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  • HMRC playing foul on penalty decisions?

    24 March 2021

    Chris Watts

    The restarting by HMRC of compliance enquiries has generally been welcome to some individuals and business owners, as the relief of not having to deal with them gets masked by the ongoing anxiety that at some point HMRC will resume and in many cases it will just be delaying the inevitable tax assessments and penalties should inaccuracies be found.

    Let’s face it, HMRC weren’t going to walk away from an enquiry they knew they were going to get some revenue from.  The need to refill the chancellor’s coffers with gold coins to replace those paid out during the coronavirus pandemic will mean HMRC are keen to finish off as many enquiries as they can in order to start banking the monies due from them.  

    However, agreeing any tax liabilities is just the start of a seemingly ongoing battle to finalise an enquiry with HMRC.  As soon as an error has been found which results in a tax liability, HMRC need to consider the taxpayer behaviour that led to the error and this is where they can still play nasty in order to try and increase the yield from an enquiry.

    You therefore need to be aware of a trap that HMRC will sometimes lay in order to obtain this, by encouraging a taxpayer to explain their behaviour and the general thought processes they used when completing the erroneous tax document.  

    What does HMRC look at to consider taxpayer behaviour?

    Before we look at this in detail, the basic criteria that sets out how behaviour is defined is worth being reminded of.  Schedule 24 of the Finance Act 2007 brought in new legislation which considers penalties attributable to inaccuracies and looked at three basic attributes of a taxpayer’s behaviour which were: the taking of reasonable care, carelessness and deliberate action,

    This legislation has not changed much for UK matters, we will not consider offshore matters in this article as that is a whole different ball game.

    Where the burden of proof rests in order to determine the behaviour is different for each one however.  

    No penalty is chargeable where an individual has taken reasonable care to ensure the tax document was as accurate as he could have made it, and would not have known there were any errors in it.  

    It is for the taxpayer to demonstrate that they took reasonable care in order for HMRC to consider the position should there be any difference of opinion on the matter.  

    HMRC Manual CH81130 provides some examples of when HMRC would consider a person to have taken reasonable care:

    • a reasonably arguable view of situations that is subsequently not upheld
    • an arithmetical or transposition inaccuracy that is not so large either in absolute terms or relative to overall liability, as to produce an obviously odd result or be picked up by a quality check
    • following advice from HMRC that later proves to be wrong, provided that all the details and circumstances were given when the advice was sought
    • acting on advice from a competent adviser which proves to be wrong despite the fact that the adviser was given a full set of accurate facts

    HMRC’s default position is that an inaccuracy would normally be caused by an individual’s carelessness in not ensuring a document was accurate before submitting it.  CH81145 provides some examples of what HMRC would consider to be careless behaviour and in fairness it would be hard to argue against these if they mirror the behaviour of the individual under an enquiry.

    Where an individual cannot demonstrate that they took reasonable care then HMRC will seek a penalty based on the percentage range for a careless inaccuracy, unless there is considered to have been deliberate behaviour.  This is where some HMRC officers have been seen to act in a less than admirable way and have caught out many an overly cooperative taxpayer who thought they were being helpful in seeking to bring an enquiry to a close.

    How does HMRC reach a penalty decision?

    Those who are accustomed to dealing with HMRC enquiries will have seen HMRC request answers to a list of questions which they may ask towards the end of an enquiry when they discuss the possibility of penalties being applied to the inaccuracies.  The request seems reasonable enough, HMRC simply want to know what was going through the taxpayer’s mind at the time of the inaccuracy, however this seemingly innocent request has meant many taxpayers facing a battle with HMRC to fight back against an HMRC decision that the error was brought about by they deliberate behaviour.  This is where HMRC’s guidance on behaviour has seemed to evolve over the years as the scope for what constitutes deliberate behaviour appears to be widening.  

    However, it is for HMRC to demonstrate deliberate behaviour and provide their reasons for this, not for them to make the suggestion with no factual basis and to invite the taxpayer to defend themselves against the accusation.

    Where HMRC have been getting sneaky is in asking questions of the individual in such a way that an answer given can be construed by them as the individual making a conscious decision in how they prepared or authorised the document and therefore a deliberate error on their part.  CH81150 provides the following statement :

    “A deliberate but not concealed inaccuracy occurs when a person gives HMRC a document that they know contains an inaccuracy. It is not necessary to demonstrate that the person knew what the accurate figure was, only that they knew that the figure they put on the document was not accurate.”

    In some cases, they can only obtain the above information by asking pertinent, sometimes even loaded questions to the taxpayer in order to make them answer in such a way that the above statement becomes relevant.  There can be a fine line between what constitutes careless or deliberate and HMRC therefore welcome the individual’s help in allowing them to make that decision.

    Should you answer HMRC’s questions?

    In recent cases seen by myself, an Inspector sought to charge deliberate penalties and extended time limits for assessments where an individual had left off some overseas dividend income as they had been taxed overseas and didn’t realise this also needed to be declared in the UK.  The act of ‘thinking’ led HMRC to consider that they had taken a conscious decision and therefore the behaviour was deliberate.  In reality, the individual had been careless in not ensuring he had checked the position with a tax advisor in the UK.

    An ongoing case passed across to me showed that HMRC had asked a taxpayer a total of 12 questions concerning their behaviour, to which the taxpayer diligently provided his perfectly reasonable explanations for, to which again HMRC used the argument that a conscious decision had been taken and therefore deliberate behaviour would apply.

    It should be noted that the questions asked by HMRC do not have to be answered.  Indeed CH402650 confirms that HMRC cannot compel a person to answer the questions as this extract from the manual confirms:

    “When the person refuses to answer our questions about penalties, you must consider whether we can obtain the details we need by using our information powers.

    Although the law specifically allows you to use FA08/Sch36 powers to obtain evidence that will enable you to establish whether a penalty is due, see CH223000, it is unlikely that you will be able to use these powers in practice. This is because a person has the right under Article 6 of the Human Rights Act not to incriminate themselves by answering our questions about their behaviour, see CH300200. We cannot therefore use our powers to force a person to incriminate themselves, for example by asking them questions about why and how an inaccuracy occurred. There are no such restrictions however on the use of third party notices, because only the person can incriminate themselves.”

    Without answering any of HMRC’s questions, neither of the taxpayers mentioned above would have been put in that position to then argue against HMRC’s decision.  The former decision was eventually overturned, the latter is currently in progress.

    So the suggestion is: should it be accepted there has been careless behaviour (to which you need to remember that any penalty levied can be suspended if certain conditions are met), then if HMRC do not have sufficient information from the enquiry to suggest there has been deliberate actions, the best course of action would be not to answer these questions.

    And if HMRC don’t like it, well they can go whistle…………

    If you have an ongoing enquiry to which you think ETC Tax can assist then please get in contact.  It is always best to obtain advice at the earliest opportunity when dealing with HMRC if you are ever unsure as to how best to proceed.

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    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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