Although the press understandably focussed on this particular issue, the case actually highlights some points of wider interest to tax advisors generally.
Firstly, HMRC adopted two different approaches to the clothing expense:
The Judge stated that HMRC cannot argue that the expenditure was not actually incurred despite the lack of receipts, as to do so would be an allegation of dishonesty when no such allegation had been advanced. It has always been a myth that no receipt automatically means no deduction, but that is an argument often advanced by HMRC.The Judge’s comments in this case are therefore welcome.
Secondly, the Judge noted that the inspector had a hard-nosed attitude from the outset of the case which soured the relationship with the taxpayer’s advisor. This then had a direct impact on any potential penalty in respect of travelling expenses, which were ruled as disallowable.
The Judge concluded that HMRC must take some responsibility for the alleged “obstreperous” behaviour by the agent, which initially led HMRC to restrict the available penalty reduction. The Judge added that the agent’s robust advocacy and support of his client’s case should not be held against him. This makes it clear that HMRC’s behaviour, as well as the taxpayer’s, can have a direct impact on penalties. Robustly defending a client in appropriate circumstances is the right thing to do, not a weapon for HMRC to use by threatening increased penalties if the agent does not do as the inspector wishes.