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Spotlight: Tax Resolutions

John Cassidy
John Cassidy, Partner, Tax Resolutions 

Our weekly spotlight, will look at the issues you may be facing and what action you need to take.

Any interaction with HMRC can be a daunting prospect. Knowing how to respond and even just understanding their terminology can be a minefield.

John and our Tax Resolutions experts are on hand to offer you top tips, break down definitions, review the outcome of recent cases and give general advice, to help you deal with enquiries from HMRC. 

This week's spotlight issue

Friday 1 October 2021

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 £2bn.

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.

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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12 good reasons NOT to accept the offer of the Contractual Disclosure Facility (CDF) or Code of Practice 9 (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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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)

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.

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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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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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.


  Offshore enquiries

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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 be signed

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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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.

Not all discoveries can be assessed

The case of Raymond Tooth at the Upper Tribunal (UT/2016/0131) confirmed two important issues regarding discovery assessments. Firstly:

“… on making a discovery, HMRC must act expeditiously in issuing an assessment… any assessment must be issued whilst the discovery is 'new'.”

The Court of Appeal agreed [2019] EWCA Civ 826:

“I agree with the UT's approach… The requirement for the conclusion to have “newly appeared” is implicit in the statutory language “discover”.”

What this means is that, once a discovery has been made, HMRC cannot sit on its hands and wait for a prolonged period before issuing a discovery assessment. The concept of a discovery becoming ‘stale’ has been discussed in a number of other cases with the outcome that each case depends on its own merits and specific fact pattern rather than there being a set time period to work to. It is, therefore, vital that advisors consider the possibility of a staleness argument if there has been any delay on HMRC’s part between making a discovery and issuing a discovery assessment.

Equally important is the Upper Tribunal’s further observation that:

“In our judgment, as a matter of ordinary English, a discovery can only be made once… the first officer makes the discovery; the second officer simply finds out something that is new to him."

It is not uncommon for a case to be passed from officer to officer during an investigation with any discovery assessment then being raised by the officer currently looking after the case. However, what is important is when HMRC first makes the discovery, not when the particular officer who issued the assessment made it. Once the first officer of HMRC has made the discovery, HMRC must then act expeditiously whilst the discovery is new.

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 - 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.