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Tax Investigations and Deliberate Behaviour.

Rumour has it that HMRC is taking a harder stance on the application of penalties during enquiries.  This translates to them applying the penalty for deliberate behaviour to situations that others might characterise as no more than a failure to take reasonable care. The primary effect of this is to increase the maximum penalty loading for a prompted case from 30% to 70%.

This has recently resulted in a number of cases where the Tribunals have sought to clarify the question of what is “deliberate behaviour” and, in fact, on a brief review of recent cases, there have been 25 cases where the Tribunal has attempted to consider the matter of deliberate behaviour.  Most of these were VAT cases and, strikingly, most of them were won by HMRC.

In Mr Anthony Clyne v The Commissioners for H M Revenue & Customs [2016] TC05123, the case concerned the alleged misuse of the VAT flat rate scheme where the company did not meet the turnover qualification necessary to use the scheme.  A penalty of £65,660 was assessed based on the assertion that the taxpayer’s actions were deliberate.

Here the Tribunal took the dictionary definition of the term “deliberate” as a starting point which states (in the Oxford English dictionary) that deliberate (as regards action) means:

 “Well weighed or considered; carefully thought out; formed, carried out, etc. with careful consideration and full intention; done of set purpose; studied; not hasty or rash.”

It has been arguing for some time that HMRC’s application of penalties on the deliberate scale has been unjustified.  Indeed, in a recent case, a widow who had inherited a farm from her deceased husband and who was relying on the advice of her husband that a particular type of income was exempt from tax was adjudged by HMRC to have acted deliberately in failing to seek advice on the income:

Clyne case judgement, Para 86:

“A person cannot simply escape liability by claiming complete ignorance where the person clearly knew that he should have taken steps to ascertain the position.  We view the case where a person makes such a conscious choice not to take such steps with the result that an inaccuracy occurs, as no less of a “deliberate inaccuracy”.”  

It is HMRC’s assertion in this and similar cases that they ‘should have known’, ergo, their actions are deliberate due to plentiful information available in HMRC’s manuals that clearly states the correct tax position.

So, the question; are you confident on your tax position? If not, give us a call 01303 230453

HMRC Tax Investigation