In Philip Cox and Deborah Cox v HMRC [2024] TC09198, the First Tier Tribunal (FTT) found that the taxpayers' incorrect claim for Entrepreneurs’ Relief (now known as Business Asset Disposal Relief) was made carelessly. The taxpayers failed to obtain appropriate professional advice and were liable to penalties of 15% of the Potential Lost Revenue (PLR).

Hands in board meeting

Philip and Deborah Cox (PDC) disposed of their entire shareholding in David Williams IFA Holdings Ltd (DWIFA) and claimed Entrepreneurs’ Relief, now known as Business Asset Disposal Relief (BADR) in their tax returns. 

  • Before the disposal, PDC had gifted shares to other shareholders reducing their ownership to approximately 4.143% each, below the required 5% each.
  • HMRC issued notices of enquiry, prompting PDC to concede that the claim was invalid.
  • HMRC issued Closure notices and Penalty notices, stating that PDC had been Careless and was liable to penalties amounting to 15% of the Potential Lost Revenue (PLR). HMRC refused to suspend the penalty.
  • PDC Appealed to the First Tier Tribunal (FTT), claiming that they had taken reasonable care by relying on the professional advice provided to DWIFA and that the penalty should be suspended.

The FTT found that PDC did not take reasonable care:

  • PDC took advice on the initial proposed disposal of shares in DWIFA, at which point their shareholdings exceeded 6% each, meeting the ER requirements.
  • It was later decided that PDC would gift shares before the disposal.
  • PDC did not seek further advice after gifting shares, which resulted in them failing to meet the 5% holding requirement. Instead, PDC relied on advice received by other shareholders, despite differing circumstances.
  • PDC failed to take reasonable care by not seeking professional advice after changing their shareholdings and they completed their tax returns based on outdated advice.
  • Mr Cox was a Financial Adviser and both he and Deborah Cox were company directors. They did not behave as prudent and reasonable taxpayers and their errors were not simple oversights. 

The FTT also found that the penalty could not be suspended:

  • HMRC may exercise its discretion to suspend penalties for careless inaccuracy. HMRC may only do so if it “would help the person [liable to the penalty] to avoid becoming liable to future penalties… for careless inaccuracy.”
  • There must be some connection between the careless error and the source of the error and not none at all. A ‘one-off' error would not normally be suitable for a suspended penalty.
  • PDC’s inaccuracy was a ‘one-off’ event and precluded suspension. 

The FTT dismissed the appeal. 

Useful guides on this topic 

Business Asset Disposal Relief (Entrepreneurs' Relief): Disposal of shares or securities in a company
When can you claim Business Asset Disposal Relief (BADR) on a share sale? What is the rate of Business Asset Disposal Relief (Entrepreneurs' Relief)? How do you claim BADR? What case law is there on BADR?

Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights? 

Penalties: SA late filing, payment, notification & error
Self Assessment (SA) tax penalties: what penalties are due for outstanding tax returns? What penalties are due for late payment? Are there special rules for delays affecting victims of the Post Office Horizon scandal and due to COVID-19? 

Client Briefing: How to avoid penalties for carelessness?
Client briefing: how do you avoid penalties for carelessness when preparing your tax return?

How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External Links 

Philip Cox and Deborah Cox v HMRC [2024] TC09198