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Recording The Tax Routes Not Taken

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Julie Butler - Expert Author

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4 June 2013

It has been said that “hindsight is wonderful”. There are clear examples of this in the world of professional negligence claims. Circumstances change and different events happen and strong, robust, original tax advice can have problems as a result. It is important therefore to record the tax drivers around the advice, eg inheritance tax (IHT) was the key focus not capital gains tax (CGT).

Important points to record in writing and copy the client into are:

-     Instructions from the client

-     Clear notes of all meetings and conversation

-     Advice re risks

One of the essential points to record is the “tax routes not taken”.

As farming is a specialist industry many advisers know what “not to do” or have a firm view of what they consider is an appropriate course. As a result they often overlook to explain alternative tax planning routes that are dismissed. At some point in the future this can backfire with extra tax being charged and blame being apportioned.

Also some newly appointed advisers can be very aggressive in their new role, being very critical of advice having been undertaken in one set of circumstances when other circumstances give another direction.

Contract Farming Agreement v Partnership

Farmer Brown, a widower, has farmed Hilltop Farm all his life but has become frail. The decision is made to enter into a robust contract farming arrangement with his neighbour Mr Strong. Mr Steer is his long standing accountant. All alternatives are considered including a Partnership Agreement with Mr Strong and possibly his son Rory but Farmer Brown is very against this suggestion for reasons of control and worries over liability. Farmer Brown suffers very badly from dementia and so his son Rory takes control. He sacks Mr Steer and appoints an urban accountant with no farm experience for a lower fee, a saving of £300 per annum.

When Farmer Brown dies three years after Mr Steer’s sacking, HMRC fight that the contract farming agreement is a “sham” and deny BPR on the let cottages £500,000 and APR on the farmhouse £800,000. The IHT bill is £1.3m @ 40% = £520,000. APR is allowed on the farmland. Rory then sues Mr Steer for failing to advise on a partnership with Mr Strong.

The weakness of the BPR and APR claim is that the new accountant did not produce accounts which showed the true entries of the arrangements.

•         The contract farming agreement was allowed to become a sham under Rory

•         Protection was not put in place by the new advisers

Obviously Mr Steer would have made sure that the contract farming agreement was robust and the fiduciary angle with dementia was taken care of.

Although Mr Steer keeps very good notes of all calls re the contract farming and advice re robust involvement, Mr Steer fails to record the telephone calls where Farmer Brown rants and raves about not going into partnership with Mr Strong and not going into partnership with Rory. The telephone calls are long and some of the contents are about personal grudges. As this was the “tax route not taken” Mr Steer fails to produce a report on the negatives and reasoning. Farmer Brown has died – where is the record?

Obviously Mr Steer would have achieved maximum IHT relief as with his experience all the protection would have been in place.

A good professional indemnity insurance lawyer would be able to push away the claim BUT matters would be made easier if there was clear evidence of the advice given of “tax routes not taken” as some opportunist and aggressive new adviser might try to exploit such opportunities.

Practical Point

The quantum of potential claims in farming are high, and the result could be estates have to sell off part of the farm to pay the IHT. Protection is needed even (or more importantly) when the client has changed advisers. In IHT cases the “best witness will be dead” and files must therefore be robust, complete and provide good evidence.


About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email; j.butler@butler-co.co.uk, Website; www.butler-co.co.uk

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis).



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Article Published/Sorted/Amended on Scopulus 2013-11-19 09:24:18 in Tax Articles

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