Couple's Costly Mistake: Tribunal Upholds Six-Figure Charge in Tax Relief Blunder

In a recent ruling, the First-Tier Tribunal Tax Chamber upheld significant penalties imposed on Philip and Deborah Cox after their claim for Business Asset Disposal Relief (BADR) was found to be invalid, resulting in an underpayment of taxes. The couple, who faced penalties exceeding £16,000 each, argued that they had relied on professional advice and were not careless in their actions. However, the Tribunal dismissed their appeal, affirming that the penalties were valid and that their behaviour was indeed careless.

Background:  The case centres around the couple's 2019-2020 tax returns, where they claimed BADR, a relief that reduces the amount of Capital Gains Tax (CGT) owed when selling or gifting business assets. The Coxes were minority shareholders in David Williams IFA Holdings Ltd (DWIFA) and had been advised by their legal team that they qualified for the relief. However, the transfer of some shares shortly before the disposal led to their shareholding falling below the required 5% threshold, making their BADR claim invalid.

Tribunal Findings:  The Tribunal found that the Coxes had acted carelessly in submitting their tax returns. Despite receiving advice from their solicitors, EWM Solicitors, it was clear that the advice was not tailored specifically to their individual circumstances, particularly the impact of the share transfer on their BADR eligibility. The Coxes failed to seek further advice when it was suggested by their legal counsel that additional tax implications could arise from the transaction.

The Tribunal noted that while the couple had relied on professional advice, they did not take reasonable care to ensure the accuracy of their tax returns. The penalties, calculated as 15% of the potential lost revenue, were deemed appropriate, given the significant underpayment of over £210,000 in taxes.

Suspension of Penalties:  The Tribunal also upheld HMRC's decision not to suspend the penalties. The Coxes had argued that they had always been compliant taxpayers and that the penalties should be suspended under the Finance Act 2007, Schedule 24. However, HMRC argued, and the Tribunal agreed, that the specific circumstances leading to the inaccuracy were unlikely to recur, making suspension of the penalties inappropriate.

Conclusion:  This case serves as a stark reminder of the importance of thoroughly understanding the tax implications of complex transactions and the risks of relying on generic or incomplete professional advice. The Tribunal's decision highlights that even experienced business owners must ensure they meet all the specific requirements for tax relief, or face significant financial consequences.

The Coxes now face the full burden of the penalties imposed, alongside the additional taxes owed, bringing the total financial impact of their mistake to a substantial six-figure sum.