Taxpayers may sometimes be probed by HM Revenue & Customs (HMRC) about their actions or ‘behaviour’ in certain circumstances, with a view to HMRC seeking to determine whether the taxpayer has taken ‘reasonable care’, or has committed a ‘careless’ or ‘deliberate’ tax offence.
Example 1 – Under-declared income
HMRC enquires into Eric’s self-assessment return. HMRC discovers that Eric’s income from self-employment has been under-declared, resulting in a loss of income tax.
HMRC initially seek to establish whether Eric has made a careless error, or has deliberately under-declared his taxable income.
Some commentators have reported that HMRC seem to be increasingly arguing that taxpayer errors are deliberate, when in reality the errors are merely careless at worse. If those reports are correct, it is a disturbing trend.
A deliberate tax offence is a serious matter, which in some cases could lead to prosecution. Taxpayers who have committed a deliberate tax offence, or are accused by HMRC of doing so, should therefore seek expert professional advice without delay. However, for the purposes of this article, it is assumed that the taxpayer’s offence is careless (i.e. he or she has not taken reasonable care, but the offence was not deliberate).
Nevertheless, what if HMRC considers that the taxpayer’s behaviour may have been deliberate? Even if the offence is not serious enough for HMRC to consider prosecution, it is important that ‘non-deliberate’ taxpayers stand their ground, and do not allow HMRC to treat their behaviour as deliberate, for various reasons.
That’s a penalty!
Returning to the above example, HMRC decided to charge Eric a penalty in respect of the under-declared income (under FA 2007, Sch 24 (‘Penalties for errors’)). However, in calculating the level of penalty, HMRC will need to determine whether Eric’s behaviour was careless or deliberate.
The standard maximum penalty for a ‘careless’ error is 30% of the additional tax. By contrast, the maximum penalty is 70% for a ‘deliberate but not concealed’ error, or 100% if the error is ‘deliberate and concealed’ (or much higher in some cases, i.e. for tax return errors involving offshore matters or relevant offshore asset moves concerning certain territories; however, for the purposes of this article, it is assumed that standard penalty rates apply in each case).
There are other circumstances in which a taxpayer’s actions can influence the level of penalty imposed by HMRC, in respect of a different tax offence.
Example 2 – Failure to notify
Erika, who does not file self-assessment returns, receives rental income from a buy-to-let property.
Unfortunately, she is several years late in notifying HMRC about this income tax liability (the normal time limit to notify is six months after the end of the tax year in which Erika first became liable to tax on the income).
The maximum penalty for failing to notify HMRC of this tax liability (under FA 2008, Sch 41) varies from 30% if the failure was ‘non-deliberate’, to 70% if deliberate but not concealed (or 100% if the failure was deliberate and concealed, and as mentioned even higher in certain cases involving offshore matters or relevant offshore asset moves).
Reopening earlier years
Aside from penalties, there are other reasons why a ‘careless’ taxpayer should not accept an allegation by HMRC that their behaviour was ‘deliberate’ in relation to certain tax offences.
For example, if a loss of income tax or capital gains tax was brought about by the taxpayer’s careless behaviour, HMRC can assess the lost tax up to six years after the end of the tax year to which it relates (instead of the ordinary time limit of four years). However, if the loss of tax was brought about deliberately, the time limit is increased to 20 years (TMA 1970, s 36(1A)(a)).
Going back to Example 1, HMRC will probably try to ascertain whether Eric’s under-declared income was a ‘one-off’, or whether the error was repeated in earlier tax years. In the latter case, by contending that the error was deliberate, HMRC has the opportunity to go back 20 years, as opposed to six years if the error was careless.
In Cardazzone t/a Mediterranean Ices v Revenue & Customs  UKFTT 357 (TC), HMRC enquired into the taxpayer’s self-assessment return for 2005/06, and concluded that his income from self-employment had been under-declared. HMRC then applied the alleged under-declaration to the two years before and two years after 2005/06 (relying on the ‘presumption of continuity’ principle established in Jonas v Bamford 1973 51 TC 1). The taxpayer appealed.
The taxpayer’s accounts did contain some errors. However, the First-tier Tribunal considered that the taxpayer’s errors were typical of the sort of one-off errors often found in the accounts of small businesses. The evidence did not lead to a ‘presumption of continuity’, such that errors in one year could be applied to other years. However, even if the presumption of continuity did apply, the tribunal found that the taxpayer’s errors were not deliberate. Thus the time limits for HMRC’s assessments in respect of 2003/04 and 2004/05 could not be extended to 20 years (by TMA 1970, s 36), and would be out of time. The tribunal held that the taxpayer did not under-declare his takings for 2005/06, and his appeal against HMRC’s assessments and closure notice was allowed.
In Example 2, Erika was several years late in notifying HMRC that she was liable to tax on her rental income. Whilst the level of penalties for late notification broadly depends on whether (and if so, to what extent) her actions were deliberate, HMRC can also go back up to 20 tax years to assess the additional tax, rather than the normal four years; it does not matter whether the failure to notify HMRC was deliberate or non-deliberate (TMA 1970, s 36(1A)(b)).
That’s a shame
Another example where it can be important to distinguish between deliberate and non-deliberate behaviour is that HMRC have powers to ‘name and shame’ deliberate tax defaulters (FA 2009, s 94). A ‘deliberate defaulter’ is broadly a person who incurs a penalty for certain tax offences, such as a deliberate error in a tax return (as in Example 1), or deliberately failing to notify HMRC of a tax liability (as in Example 2).
HMRC may publish information about a deliberate tax defaulter if HMRC has carried out an investigation and the person has been charged one or more penalties for deliberate defaults, where those penalties involve tax of more than £25,000. There is no right of appeal against an HMRC decision to publish information about the person. However, the defaulter’s information will not be published if the person receives the maximum reduction of the penalties by HMRC for fully disclosing details of the defaults.
HMRC’s powers under FA 2009, s 94 can be an unpleasant ‘sting in the tail’ at the end of an HMRC investigation, particularly if the taxpayer does not accept that there has been any deliberate wrongdoing in the first place.
In Mr and Mrs B v Revenue & Customs  UKFTT 256 (TC), the taxpayers jointly purchased a property. The stamp duty land tax (SDLT) return was subject to an enquiry by HMRC, which resulted in SDLT of £30,550 being paid. HMRC also considered that a penalty of over £16,000 was due for deliberate inaccuracy. The taxpayers did not consider that they had deliberately evaded tax, but subsequently paid HMRC’s penalty assessments. HMRC notified the taxpayers that their appeal against the penalty assessments was settled by agreement.
Subsequently, HMRC informed the taxpayers that they were considering the publication of the taxpayers’ names under the ‘deliberate defaulters’ provisions, and invited representations as to why this should not happen. The taxpayers’ reply stated that they would not have settled the penalty appeal if they had appreciated that there was no right of appeal against HMRC’s decision to publish their details. The taxpayers applied for permission to make a late appeal against the penalties. The tribunal considered that if there was a contract settlement, it would have no jurisdiction to consider the taxpayers’ application. The tribunal found that, as a matter of contract law, the taxpayers and HMRC had settled the matter. The tribunal therefore had no jurisdiction to go behind the contract, and the taxpayers’ application was refused.
It should also be noted that deliberate offenders will be subject to monitoring by HMRC in relation to their tax affairs, typically for between two and five years, under HMRC’s ‘Managing serious defaulters programme’ (see www.gov.uk/managing-serious-defaulters-msd-programme).
It will generally be for HMRC to show that (for example) a tax return error is deliberate (or careless, for that matter), or that failure to notify a tax liability was deliberate. In its guidance on time limits for raising assessments (in its Compliance Handbook manual, at CH54300), HMRC states: “the onus of proof of careless or deliberate behaviour is on HMRC” and that the standard of proof is on the ‘balance of probabilities’. The guidance adds: “the quality of evidence should be higher for the more serious behaviour.”
Taxpayers who have committed a ‘non-deliberate’ tax offence should resist any accusation by HMRC that their behaviour was ‘deliberate’, and obtain expert professional advice.
The above article was first published by Tax Insider (www.taxinsider.co.uk).