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Spotlight: Tax Resolutions

Current spotlight issue

Reasonable Excuse – Once again, common sense did not prevail

In several previous posts I have commented on tax cases which beg the question of how on earth HMRC allowed them to proceed as far as the First Tier Tax Tribunal (FTT).

There is now yet another FTT decision which suggests HMRC has still not learned to drop pointless arguments. In Michael Barrett HMRC chased a penalty of £182.40, arguing that the taxpayer, who had never before had to complete a tax return, being a PAYE employee, did not have a reasonable excuse for being genuinely unaware of the “High Income Child Benefit Charge (“HICBC”), a tax levied on recipients of child benefit whose income exceeds £50,000. He had not been contacted by HMRC prior to the relevant notification deadline, general “nudge” letters were sent to an old address, and he acted promptly to rectify matters soon after HMRC finally wrote to him some three years later. Not surprisingly, the Tribunal agreed that he did have a reasonable excuse and allowed Mr Barrett’s appeal.

Not only was the amount at stake a mere £182, somewhat incredibly HMRC also submitted a documents bundle totalling some 923 pages to the tribunal as well as agreeing, prior to the hearing, that he had not purposely misled HMRC or tried to avoid any tax due.

Reasonable excuse is a complex matter with each case depending on its own facts, but the position here seems straightforward. How many hours did HMRC spend on this case and why; how much did it cost the taxpaying public? Not to mention the considerable stress it must have caused Mr Barrett, all for £182 in circumstances where it seems obvious that he had a reasonable excuse. A few minutes spent helping a taxpayer to realise and rectify the error should have been sufficient and would have been far more sensible.

I repeat my comment from a previous post in that perhaps an independent (as far as that is possible) person within HMRC’s Solicitor’s Office ought to be appointed, whose role is to review all potential FTT cases and with power to either authorise progression, giving suitable reasoning, or to immediately stop a silly case going any further. Until then, we can only hope that common sense eventually prevails within HMRC.

Previous issues 

Click below to find out more on the issues that our clients are commonly facing.


  Code of Practice 9

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To meet or not to meet, that is the question

HMRC investigate under Code of Practice 9 (COP9) where they suspect tax fraud has been committed. COP9 is extremely wide-ranging and covers all taxes as well as fraud related to COVID-19 payments under the Coronavirus Job Retention Scheme (CJRS), often referred to during the pandemic as furlough, and the Self-Employment Income Support Scheme (SEISS).  HMRC offer guaranteed immunity from prosecution in respect of tax irregularities, in return for an admission of fraud, a full disclosure of the offences and payment of the resulting tax, interest and penalties.

As part of the process, HMRC usually request a meeting with the client. These meetings can be lengthy and the inspector will normally wish to discuss all aspects of the client’s business and personal financial affairs, in some detail. While it is often advisable to attend these meetings, there is no obligation to do so and where the client is elderly, has health issues or would be caused unmanageable levels of stress, we may advise against it and consider other options.

HMRC may suggest that failure to attend a meeting demonstrates a lack of co-operation that will be reflected in the final penalty. This is simply not true. It is perfectly possible for the client to provide full co-operation without meeting the inspector, with relevant information being provided to HMRC in writing. However, a blanket refusal to meet with HMRC in all cases is unnecessarily counter-productive. If handled correctly, a meeting with HMRC can be an efficient way to move the investigation forward and avoid protracted periods of correspondence.

Whether or not to meet with HMRC in COP9 cases is a judgement call that should be made based on the specific factors of the case and the client’s own personal circumstances. If a meeting is appropriate, then the location should also be considered carefully, with the agent’s offices usually being preferred. In most cases, COP9 meetings at the client’s home or work premises should be avoided.

A meeting with HMRC in a COP9 investigation can be complex and is not to be taken lightly. It is therefore imperative that clients engage an experienced COP9 specialist to assist them.  Crowe’s Tax Resolutions Group has significant experience in representing clients in COP9 investigations so please contact a member of the team for specialist advice.

To meet or not to meet, that is the question

HMRC investigate under Code of Practice 9 (COP9) where they suspect tax fraud has been committed. COP9 is extremely wide-ranging and covers all taxes as well as fraud related to COVID-19 payments under the Coronavirus Job Retention Scheme (CJRS), often referred to during the pandemic as furlough, and the Self-Employment Income Support Scheme (SEISS).  HMRC offer guaranteed immunity from prosecution in respect of tax irregularities, in return for an admission of fraud, a full disclosure of the offences and payment of the resulting tax, interest and penalties.

As part of the process, HMRC usually request a meeting with the client. These meetings can be lengthy and the inspector will normally wish to discuss all aspects of the client’s business and personal financial affairs, in some detail. While it is often advisable to attend these meetings, there is no obligation to do so and where the client is elderly, has health issues or would be caused unmanageable levels of stress, we may advise against it and consider other options.

HMRC may suggest that failure to attend a meeting demonstrates a lack of co-operation that will be reflected in the final penalty. This is simply not true. It is perfectly possible for the client to provide full co-operation without meeting the inspector, with relevant information being provided to HMRC in writing. However, a blanket refusal to meet with HMRC in all cases is unnecessarily counter-productive. If handled correctly, a meeting with HMRC can be an efficient way to move the investigation forward and avoid protracted periods of correspondence.

Whether or not to meet with HMRC in COP9 cases is a judgement call that should be made based on the specific factors of the case and the client’s own personal circumstances. If a meeting is appropriate, then the location should also be considered carefully, with the agent’s offices usually being preferred. In most cases, COP9 meetings at the client’s home or work premises should be avoided.

A meeting with HMRC in a COP9 investigation can be complex and is not to be taken lightly. It is therefore imperative that clients engage an experienced COP9 specialist to assist them.  Crowe’s Tax Resolutions Group has significant experience in representing clients in COP9 investigations so please contact a member of the team for specialist advice.

Where have all the COP9s gone?

HMRC carry out investigations under Code of Practice 9 (otherwise known as the Contractual Disclosure Facility) when they suspect someone has committed tax fraud. Guaranteed immunity from prosecution for tax offences is offered in return for a complete ‘confession’ in the form of a written and adopted report and full payment of any tax, interest and penalty due. This process has been around for many years and has proved to be extremely lucrative for HMRC, especially as the majority of the work is carried out by specialist advisors appointed by the taxpayer.

Why then, have HMRC opened fewer of these cases recently? A freedom of information request made by another top 20 accountancy firm and reported in City AM has shown that the number has fallen consistently year on year, with as few as 27 cases per month opened during 2020/2021, down from 45 per month in 2016/2017. Is it likely that fewer taxpayers are committing fraud? It is understandable that HMRC opened fewer cases during 2020/2021, as staff were moved from their usual roles to deal with operation of the furlough scheme and other assistance packages, but that does not explain the drop in 2017/2018, 2018/2019 and 2019/2020. It may simply be the result of a lack of human resource at HMRC dedicated to this work.

The furlough and other job support schemes reportedly cost over £100bn, and there will be a desperate need to refill the Exchequer’s coffers over the coming years. Increasing the number of COP9 investigations would seem an obvious starting point.

Crowe is expecting to see a dramatic rise in cases opened by HMRC in the near future; indeed, wouldn’t anything less be seen as a failure? COP9 cases are complex and out of the ordinary and financial penalties can be extremely high (although mitigated by spontaneous, unprompted disclosures); it is therefore vital that clients are properly represented with COP9 disclosures being handled by experienced specialists in order to navigate the process and avoid the many possible pitfalls.

12 good reasons NOT to accept the offer of the Contractual Disclosure Facility (CDF) or Code of Practice9 (COP9)

Individuals who are offered immunity from prosecution for tax fraud should seriously consider the consequences of their responses even if well intended.

Reasons not to accept the CDF offer are listed below.

  1. An admission of tax fraud will immediately condemn you to large monetary penalties of a minimum 20% of the tax lost, 35% if you are approached first by HMRC and possibly 45% if irregularities go back more than three years.

  2. You may not have done anything with a deliberate intention (‘mens rea’ or guilty mind) to evade tax.

  3. You may have been acting under the advice of a qualified professional (accountant, Independent Financial Adviser, solicitor or barrister).

  4. If you work in a regulated sector you will not want to be ‘named and shamed’ as a tax evader, since this could prevent you from working in The City say, or other regulated market.

  5. If you are a professional, admitting to tax fraud (even though you may not be guilty at all) may put you under an obligation to report yourself to a professional body, which may render you liable to other punitive sanctions including being struck off.

  6. Innocent participation in a tax scheme does not equate to tax fraud.

  7. Your business or your company may have been the victims of a fraud perpetrated by a third party of which you are unaware.

  8. Information may have been disclosed to HMRC maliciously by third parties which is capable of explanation.

  9. You cannot always rely on what your adviser tells you particularly, if he/she asserts that there must be truth in an allegation ‘otherwise why would HMRC have accused you’.

  10. The costs of defending yourself are likely to be many times what they would be from simply reviewing, with the assistance of a tax investigations specialist, precisely what may have happened.

  11. Making an admission of deliberate behaviour may put you at risk of being on HMRC’s hit list, where you are monitored for years to come.

  12. If your name becomes public, your personal and business reputation could be left in tatters.

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.

Case study

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! 

An HMRC accusation of fraud is not necessarily a bad thing

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.

  1. There is no criminal investigation so the matter is kept out of the courts and out of the public eye.
  2. It is a civil procedure so the taxpayer will have no criminal record.
  3. Professional standing can be preserved, for example if the taxpayer is in a profession governed by a regulatory body.
  4. No large scale tax fraud or minimum amount of tax is needed, it can be used for simple cases such as a single entry being deliberately omitted from a tax return.
  5. A full and cooperative disclosure should lead to maximum penalty mitigation which means that the taxpayer will not be ‘named and shamed’ on HMRC’s website.

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.



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UK Property Register – HMRC to target offshore structures holding UK property

The latest tool in the government’s ongoing drive to increase offshore transparency has come into force with effect from 1 August 2022, after the Economic Crime (Transparency and Enforcement) Act 2022, received Royal Assent.

The Act imposes a legal requirement for offshore entities that own UK property to register at Companies House and disclose details of their ultimate beneficial owners by 31 January 2023. Government guidance states “this will lead to more transparency, which will allow law enforcement agencies to investigate suspicious wealth more effectively.” Non-compliance can lead to daily fines, a potential prison sentence of up to 5 years and restrictions on land transactions.

The register will of course be of great interest to HMRC. The department has already announced it will be launching a new campaign in September 2022 targeted at non-compliance within these structures via its favoured “nudge letter” approach. The letters will be addressed to the corporates and accompanied by a Certificate of Tax Position, with the recommendation that officers should inform any connected UK resident individuals to review their tax affairs with various anti-avoidance provisions in mind. We understand two types of letters will be issued to those overseas companies:

  1. that may need to disclose rental income or ATED liabilities
  2. that appear to have made disposals of UK residential property without completing Non-Resident Capital Gains Tax (NRCGT) Returns.

In both of the above situations, there are likely to be other issues for UK resident participators to consider by reference to the complex Transfer of Assets Abroad (TOAA) rules, as those with indirect or direct interests may be subject to an income tax charge. Furthermore, the NRCGT rules work in such a way that the total gain may not always be taxed at the corporate level, meaning that the untaxed part of the gain may be attributable to the participators in the company.

Therefore, while the letters will be issued to the overseas corporates involved, UK resident individuals with links to such structures ought to seek professional advice to ensure their affairs are up to date. Early review and disclosure is recommended to anyone who may be affected by this issue. Contact Crowe’s Tax Resolutions team for specialist advice.

UK Property Register – the end of opaque property ownership?

The latest tool in the government’s ongoing drive to increase offshore transparency will shortly come into force, after the Economic Crime (Transparency and Enforcement) Act 2022, received Royal Assent.The Act imposes a legal requirement for offshore entities that own UK property, to register at Companies House and disclose details of their ultimate beneficial owners.  Whilst the idea has been in the planning for a few years, the Ukraine crisis has led to the Bill being fast-tracked through Parliament, no doubt to facilitate the imposition of international sanctions.

Whilst the main aim of the Act is perhaps to tackle economic crime and act as a deterrent to criminals seeking to launder the proceeds of crime through the acquisition of UK property behind the name of offshore shell companies, the register will also be of great interest to HMRC.  Of particular interest will be those entities whose ultimate beneficial owner is UK resident, for which HMRC will be keen to establish whether any rental income or chargeable gains should have been returned in the UK, along with how the how the owner funded the acquisition of the property in the first place.

In terms of the register itself, the onus will be on the officers of the offshore entity to identify the beneficial owners which, for this purpose includes those with over 25% of the shares or voting rights, those with the power to appoint or remove a majority of the board, or those who otherwise exercise significant control or influence.Failure of the officers to register the details of the beneficial owners will be a criminal offence.  Similarly, failure of the beneficial owners to disclose their details to the officers of the entity upon request, may also be a criminal offence under UK law.

Interestingly, the requirement to register beneficial ownership will also apply retrospectively, to land and property acquired by offshore entities on or after 1 January 1999 (England and Wales) and 8 December 2014 (Scotland).Furthermore, there will be an annual requirement to provide updated information to Companies House.

Whilst there are many legitimate reasons for UK property to be owned through offshore structures, HMRC will use the information to target those who have unlawfully taken advantage of the lack of transparency this provides.

Anyone who may be affected by this issue, or who believes they may have income or gains to disclose should contact Crowe’s Tax Resolutions team for specialist advice.

Young and famous?

Scarcely, a day goes by without news stories about social media influencers or ‘Only Fans’ exhibitors making huge amounts of money from an online audience either through advertising or images displayed.

HMRC cannot be oblivious to such stories, and it will surely only be a matter of time (if it has not commenced already) before Fraud Investigation Specialists trawl the department’s computer records to see if sums declared on income tax returns etc. are commensurate with amounts claimed in the online world, that are in all likelihood probably significantly overstated to generate publicity and interest.

There will doubtless be other technical arguments about whether such activities constitute a trade and/or the provision of a service. Individuals who court publicity should be careful what they wish for in case they attract unwanted interest from the taxman. In reviewing the activities of individuals, it can often be many months before a brown envelope lands through the post box announcing the onset of an investigation. HMRC will normally have quite a clear picture of that individual’s lifestyle and background including occupation (and ownership?) of expensive properties, cars (and personalised plates) owned, holidays taken in Dubai (or other similar retreats), clubs and restaurants frequented as well as all the other intelligence available online.

Anyone wishing clarification on technical treatments or wishing to make voluntary disclosures in respect of income not disclosed or partially disclosed should contact a member of Crowe’s tax Resolutions team.

Should there be a new tax amnesty?

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.

Disclosures - Targeted nudge letters due in October and November

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:

  1. CGT letters – taxpayers selected are those who, according to HMRC’s data, have disposed of a property which was not their primary residence but have not declared any Capital Gains Tax in respect of the disposal on their 2018/19 returns.

  2. Benefit in Kind letters – where P11D data from employers does not match the BIK information on the person’s 2018/19 tax return.

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)

HMRC acting fast, employers should do the same

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 enquiries

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How to avoid being ‘named and shamed’

A review of the recently updated list of deliberate tax defaulters on HMRC’s website gives us an opportunity to remind readers about one of the often-overlooked consequences that can arise at the conclusion of an HMRC enquiry.

The list ‘names and shames’ certain taxpayers who have been charged a penalty for deliberate behaviour and being on it can not only be embarrassing for a client but also potentially extremely damaging for their personal or business reputation. Therefore, what determines whether a client will be placed on the list and what can be done to avoid it?

In simple terms, if an enquiry results in a penalty being charged and the answer to the following questions is ‘yes’, then HMRC can publish details of the taxpayer’s default:

  1. Is it a relevant penalty? A relevant penalty is one charged for a deliberate, or deliberate and concealed inaccuracy, or deliberate failure to notify chargeability.
  2. Is the penalty charged for a relevant period? This is broadly any period commencing after 1 April 2010.
  3. Is the penalty charged as a consequence of an HMRC investigation? This includes any enquiry or check into a person’s tax affairs, where ‘person’ includes (among others) individuals, companies, partnerships and Trustees.
  4. Is it a qualifying relevant penalty? This is a penalty for which the maximum reduction for the quality of disclosure has not been given.
  5. Does the potential lost revenue, i.e., the tax upon which the penalty is charged, exceed £25,000?

The law allows HMRC to publish the minimum amount of information required to identify the taxpayer. This usually includes their name, business or private address, nature of business, the tax on which the penalty has been charged and the amount of penalty.

The taxpayer has the opportunity to make representations to HMRC but there is no formal right of appeal against the decision to publish the taxpayer’s details. HMRC’s guidance states:

“To be fair and consistent, we aim to publish the details of every person, company or other kind of organisation where the answer to all of the five publication questions is ‘yes’. We’ll only decide not to publish in exceptional circumstances.”

So, how can a client prevent inclusion on the list? As always, if they identify an error in their tax affairs, then a full, unprompted disclosure of the issue should be made, before HMRC approaches them. If HMRC does open an enquiry and errors are identified, then it is essential that the process is managed properly, with appropriate information provided to accurately quantify the additional tax due. Not only will this maximise the available penalty reduction, to prevent inclusion on the list but it will also reduce the amount of financial penalties they have to pay.

As always, it is vital that specialist advice from Crowe’s Tax Resolutions group is sought in all such cases.

Was company information reasonably required to check the director’s tax position?

When HMRC requests documents and information from a taxpayer during an enquiry, they have to be ‘reasonably required’ for the purpose of checking the person’s tax position. Whether or not the request meets these criteria, is a recurring battleground between advisors and HMRC. In particular, we are regularly asked to consider whether information requested by HMRC from a director and shareholder of a company, relates to their own tax position or that of their company. This issue was recently considered in the case of Leen v HMRC.

Dr Leen was an NHS consultant, who also ran a private practice. In the course of an enquiry into his personal tax return, Dr Leen’s agent advised HMRC that the private fee income was reported through a limited company, GRI Research Laboratories Ltd (GRI). A breakdown of the fees was provided to HMRC, taken from analysis of the personal bank statements into which the fees had been paid but this indicated a significant discrepancy to the turnover declared by GRI. HMRC’s review also identified reductions in shareholder funds in GRI, without evidence of corresponding dividends or salaries having been paid.

HMRC consequently issued an information notice to Dr Leen to request explanations and documentation to address these concerns but Dr Leen appealed against the notice, arguing that the relevant records of GRI were not reasonably required for the purpose of checking his personal tax position.

However, the First Tier Tribunal disagreed. The potential discrepancy with the figures left Dr Leen’s explanation that all fee income had been declared via GRI, open to challenge. Furthermore, the fact that the fee income had been paid into Dr Leen’s personal bank accounts meant that there was a prima facie case for HMRC to argue for any shortfall to be assessed as undeclared personal income. Therefore, the information was found to be reasonably required to check Dr Leen’s tax position.

In this case, it might have been more beneficial to Dr Leen’s position, to review the potential discrepancies, establish if any underlying errors had occurred and, if necessary, to make an appropriate disclosure on his behalf, rather than to challenge the information notice. That said, the case does remind us of the importance of carefully scrutinising the detail of HMRC information notices, as it is not always straightforward to establish if the information requested is reasonably required for the purpose of checking the person’s tax position, or whether it should be challenged. Specialist advice from Crowe’s Tax Resolution Group should therefore be sought in cases of difficulty.

Closure notice application – not the right choice?

In our previous Spotlight, we discussed the situations in which a client might consider applying for an enquiry closure notice. This included cases where there has been excessive HMRC delay, or where it is felt that the HMRC officer is on a ‘fishing exercise’ despite the perceived risks having been addressed. However, we also advised that to be effective, such applications need to be carefully considered and only made in appropriate circumstances.

The recent case of Paul Joseph Bryan t/a Bryan & Co Solicitors v HMRC acts as a timely reminder of this. In this case, the taxpayer was making a second closure application during an ongoing HMRC enquiry, having had a previous application rejected by the Tax Tribunal. After the first hearing, Mr Bryan had complained against the HMRC officer’s conduct, which he described as “oppressive, disproportionate and unreasonable” and this clearly had an effect on their working relationship as matters progressed.

Following the original rejection, Mr Bryan did provide various documents and information to HMRC to help progress the enquiry but this led to further questions and information requests, which Mr Bryan felt were unreasonable and unnecessary. He therefore applied for the enquiry to be closed down a second time. While the judge showed some sympathy for Mr Bryan and the pressure that he was under, he found that the information requested by HMRC was appropriate and necessary to address the enquiry risks and so, once again, rejected Mr Bryan’s closure notice application.

It was evident in this case that the bad feeling between the taxpayer and the HMRC officer had influenced his decision to make a second application for a closure notice. However, perhaps it would have been more effective to try to put emotion to one side and consider a more pragmatic approach to moving the enquiry towards a conclusion. Advisors and clients facing a difficult HMRC enquiry such as this, should therefore always seek an independent opinion, so please contact Crowe’s Tax Resolution Group for further advice.

How can I get HMRC to close an enquiry?

Being subjected to a HMRC enquiry can be a stressful time for a client. This is even more so where the enquiry takes a long time to resolve, or where the client feels that HMRC’s questions are overly intrusive. As many advisors can attest, for every enquiry that is resolved smoothly, there is one which seems to drag on, or where the HMRC officer appears to feel the need to keep digging in the hope that they will eventually find an error in the client’s tax return.

An often overlooked tool available to clients and their advisors in these circumstances, is the ability to ask the Tax Tribunal to direct HMRC to issue an enquiry closure notice. Such an application can be made at any point during the enquiry process and, once made, puts the onus on HMRC to demonstrate to the Tribunal why the enquiry should remain open. As such, this can be a useful way of forcing HMRC to step back and consider whether or not the enquiry should be concluded, or what (if any) specific information is actually required to progress matters.

However, a closure notice application should not be made as a matter of routine. It should always be borne in mind that HMRC has the right to enquire into a tax return and request information that is reasonably required to check the person’s tax position. Furthermore, if the Tribunal does direct HMRC to issue a closure notice, it does not mean that HMRC has to accept that the tax return is correct. The officer can issue a closure notice to reflect any adjustments to the tax return figures that they believe are due. Therefore, a premature closure notice might then require a separate appeal against HMRC’s conclusions, which might otherwise have been avoided.

Nevertheless, if a client or their advisor feels that HMRC’s perceived risks have been satisfactorily addressed or that the officer’s continued questions are nothing more than a ‘fishing trip’, then a closure notice application can be an effective way of moving an enquiry towards a swifter conclusion.

As always, if you have any questions about this issue or HMRC enquiries in general, please contact Crowe’s Tax Resolutions Group.

HMRC ‘nudge letters’ and CRS information

In an earlier Spotlight (Offshore enquiries: Common Reporting Standard – why the secrecy?), we discussed the Common Reporting Standard (CRS) which was introduced in 2017. More than 100 countries are signed up to this agreement, which facilitates the automatic exchange of information between tax authorities.

The original CRS regulations require financial institutions to make annual reports of account activity to their domestic tax authorities, which is then shared with HMRC where account holders are resident in or have other registered links to the UK. This gives HMRC a vast range of financial data which it uses to inform and target its efforts to tackle tax non-compliance, such as its ‘nudge’ letter campaign regarding offshore income and assets.

A new agreement has recently been signed by 22 countries, including the UK, to extend the scope of the entities required to report under CRS. Digital platform operators in the sharing and gig economy will now be required to report transactions and income received by sellers. HMRC may well use this information in future to target individuals whom it deems to be trading on these platforms. It has already launched a recent nudge letter campaign to drivers using digital platforms such as Uber who may have underdeclared their income.

HMRC’s current nudge letter campaigns are extensive and target, amongst others:

  • offshore corporates owning UK property
  • residential landlords
  • business asset rollover relief against capital gains on residential property
  • persons of Significant Control
  • individuals claiming non-resident status due to exceptional days
  • internationally mobile employees claiming foreign tax relief.

Some of these letters are educational, whereas others are more targeted and require a prompt response. Specialist advice should be sought so that appropriate action can be taken; please reach out to our award-winning Tax Resolutions team for assistance.

Tax residence – exceptional days under HMRC’s microscope

As part of its ongoing campaign of targeting specific issues through the use of ‘nudge’ letters, HMRC has begun writing to taxpayers who have claimed to be non-UK resident and who have stated that some of their days in the UK were due to ‘exceptional circumstances’.

Under the Statutory Residence Test (SRT), a person is able to ignore up 60 of their days in the UK, if they were only in the UK on those days due to exceptional circumstances. The conditions surrounding this rule are strict, with the legislation citing examples as being national or local emergencies such as war, civil unrest or natural disasters, or a sudden or life-threatening illness or injury.

However, following the breakout of COVID-19, HMRC issued further guidance to clarify how the restrictions imposed by the pandemic would impact on this rule. Quite sensibly, HMRC advised that where a person was prevented from leaving the UK due to national lockdowns, having to self-isolate, the closure of international borders, or where they were asked to return to the UK temporarily, then these circumstances would fall within the exceptional circumstances definition.

Nevertheless, it was not an open-ended relaxation of the rules. HMRC did not extend the limit beyond the maximum 60 days allowed. Furthermore, it did not amend how the rule interacts with the other components and tests of the SRT, which can be extremely complex.

HMRC clearly feels that a number of taxpayers have fallen foul of the complexities of these rules and is writing to those that may potentially be affected. The nudge letter asks the taxpayer to check their residence position which, as with other nudge letters, implies that HMRC may take further steps if the person chooses to ignore this informal request.

It is therefore imperative for anyone in receipt of one these letters to obtain specialist advice and so please contact Crowe to arrange for an independent review of your tax residence position and, if necessary, to approach HMRC with any issues requiring disclosure.

A case of what might have been

While our commentary often focuses on the need to ensure that HMRC acts reasonably with the use of its powers and procedures, we also have to reflect on situations where it is the taxpayer who perhaps should have acted differently. One such example is the recent case of Adspec Ltd & Adil Hussain. Adspec sold tablets and electronic accessories online, primarily through eBay but also Amazon and its own website. HMRC opened Corporation Tax and VAT enquiries into the company, following a review of import data which suggested that recorded sales were not commensurate with the number of goods imported.

While the company director, Mr Hussain, provided HMRC with some documentation, such as the company bank statements, he failed to provide the company’s PayPal statements, accounting records or the records for all of the online platforms through which sales were made, despite formal information requests by HMRC. Therefore, in the absence of such information, HMRC issued Corporation Tax and VAT assessments to recover the undeclared liabilities it believed to be due.

Alongside the import data, HMRC had obtained information from one of the three E-bay accounts used by the company, which provided product sales prices and these were used to estimate the undeclared sales. Mr Hussain argued to the Tribunal that HMRC’s estimates were excessive but he failed to provide sufficient evidence to counter its figures.

The Tribunal found in favour of HMRC and agreed that the lack of cooperation by the taxpayer had left HMRC with little choice but to proceed in the way it had. Significant penalties were also issued, based on deliberate inaccuracies, which HMRC attributed to Mr Hussain personally via Personal Liability Notices.

The case is a clear reminder of the importance of handling HMRC enquiries and information requests properly from the outset. While there may have been inaccuracies in the company’s returns, ignoring HMRC’s requests was not going to resolve the situation. HMRC’s information requests should have been carefully considered, with all reasonably required information provided. Furthermore, the information HMRC relied upon and the methodology it used to estimate sales should have been scrutinised in detail, with alternative figures and explanations provided to HMRC if appropriate. Not only could this have led to a more accurate quantification of revised sales but also a sizeable reduction in the level of penalties charged.

It is imperative that specialist advice from Crowe’s Tax Resolution Group should be sought in cases where HMRC is requesting information from a client or looking to issue assessments where it believes tax has been undeclared.

“Reasonably required” test examined by Tax Tribunal

Information notices are a key tool used by HMRC to scrutinise tax returns and obtain supporting evidence and documentation during enquiries. However, the information requested by HMRC must be “reasonably required for the purpose of checking the taxpayer’s tax position” and both legs must be satisfied for the information notice to be valid.

The recent case of M Jenner v HMRC [2022] UKFTT 203 (TC), heard at the First Tier Tribunal, is an important reminder of the limitations on HMRC’s powers to request information, that are in place to safeguard taxpayers.

HMRC opened enquiries into Mr Jenner’s 2017/18 and 2018/19 tax returns on the basis that there was a significant shortfall between the minimal self-employment and interest income included on the returns, and Mr Jenner’s previously reported living expenses

The Tribunal ruled that HMRC’s wide-ranging request for information regarding Mr Jenner’s household expenses, which included details of expenditure on food as well as the dates and costs of holidays taken during the enquiry period, was not reasonably required to check his tax position.

Although it has been confirmed in previous tribunal cases that HMRC can validly inspect a return without needing a pre-conceived suspicion that income has been underreported or omitted, the information requested must be relevant to the purpose of checking the taxpayer’s tax position. HMRC cannot request information for speculative purposes to see if they can uncover new information about a taxpayer’s affairs.

It is therefore crucial that clients seek specialist advice, if they receive an information notice from HMRC. Information provided in response to a valid and reasonable request may help to speed up the closure of enquiries, but HMRC ought to be challenged where they are carrying out ‘fishing exercises’ and asking for more information than they are entitled to.

Can HMRC extend the scope of an enquiry?

New clients who are undergoing an HMRC enquiry into their tax affairs will often come to us for advice because the enquiry has expanded beyond the original issue being reviewed. They ask us whether HMRC are allowed to do this and what can be done to prevent it from spiralling further.

HMRC’s guidance states that “at the start of your compliance check you must tell the person the risk or reason for your check”. However, this does not prohibit an officer from extending the scope of the enquiry into new matters, if further risks are identified during the course of the enquiry. It is not unusual for questions about a particular transaction to identify a new avenue to be checked. For example, the officer might have stated at the outset that they want to check the source of capital introduced into a client’s business and in doing so a number of separate questions arise about the tax treatment of a hitherto unknown source of funds.

The enquiry legislation states that an enquiry covers the full tax return and so, while the officer is encouraged to be open with their perceived risks, technically they are entitled to consider all entries in (or that are omitted but ought to be in) the tax return.

That said, any information requested by the officer has to be reasonably required for the purpose of checking the client’s tax position and there are various restrictions and safeguards in place to protect the client from over-zealous officers requesting information to which they are not entitled. HMRC’s guidance states that “when requesting documents or further information you must provide the person with an explanation of why you need these” and these reasons should be carefully considered in accordance with the safeguards, especially where the officer is requesting information relating to years other than the one under enquiry.

It is therefore imperative that specialist advice from Crowe’s Tax Resolution Group should be sought in cases where HMRC is requesting information from a client or looking to expand an ongoing enquiry.

Tax residence enquiries – what makes circumstances exceptional?

When the Statutory Residence Test (SRT) was introduced in 2013, it was perhaps hoped that its more structured approach to establishing a person’s tax residence status would eliminate ambiguity and therefore simplify the position when challenges were made by HMRC. However, there are still elements of the SRT that are open to interpretation, as was the situation in the recent, anonymised case of A Taxpayer v HMRC. The case concerned the application of the ‘exceptional circumstances’ rule, which allows for an exclusion from a person’s UK day-count of days where the person would not have been in the UK but for exceptional circumstances beyond their control.

The facts of the case concerned a series of unfortunate and traumatic personal events involving the appellant’s twin sister, including mental health issues, addiction and suicide risk, with the appellant coming to the UK to provide care to her sister and her children.

In the case, it was accepted that the appellant would be UK tax resident under a straight day count but if the days spent in the UK only due to exceptional circumstances were excluded, then the taxpayer would not be UK tax resident.

HMRC has historically imposed a narrow interpretation of the exceptional circumstances rule, saying that it should only apply if a person came to and remained in the UK under a legal obligation, or where they are physically prevented from leaving the UK. It argued in this case that the test does not encompass a person who came to the UK under a moral obligation or an obligation of conscience, such as to care for a family member.

The judge rejected this and found in favour of the appellant, saying “the word ‘prevent’ can encompass all manner of inhibitions - physical, moral, conscientious or legal - which cause a taxpayer to remain in the UK. To read in the restriction that HMRC suggests, is not an exercise in statutory interpretation (purposive or otherwise) but rather an exercise in reading words into a statute which are not there”.

The case acts as a useful reminder that just because HMRC has its own interpretation of legislation, perhaps ‘formalised’ in its guidance manuals, this does not always make that interpretation correct. Clients and advisors should therefore not be afraid to challenge HMRC decisions on complex, technical issues and Crowe’s Tax Resolutions group can offer specialist advice on the best approach to take.

Tax residence enquires – more than just day-counting

In the recent case of J Oppenheimer v HMRC, we are reminded of the complexities of tax residence and the difficulties that clients and their advisors can face when trying to establish the correct position with HMRC.

The issue at hand in this particular case, was not whether the appellant was tax resident in the UK under the Statutory Residence Test (SRT) – it was accepted that he was. Instead the appellant argued that he was ‘treaty resident’ in South Africa, based on the application of the tie-breaker clauses within the UK / South Africa double taxation agreement.

The Tribunal considered the appellant’s circumstances in extensive detail, to establish whether his personal and economic relations were closer to the UK or South Africa, along with which of the countries he had an ‘habitual abode’ in before finding, on the facts, that the appellant was indeed treaty resident in South Africa.

HMRC regularly challenges claims of non-UK tax residence and, while it will often utilise information from third parties, such as the UK Border Agency, to check the number of days a client has spent in the UK, the case serves as a useful reminder that establishing tax residence is not just a matter of day-counting.

Where a client’s tax residence status is not clear-cut under the SRT, HMRC might challenge the position and assert a more favourable [to them] conclusion. Therefore, a wide range of factors may need to be considered before the position can be agreed, as well as the validity of any such HMRC challenge or request for information and documents, so it is important that specialist advice from Crowe’s Tax Resolutions group is sought to ensure that, not only is the information provided to HMRC relevant but that it is applied in the correct manner.

Contract settlement or formal assessment?

When it comes to settling the additional tax liabilities arising from either a voluntary disclosure to or a formal enquiry by HMRC, there are two main mechanisms to bring the liabilities into charge – formal assessment, or a contract settlement. While the formal assessment route may be more familiar to some, the benefits of a contract settlement should not be overlooked, especially in cases where tax is due for more than one year, or if penalties are involved.

A contract settlement consists of a formal ‘offer’ by the client to pay the agreed tax, interest and (if relevant) penalties and a letter from HMRC accepting the offer, thereby creating a binding contract. It is a tidy way to process a settlement where the liabilities have been agreed, without the need for multiple tax and penalty assessments, which can become cumbersome to administer.

Importantly, a contract settlement can be used to introduce settlement conditions that are bespoke to the particular client. In particular, where a client requires an instalment arrangement to pay the liabilities, or needs a deferred payment date, for example if they are waiting on the disposal of a particular asset to raise sufficient funds, these terms can be built in to the contract.

While HMRC should suggest using a contract settlement in relevant circumstances, this does not always happen. Therefore, clients and their advisors should consider whether or not the route is appropriate and to request it from HMRC. HMRC will usually only decline to enter a contract settlement if there is unresolved disagreement over the liability figures, or a concern that the client will stick to the conditions of the contract.

As always, if you have any questions about this issue or HMRC enquiries in general, please contact Crowe’s Tax Resolutions Group.

In the past but definitely not forgotten

Under an EU initiative known as DAC6, HMRC was hoping to receive huge amounts of new intelligence on offshore structures, arrangements and transactions which would no doubt be worthy of further investigation in many cases. Brexit put a stop to that, but it now looks like being reinvigorated with a vengeance.

The UK was one of the first jurisdictions to implement the Common Reporting Standard (CRS) which provides for automatic exchange of financial information with over 100 jurisdictions worldwide. This data has been invaluable to HMRC and countless investigations have arisen as a result. However, HMRC believes that arrangements and structures were designed to try and circumvent such transparency; the proposal now is that, from the summer of 2022 onwards, Mandatory Disclosure Rules will be implemented as the successor to DAC6. These proposals will require automatic reporting by, for example, those who have input in the design or marketing of so-called “CRS Avoidance Arrangements” (essentially any arrangement for which it is reasonable to conclude that it is designed to circumvent CRS legislation or is marketed as such) or “Opaque Offshore Structures” which effectively mask beneficial owners of assets, or even self-reporting by individuals using such arrangements.

A key proposal is that the rules are significantly backdated to catch those who have tried to avoid CRS reporting since its inception on 29 October 2014. Hence there will be a requirement to report certain pre-existing arrangements from as far back as more than 7 years ago to ensure that those who designed and promoted CRS Avoidance Arrangements from that era will not avoid the new reporting obligation. HMRC has suggested that the incentive to enter into CRS Avoidance Arrangements was greatest at that time, when details of the CRS were public but the rules were not yet in force, hence the prospect of highly valuable intelligence for HMRC and the significant amount of activity that should follow after their investigators have scrutinised the data.

It is always better, from both a case management and a penalty perspective, to come forward voluntarily in these circumstances. Anyone with something to declare should now seek expert and specialist advice from Crowe’s Tax Resolutions team as a matter of urgency and act now by making such a voluntary disclosure rather than waiting for a HMRC challenge.

Just because HMRC asks for it...

Crowe has experienced numerous instances lately where HMRC asks searching questions exploring issues outside the year, or person, under enquiry. Sometimes there is no enquiry open at all, sometimes there is an enquiry that, on closer examination, is invalid.

In the 2020 case of JJ Management Consulting LLP v HMRC, the Court of Appeal confirmed that HMRC can ask wide ranging questions even in the absence of a valid self-assessment enquiry. In other words, HMRC’s general powers include the power to conduct informal investigations to check tax returns, including after the enquiry window has closed, which can involve contacting the taxpayer to request information and documents. HMRC has the power and duty to collect tax so carrying out checks of a person’s tax position, however informal, is ancillary to those functions and are therefore permissible. HMRC has quoted this case extensively to justify requests for data from taxpayers.

It should, however, be noted that whilst HMRC officers now have the green light to ask questions outside an enquiry, JJ Management in isolation does not necessarily compel taxpayers to respond. It may be that the taxpayer or advisor insists on a formal information notice being issued, which carries a right of appeal and brings into play various other issues such as whether the data requested is “reasonably required”, a very wide topic with a substantial amount of case law. Alternatively, it may of course be in the taxpayer’s interests to respond to an informal notice to try and move the investigation towards closure.

There is a lot to think about whenever HMRC officers ask questions, it is not simply a matter of providing reams of data because HMRC has requested it under powers confirmed by the Court of Appeal. Instead, advice should be sought from someone with appropriate and extensive expertise on matters such as rights, powers and strategy. Providing data to HMRC which then leads to an adverse tax or penalty position for a client could lead to an expensive negligence claim if it turns out that the data request could or should have been resisted in the first place.

Self-assessment enquiries: answering the right questions

When opening an enquiry into a self-assessment tax return, HMRC sometimes asks a lot of questions and requests large volumes of documentation. It is always worth remembering that an enquiry into a tax return allows HMRC to ask questions to verify the figures on (or that ought to be on) that return, and that return only. There is no initial obligation to answer questions that seek to delve into the past. Providing information to HMRC that they are not entitled to could leave the advisor with an unhappy client, and possibly lead to the withdrawal of enquiry fee cover.

Having said that, the conscientious advisor should always ensure that they know the answers to any questions that HMRC has asked, as failure to do so may lead to bigger problems further down the line.

For example

If HMRC’s opening notice asks...

“when was this stream of income first received?”

simply responding with...

“that is outside of the period of enquiry”

could be counter-productive. As a first stage, advisors should ensure that they are aware of this date, in order that they can check whether the income was included in previous tax returns. Furthermore, this response immediately alerts HMRC to the fact that it is likely that the income was received in at least one earlier year.    

On the other hand, is it a good idea to refuse to provide answers to HMRC just because the legislation allows it, especially if the information is easy to obtain, causes no issues for the client and helps HMRC to close their enquiry quickly?

Deciding what should and should not be provided to HMRC can be a tricky balancing act. It is a fine line between defending your client’s interests and being needlessly obstructive. If you are unsure, you should always seek the help of an experienced specialist who is more used to dealing with such matters on a regular basis.

Why you should always request a Statutory Review?

Statutory reviews are offered by HMRC where agreement cannot be reached between HMRC and appellants and their advisers. The reviews are conducted by independent officers unconnected to the case who are given 45 days (longer periods by agreement) to conduct the review and notify the conclusion to the appellant (and the reasons for reaching that conclusion). Decisions by investigating officers are checked to see if they are legally, technically and procedurally correct. If the review upholds the original decision then the appellant has a further 30 days to refer the appeal to the Tax Tribunal.

In 2020/21, 1751 direct tax statutory reviews were undertaken (2467 in 19/20); there were 299 counter avoidance reviews (711 in 19/20); and 2371 late penalty reviews (5594 in 19/20). Although, the number of reviews undertaken was down in 2019/20 because of the pandemic, the number of reviews requested remained static as it has since the mechanism was introduced in 2009.

Of the direct tax reviews undertaken in 2020/21, 75% resulted in HMRC decisions being upheld (53% in 19/20); 9% were cancelled (25% in 19/20); 13% were varied (18% in 19/20). It is suggested that the results for the earlier year should be regarded as more typical with the results for 20/21 being more anomalous due to the pandemic. Despite the fact that 22% of the results for 20/21 gave fully or partially favourable outcomes (43% for 19/20), 66% of appellants go straight to the Tribunal without having a review. Such a low take up may be attributable to a lack of understanding or lack of confidence in the system perhaps as the result of a number of negative outcomes. The results are even more startling for late penalty reviews where 59% were cancelled in 2020/21 (and 43% in 19/20). Your chances of getting a ‘reversal’ are therefore reasonable.

It is suggested that if no further evidence is offered between an officer giving their ‘view of the matter’ and the conduct of the review, that the conclusion of the review is unlikely to cancel the original decision. Practitioners at the ‘review stage’ should consider what additional facts or evidence might be introduced into evidence (e.g. witness statements from relevant individuals (including the appellant), additional documentation or other third-party verifications). Advisers might also consider taking their own second opinion from Crowe or in the most complex matters from Tax Counsel; such avenues might steer the direction of the technical arguments, and sift out any weaker or ‘no hope’ arguments.

Going to the Tax Tribunal and litigating with HMRC is very expensive, and should not be undertaken lightly. The Review presents another opportunity to try and influence an investigation and hopefully persuade the new ‘pair of eyes’ to cancel the decision. It should therefore not be lightly dismissed.

Penalty – HMRC’s fault? 

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. 

HMRC’s information gathering powers – what’s the latest? 

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.

HMRC Enquiries: Statutory or not?

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.

Bad or Goodwill?

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.

Losses brought forward 

In 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.

HMRC 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.

Can HMRC ask for historic data?
HMRC’s information gathering powers enable them to carry out an “investigation or enquiry of any kind” to check the tax position which extends to “past, present and future” tax liabilities. On the face of it, this allows HMRC to ask for all sorts of historic documents and they frequently do so.

However, the assessing time limits must also be considered as a further requirement is that the data requested is “reasonably required”. If, for example, a document relates to a transaction in a period that has become final, it is unlikely that the document can be reasonably required by HMRC. 

Normally HMRC will not need to see a document that was entirely created more than four years ago as such an old document would normally only affect a tax position that can no longer be changed because the assessment time limit has expired. This may not apply of course if carelessness or deliberate behaviour is apparent in which case the assessment time limit could be extended to six and 20 years respectively. Remember that the burden of proving such behaviour is on HMRC.

An old document might affect the tax position of a later period, for example it may relate to the original purchase of an asset and is therefore needed to check the capital gain in a later period, in which case it is fair game.
Visits to business premises – a search?

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. 

Do I have to cash up?

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.

Can HMRC demand sight of tax advice?

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.


HMRC 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 contrary.

It 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. 

Do not be afraid to ask HMRC why an enquiry has been opened

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.

Always check the date - is there a valid enquiry?

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 [1999] 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.

In summary, the date of receipt of an enquiry notice is extremely important, it is the first thing advisors should check, whilst paying close attention to bank holidays, with incoming post being routinely date stamped.



Let Property Campaign

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HMRC continue to target undeclared rental income with Airbnb data request

To say that HM Revenue & Customs (HMRC) continues to target the recipients of rental income, is hardly news to those of us in the Tax Resolutions world. Therefore, recent commentary announcing that online accommodation marketplace Airbnb, has been forced to share its users’ income details with HMRC, comes as no surprise.

Airbnb’s website confirms that the company is “legally required to provide a limited amount of data about transactions that take place on the Airbnb platform to Her Majesty’s Revenue & Customs when requested”; HMRC will no doubt scrutinise any such information carefully, in order to identify those who may have failed to declare their rental income.

HMRC receives a significant amount of data from third parties and uses its hugely powerful ‘Connect’ software to join the dots to build a comprehensive picture of a taxpayer. This underpins HMRC’s ‘one to many approach’ of sending targeted nudge letters to specific individuals or groups – it is not random. Since February of this year, HMRC has reportedly issued over 800 letters to those it suspects may not have paid the correct amount of tax on their rental income from online platforms, reminding them of their obligation to declare it.

For those who have failed to declare their rental income, HMRC’s Let Property Campaign (LPC) remains a useful mechanism for making a disclosure. With the right advice, the LPC, which was originally intended to run for 18 months but has now been available for 10 years, offers a relatively smooth way of bringing a person’s tax affairs up to date. However, it is not always the most appropriate way forward and those with more complex tax affairs, or who have deliberately failed to declare all of their income to HMRC, may need to consider alternative methods of disclosure, such as the Contractual Disclosure Facility (CDF) applying HMRC’s Code of Practice 9 (COP9).

Either way, an unprompted voluntary disclosure is always more beneficial than waiting to be contacted by HMRC first but it is a complex arena and specialist advice should be sought from Crowe’s Tax Resolution group before making any approach to HMRC.

Submitting a disclosure

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.

The Let Property Campaign – who can and can’t use it?

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:

  • profits from residential property (income or gains)
  • income from tenants lodging in their own home
  • income from student or holiday lets
  • residential AND commercial property profits, although those with only commercial property cannot use the LPC.

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.

Let Property Campaign - background 

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”.

Why should landlords listen to this message?

HMRC gets information from numerous sources.

  • Letting agents.
  • Land Registry.
  • Council tax records.
  • Mortgage applications.
  • Tip-offs, usually from disgruntled ex-tenants or ex-spouses. 

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.


Measuring Tax Gaps

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The Tax Gap - any improvement?

HMRC has recently published its annual 'Measuring Tax Gaps' report for the 2020/21 tax year, which estimates the shortfall between the theoretical amount of tax that should be collected by HMRC and the amount that is actually paid. As usual, the devil is in the detail and while the headline figures may state that the total estimated tax gap has fallen slightly to £32bn from the previous year's £34.8bn, we have to look behind the figures to draw any reasonable conclusions.

HMRC estimates that errors caused by taxpayers who fail to take reasonable care, account for £6.1bn, or 19% of the total tax gap. If we add to this the estimated tax lost by errors occurring despite the taxpayer taking reasonable care of £3.0bn, we have £9.1bn of tax lost at the most innocent end of the behaviour scale. If we compare this to the previous 2 years’ totals of £9.6bn (2019/20) and £9.0bn (2018/19), one could argue that HMRC has not made much of an improvement in tackling these errors.

It is widely acknowledged that the UK tax system is particularly complex and these figures highlight the fact that there is still some way to go before the taxpayer population has a sufficient understanding of the rules to minimise mistakes. HMRC has made a lot of noise in recent years about educating taxpayers and through the use of things such as 'nudge' letters, has tried to prompt taxpayers to review their affairs and take steps to bring their tax affairs up to date. However, it is clear from this report that HMRC still has a lot of work to do before improvements are seen.

The tax gap - time to focus on the hidden economy?

Chancellor Rishi Sunak’s autumn Budget 2021 consisted more of a tinkering around the edges of policies to combat tax non-compliance, rather than an announcement of any radical policy changes.

One point of interest though, was the announcement that an additional £292 million would be allocated to HMRC to provide resources to help tackle the ‘tax gap’ over the next three years. As we commented in our previous Spotlight, the latest estimate of the tax gap, for 2019/20, is £35 billion. When compared to the fact that HMRC’s latest accounts state that the total tax yield generated from tackling non-compliance, was £36.9 billion, it shows how big a task closing the tax gap is.

No details have yet been provided about how this additional funding will be utilised and, as always, there will be debate over where it can generate the most benefit. Should HMRC provide further resources to tackle non-compliance by large businesses, or continue the high-profile attacks on tax avoidance? Both of these would be popular with the ‘man on the street’. However, how about placing a focus on the hidden economy? ‘Ghosts’, i.e. those whose entire income is unknown to HMRC, and ‘moonlighters’, those who are known to HMRC in relation to part of their income but have other, undeclared, sources of income, are estimated to account for £3 billion, or 8% of the total tax gap but specific publicity targeting these areas has perhaps been lacking.

In our experience of making a significant number of voluntary disclosures for people with undeclared sources of income, one of the main factors that has prevented them from coming forward before, is uncertainty. Concerns over how many years of historical taxes HMRC will assess, the level of financial penalties the person could face and what will happen if they cannot pay, are regular explanations of why a person did not come forward sooner.

Whilst HMRC does of course need to balance the carrot and stick approach regarding past non-compliance, perhaps more of a carrot could be offered to encourage ghosts and moonlighters to come forward? HMRC can currently assess up to four previous years where the person has a reasonable excuse for failing to notify their chargeability but up to 20 years if they do not have a reasonable excuse. Could a specific disclosurae facility, limiting the number of historical years requiring disclosure, incentivise people to come forward? Additionally, might it also be time to introduce a six-year assessment period where there has been a non-deliberate failure to notify, to bring the time limits in line with those for careless inaccuracies in submitted tax returns?

Whilst such decisions may not be politically popular, something radical may be needed to incentivise those in the hidden economy to come in from the cold and regularise their tax affairs going forward. Could now be the time to do it?

Mind the Gap!

In the latest edition of Measuring Tax Gaps HMRC’s annual analysis of the difference between the total tax paid and the theoretical amount of what should be paid, the department has estimated that the ‘tax gap’ has increased from 2018/19 to 2019/20 by £2 billion.

This equates to £35bn of potentially unpaid tax, being 5.3% of the total potential tax take (up from 5.0% in 2018/19). This is the first increase in percentage terms, since 2013/14 and, as HMRC point out, there has been a general downward trend since the heady days of a 7.5% tax gap in 2005/06.

Whilst the report provides the usual statistics, such as the fact that Income Tax, NIC’s, CGT & VAT together account for over 70% of the tax gap, of key interest to those in the field of tax resolutions, are the underlying behaviours that are believed to have led to the underpayments of tax:

Behaviour Lost tax % of tac gap
Failure to take reasonable care £6.7bn 19%
Legal interpretation £5.8bn 16%
Evasion £5.5bn 15%
Criminal attacks £5.2bn 15%
Non-payment £4.0bn 11%
Error £3.7bn 10%
Hidden economy £3.0bn 8%
Avoidance £1.5bn 4%


HMRC has made a well-publicised target of tax avoidance for a number of years now and this is reflected in a steady decrease in the amount of the tax gap attributable to those schemes in recent years. Despite the ongoing publicity in this area, HMRC believe that such schemes only account for 4% of the total tax gap.

Conversely, as the table shows, there are clearly other areas that HMRC should turn its attention to. Even putting to one side the more heinous issues of tax evasion and targeted criminal attacks on the system, unpaid tax caused by failures to take reasonable care and straightforward ‘errors’, where there is no carelessness, account for 29% of the total tax gap.

HMRC will hope that its approach of issuing ‘nudge’ letters to target specific areas of risk will help reduce this figure by prompting those affected to review their affairs and make disclosures if necessary. However, perhaps HMRC could do more to raise awareness of this approach and the underlying issues where it believes tax is at risk? Clearly mistakes will always be made but the aim must be to educate both taxpayers and their agents on the most common risk areas and to encourage them to seek advice on these issues before mistakes are made.

The tax gap - a closer look

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.

  • There is a well-established mechanism to enable HMRC to collect historic liabilities – the Contractual Disclosure Facility (CDF) operated alongside Code of Practice 9 (COP 9). This offers an efficient mechanism, proven over many years to work well, which also uses less resources than cases pursued using criminal powers.
  • Evaders will continue to underpay tax in the coming years, unless they are caught.
  • HMRC can recover up to 20 years of underpaid tax and charge higher penalties for deliberate understatements. These monies can be collected efficiently under the CDF or COP 9 it and will go a long way towards helping HMRC replenish its coffers.
  • It sends a message that tax evasion won’t be tolerated, which discourages others.

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.

The tax gap - how will HMRC make it narrower?

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:

  Lost tax Customer Group  % of tax gap 
   £13.4 billion Small business  43% 
   £5.3 billion Large business  17% 
  £4.5 billion Criminals 14%
  £3.7 billion  Mid-sized business  12% 
  £2.4 billion Individuals 8% 
  £1.7 billion  Wealthy 6%

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.


  Offshore enquiries

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Euro Pacific Bank – Arrests announced by HMRC

In our previous Spotlight, 'Bank customers targeted by HMRC', we announced that HMRC was targeting UK taxpayers who held or controlled accounts with Euro Pacific International Bank in Puerto Rico, following an investigation into alleged facilitation of tax evasion by the bank.

HMRC embarked on a ‘nudge’ letter campaign by writing to known UK customers of the bank, asking them to review their tax affairs and, if necessary, to make a disclosure of any undeclared income or gains. 

However, it was clear that HMRC suspected that some accounts may have been used to evade tax and the department has now announced that two men have been arrested on suspicion of tax evasion and money laundering in connection with this. HMRC officers executed search warrants at three residential and business addresses in Liverpool and seized business records, computers and high value assets such as jewellery, watches and designer clothing. HMRC stated: 

“When we launched this probe, we were clear that customers of this bank should come to us before we came to them. These arrests prove we’re true to our word…. our investigations are gathering pace so now’s the time to come clean before it’s too late.”

The announcement serves as a further warning, if one were needed, that anyone with connections to Euro Pacific Bank, whether or not they have already received a nudge letter from HMRC, should act now. 

We strongly recommend that anyone affected by this issue, or indeed anyone with offshore assets or income, who is unsure if they have any income or gains to disclose, contacts Crowe’s Tax Resolution group for specialist advice on the most appropriate way forward.

HMRC issues nudge letters to those named in the Pandora Papers

UK residents named in the Pandora Papers are now being contacted by HMRC and given the opportunity to review and update their tax affairs. The Pandora Papers consist of almost 12 million records released by international investigative journalists, obtained from financial service providers specialising in companies, Trusts, foundations and other entities in low tax, or no tax, offshore jurisdictions. This data is of huge interest to investigators at HMRC who will be naturally suspicious of such structures in those offshore centres.

Having reviewed the papers, HMRC are now writing to people they suspect may have additional tax liabilities to disclose. Therefore, anyone receiving such a letter will not have been chosen at random.

The letter explains that penalties can be up to 200% of any tax found to be due and that HMRC may prosecute if there has been dishonest behaviour, underlining the seriousness of the position. Where tax has deliberately been underpaid, the Contractual Disclosure Facility (CDF) should be used; a full and frank disclosure under the CDF / Code of Practice 9 (COP9) can give the taxpayer protection from criminal prosecution for any tax offences, which is not available via any other disclosure route.

HMRC recommend taking professional advice and the Chartered Institute of Taxation (CIOT) has stated that making disclosures to HMRC, particularly of tax fraud and deliberate behaviour, is a specialist area and that tax advisors should not undertake professional work which they are not competent to perform unless they obtain appropriate assistance from a suitably qualified specialist. 

HMRC will continue to review the extensive data in its possession and will investigate further as necessary. Therefore, doing nothing is not a viable option. Advice from an experienced advisor specialising in tax disputes should be sought immediately; the experts in the Crowe Tax Resolutions team have a huge amount of experience in these issues and will be able to explain the options and guide you through this complex area.

Explore our service page the Pandora Papers.

Bank customers targeted by HMRC 

HMRC has confirmed that UK taxpayers with connections to Euro Pacific International Bank in Puerto Rico are to be investigated for suspected tax evasion.

The bank is suspected of facilitating tax evasion and its operations have been suspended.  HMRC is naturally concerned that some accounts might have been used to evade UK tax and already has some UK customers linked to the bank under investigation; it is expected that there are many more to come.

As part of the ongoing intelligence gathering and investigation work, HMRC is planning to send letters to UK account holders in the next few weeks. This is clearly not a minor or routine investigation, quite the opposite, with references to the serious offences of tax evasion and money laundering having been made. This is very much out of the ordinary, so anyone in receipt of a letter from HMRC on this subject should immediately seek professional advice from a suitably experienced tax investigations specialist.  

Advisors should also consider whether they have the appropriate specialist knowledge to assist a client with matters such as this; it is specialist work that cannot really be bolted on to general tax compliance or advice. In accordance with regulatory guidelines, advice from a specialist in tax resolutions/disputes ought to be taken if the agent does not have the necessary experience to advise on this type of project. 

Anyone with connections to the bank should now check their tax position and take swift action to rectify any tax problems; a full, voluntary disclosure will always lead to a more favourable penalty position than waiting for HMRC’s letter and inevitable challenge. There are various routes that can be used for a disclosure in these circumstances so, again, specialist advice should be taken on the most appropriate way forward, which will depend on the individual circumstances of the taxpayer and whether or not fraud is suspected.

The Crowe Tax Resolutions team has many decades of experience of these types of case and would be happy to provide an initial consultation, with no obligation on the potential client, to discuss the background and possible options.

HMRC target non-UK companies owning UK property

As part of its ongoing focus on offshore tax issues, HMRC has launched a campaign aimed at non-UK resident corporates that own UK property. As with other campaigns, HMRC are sending ‘nudge’ letters to those they have identified as targets. The letters inform the recipient that HMRC has information to suggest that UK tax may have been underpaid and suggest that a full disclosure is made if that is the case.

Two letters are being issued. The first is to non-UK companies that can be identified as owning UK property as non-resident landlords, and who may need to disclose previously undeclared rental income, or a liability as a result of the Annual Tax on Enveloped Dwellings (ATED). The second letter will be sent to non-UK companies that made a disposal of UK residential property between 6 April 2015 and 5 April 2019 but have not filed a tax return in the UK to declare any resulting capital gains tax.

HMRC is likely to be acting on information received from the UK Land Registry so any entity that receives one of these letters will have been specifically targeted in the belief that it has not been fully UK tax compliant. Interestingly, while both letters are being issued to non-UK companies, they also suggest that the company directors contact any connected UK resident individuals to ask them to ensure that their own UK tax affairs are up to date.

As with other ‘nudge’ letters from HMRC, both letters request that the recipient completes and returns a certificate of tax position. However, offshore tax matters can be extremely complex so it is imperative that if you or one of your clients has received one of these letters, specialist advice is sought before responding to HMRC. Crowe’s Tax Resolutions Group has significant experience of assisting companies and individuals with UK tax issues arising from overseas ownership of UK property. Please contact one of our team for an initial discussion.

Bank customers targeted by HRMC

HMRC has confirmed that UK taxpayers with connections to Euro Pacific International Bank in Puerto Rico are to be investigated for suspected tax evasion.

The bank is suspected of facilitating tax evasion and its operations have been suspended.  HMRC is naturally concerned that some accounts might have been used to evade UK tax and already has some UK customers linked to the bank under investigation; it is expected that there are many more to come.

As part of the ongoing intelligence gathering and investigation work, HMRC is planning to send letters to UK account holders in the next few weeks. This is clearly not a minor or routine investigation, quite the opposite, with references to the serious offences of tax evasion and money laundering having been made. This is very much out of the ordinary, so anyone in receipt of a letter from HMRC on this subject should immediately seek professional advice from a suitably experienced tax investigations specialist.

Advisors should also consider whether they have the appropriate specialist knowledge to assist a client with matters such as this; it is specialist work that cannot really be bolted on to general tax compliance or advice. In accordance with regulatory guidelines, advice from a specialist in tax resolutions/disputes ought to be taken if the agent does not have the necessary experience to advise on this type of project.

Anyone with connections to the bank should now check their tax position and take swift action to rectify any tax problems; a full, voluntary disclosure will always lead to a more favourable penalty position than waiting for HMRC’s letter and inevitable challenge. There are various routes that can be used for a disclosure in these circumstances so, again, specialist advice should be taken on the most appropriate way forward, which will depend on the individual circumstances of the taxpayer and whether or not fraud is suspected.

The Crowe Tax Resolutions team has many decades of experience of these types of case and would be happy to provide an initial consultation, with no obligation on the potential client, to discuss the background and possible options.

Common Reporting Standard – why the secrecy?
HMRC has published a consultation on ‘Reporting rules for digital platforms’. The plan is to adopt OECD rules that have already been agreed internationally to ensure consistency and require digital platforms to report details of the income of sellers on their platform to their local tax authority which will then exchange the information with the other participating tax authorities for the jurisdictions where the sellers are tax resident.

The digital platforms will also be required to provide a copy of the information to the taxpayer. This seems incredibly sensible to help the sellers comply with their tax obligations and also to help HMRC focus resources on the minority who might still decide not to declare the income. Anyone with undeclared but taxable profits from a digital platform should take immediate specialist advice.

This all seems very similar to Common Reporting Standard (CRS) under which financial institutions around the world provide data to their tax authority which, for UK residents, then finds its way to HMRC. The big difference is that nothing is provided to the taxpayer which then leads to HMRC challenges shrouded in secrecy, telling taxpayers that something may or may not be amiss but providing no other substantive details. It is fair to say that this does nudge taxpayers to check their returns and does lead to disclosures to HMRC, but there are many cases where there is a simple explanation and no tax impact such as current accounts held to facilitate payment of utility bills relating to overseas holiday homes. The system could potentially be better focused if the CRS reporting included a report to the bank’s clients in the same way as is now proposed for digital platforms – “this is what we have reported under CRS, if in doubt we recommend that you seek professional advice on any tax requirements”. That may reduce non-compliance in the first place and, perhaps more importantly, will help HMRC identify and focus on the more sizeable and serious cases, utilising Code of Practice 9 if fraud is suspected which is potentially lucrative for HMRC and seems more likely and if a sizeable sum has not been reported despite the bank’s client being told of what has been reported under CRS.
When it comes to offshore issues, HMRC has enhanced powers to assess

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 ‘nudge’ letters asking for a certificate to besigned

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 assets.  

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 like:

“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 place.

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.


  Penalties and discovery assessments

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Discovery assessments– significant errors of law in Tribunal decision
Tribunal cases that consider appeals against discovery assessments, especially Upper Tribunal (UT) cases, are always of interest to those of us in the Tax Resolutions world. This is especially the case when an UT decision so unequivocally overturns the First Tier Tribunal’s (FTT) findings on the basis of multiple errors of law, as in the recent case of Danapal v HMRC.

Dr Danapal was an A&E consultant, who also ran a private clinic in Harley Street. In 2013, HMRC opened enquiries into his tax returns for 2010/11 and 2011/12. HMRC argued that certain expenses for 2010/11 should be disallowed, with the errors caused by the carelessness of Dr Danapal, or a person acting on his behalf. HMRC also contended that amounts had been omitted from Dr Danapal’s turnover and that capital allowances on an asset acquired in 2007/08 had been claimed incorrectly, with both errors, it argued, being brought about deliberately by Dr Danapal, or a person acting on his behalf.

HMRC issued closure notices in respect of the two enquiry years, along with discovery assessments for 2006/07, 2007/08 and 2009/10, arguing that under a presumption of continuity, adjustments were also due for those years. Dr Danapal appealed the decisions but the FTT upheld HMRC’s assessments. He therefore appealed to the UT. 

The UT overturned the FTT’s decisions, finding that the FTT had made a number of errors of law. In particular, it failed to provide sufficient reasons to justify its conclusion of carelessness of a person acting on Dr Danapal’s behalf (his accountant, ‘Firm A’). Also, on the basis of the evidence before it, the FTT had erred by concluding that Firm A had acted deliberately in respect of the 2007/08 capital allowance claim and by concluding that Dr Danapal had deliberately understated his turnover in 2010/11 and earlier years.

The UT was highly critical about how the FTT had reached its conclusions. For example, HMRC’s statement of case had only asserted deliberate behaviour by Dr Danapal and not Firm A. Therefore,

'it was clearly wrong for the FTT to have made the findings they did of dishonesty on the part of Firm A. Such a finding could have had serious implications for Firm A as a professional firm of chartered accountants and it was given no opportunity to refute them”.

Any assertion of careless or deliberate behaviour by HMRC, should always be considered extremely carefully and, where appropriate, resisted. Specialist advice on this issue should be sought from Crowe’s Tax Resolutions group.

Did a ‘reckless’ taxpayer deserve a deliberate penalty?
One of the key issues that Crowe’s Tax Resolutions group is frequently asked to advise on, is the ‘behaviour’ of a client. In particular, where an inaccuracy has arisen in the client’s tax affairs, did it occur despite the client taking reasonable care, or was the client careless, or in more serious cases, were their actions deliberate?

This final point was considered in the recent Upper Tribunal (UT) case of CPR Commercials Ltd v HMRC. The case considered the First Tier Tribunal’s (FTT) conclusion that errors in the client’s VAT returns were due to deliberate behaviour. Although a VAT case, it is the discussion on behaviour that should be of interest to all advisors.

The company had sold used commercial vehicles to customers registered for VAT in Ireland and had treated those supplies as zero-rated exports. However, HMRC argued, and the FTT agreed, that the company had not obtained sufficient evidence that the goods were supplied to customers based outside of the UK and so should have accounted for VAT at standard rate. The FTT also agreed with HMRC that a penalty should be charged on the basis of a deliberate inaccuracy in the company’s VAT return and it was this point upon which the company appealed to the UT.

The UT found that the FTT had not applied the correct test to establish deliberate behaviour. It referred to the FTT’s conclusion that:

“CPR cannot have reasonably concluded that they had sufficient evidence of export when they zero-rated the supplies. In these circumstances, we find that the behaviour … was, therefore, deliberate as the returns had been submitted when CPR was at least reckless as to whether it had the required evidence to zero-rate.”

The UT found that the conclusion that the taxpayer had been “at least reckless” did not support a finding that a deliberate penalty was due. The established principle is that a deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error, with the intention that HMRC relies on it as accurate. However, the UT concluded that:

“the FTT did not make any finding that CPR knew that its VAT returns contained any inaccuracies when it submitted them to HMRC”

and so downgraded the penalty to one based on carelessness.

The test for deliberate behaviour is a subjective one. It is the specific knowledge and actions of the particular taxpayer at that time that need to be considered and so it is imperative that all relevant facts are established, following an assertion of a deliberate inaccuracy by HMRC.  For specialist advice, get in touch with Crowe’s Tax Resolution group.

Financial Institution Notices – still a cause for concern?

The proposal to introduce Financial Institution Notices (FINs) to HMRC’s information powers was met with a lot of criticism in 2020. Nonetheless, the powers were introduced with effect from July 2021 when Finance Act 2021 received Royal Assent.

The power enables HMRC to request information from Financial Institutions about specific taxpayers for the purpose of checking their tax position or to collect tax debts. Many advisors continue to have concerns that personal privacy is at risk, because FINs can be issued without HMRC needing to seek tribunal, or indeed any, approval first. There are a number of safeguards written into the legislation, although it is ultimately the responsibility of the Financial Institution to resist inappropriate requests. 

HMRC indicated in the consultation process that FINs were necessary in order to speed up its ability to respond to requests from other worldwide tax authorities, to help the UK contribute more efficiently to the global drive to tackle non-compliance. Recent data from HMRC, however, confirms that less than half of the FINs issued in the first nine months of operation were issued in response to international requests. This is at odds with the main purpose described during the consultation process.

HMRC frequently pushes the boundaries of what can be demanded and having access to personal account details enables HMRC to scrutinise a significant amount of personal data and transactions. HMRC might ask questions about perfectly legitimate transactions, putting the onus on the taxpayer to explain historic matters, compelling them to enter into prolonged correspondence to prove there is no loss of tax.

Financial Institutions in receipt of a FIN ought to seek advice from independent specialists on the validity of the request in order to prevent claims from disgruntled customers in instances where notices could have been legitimately resisted. Please contact Crowe’s Tax Resolutions Group for further advice.


Does a ‘white space’ entry prevent discovery assessments?

One of the situations we regularly advise on is when HMRC argues it has discovered a loss of tax for a year where the enquiry window has passed but where our client or their advisor believes that HMRC had sufficient information to have opened an enquiry within the statutory time limit. For example, it is often asserted that where there is a ‘white space’ entry in the client’s tax return to make HMRC aware of a particular transaction, then this should protect the client against HMRC issuing an assessment to recover the tax, if it is later found that the treatment adopted was incorrect.

However, the answer is rarely that simple. The situation can be illustrated by reference to the recent case of T & A Johnson v HMRC. In this case, the taxpayers (husband and wife) received financial redress in respect of an interest rate hedging product. On their tax returns, their agent included disclosures that the financial redress had been received but that it was not considered to be taxable. HMRC challenged this and issued assessments, arguing there was a loss of tax brought about carelessly by a person acting on the taxpayers’ behalf.

The taxpayer’s agent had researched the tax treatment of the redress payments but had got it wrong. Documentation provided when the payment was made to the taxpayers clearly confirmed that it should be declared as taxable and HMRC’s guidance on the issue confirmed this. While the agent had attempted to treat the payment correctly, it was found that he had “failed to take reasonable care when tested against the standard of a reasonably competent tax adviser”.

While it could be argued that a white space entry should prompt HMRC to open an enquiry within the time limits, the often-overlooked fact is that if a loss of tax is brought about carelessly or deliberately by the taxpayer or a person acting on their behalf, this effectively ‘trumps’ any protection from information that was disclosed in the white space.

As well as acting as a useful reminder that tax advisors should only advise on issues they are qualified to, the case also reminds us that the issue of discovery can be complex, so specialist advice should be sought from Crowe’s Tax Resolutions group whenever it arises.

Penalty suspension - get the conditions right

Where HMRC imposes a penalty for an error in a tax return caused by a failure to take reasonable care by the taxpayer, a request can be made for that penalty to be suspended. Suspension cannot apply where there has been deliberate behaviour, or a failure to notify chargeability but, in cases where there has been a ‘careless’ error, subject to the suspension conditions being met for a period of up to 2 years, the taxpayer can avoid having to physically pay the penalty to HMRC.

The key objective of penalty suspension is to encourage the taxpayer’s future compliance and the mechanism for achieving this is the setting of suitable suspension conditions that will prevent further careless inaccuracies from arising.  In addition to a generic condition that must be imposed, which requires the taxpayer to file all of their returns on time during the suspension period, there has to be at least one specific condition set.

HMRC guidance states that suspension conditions must be SMART (Specific, Measurable, Achievable, Realistic, Time bound) but beyond that there are few limitations.  It therefore gives clients an opportunity to have a good look at their own individual or business circumstances and to propose bespoke suspension conditions that work for them.  The conditions should not be too onerous or complicated but it is important that the client and their advisor carefully considers what went wrong and how it can be prevented in the future, rather than just setting a standard condition in order to ‘tick a box’.

HMRC can deny a request for a penalty to be suspended or can deny the suspension conditions proposed (both of which decisions can be appealed against), so it is vital that clients get these right at the outset.  Therefore, specialist advice should be sought from Crowe’s Tax Resolutions group in cases where penalty suspension is a possibility.

Was a third-party agent ‘acting on behalf’ of the taxpayer?

The recent case of Shaun McCumiskey v HMRC, demonstrates the importance of appointing reputable advisors, even for routine tax matters. It also shows HMRC’s rather strict approach to recovering tax, even when the taxpayer was clearly not at fault. This makes it even more valuable to appoint specialists when faced with questioning from HMRC.

Mr McCumiskey had appointed an agent to file his tax returns when he started working as a self-employed electrician following a difficult spell in his personal life. However, without his knowledge, his agent instructed a third party to file his return, which included a fraudulent claim for SEIS relief that resulted in a repayment to the third party of £7,500. HMRC queried the claim and subsequently issued a discovery assessment to recover the refund.

The Tribunal rightly found that Mr McCumiskey had not authorised the appointment of the third party, who was therefore found to not be acting on his behalf. It is crucial for taxpayers to ensure that they appoint reputable advisors, as a discovery assessment issued by HMRC may be valid if an agent acting on their behalf causes a loss of tax through their careless or deliberate behaviour.

It should have been obvious to HMRC early on that Mr McCumiskey did not fit the usual income profile of a SEIS investor. Furthermore, he was unaware of the scheme itself let alone the fraudulent claim made by the third party. If the HMRC inspector had realised this before issuing a discovery assessment and had pursued the third party instead, the lengthy legal process and associated costs to both parties could have easily been avoided.

10% penalty uplift - justifiable?

In recent years, HMRC have imposed a 10% uplift to the statutory minimum penalty for an inaccurate return, where the error identified is more than three years old. For example, where a person makes an unprompted disclosure of a ‘careless’ error, for which the statutory penalty range is between 0% and 30%, the minimum penalty that the taxpayer could expect if they took more than three years to identify the error would be 10%.

HMRC’s policy, rather than being a legislative requirement, is based on the argument that a person who has taken a ‘significant period’ to correct an error, should not expect to benefit from the maximum abatement available. The policy has not proved popular with advisors and taxpayers alike, who have regularly argued that an indiscriminate increase to the minimum penalty has no statutory basis.

This point has now been considered by the Tax Tribunal, in the 2022 case of Atlas Garages (Morpeth) Ltd v HMRC. The Tribunal found that, while the legislation does set out the maximum percentages by which a penalty can be reduced for the quality of the disclosure, it gives no further restrictions on how HMRC can interpret this. It concluded that if HMRC choose to restrict the reduction on the basis that it took the taxpayer too long to correct the error, then there is no legal basis for arguing against this policy.

However, although the Tribunal supported HMRC’s right to calculate the penalty reduction in this way, it affirmed that the 10% uplift should not necessarily apply in all such cases:

“The 10% restriction, as applied by HMRC, also does not infringe on the statutory minima and maxima: there are still circumstances where the nature, timing and extent of disclosure will allow for the maximum penalty reduction”.

The case reminds us that the imposition of HMRC penalties and their calculation can be complex. Therefore, specialist advise from Crowe’s Tax Resolution Group should be sought whenever the issue is raised.

Ensuring discovery assessments aren’t too taxing

If a taxpayer has filed incorrect tax returns which lead to an underpayment of tax, HMRC can, subject to the discovery provisions at S29 TMA 1970, raise assessments to make good the tax loss.

When a client receives discovery assessments there are two areas that many experienced advisors will address, and, if appropriate, challenge HMRC on:

  • has HMRC made a valid discovery?
  • given the behaviour displayed by the taxpayer in filing the incorrect return, was HMRC ‘in time’ to raise the assessments?

However, there is a third vitally important issue that is often overlooked, specifically:

  • are HMRC’s figures correct?

As shown in the recent tax case Chang Ling v The Commissioners of HMRC [2021] UKFTT 0087 (TC), even when it has to be accepted that HMRC has raised valid discovery assessments, there is no obligation to simply accept the tax assessed, any associated penalty and late payment interest sought. In this case, the tribunal found that the assessments were valid, but HMRC had taxed significant amounts that were demonstrably not income.

When raising assessments, the HMRC officer should base the figures on fair inferences or best judgement. However, for many reasons, these maxims are not always applied. Like everyone else, tax inspectors make mistakes and sometimes reach unsubstantiated conclusions. Therefore, it is of paramount importance that the accuracy of the amounts assessed and the methodology behind the figures is checked and, if necessary, challenged.

When seeking to challenge HMRC, it is always worth engaging the services of a suitably experienced specialist to assist and advise on the best course of action. If you have any issues, please contact me or another member of Crowe’s Tax Resolutions Group.

Deliberate vs fraudulent behaviour

In Cliff v HMRC [2019] 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.

Remember that penalties can be suspended

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.

What does ‘acting on behalf of’ a client mean?

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.

Management of Information Notices
Schedule 36 Finance Act 2008, consolidated existing powers and introduced various new information-gathering powers. The general perception of some inspectors and advisors is that these rules replaced the enquiry legislation as they allow HMRC to ask copious amounts of questions about the taxpayer’s general tax position.

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.

  • Condition A - requires notice of enquiry to have been given ‘in respect of the return’ which then allows a check ‘in relation to the chargeable period’. The enquiry itself is under Section 9A TMA which allows HMRC to enquire into ‘a’ return. Whilst this does not restrict information notices to asking only for documents created in the year of enquiry, it very clearly restricts matters to the questions relating to the tax position for the year of enquiry.

Nothing at all can therefore be asked of the taxpayer unless a valid enquiry has been opened and no closure notice has been issued.   

  •  Condition B – may allow to HMRC have a further bite of the cherry but, HMRC must have a genuine suspicion of a discovery before requesting the data, as the case of Kevin Betts (TCO2824) neatly summarised. The data requested can then be used to help confirm and quantify that suspicion, but cannot be requested to find out if there may be a problem in the first place. We often see such requests where taxpayers have something offshore such as a bank account, with HMRC declaring that, in their experience, undeclared tax often follows. That is a generic assumption about the population of offshore account holders, not a genuine suspicion that the specific taxpayer in question has a problem.
The importance of ‘acting on behalf of’ a client

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.

Carelessness is not all around 

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.  


  Reasonable excuse

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Reasonable Excuse – Another avoidable Tribunal case

In two previous Spotlights (Reasonable Excuse – Groundhog Day? and Reasonable Excuse – how did it get this far?), I commented on a couple of tax cases which begged the question of how on earth HMRC allowed them to proceed as far as the First Tier Tax Tribunal (FTT).

A recent decision suggests HMRC has still not learned to drop pointless arguments. In Lucy Anne Watt the taxpayer had previously submitted paper tax returns before being told by HMRC to file her 2019/20 tax return electronically, which she duly set about doing. After correctly inputting all the relevant data, HMRC’s system showed tax due of £640, which she correctly paid. Unfortunately though, several months later, she received a late filing penalty of £100. Ms Watt was understandably confused and logged on to her HMRC account which revealed that “You paid the right amount of tax. There is nothing more to pay this year”. The penalty was therefore appealed but, after a 4½ month delay, HMRC upheld the penalty.

Ms Watt tried twice to speak with HMRC but did not receive a clear explanation. She then tried to submit a further online return but the system would not let her and so, finally, she submitted a paper return the following day. In the meantime, HMRC had ramped up the late filing penalties by another £1,200.

At the appeal hearing, the judge agreed that it was objectively reasonable for Ms Watt to believe that her tax return had been filed, as the amount due and paid was the result of the entries in that return. Unsurprisingly, the FTT therefore concluded that Ms Watt had a ‘reasonable excuse’ for the failure to file her tax return on time and the penalties were duly discharged.

‘Reasonable excuse’ is a complex matter with each case depending on its own facts but the position here seems straightforward. The taxpayer reasonably thought she had filed her return; she paid the tax shown by HMRC; her online account noted that she had paid all tax due for the year; she contacted HMRC seeking clarification; and she acted swiftly once she realised that the return was outstanding.

How many hours did HMRC spend on this case? Not to mention the considerable stress it must have caused Ms Watt, who demonstrated admirable resilience. All for £1,300 in circumstances where it seems obvious that she had a reasonable excuse. A few minutes spent helping a taxpayer, new to online filing, realise her error would have been far more sensible. We are seeing too many cases head to the FTT that really should not get that far. Perhaps HMRC ought to appoint an independent (as far as that is possible) person within its Solicitor’s Office, whose role is to review all potential FTT cases and with power to either authorise progression, giving suitable reasoning, or to immediately stop a silly case going any further. Until then, we can only hope that common sense eventually prevails within HMRC.


Reasonable Excuse - Groundhog Day?

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.

  • Mr Catchpole’s elderly mother suffered a stroke which rendered her unable to be independent, in need of 24 hour care and without mental or physical capacity.
  • He had to relocate to help look after his mother.
  • He then lost his job.
  • In order to meet rental and care costs, he used some of the money put aside to pay his taxes.
  • He was unable to find employment and took a reduced salary as a delivery driver.
  • He got no support from his siblings and had to bring a Court action to obtain a Power of Attorney.
  • He had to deal with criminal justice issues relating to his daughter at the same time.
  • He had his own problems with depression.
  • He contacted HMRC and agreed an initial payment plan. He contacted HMRC several more times to discuss payment arrangements but did not receive a call back.

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? 

Reasonable Excuse - Perrin says it all

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 ([2018] UKUT 156) including some key observations on reasonable excuse.

  • The excuse in question must be objectively reasonable based on the specific facts.
  • The facts, circumstances, experience, knowledge and attributes of the particular taxpayer must be considered.
  • The taxpayer’s state of mind may be relevant, e.g. “I did not believe it was necessary to file a return in these circumstances”. A common sense approach to this is needed.
  • Ignorance of the law can be a reasonable excuse.
  • HMRC’s argument that there must be some sort of event that is unforeseen or inescapable is not sustainable, nor is the mantra that any event must be unexpected or unusual.  

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.

Reasonable Excuse - how did it get this far?
As has been said in previous Spotlights, HMRC’s current guidance on what constitutes a reasonable excuse for failing to do something which the tax legislation requires, is dated and significantly out of kilter with the relevant case law. The difference between an excuse being acceptable or not can be enormous, for example if 100%+ Failure to Correct penalties are in play. One case sums up the problem and highlights just how heavily HMRC ought to be challenged on reasonable excuse.  

In K Pokorowski v HMRC [2019] FTT 86, the taxpayer had mental health issues and was homeless. Initially the taxpayer was a self-employed electrician living in a shared house. After visiting Poland, where his drink in a bar was spiked with drugs, he lost his job, exhausted his savings and was evicted from his house, all his belongings were thrown on the street and were then lost or stolen. He ended up sleeping on the street until, almost three years later, he found a hostel, and then permanent, accommodation and a job. In the meantime, HMRC had issued a notice to file a tax return to his previous address (the one he had been evicted from) and he eventually filed the tax return very late. Penalties were issued, the appeal refused by HMRC on the grounds that there was no reasonable excuse and no ‘special circumstances’. The FTT found HMRC’s pursuance of penalties from Mr Pokorowski ‘a scandal’ and agreed his homelessness and mental health issues (which should have been obvious to HMRC) constituted a reasonable excuse.

That this case got as far as the FTT is appalling; imagine the effect on the taxpayer if the penalty had been far higher than a late filing penalty, for example 150% of the tax due on, say, interest earned on a bank account in the taxpayer’s home country of Poland. It demonstrates just how far inspectors still have to travel before understanding this concept properly and that HMRC needs to learn to use common sense at an early stage, not just in reasonable excuse cases.
Real world application of reasonable excuse

For a change of pace, here is a case study, showing how reasonable excuse can be used effectively to reduce penalties.

Why did the client come to us for help?

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%.

What was our solution?

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.

What was the outcome?

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!

Reasonable Excuse - HMRC’s unreasonable view 

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:

  • ignorance of the law is not a reasonable excuse
  • it is unlikely that illness, absence or family problems would persist at such a level, throughout the [relevant] period, as to constitute a reasonable excuse for an extended period
  • you should not accept as a reasonable excuse
    • failure by the agent
    • delays in the post, unless there was an exceptional event disrupting the postal service
  • what may count as a reasonable excuse
    • your partner or another close relative died shortly before the deadline
    • you had an unexpected stay in hospital
    • you had a serious or life-threatening illness
    • a fire, flood or theft
    • delays related to a disability you have.

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.

Why is a reasonable excuse important?
Whilst some legislation states what is ‘not a reasonable excuse’, nowhere defines what is a reasonable excuse. The legislation states that:
“where a person had a reasonable excuse for not doing anything required to be done, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased”

In a nutshell, reasonable excuse relates to something not done that should have been, for example, failing to file a return or pay tax on time, unlike failing to take reasonable care, which is something done, albeit not done well. 

Having a reasonable excuse for the failure is particularly important now as the resulting problems can be huge. For example, failure to correct offshore errors lead to massive penalties of at least 100% of the tax arising, whatever the taxpayer’s behaviour. These are more likely to be 150% given that HMRC will class many disclosures as ‘prompted’ if the taxpayer has been contacted after receipt of data under the Common Reporting Standard.  

There is a lot of case law on reasonable excuse, making it clear that each case depends on its own merits and the circumstances relating to the particular taxpayer in question. Advisors should not be afraid to challenge HMRC. Those who do not deal with such matters on a regular basis, ought to approach an appropriate specialist for expert help, given that a successful reasonable excuse challenge can lead to huge savings. At the same time HMRC needs to learn to accept that case law has also noted that the legislation uses the word ‘reasonable’, not, as is often argued by inspectors, some exceptional or inescapable event outside taxpayer’s control. In this respect, HMRC inspectors are naturally guided by their internal manuals, which are incorrect and in dire need of updating. More on that next week.

 A reasonable excuse only has to be reasonable

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.

What is a ‘reasonable excuse’?

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 [2018] 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.