In Patrick Cannon v HMRC [2017] TC06254, the First-Tier Tribunal (FTT) quashed two of three penalties for a tax barrister, finding he had taken reasonable care despite misunderstanding the furnished holiday let rules.

Mr Cannon’s 2010/11 Tax Return included the following:

  • A Furnished Holiday Lettings Sideways loss relief claim. This was the last tax year in which a sideways loss relief claim was permitted.
  • Repairs and capital allowances claims in respect of the FHL. The claim was double counted and this error was volunteered by Mr Cannon.

The 2010/11 Return also missed off income which was erroneously included in the 2011/12 accounts and return.

FHL loss relief claim

Mr Cannon started an FHL business half-way through the tax year. HMRC claimed that Mr Cannon knowingly made an incorrect FHL loss relief claim and charged him deliberate penalty rates:

  • Mr Cannon’s gardener, who was also helping with the FHL building works was staying there 2 or 3 days a week to avoid a commute and HMRC believed this was not commercial.
  • The FHL conditions were not satisfied, as the 12-month period that is referred to in the legislation could not be pro-rated. Mr Cannon did not meet the FHL conditions in the first 12-months of letting. 
  • Mr Cannon did not spend 10 hours a week engaged in the property letting business, so it could not have been a FHL business.

The FTT made the following observations:

  • HMRCs guidance included nothing about a 10-hour per week working requirement.
  • There is nothing in the FHL rules that requires the accommodation to be used as holiday accommodation. The gardener occupying the property two or three days a week made commercial sense.
  • Just because Mr Cannon is known for his expertise in one area of tax law(SDLT) does not mean he should be considered an expert in every aspect of tax.
  • Mr Cannon assumed that pro-rating applied to the FHL requirements and this was a reasonable assumption. Mr Cannon checked this with his accountant who Incorrectly advised that it was correct. Mr Cannon took Reasonable care and the error was not careless.
  • There was nothing to suggest the mistake was Deliberate.
  • No penalty applies.

Double counted repairs

  • An independent advisor completed a capital allowances report for Mr Cannon’s FHL property, splitting the building works between Capital and Revenue.
  • The report was passed to his accountant and the draft P&L given to the accountant included the figure as an expense.
  • It was not explained to the accountant that the P&L deduction included the amount from the report and it was double counted.

The FTT concluded that Mr Cannon should have advised his accountant that the amount had been included in the P&L figures provided. He failed to take reasonable care and a 10% penalty applies.

Missing receipt

  • A payment was received directly into Mr Cannon’s bank account one or two days before the end of his professional accounting period.
  • Mr Cannon emailed his clerk on 31 July, the last day of his accounting period, a Saturday.
  • His clerk entered the details into his accounts on the next working day, which was in the following accounting period.
  • This lead to the receipt being included in the accounts of the following year.
  • HMRC initially said that this was deliberate cheating of the revenue, but withdrew this and charged penalties on the basis that it was careless.

The FTT found that Mr Cannon was acting reasonably:

  • He should not have to audit and reconcile the clerks computer printout of fee income, which was used to compile the business accounts.
  • He was entitled to place faith in the integrity and reliability of the accounting records maintained by his clerks. Particularly as he was unable to interfere with the preparation of them.
  • Mr Cannon took reasonable care, and no penalty arises.

As an aside, Mr Cannon believed that he was being targeted, in part due to his refusal to cease providing advice on SDLT planning and mitigation.

The FTT found that this was subjective and as the HMRC Officer that asked Mr Cannon to desist from giving legal advice on SDLT mitigation strategies or arrangements, was not a witness to this case, they did not look into this any further.


Furnished Holiday Letting

Losses, trade losses and sideways losses

Repairs and renewals

Replacement of Domestic Items Relief

Appeal: mistake by an adviser

Client guide to "Reasonable care and tax penalties"

Penalties: Deliberate behaviour

External link: Patrick Cannon v HMRC [2017] TC06254


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