Tax penalties: Sorting ‘deliberate’ from ‘careless’ mistakes
Deliberate mistakes trigger higher penalties than careless mistakes and carry the risk of public naming and shaming. It’s therefore important to understand what makes a mistake ‘deliberate’.
Careless errors carry a maximum penalty of 30% of the tax under-assessed, while deliberate errors can draw a penalty of 70%, or up to 100% if the taxpayer also tried to conceal their error. Those percentages are set out in FA 2007, Schedule 24 and apply to UK domestic matters. If the mistake or inaccuracy relates to an offshore matter, the maximum penalty percentages may be doubled.
Additionally, deliberate errors which result in under-assessed tax of £25,000 or more can result in the taxpayer being put on the list of deliberate defaulters - public naming and shaming.
Is ‘deliberate’ defined?
The wording in FA 2007 Schedule 24 gives some guidance on the words “careless” and “concealed”, but leaves “deliberate” just hanging there:
“Inaccuracy in a document… is:
(a) “careless” if the inaccuracy is due to failure... to take reasonable care,
(b) “deliberate but not concealed” if the inaccuracy is deliberate… but [the taxpayer] does not make arrangements to conceal it, and
(c) “deliberate and concealed” if the inaccuracy is deliberate… and [the taxpayer] makes arrangements to conceal it (for example, by submitting false evidence in support of an inaccurate figure).”
HMRC’s policy staff at the time of introducing the new penalty regime took the view that a specific tax definition for deliberateness was not needed: the word is generally well-understood by the public. In any event, the tax tribunals would resolve any disputes.
Which is what is slowly happening – a trickle of cases at first tier tribunal (FTT) have looked at some situations where HMRC says a taxpayer’s inaccuracies were deliberate but the taxpayer says they were just careless. Let us examine some of the principles which are starting to emerge.
Knowledge and intention
In Auxilium Project Management (TC05024), the FTT found that “a deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document”.
This is a subjective test. The man on the Clapham omnibus may be our essential guide for questions of carelessness (did you take the reasonable steps which a hypothetical reasonable taxpayer would have taken?), but he doesn’t matter at all when it comes to deliberateness: “it is a question of knowledge and intention of the particular taxpayer at the time” (my emphasis).
In Anthony Clynes (TC05123) the FTT considered that an inaccuracy “may also be held to be deliberate where it is found that the person consciously or intentionally chose not find out the correct position, in particular where the circumstances are such that the person knew that he
should do so”.
So, if the taxpayer knows there are steps they could take to find out the correct position, but consciously chose not to take those steps, this is “no less of a deliberate inaccuracy… than making the inaccuracy with full knowledge of the inaccuracy”.
While this decision might seem harsh and risks blurring the lines between deliberate and careless behaviour, it is important to remember the principle from Auxilium that matters is the taxpayer’s knowledge and intention.
When the taxpayer completes a return, what is going through their mind? If they think the return is probably correct and don’t check, that should still be carelessness; if they think it’s probably wrong but decide not to find out, then that would be deliberate error.
Not consciously aware of the error
With the benefit of both the above decisions before them, the FTT examined the case of Dorothy Lyth (TC05994), who had submitted a tax return from which a £907,000 capital gain was omitted. She had previously set aside funds to settle the CGT liability but by the time of filing the return she had been diagnosed with severe depression and was, by her own admission, “not caring and going through the motions… acting very much on auto-pilot”. Although she was an accountant (FCAA), capital gains tax was not part of her everyday skill set, and therefore not part of her “auto-pilot”.
Based on these facts, the tribunal ruled that the mistake was careless but not deliberate, as she “was not as a matter of fact aware of the inaccuracy when she completed and then submitted the return. Nor was it the case that she consciously or intentionally chose not to find out the correct position”.
Was aware of the error
Dr Baloch (TC06092) worked as a locum doctor through an agency. For some years he used a limited company as a trading vehicle, although he appears not to have told the agency, who were unaware of its existence. He issued timesheets and invoices to the agency in his own name and received fees paid into his personal account. For the first two years, the company didn’t even have a bank account!
His tax returns showed salary from the company, but neither dividends nor loan interest benefit on his heavily overdrawn director’s loan account. Overruling his accountant, he refused to declare the CTA 2010 s 455 corporation tax liability arising on that loan account.
Dr Baloch lost his appeal because the reality of his arrangements did not carry through to either his relationship with the agency or his disclosures to HMRC. The FTT found it impossible to believe that he was not fully aware that his returns were inaccurate. “He might have intended that the income should be treated as if it had been earned by the company, but it is not credible that he believed that the profits had in fact been earned by the company”.
Burden of proof
How do the tax tribunals discover what a taxpayer’s knowledge and intention was?
It is up to HMRC to show that someone’s actions were deliberate. However, this does not mean that they have to produce positive evidence of an intention.
“HMRC are entitled to invite the tribunal to draw inferences from the circumstances as a whole”.
This quotation comes from Mehaffey Ltd (TC06194), a VAT case which was decided based on the overall implausibility of the taxpayer’s explanations. As with Baloch, the FTT came to the conclusion that, on the balance of probabilities, the company knew its returns must be wrong but filed them anyway.
There is still no definitive case law definition of a deliberate inaccuracy, but we can draw some general principles.
It is very much a test of what the taxpayer knows, and what they intended at the time they made the return. If they believed the number included on the return or document was the right one, but in fact it was incorrect, the taxpayer’s mistake is careless, not deliberate.
Did the taxpayer have any doubts? If they thought the figure might be wrong, they must do some research to check; not doing so pushes the mistake out of the careless bracket towards deliberate. Because this depends so much on what is going on in the taxpayer’s mind, the pattern of facts surrounding that taxpayer is important.
At some stage, the taxpayer (or you on their behalf) may need to convince a tribunal judge that they genuinely could not see anything wrong with the numbers he filed.
Finally, if the taxpayer knew full well that the number used was wrong, but used it anyway, that most definitely is a deliberate mistake.