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.
It is generally accepted that taxpayers who have knowingly declared too little should face some sort of penalty, but is the current penalty structure right, not only in the moral context but also whether it is working against HMRC?
At present, the minimum penalty applied to a deliberately incorrect tax return is 30-55% of the tax, depending on whether the disclosure relates to domestic or offshore matters and any prompting by HMRC, being the base penalty plus an extra 10% added by HMRC’s interpretation of the mitigation rules where there has been a delay in coming forward. Other significant penalties apply to some tax years, even if the error was not deliberate, if the disclosure involves an offshore matter, starting at 200% of the tax, with a minimum penalty of 100%, usually 150-160% if the matter was prompted by HMRC, thereby at least doubling the tax bill.
HMRC has a long-standing desire to spur taxpayers into action; there are currently many different ‘nudge’ letters in circulation seeking to encourage taxpayers to double check their past affairs and make a disclosure of any problems uncovered, for example. These letters count as prompts, so the higher end of the penalty range applies. Could the threat of a huge penalty on top of the tax bill be having the opposite effect, and actually discouraging people from coming forward? The fear brought on by the sheer weight of the financial burden of paying the tax, plus interest, plus an extra 30-55%, 100%, 200% of the tax is very real; anecdotal evidence from initial discussions with potential clients suggests that this is indeed deterring disclosures.
HMRC has had past successes with disclosure facilities which provided a smooth process, tied up relatively little staff time at HMRC, initially looked back 10 years instead of the usual maximum of 20, and offered a fixed penalty of 10- 20%; in summary, an efficient and stress free route to navigate back to full tax compliance. The last of the incentivised facilities, the Liechtenstein Disclosure Facility, closed over five years ago. In the current circumstances, with HMRC under pressure to replenish the Exchequer’s coffers, perhaps it is time for something similarly radical to encourage voluntary disclosures.
HMRC has far more data available than ever before that can be used to unearth past tax irregularities but, without a managed disclosure facility, it could be very labour intensive for HMRC to investigate properly at a time when staff resources are significantly lower than historically, and it could take many years to reach a settlement. A properly structured disclosure facility would involve little work for HMRC and quick resolutions.
Such a general disclosure facility should encourage people to come forward en masse to make a full disclosure; at present, the high penalties are discouraging some people from doing this. Nobody would complain if significantly higher penalties were levied for future tax errors, having been warned that such punishments would apply, since there would be no excuse. However, encouraging disclosure of past irregularities needs the right balance between carrot and stick, and that does not appear to be the case at the moment.
Click below to find out more on the issues that our clients are commonly facing.
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.
HMRC is planning to send round two new batches of ‘nudge’ (or ‘one to many’ as they prefer to call them these days) letters shortly. HMRC has confirmed that these will be targeted, rather than scattergun, so:
The plan is for these nudge letters to go out from mid-October to the end of November (and a potential second batch early next year). Anyone who has not declared such items should likely make a disclosure, with the help of a specialist, using a formal disclosure mechanism or, with the protection of the Contractual Disclosure Facility (CDF) using Code of Practice 9 (COP 9)
Last week we looked at HMRC’s recently published Measuring tax gaps 2020 edition and how the figures are split between taxpayers of different sizes. The report also gives a breakdown of the lost tax according to behaviours. Carelessness makes up 18% of the tax gap (£5.5 billion), which can be overcome with improved standards of advice and additional HMRC support.
Tax evasion makes up 15% of the tax gap (estimated at £4.6 billion in 2018/19). It would be sensible for HMRC to put maximum focus on tax evaders for a number of reasons.
The exchequer must use the findings of this report to put appropriate measures in place if it is to claw back much needed revenues, particularly in light of huge spending on COVID-19 related support packages.
HMRC has recently published its Measuring tax gaps 2020 edition which provides interesting statistics of estimated tax lost in 2018/19. The figures show that £31 billion of all theoretical tax and duties has not been paid.
HMRC has collated this data on annual basis since 2005/06 to help shape its policies and strategies. As an example, HMRC put huge focus on closing down tax avoidance schemes in recent years, which appears to have paid off. In 2018/19, the lost tax through avoidance was £1.7 billion (5% of the tax gap), whereas it was £3.7 billion (11.5% of the tax gap) in 2005/06.
The statistics show the amounts lost by taxpayer group as follows:
At first glance, it is surprising that those classed as wealthy (income greater that £200,000 or with assets worth more than £2 million) contributed the least to the tax gap, despite each individual in this group presumably owing more tax than other individuals. Perhaps one of the reasons for this is that wealthy individuals have the means to seek out good quality advisors and obtain advice on a timely basis. HMRC is currently looking at ways to bring standards up across the board through its current consultation Raising standards in the tax advice market. This is a very positive step, because tax is complicated and it is only fair that those who pay for a service should be able to rely on the advice given; the Tax Resolutions team often helps clients who have relied on their advisors but received incorrect advice and, unfortunately, it is the taxpayer who must resolve past issues with HMRC at additional expense.
HMRC also has a Wealthy/ Mid-Sized Business Compliance unit, which was expanded in 2013 to monitor affluent taxpayers, particularly given the thinking at the time that wealthy members of society are more likely to participate in tax avoidance schemes. This additional support and scrutiny appears to have also helped mid-sized businesses “get it right” as this group has contributed less to the tax gap than small and large businesses.
Looking at the figures, HMRC needs to do more to support small businesses, which account for 43% of the tax gap. Hopefully we will see the launch of a specialist team dedicated to helping sole traders and small companies navigate the requirements properly.
HMRC has announced that it has made its first arrest in connection with Coronavirus-related fraud, a clear demonstration that it intends to act quickly and decisively to recoup monies wrongly claimed or used.
More than £27 billion has been claimed through the furlough scheme which HMRC believes is open to abuse by some employers, for example if the furlough monies were not passed in full to employees or they continued to work. HMRC is understandably very keen to claw back the funds and will not need to rely on labour intensive criminal investigations to do so. The current Finance Bill, expected to receive Royal Assent this month, provides powers to claw back the payments by creating a tax at the rate of 100% of the misused funds. This applies to any such funds, not just where there has been deliberate abuse, so will also cover genuine errors. A penalty of up to 100% of the tax can also be applied if employers do not notify HMRC of their liability to this new tax, potentially doubling the bill to be paid to HMRC. The legislation also includes powers to impose the penalty on company directors personally in certain circumstances.
The announcement of this first arrest shows that HMRC has the bit firmly between its teeth and a spike in activity can be expected once the Finance Bill is enacted later this month; employers should therefore take appropriate advice and check their filed claims now (read more on HMRC’s powers). Given the need for the government to replenish its coffers we believe there will be a big spike in HMRC activity across the spectrum of enquiries and investigations generally, so taxpayers and businesses cannot be complacent even if there are no COVID-related problems.
HMRC is often reluctant to allow reductions in penalties where the taxpayer, or his representative, is perceived to have been uncooperative during an enquiry which led to tax adjustments. In some case, however, it is worth delving a little deeper to determine the reasons for any such belligerence.
In the case of Gemma Daniels HMRC restricted the penalty deduction in part because of the “obstreperous approach from the agent”. HMRC offered only 10% of the available reduction, out of a maximum of 30%, because of the agent’s perceived attitude. The Tribunal disagreed and stated that the HMRC inspector’s “hard-nosed attitude soured his relationship with [the agent] from the outset” and that the inspector’s “rather unreasonable approach…soured the relationship from the beginning”. In other words, HMRC caused, or at least contributed to, the lack of cooperation.
Additionally, the Tribunal also praised the agent by referring to his “robust advocacy and support of his client’s case”. Perhaps a reminder to us all that standing up to HMRC when you believe that the inspector is wrong is not a lack of cooperation, it should be applauded.
Draft legislation boosting HMRC’s information gathering powers provides for a new Financial Institution Notice (FIN) that will enable HMRC to request information from a Financial Institution (FI) about specific taxpayers, without the need to seek outside approval. Currently HMRC requires either the agreement of the taxpayer or the tax tribunal before such a notice can be issued.
At the weekend the Financial Times included an article on this in which HMRC is quoted as saying “The new power will contain numerous safeguards…and the power can only be used in specific circumstances where the information is reasonably required [to check] the taxpayer’s tax position”. HMRC has not provided the newspaper with an entirely correct picture in this respect, a more accurate quote being that “the power can only be used in specific circumstances where a single officer of HMRC decides that the information is reasonably required to check the taxpayer’s tax position”.
That is the real point, there is no scrutiny at either end. The proposal is that a FIN can be issued without approval from the taxpayer or tax tribunal and, once issued, it cannot be appealed, so there is to be no oversight of the validity of the decision to issue a FIN in the first place and no right to examine and check that validity after it has been issued.
If one party – not HMRC as a body, but an individual officer of HMRC - has 100% of the power to decide whether a request is reasonable or not, how can that be described as a safeguard? It is true that the HMRC officer must be, or have the approval of, an 'authorised officer' but that is then defined simply as “an officer…who is, or is a member of a class of officers who are, authorised by the Commissioners [of HMRC] for the purpose of that provision”. In other words, an authorised officer is just an officer that HMRC has authorised.
As I noted in the same FT article,“The tax tribunal is a crucial safeguard to ensure proper scrutiny…it is worrying HMRC might bypass this system…in some instances without the taxpayer knowing”.
Assuming this proposal becomes law next year, HMRC will have unfettered access to personal financial matters and banks, credit card issuers and some trust management businesses, amongst others, both in the UK and overseas, can expect a lot of new activity. HMRC’s efforts to combat tax evasion are to be applauded but the draft legislation ought to be updated to include the right of challenge to ensure the powers are used appropriately and not for 'fishing'. If HMRC has confidence in its officers’ decisions it should have no objection to appropriate oversight of them by the independent tax tribunal.
In enquiry cases, HMRC regularly requests a long list of documents and states openly that the documents are ‘statutory records’, hence the request cannot be appealed against. Very often, however, the records are nothing of the sort.
Statutory records are, to paraphrase the legislation, those records which a person is required to keep under the Taxes Acts. For tax return (and therefore enquiry) purposes, the Taxes Management Act only requires a person to keep 'such records as may be requisite for the purposes of enabling him to make and deliver a correct and complete return'.
Many records requested by HMRC were not required to prepare an accurate tax return. For example, bank statements may not be needed if a certificate of bank interest is held, rental contracts may not be needed if an agent manages all rental properties, and lists of properties, bank accounts or shares held are clearly not statutory records. The tax Tribunal has confirmed that, in relation to information notices, the phrase statutory records must be construed narrowly.
It should also be remembered that, once the period for which the legislation requires records to be retained has expired, any records that were statutory records cease to be so. That could be quite short period under the Taxes Management Act.
Advisors should be aware of what the legislation actually requires and should not be afraid to challenge HMRC’s assertion.
We are regularly seeing enquiry cases where HMRC is asking about the valuation of goodwill acquired many years earlier. HMRC asserts that such questions are reasonable because a corporation tax deduction is taken for goodwill amortisation in the year of enquiry.
If that is right, HMRC would be able to challenge the original goodwill valuation multiple times by simply opening self-assessment enquiries year after year, which is clearly not allowed. While the goodwill has an impact on later tax returns, questions on its value required an enquiry into the tax return covering the year of its acquisition, otherwise the figures in that return became final on the closure of the enquiry window for that year.
Paragraph 88, Schedule 18 FA 1998 confirms that an amount stated in a company tax return (which includes the company’s accounts) for a year which may affect a later year’s return, is final in relation to the later year. Thus, the figure for goodwill included in a past return, which can no longer be altered is, to quote the legislation, “conclusively determined” in relation to the effect on the later return.
HMRC’s Enquiry Manual clearly supports this position.
“Para88 restricts the circumstances in which a CTSA enquiry can be made. The intention is to prevent enquiries being made into amounts which have become final (either following an enquiry or by the passage of time) for earlier years, and which are carried forward to a later year. It would be unfair if, having properly achieved finality in respect of these amounts, the company were to be exposed to the possibility of an enquiry simply because they were repeated in a later year’s return. You should not therefore make enquiries into items which merely repeat amounts which have featured in earlier returns”.
Such a safeguard in the self-assessment enquiry powers is logical and should be respected.
an increasing number of enquiry cases, HMRC is asking questions about losses
brought forward, presumably because these reduce the tax liability in the year
the losses are utilised. However, the legislation only allows an enquiry into a
tax return and for information notices to be issued under the auspices of an
enquiry in relation to the chargeable period. The losses were of course
incurred as part of the profit and loss account of an earlier period so any
such questions ought to be resisted.
agrees with this, for example its Company Tax guidance manual confirms that, when a negative amount in a company tax return is final it is conclusive
of the quantum of the amount and “When a negative amount is carried forward to
a return for a later accounting period, including it in the later return does
not give you a second opportunity to enquire into it. An example is a loss
carried forward and set off against the profit of a later accounting period”.
In principle, the same must be true of losses carried forward in the
accounts of unincorporated businesses.
HMRC can of course enquire into the later return to check that the loss
brought forward has been correctly and validly used.
HMRC has the power to visit business premises and inspect those premises, business assets and business documents. Experience shows that this sometimes involves HMRC rummaging around. For example, it has been known for HMRC to delve into a business’s waste paper baskets for evidence of discarded sales receipts.
It should be remembered that HMRC has a power to inspect, not a power to search. The broad rule of thumb is that inspect is by eye, for example looking at documents, whereas a search is by hand, i.e. trying to find something. By way of example, straight from HMRC’s guidance manual, with added emphasis:
“You are shown into a room in which the books, records and invoices you asked for have been placed on a table for your inspection. You are allowed to open the files and boxes of records that have been collected. You are allowed to walk around and look at the pictures on the wall. You are not allowed to open the filing cabinet in the corner just to see what is in it".
In short, HMRC is not allowed to and should not rummage around, so both the client and HMRC may need some managing in this respect.
HMRC has the power to visit business premises and may even turn up unannounced. During visits to retail premises it is not uncommon for HMRC to check the till, part of which involves asking the proprietor to count the takings to ensure they reconcile with the electronic till readings. But is this ‘cashing up’ allowed?
The legislation allows HMRC to visit business premises and inspect those premises, business assets and business documents. While cash is of course a business asset, asking a business to cash up is not inspecting that asset, it is asking the proprietor to do something with the asset which is not allowed. HMRC’s Compliance Handbook guidance manual recognises this:
“you do not have the power to require a customer to cash up at any time during your inspection”
HMRC may, on the other hand, remain on the premises to observe any cashing up process undertaken, which is inspecting business documents and assets, but must not disrupt the business activities by requiring cashing up to take place.
When issuing demands for data during an enquiry, it is not uncommon for HMRC to request sight of any tax advice related to the matters under scrutiny. Under the information gathering powers there is a form of privilege for such data in that an information notice cannot require a tax advisor to provide information, or documents relating to tax advice.
The wording only refers to a tax advisor, it says nothing about that same data being requested from the taxpayer in receipt of the advice. HMRC's guidance manuals help resolve this. The Compliance Handbook recognises that the protection only applies to data sought from a tax advisor, but goes on to confirm that:
"the advice that a person has received from their tax advisor is not usually something that is reasonably required to check the tax position."
This is logical as the tax position depends on the facts, not any advice or opinions given, a point which HMRC again recognises in the Compliance Handbook. While it may be that, in appropriate circumstances, advisors do wish to submit copies of advice given, it is important to remember that there is a choice, it is not a requirement.
often likes to prompt the taxpayer and /or their advisor to a meeting with the
assertion that it will help progress matters quickly. There is no requirement
whatsoever to agree to a meeting, even during a visit by HMRC officers to
business premises. The client cannot, therefore, be penalised for insisting on
all questions being put in writing, despite any HMRC protestations to the
is of course sometimes beneficial to attend a meeting, but that should be a
decision of the client/ advisor rather than dictated by HMRC. If a meeting is
agreed to, a properly detailed agenda should be requested from the HMRC
inspector. If the inspector genuinely wants to get the best out of a meeting,
he or she should be happy to provide this, rather than expecting a taxpayer to
provide answers off the cuff, from memory of events potentially many months, or
even years earlier, rather than responses that benefit from a check of the
relevant records. It is of course human nature to try and be helpful but
clients who, during a meeting, try and guess their recollection of the position
or a transaction do not always help themselves.
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.
What happens when a disclosure is submitted to HMRC using the LPC.
The disclosure gets submitted to HMRC along with an offer in full and final settlement of the historic liabilities. The landlord then sits back and waits to hear from HMRC; hopefully they will simply receive formal acceptance of the amount offered.
However, HMRC can and does ask questions about disclosures submitted, particularly if there appear to be gaps or discrepancies with the figures HMRC would expect under all the circumstances. For example, HMRC can look at average rental yields in certain areas and determine whether or not the disclosure appears to be accurate. HMRC might ask for proof in support of the figures, or state certain items of expenditure aren’t deductible, or that the behaviour is worse than that put forward and seek more tax years and higher penalties.
It is simply best to seek advice at the outset to ensure that you are making a full disclosure in the first place, covering all the aspects HMRC would expect to know about. Crowe’s policy is to submit a short disclosure report alongside the forms, because the digital forms don’t give much space to add information about why a disclosure is needed, what assumptions have been made, etc. A report can help demonstrate to HMRC that a thorough review has been conducted and that any estimates used are reasonable.
In recent years, HMRC has attempted to streamline how it deals with disclosures, encouraging the use of digital services. However, some elements could be improved, for example, it is not currently possible to submit agent authorisations or disclosure reports online. Hopefully improvements will be made to the online systems to make the process as efficient as possible.
Previously we looked at the Let Property Campaign (LPC) and why landlords should consider using it. We are looking at who can and can’t use the LPC.
Individuals can use the LPC to declare:
If the rental property is owned by a company or a Trust, then the directors and Trustees can’t use the LPC. Nonetheless, if historic issues need to be resolved, these classes of taxpayer should get in touch to see what other options they have.
It is worth pointing out that if the rental property is jointly held with another individual, it isn’t possible to make a joint disclosure. Therefore, both parties would need to register for the LPC and disclose their respective shares. If you like your co-owner, it is a good idea to let them know you are making a disclosure in case they have anything to sort out.
Whilst the LPC is aimed at landlords, it enables individuals to bring all unresolved issues up to date, e.g. self-employment profits or capital gains that have historically not been declared.
Whether or not the LPC can be used as a mechanism to make a disclosure, if there are issues to be resolved, it is always better to volunteer this information to HMRC. This will have a positive impact on the penalty position. Additionally, voluntary disclosures tend to be met with less scrutiny than those prompted by HMRC.
The Let Property Campaign (LPC) has been with us just shy of seven years now. At the outset, it was only intended to last for 18 months, but it was deemed a huge success and so it still continues to this day. Unlike previous campaigns, there’s no specific date by which taxpayers need to register.
The best advice is to come forward sooner rather than later. It’s no secret that HMRC has vast amounts of data from various sources which enables them to spot individuals whose affairs are lacking and get in touch with them. The message HMRC is eager to promote is “it’s only a matter of time”.
HMRC gets information from numerous sources.
All this data is fed into HMRC’s Connect computer system. The Connect system has the ability to flag individuals whose tax affairs appear to be lacking. For example, if the data shows that an individual owns several properties and has a buy-to-let mortgage, yet there’s no land and property pages on the submitted tax returns, it doesn’t take much of a leap for HMRC to work out they have probably underpaid tax. HMRC’s usual approach would be to write to the individual and invite them to use the LPC to make a disclosure.
The LPC is a fairly pain free disclosure mechanism. It enables individuals to sort out historic tax issues by contract settlement, draw a line under past non-compliance and move on.
Unlike previous disclosure opportunities, there are unfortunately no beneficial terms to encourage individuals to use the LPC. The LPC does not offer immunity from prosecution and 'normal rules apply' in respect of penalties.
Nonetheless, landlords should not feel discouraged from using the LPC if there are unresolved issues. The team at HMRC dealing with LPC disclosures are generally well versed and appear to be pragmatic when it is necessary to submit estimated figures.
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.
In Cliff v HMRC  UKFTT 564, the First-tier Tribunal (FTT) held that the term ‘deliberate’ does not have to be accompanied by an intention to knowingly underpay tax, which would be ‘fraudulent’. If deliberate did require an intention to deceive, then it would be difficult to find a meaning to attach to the word fraudulent. The decision seems somewhat bizarre and could have a strange impact, for example a taxpayer who acted in good faith, may still end up agreeing to admit to careless behaviour to prevent a 20 year discovery window and enhanced penalties. It is hoped that the decision will be reviewed in a higher court in due course.
In the meantime, is there a prima facie argument that the FTT is wrong? HMRC certainly seems to think so, for example the Contractual Disclosure Facility linked to COP 9 relates to investigations where HMRC suspects tax fraud and is fundamentally based on the taxpayer admitting to deliberate conduct.
In addition, the ‘Powers Review’ over a decade ago made it clear that the word ‘deliberate’ was substituted for the word ‘fraudulent’ such, that the latter is no longer used in the tax legislation at all.
In a case concerning the National Crime Agency and its tax functions, Matthew Chadwick (as Trustee in bankruptcy of Mrs Gloria Oduneye-Braniffe) (TC06083), the Judge states succinctly that:
“For 2008-09 then it is necessary for NCA to show that the appellant's conduct in not making the tax return she was required to make was deliberate. Deliberate connotes knowingly. It is a term which the legislation introduced in FA 2007 and continued in 2008 and 2009 following the HMRC review of its powers. In this particular context it replaced wording in s36 TMA which had used the adjective fraudulent. We are satisfied that if NCA allege deliberate conduct in the context of a loss of tax they are alleging fraud”.
Overall, advisors should not accept the decision in Cliff at face value, but should consider all arguments based on the facts in the round after undertaking due technical research and consultation.
The case of Raymond Tooth at the Upper Tribunal (UT/2016/0131) confirmed two important issues regarding discovery assessments. Firstly:
“… on making a discovery, HMRC must act expeditiously in issuing an assessment… any assessment must be issued whilst the discovery is 'new'.”
The Court of Appeal agreed  EWCA Civ 826:
“I agree with the UT's approach… The requirement for the conclusion to have “newly appeared” is implicit in the statutory language “discover”.”
What this means is that, once a discovery has been made, HMRC cannot sit on its hands and wait for a prolonged period before issuing a discovery assessment. The concept of a discovery becoming ‘stale’ has been discussed in a number of other cases with the outcome that each case depends on its own merits and specific fact pattern rather than there being a set time period to work to. It is, therefore, vital that advisors consider the possibility of a staleness argument if there has been any delay on HMRC’s part between making a discovery and issuing a discovery assessment.
Equally important is the Upper Tribunal’s further observation that:
“In our judgment, as a matter of ordinary English, a discovery can only be made once… the first officer makes the discovery; the second officer simply finds out something that is new to him."
It is not uncommon for a case to be passed from officer to officer during an investigation with any discovery assessment then being raised by the officer currently looking after the case. However, what is important is when HMRC first makes the discovery, not when the particular officer who issued the assessment made it. Once the first officer of HMRC has made the discovery, HMRC must then act expeditiously whilst the discovery is new.
All penalties levied for careless behaviour, whether disclosure of the underlying error was prompted by HMRC or not, can be suspended, so no cash will need to be paid to HMRC if the suspension conditions are complied with during the suspension period. HMRC often neglects to mention suspension hence advisors may have to step in to managing the penalty position.
If the tax adjustment relates to a one-off event, for example the sale of the only rental property owned by the client, HMRC has been known to argue that the event is unlikely to recur so no suitable penalty conditions can be applied to help prevent he same problem in future. The legislation does not, however, isolate the type of error to the same thing happening again but is much wider than that, stating that suspension is available if:
“compliance with a condition of suspension would help [the taxpayer] to avoid becoming liable to further penalties… for careless inaccuracy.”
Penalty suspension is meant to help change a taxpayer’s behaviour by setting conditions designed to help ensure there is no future carelessness. The legislation says nothing about it having to be the same or similar event that leads to the future carelessness. Hence, it does not matter that the event was a one-off, if conditions can be agreed to help prevent carelessness generally. Nor does it matter if the taxpayer and his advisor have already addressed the problem and implemented behavioural changes, such as improved record keeping procedures before the suspension conditions are agreed; such changes can be included among the conditions.
It may also be the case that the advisor has to think about and propose suitable suspension conditions as another common assertion from HMRC is to state that they cannot identify any.
This is important as, when HMRC discovers that tax has been under-assessed for a past tax year, they can assess a longer period if the client “or a person acting on his behalf” was careless or had acted deliberately.
However, not everyone who provides input into a tax return is acting on behalf of the taxpayer.
In Patrick Cannon (TC/2016/02491):
“There can be no doubt that there is a distinction to be drawn between a taxpayer who uses a professional adviser, such as an accountant…as a mere functionary rather than to give advice on technical matters within his field of expertise.
In our judgement, where an accountant acts as a mere agent, administrator or functionary, he is acting as the taxpayer’s agent…However, when a professional person acts in a truly professional advisory capacity, the situation is otherwise…”
In Bessie Taube (TC00735):
"The person must represent, and not merely provide advice to, the taxpayer”.
Hence a professional providing technical tax planning advice is not acting on the taxpayer’s behalf in the required sense, i.e. preparation of the tax return. Similarly, a bank or property management agency that provides figures for interest and rental income/ expenses is merely feeding figures to the agent to prepare the tax return, not acting on behalf of the taxpayer in the preparation of what turns out to be an incorrect tax return.
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.
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.
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.
HMRC has lost another case on reasonable excuse, which again highlights the importance of not giving up, and begs the question of how HMRC allowed it to get as far as the Tribunal.
In Marc Catchpole HMRC sought penalties for late payment of 2014/15 tax on his consultancy income. The facts covering the relevant period are outlined below.
HMRC’s position was that a reasonable excuse should be limited to exceptional and unforeseen events, a position that has been repeatedly ruled as incorrect, and that a lack of funds is not a reasonable excuse unless attributable to something outside the Appellant’s control.
The Tribunal quite rightly stated that the relevant question is “was what the taxpayer did (or omitted to do, or believed) objectively reasonable for this taxpayer in those circumstances?” He had clearly gone through a prolonged period of difficulty and it was understandable that he omitted to give proper attention to his tax affairs and used funds previously allocated to meet his tax not least because, at the time, he expected to be able to replenish them from his consultancy earnings. There was also a mental health issue which, on its own, can be a reasonable excuse.
The tribunal took the view that these were difficult and traumatic situations which were unexpected and definitely unforeseeable. In short, “there was a lot on his plate”, which seems an understatement, yet it was clear that he wanted to do the right thing by filing his returns and making arrangements later to pay what he could afford.
The Tribunal made the right decision, but should HMRC really have pursued the taxpayer in these circumstances, rather than accepting a reasonable excuse at a much earlier stage?
As we know, the concept of reasonable excuse is currently extremely important especially if tax is due, for whatever reason, on an offshore matter where punitive penalties of a minimum of 100% of the tax
apply. An Upper Tribunal case analysed reasonable excuse in some depth, and in
my opinion got it right. There are many angles to the case of Perrin (
UKUT 156) including some key observations on reasonable excuse.
Overall the position is that the excuse has to be genuine and, taking a step back, reasonable. For example, a taxpayer may have been told that all tax returns had been abolished and may genuinely believe
that, but is such a belief objectively reasonable?
Finally, Perrin drew on cases from as far back as 1991 where this objective test had been used, which demonstrates just how far behind reality HMRC’s guidance manuals are.
For a change of pace, here is a case study, showing how reasonable excuse can be used effectively to reduce penalties.
The Trustees of two offshore settlements came to us for assistance in making a disclosure to HMRC. The Requirement to Correct deadline had been missed, thus incurring Failure to Correct penalties amounting to, at minimum 100% of £250,000 or potentially the maximum 200%.
By looking in depth at the information that was provided to us by the client, we found that we could robustly challenge HMRC, in order to reduce the penalty. A voluntary disclosure was made and a case for 'reasonable excuse' was put together in partnership with the Trustees. Two waves of sensible questions were asked by HMRC to which we firmly responded.
The day was won (nil penalties) by skilled use of case law and HMRC manuals which generated a saving for the client of £250,000!
Last week’s Spotlight considered the importance of reasonable excuse and the huge financial penalties if one cannot be established. It is perhaps unfortunate that HMRC’s guidance manuals, which inspectors will of course rely on, contain numerous misinterpretations of what is, or is not a reasonable excuse. The Enquiry Manual, for example, states that “HMRC consider reasonable excuse to be something that stops a person from meeting a tax obligation despite them having taken reasonable care to meet that obligation”. This implies that there must be some sort of external force or event in play, which is certainly not a precondition of having a reasonable excuse.
A by no means exhaustive list of other inappropriate HMRC guidance:
It is interesting that, over many years, case law begs to differ. Matters noted as unacceptable above are perfectly capable of being reasonable excuses and there is no need for the extreme events shown above; all that is required is that the excuse is reasonable. The Upper Tribunal has gone as far as to say that it may be appropriate to award costs against HMRC if they persist with the unsustainable mantra that some unforeseeable, inescapable, unexpected or unusual event is required.
Advisors, and HMRC, must be aware that, whether a person has a reasonable excuse will depend on the particular circumstances in which the failure, the abilities of the person who has failed and, crucially, what is a reasonable excuse for one person may not be a reasonable excuse for another person.
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.
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.