says as follows:-

Jointly owned property - partnership

A taxpayer may jointly own properties which are let out as part of a partnership business. This might occur where:

- they are in a trading or professional partnership which also lets some of its land or buildings (but see BIM41015 about the inclusion of rents from the temporary letting of surplus business accommodation in the trading or professional profit),

or

- more rarely, they are in a partnership which runs an investment business which does not amount to a trade and which includes, or consists of, the letting of property.

To read more see https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

A company is a separate legal entity so there is nothing to stop a company being a partner in your business, regardless of whether it has a trade or not. That said, there are very tight rules to prevent "mixed partnerships" from manipulating tax by hiving off profits into a more tax advantageous tax environment. In simple terms, the company can receive the percentage of partnership profits it owns, plus a commercial rate for the work it does. This differs from the rules affecting partners who are human being in that profits do not have to be allocated in accordance with partnership equity and that drawings do not have to reflect profit allocation or ownership of equity. See goo.gl/HhL9yW

If you would like an expert option on your own circumstances please see https://www.property118.com/optimal-tax-planning/91857/
.


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