Many people who have little understanding of the tax system sensibly seek help from those with greater expertise. However, a case that exposed an apparent loophole in HM Revenue and Customs’ (HMRC’s) systems showed how important it is to choose your advisers carefully.

A taxpayer contacted a company that he hoped would assist him in obtaining tax rebates. The company was alleged to have purported to act as his agent in causing self-assessment tax returns to be filed online, apparently on his behalf. The returns included claims for Enterprise Investment Relief (EIR) and, without any checks having been performed, tax repayments totalling almost £25,000 were made. The money was not paid to the taxpayer but to nominees identified in the returns.

After HMRC made inquiries, the taxpayer accepted without demur that he had not made any investments that would qualify for EIR. On the basis that he was deemed to have authorised the company to act on his behalf, HMRC raised tax assessments against him in the full amount of the repayments.

In upholding his appeal against those bills, the First-tier Tribunal (FTT) did not accept that the actions of the company could be viewed as merely careless. On the available evidence, it appeared that a fraud had been perpetrated. The taxpayer was not a tax expert and, in seeking professional advice and placing his trust in the company, he had acted reasonably and diligently.

He had not expressly or impliedly authorised the company to act on his behalf and, until he was put on the alert by HMRC, he was wholly unaware that the returns had been filed. He had no opportunity to check their accuracy and there was no knowledge or connivance on his part.

The FTT noted that, although a number of other taxpayers were said to have found themselves in a similar position, the circumstances of the case must be rare. They had, however, served to expose what appeared to be an unfortunate loophole in HMRC’s systems that was open to abuse.