Our weekly spotlight, will look at the issues you may be facing and what action you need to take.
Any interaction with HMRC can be a daunting prospect.
Knowing how to respond and even just understanding their terminology can be a
John and our Tax Resolutions experts are on hand to offer you top tips, break
down definitions, review the outcome of recent cases and give general advice,
to help you deal with enquiries from HMRC.
Click below to find out more on the issues that our clients are commonly facing.
Penalties and discovery assessments
Under the discovery provisions, HMRC can issue an assessment up to four, six or 20 years previously, depending on the behaviour that led to the under-assessment. That does not mean, however, that a year drops out of scope each time a new tax year starts.
If the irregularity relates to an offshore matter (which is extremely widely defined), the assessment clock effectively stops for four years at 6 April 2017, under Requirement to Correct provisions in Schedule 18, Finance (No. 2) Act 2017. This means that, if a matter could, in theory, be assessed by HMRC as at 6 April 2017, then it can still be assessed until 5 April 2021.
Also significant is that Finance Act 2019 inserted a new section 36A into the Taxes Management Act 1970, which introduced a new 12 year assessment time limit for offshore issues no matter what the taxpayer’s behaviour.
Offshore tax matters can be extremely complex. Clients may now be faced with questions and assessments from HMRC for longer periods than in the past, long after the period for which relevant records must be kept (which has not been extended) has passed. It is therefore important that clients with offshore affairs, retain appropriate records if future HMRC challenges are to be resisted as appropriate.
HMRC continues to issue letters to taxpayers with apparent offshore
interests alongside a document headed ‘Certificate of tax position – To
complete and return to HMRC’ relating to offshore income, gains and
Clients should check their tax position thoroughly and satisfy themselves that,
to the best of their knowledge and belief, their tax affairs are in order. The
tax rules in relation to offshore income and gains are complex and so further
exploration might be required, not least because the certificate includes the
warning that choosing to complete a false certificate is a criminal offence
which can result in investigation and prosecution.
There is also a problem if there is nothing to declare in that, with
some slight variation seen in different cases, the wording states something
“I have declared all my worldwide
income, assets and gains that are taxable in the UK”.
The UK tax return
does not require assets to be declared, so the wording is flawed. Nor does the
certificate include important safeguards such as a defined period of time to
which it relates.
If, after careful review, there is thought to be nothing to correct, a
bespoke response can be sent to HMRC rather than the certificate being
completed. The certificate is not statutory so there is no requirement to
complete it. Therefore, an appropriately worded letter can be sent in its
If there is an issue to resolve,
careful consideration of the client’s situation needs to be made to establish
the best disclosure method. The rules surrounding disclosures of
offshore income and gains as well as penalty considerations are ever more
complicated given the Requirement to Correct legislation. Advisors should
therefore remember the fundamental principles of professional competence and
due care as set out in Professional Conduct in Relation to Taxation and obtain appropriate assistance from a
suitably qualified specialist if the agent does not have the necessary
expertise to handle a disclosure themselves.
One reason for the misconception is that the definition of ‘tax position’ includes past, present and future tax liabilities and the legislation allows an enquiry ‘of any kind’ to be carried out. That is not, however, carte blanche authority allowing all information notices to ask about past tax years or for unlimited investigation, as there are clearly defined restrictions.
Schedule 36 also includes restrictions which provide for certain conditions to have been met before an information notice can be issued at all, if a tax return has been submitted.
Nothing at all can therefore be asked of the taxpayer unless a valid enquiry has been opened and no closure notice has been issued.
There are various instances in tax legislation where ‘reasonable excuse’ is a way out of a tax problem, for example having a reasonable excuse for failing to notify HMRC of chargeability to tax.
HMRC has historically been very difficult when faced with reasonable excuse claims, often arguing that the circumstances need to be exceptional or outside taxpayer's control before reasonable excuse will be agreed.
There are, however, decided cases which go against HMRC’s thinking. For example, in Anthony Leachman (TCO1125):
“HMRC argues, wrongly, that before a person can establish a ‘reasonable excuse’ it must be established that there are exceptional circumstances or some exceptional event giving rise to the default. That is not what Parliament has laid down. Parliament has used the ordinary English words ‘reasonable excuse’ which are in everyday use and must be given their normal and natural meaning.”
Advisors should not be afraid to challenge HMRC if they think their client does have a reasonable excuse, as the name suggests, the excuse only has to be ‘reasonable’, nothing more.
When HMRC discovers that tax has been under-assessed for a past tax year they can, assuming the relevant requirements are met, issue a discovery assessment. If the underpayment arose because of careless or deliberate behaviour HMRC can look back and assess up to the past six or 20 years respectively.
Any such behaviour has to be careless or deliberate behaviour by the taxpayer 'or a person acting on his behalf'. This means that the actions of a tax agent can be taken into account. For example, if the agent was provided with all relevant data but omitted something from a tax return such that his action was careless, HMRC could issue a discovery assessment up to six years later to recover the associated tax once the error had been unearthed.
The importance of this point is that is does not apply to penalties. For a penalty to be validly levied for careless (or deliberate) inaccuracies, the behaviour must be the taxpayer’s, not the agent acting on his or her behalf. In the above example, therefore, whilst HMRC may be able to issue a discovery assessment, there should be no penalty for the agent’s carelessness, so do not be afraid to challenge HMRC in this respect. That said, be aware of the possible HMRC challenge that the taxpayer may not have reviewed the tax return properly, after it had been prepared by the agent, before signing it.
It is impossible to be prescriptive by listing what might be acceptable as a reasonable excuse; each case depends on its own merits and circumstances. The recent case of
Perrin  UKUT 156, however, provided a useful analysis of the correct test for ‘reasonable excuse’.
“… the issue is whether the particular taxpayer has a reasonable excuse, the experience, knowledge and other attributes of the particular taxpayer should be taken into account, as well as the situation in which that taxpayer was at the relevant time.”
“… the FTT must assess whether those facts… are sufficient to amount to a reasonable excuse, judged objectively.”
“… 'I did not think it was necessary to file a return’… the FTT may accept that the taxpayer did indeed genuinely and honestly hold the belief that he/she asserts; however that fact on its own is not enough. The FTT must still reach a decision as to whether that belief, in all the circumstances, was enough to amount to a reasonable excuse. So a taxpayer who was well used to filing annual self-assessment returns but was told by a friend one year in the pub that the annual filing requirement had been abolished might persuade a tribunal that he honestly and genuinely believed he was not required to file a return, but he would be unlikely to persuade it that the belief was objectively a reasonable one which could give rise to a reasonable excuse.”
In summary, advisors should consider the taxpayer’s personal abilities, the specific circumstances and whether, viewed objectively, his/her actions or inaction were reasonable.
At the end of an enquiry the issue of penalties often rears its head. HMRC inspectors may then paint a picture of a careless taxpayer to try and justify a penalty. It is, however, not sufficient to depict the taxpayer as slapdash in general terms, for example having a lax attitude to paperwork or signing contracts, as the carelessness must be more focused. The penalty is for an incorrect tax return, hence the only carelessness that is relevant must have taken place before or on submission of that return, for example by carelessly failing to include a source of income or to review the return properly.
In Anthony Bayliss (TCO5251) the Judge stated that:
“We need to focus on the error in the return and whether the appellant was negligent in making that error.”
The point was reiterated in John Hicks (TCO6301):
"The issue is not whether Mr Hicks… was careless in general or in the abstract, but whether [the] failure to take reasonable care brought about the insufficiency in the return."
It is clear that any lack of care must relate to the tax return itself, not a wider, generic lack of care. Lack of care during the enquiry, for example submitting a reply to an information request with incomplete or inaccurate data, cannot lead to a penalty, although it may affect the level of penalty if one is due in the first place.
Finally, always remember that the burden of demonstrating carelessness (or worse) is on HMRC, even though HMRC often ask the taxpayer to explain why he or she was not careless. Whilst some may argue that any error on a tax return is prima facie evidence of carelessness, it is no more than that; the burden of proving careless behaviour (to the standard of balance of probabilities) is on HMRC. There may, therefore, be some work to be done in making sure that HMRC is apprised of the rules and aware of the burden.
The introduction of self-assessment more than 20 years ago enabled HMRC to conduct random enquiries and led to advisors assuming in many cases that clients had been chosen for enquiry at random. The reality was somewhat different in that HMRC had usually identified what it perceived as a risk of the declared tax position being incorrect.
Advisors would not be told what that risk was so that nothing could be taken for granted.
Nowadays, at the start of an enquiry, HMRC should state the specific concerns identified in the case in question.
The HMRC manuals state that:
"wherever possible you should also explain what risks have been identified in order to establish openness and early dialogue with the taxpayer.”
The manuals also recognise that:
“at the start of your compliance check you must tell the person the risk or reason for your check. It may be that the person can explain and offer evidence to satisfy the risk identified.”
Similarly, when asking for information and documents as part of the enquiry:
“you must provide the person with an explanation of why you need these.Explaining why you require certain information will help the person to provide it [and] prevent requests for unnecessary records.”
The overriding message is that advisors should not be afraid to ask questions of HMRC if it is not clear at the outset why an enquiry has been opened, or data has been requested.
This will help manage the case by focusing on the perceived risks rather than leaving the agent in the dark.
For an enquiry to be valid, notice of enquiry must be given. By definition, nothing is ‘given’ until the recipient has received it hence, for an enquiry to be valid, the notice of enquiry must be received before the enquiry deadline. Numerous examples have been seen over the years where the enquiry letter was dated shortly before the deadline but was not received until after the window closed. This does not then constitute a valid enquiry so should be challenged immediately and robustly by the advisor.
So when is the notice received? In many cases this will be known as a matter of fact; many advisors may even date stamp it on receipt. If, however, the receipt date is not recorded, a date is then determined using section 7 of the Interpretation Act 1978 which states that service of the notice is deemed at the time at which the notice would be delivered in the ‘ordinary course of post.
HMRC’s guidance manual at EM1506 states that the second class post takes up to three working days to be delivered and first class post takes 1 working day and that the term ‘working day’ includes Saturdays. HMRC’s manuals are, however, not always right. In the case of Wing Hung Lai v Bale  STC (SCD) 238, it was noted that a practice direction from the Queen's Bench Division issued on 8 March 1985 provides, inter alia, that delivery in the ordinary course of post is to be taken to have been effected in the case of second class mail on the fourth working day after posting and that ‘working days’ only include Monday to Friday, excluding bank holidays.
The dangers of not realising that a valid enquiry has not been opened can be significant. For example, if the advisor does not realise the asserted enquiry is invalid and proceeds to supply data to HMRC that is damaging to the client, the possibility of a claim on the advisor’s Professional Indemnity Insurance is obvious.
Individuals who are offered immunity from prosecution for
tax fraud should seriously consider the consequences of their responses even if
Reasons not to accept the CDF offer are listed below.
On all occasions, the circumstances of any tax underpayment
should be rigidly scrutinised by an experienced specialist who is skilled in
tax investigations and tax resolutions work, and well versed in COP9 work.
Mr & Mrs B were written to by HMRC and offered the opportunity to make a disclosure under the CDF. Their high street accountant was immediately fearful and said that they must admit tax fraud, and accept the offer. Crowe’s Tax Resolutions team took up the case and spoke to the husband and wife about their circumstances. It transpired that they were involved in a multi-million pound overseas property development that received ‘unhelpful’ press coverage. Most of the development was, however, financed through bank borrowings with relatively modest personal investments. It transpired that there were issues connected with personal tax residence which required review but no evidence whatsoever of any mischief (deliberate or otherwise). On our advice the offer of CDF was declined, and a traditional review of potential tax issues ensued. A small civil settlement was agreed and the professional costs were much reduced.
Historically, you would say to a client that the CDF is only offered in the most serious cases where HMRC stand in possession of plausible evidence. Sadly, in more recent times HMRC has lowered the bar and the CDF is offered in far more cases involving tax avoidance, than tax evasion. Investigation checks can be less assiduous than in previous years, and the quality of evidence can be poor depending on the source.
Conversely, the CDF or COP9 may be viewed as an opportunity to be grasped with both hands for those who have committed deliberate acts with a view to evading taxes. This is usually not something which requires an individual to spend much time considering. If you have done something with deliberate intent, you know that you have done so.
In such circumstances, the issue of the COP9 protocol with the offer of the facility should be viewed as a panacea. Clearly when dealing with actual tax fraud or tax evasion, an individual’s liberty will be the first consideration and securing a civil outcome (writing a cheque) is paramount. The Contractual Disclosure Facility is not to be scorned in such serious circumstances!
HMRC sometimes seeks a prosecution in tax fraud cases but its preferred method of dealing with fraud is very different.
HMRC normally issues Code of Practice 9 (COP 9) for 'investigations where we suspect tax fraud' and invites the taxpayer to participate in the Contractual Disclosure Facility (CDF), under which the taxpayer is asked to volunteer a full disclosure of all tax irregularities. On the face of it, this is a Government department accusing a citizen of fraud without having to prove it and then asking for a confession. However, in the right circumstances, COP 9 and the CDF is a very good place to be.
In summary, in exchange for the taxpayer making a full disclosure of all irregularities, HMRC undertakes not to pursue a criminal investigation into the taxpayer’s conduct. If the taxpayer has deliberately got his or her tax returns wrong, the CDF is a good way to resolve the problem. Such cases are sensitive and complex so specialist advice should be taken at an early stage to help navigate through the CDF process successfully and achieve a positive outcome.
That said, it should not be used in inappropriate circumstances, for example if the taxpayer genuinely believes he or she has not been fraudulent. More on that next week.