Tax Insider Reports: HMRC Penalties Explained

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Penalties can be imposed by HM Revenue and Customs (HMRC) for a wide range of tax ‘offences’, i.e. compliance failures such as the late filing of tax returns, late payment of tax, the failure to notify chargeability to tax, and in some cases the failure to provide information and documents.


For taxpayers who are required to submit tax returns to HMRC each year, the potential for penalties is ever present. Penalties can arise not only for the late submission of tax returns, but also for errors in them. Even those who do not need to file a tax return personally can sometimes be liable to a penalty, if they are responsible for a mistake in someone else’s return!

The following is an excerpt from our popular business tax report: HMRC Penalties Explained.

Think You’re Safe From Penalties? Think Again!

The range of powers available to HM Revenue and Customs (HMRC) is considerable. Those powers include an eye-watering range of penalties, which are largely aimed at ‘encouraging’ taxpayers to comply with their tax compliance obligations.

Those taxpayers who are not required to submit tax returns to HMRC might be forgiven for thinking that they are safe from being charged penalties for errors in them. However, as indicated in this section, HMRC’s penalty powers extend beyond tax return filers.

How To Avoid A Penalty For Someone Else’s Mistake!

The penalty rules for errors in tax returns, etc., were originally introduced in Finance Act 2007, and have become relatively familiar to many tax advisers (and, unfortunately, to some taxpayers on the receiving end of a penalty!).

In broad terms, a penalty arises if (for example) an individual submits a tax return that contains an error resulting in a tax liability being understated, where the error was ‘careless’ (i.e. reasonable care was not taken) or deliberate by that individual (FA 2007, Sch 24, para 1). The following table shows the penalty ranges for ‘domestic’ errors (i.e. as mentioned in the introduction, penalty percentages are generally higher where the error giving rise to the penalty involves an offshore matter):

BehaviourMaximum penalty

%

Minimum penalty (prompted disclosure)

%

Minimum penalty  (Unprompted disclosure)

%

Error despite taking reasonable careNo penaltyNo penaltyNo penalty
Careless30150
Deliberate703520
Deliberate and concealed1005030

                                                      

As can be seen from the above table, whether the disclosure of a tax return inaccuracy was ‘prompted’ or ‘unprompted’ can have a significant impact on the level of penalties charged. This issue is therefore an important one, which the tribunal may be called upon to decide (for example, see Mikhail v Revenue and Customs [2016] UKFTT 363 (TC)).

Taxpayers may sometimes be probed by HMRC about their actions (or ‘behaviour’) in certain circumstances, with a view to HMRC seeking to determine whether the taxpayer has taken ‘reasonable care’ or has committed a ‘careless’ or ‘deliberate’ tax offence. There is evidence of HMRC increasingly contending that tax return errors were caused by the taxpayers’ deliberate behaviour, even though their behaviour was arguably only careless (for example, see Scott v Revenue and Customs [2016] UKFTT 599 (TC) and Lyth v Revenue and Customs [2017] UKFTT 549 (TC)). Such HMRC arguments should be strongly resisted in appropriate cases. The generally higher penalties for deliberate behaviour cannot be suspended. Furthermore, various other possible adverse consequences of deliberate behaviour compared with careless behaviour include the potential for HMRC to raise discovery assessments for additional earlier years, the possibility of the taxpayer being placed in HMRC’s ‘managing serious defaulters’ regime, and ‘naming and shaming’ (i.e. the publication of the taxpayer’s details (FA 2009, s 94)).

Practical point

A deliberate tax offence is a serious matter, which in some cases could lead to prosecution. Unrepresented taxpayers who have committed a deliberate tax offence, or are accused by HMRC of doing so, should therefore seek expert professional advice without delay.

Your Fault, Your Penalty!

What if an error in the individual's tax return was caused by someone else? An additional provision in the penalty rules (introduced in Finance Act 2008) deals with errors in a taxpayer’s tax return attributable to another person (FA 2007, Sch 24, para 1A). The other person in the above scenario (referred to as ‘T’ in the legislation) is liable to a penalty broadly if the error in the taxpayer’s return was attributable to T deliberately supplying false information to, or deliberately withholding information from, the taxpayer with the intention of the return being incorrect.

It is possible for both the taxpayer and the ‘other person’ to be liable to a penalty in respect of the same error (FA 2007, Sch 24, para 1A(3)); more on this later.

Breaking New Ground

The first reported case dealing with an ‘another person’ penalty of this kind was Hutchings v Revenue and Customs [2015] UKFTT 9 (TC), where a beneficiary who was found to have withheld information requested by the deceased's executors was liable to a penalty for the resulting error in the inheritance tax (IHT) return prepared by the executors in relation to the deceased.

In that case, the deceased (RH) made a lifetime gift to his son (CH) of funds held in an offshore account in around March 2009. RH died in October 2009. His executors wrote to various members of the deceased's family, including CH. The letter asked the family to disclose if they had received any lifetime gifts from the deceased. CH did not reply to the letter.

The executors submitted an IHT return (form IHT400) in relation to the deceased's death to HMRC. The return made no mention of the cash previously held by the late RH, nor that the value in the offshore account had been transferred to CH seven months before his death. HMRC subsequently received anonymous information that CH had an offshore bank account. HMRC wrote to the executors, and also to CH and his accountant. The executors replied stating that before submitting the IHT return they had made enquiries with the family but had not been provided with any information about lifetime gifts.

HMRC assessed CH to IHT on the basis that he had received a lifetime gift of the offshore funds, and also issued CH with a penalty (under FA 2007, Sch 24, para 1A) in respect of the error in the IHT return submitted by the executors. The appellant appealed against the penalty.

The First-tier Tribunal held on the facts and evidence that the omission of the gift from the IHT return was not the executors’ fault. With regard to the conditions for the imposition of a penalty on CH, the tribunal found that the inaccuracy on the IHT return was attributable to him; that CH withheld information from the executors; that the withholding of information was deliberate; and that CH intentionally did not answer the executors’ questions about gifts with the intention that the IHT return would not contain the information about the gift to him.

The tribunal concluded that the prerequisites to a penalty under FA 2007, Sch 24, para 1A had been met. The appeal was dismissed.

A ‘Double Whammy’?

Coincidentally, HMRC's guidance on penalties includes an example of an incorrect IHT return submitted by an executor, which was caused by the deliberate withholding of information about a bank account, in this instance by the trustees of a settlement (see HMRC's Compliance Handbook manual at CH81168):

HMRC example: Incorrect IHT account

Elizabeth submitted an IHT account in respect of her late father’s estate. The estate exceeds the amount of the IHT ‘nil rate band’ and is wholly non-exempt. It consists of her late father’s own property and a qualifying interest in possession in a settlement.

Elizabeth approached the Trustees of the settlement for information for the IHT account because she did not have access to the settlement’s books and accounts. The Trustees deliberately did not tell her about a bank account containing £50,000.

They:

  • knew that Elizabeth needed the information to complete the IHT account;
  • knew that if they withheld details of the bank account the IHT account would be wrong; and
  • knew that not including the bank account would understate the IHT due.

Elizabeth submits the IHT account on the basis of the information she was given by the Trustees. Sometime later we discover the under-statement.

The Trustees are liable to a penalty.

In this example, Elizabeth took reasonable care, to the best of her ability, to check that the information given to her by the Trustees was accurate and complete, because it was not possible for her to independently check if the details the Trustees gave her were correct.

If she had also failed to take reasonable care, she may also be liable to a penalty for the inaccurate IHT account - see CH81125.

It is interesting to note that HMRC's example considers whether Elizabeth (i.e. the executor who submitted the incorrect IHT return) is also liable to a penalty for the error. As indicated above, a taxpayer may be charged a penalty for the same error. However, no penalties can be charged if the taxpayer took reasonable care to ensure that the information supplied by the other party was correct (CH81166).

In HMRC's view, the executor in its example took reasonable care to check that the information given to her by the trustees was accurate and complete because it was not possible for her to independently check if the details that the trustees gave her were correct.

What constitutes ‘reasonable care’ can be rather a moot point. The fact that HMRC is considering charging a penalty on another person for an error in the taxpayer’s return should not be seen as a ‘get out of jail’ card for the taxpayer; HMRC is likely to consider the question of penalties separately for both parties.

Prove It!

Before HMRC can charge another person a penalty for an inaccuracy in a taxpayer’s return, it needs to be established that the other person knew the consequences of their actions. In HMRC's view ‘it is not a defence for T [the other person] to state that if P [the taxpayer] had conducted further investigation, they would have realised that T provided false information (or withheld pertinent information)’ (see CH81167). However, note that the taxpayer may need to investigate further in order to have taken ‘reasonable care’ and avoid incurring a penalty themselves.

HMRC adds: ‘There is no requirement for T to have any motive for their action but, evidence that T has benefited financially as a result of the inaccuracy in P’s return or other document may add to the weight of evidence that T’s actions were deliberate.’

In the case of tax advisers, HMRC considers it ‘extremely unlikely’ that an adviser would be liable to the ‘another person’ penalty under FA 2007, Sch 24, para 1A. This is on the basis that a tax adviser receives information (and gives advice based on that information), as opposed to the adviser giving information to the taxpayer in a manner that would fall within the conditions for a penalty under the above provisions (CH84545).

However, a tax adviser who engages in dishonest conduct can be subject to other sanctions, including a penalty of up to £50,000, the publication of the agent’s details, and a right of access by HMRC to the agent’s files (FA 2012, Sch 38). In certain circumstances, a tax adviser can be liable to prosecution for fraud.

Practical point

Taxpayers who complete their tax returns by including information supplied by another person should ensure that they have taken ‘reasonable care’ in using that information. Remember that the ‘other person’ penalty provisions in FA 2007, Sch 24, para 1A do not relieve the taxpayer from this obligation for the purposes of avoiding a separate penalty in relation to the other person's error in the return.

As for the ‘other person’ who is considering the deliberate supply of false information, or deliberately withholding information that would result in an incorrect tax return, the message is simple - don't even think about it!

 

For more ways to ensure that you don't get caught out with any unwanted HMRC Penalties, get the full report here!

HMRC Penalties