The right and requirement for HMRC to issue an HMRC tax penalty does need certain conditions to have arisen, otherwise, there would be no such entitlement.
It is important to get your opening move right. You will not have a better opportunity to be seen as credible. The important thing to remember in this guide is that when you enter an appeals process you are going into a litigation arena and you should do so from a position of strength. When you appeal a tax penalty, you are the party initiating a piece of litigation in the Tax Tribunal, not HMRC. This is not a game like chess with a checkmate ending. You should understand the rules, pick your opening move carefully, and any concessions that may materially affect how matters develop to attempt to achieve a successful resolution. For the avoidance of any doubt, the duty of the taxpayer is to come completely clean to HMRC. Although the penalty regimes run through various pieces of tax legislation there is a recurring theme in how it is applied in most cases.
For the purposes of this guide, it will be considered with reference to Schedule 24 of the Finance Act 2007 which was brought in to simplify matters. Further, a case will be briefly reviewed on a successful appeal in respect of the case of the well-known businessman Simon Dolan, who in recent times has been taking Her Majesty’s Government to court over the Covid-19 restrictions. There was an error in one of his personal tax returns that was considered in the Tax Tribunal in the case of Dolan v Revenue & Customs [2020] UKFTT 448 (TC) (“the Dolan Case”).
What Is An HMRC Tax Penalty?
A tax penalty is a charge levied following an assessment to tax following an inaccuracy in a tax return or the failure to file a return. It is a regime designed to ensure proper compliance with the tax legislation. If you dispute a tax penalty following a tax enquiry, then the first thing to do is request that it be reviewed by HMRC and explain why you think it has been raised unfairly giving your reasons.
How Does HMRC Determine The Amount Of A Tax Penalty?
In order to successfully appeal an HMRC tax penalty one needs to know how the penalty has been determined and then consider if it has been unfairly levied. To determine the amount of a tax penalty HMRC will consider what led to the error on the tax return or why it has not been filed to enable a calculation to be undertaken as to the amount of the tax penalty. HMRC determine the amount of a tax penalty by three types of conduct criteria. Does the error in the taxpayer’s tax return arise from behaviour that was careless, deliberate or concealed? It is an escalating penalty regime whereby behaviour that is concealed results in a higher tax penalty compared with behaviour that is simply deliberate. Careless conduct results in the lowest form of penalty.
Mistakes happen and that is a fact of life. When a mistake is made that is not intentional, the penalty that HMRC can levy on a person in relation to a UK matter is up to 30% of the tax revenue in question.
Delivery Of HMRC Tax Penalty Notice
An HMRC tax penalty notice can be delivered by post and Section 115 of the Taxes Management Act 1970 at the taxpayer’s usual or last known place of residence. Delivery of an HMRC tax penalty is done by an automated system. In light of Section 103 of the Finance Act 2020, delivery of such a penalty notice can be done by use of a computer.
Where a taxpayer is liable for a tax penalty, HMRC must according to paragraphs 18(1) of Schedule 55 of the Finance Act 2009 and 11(1) of Schedule 56 of the Finance Act 2009 (a) assess the penalty, (b) notify the taxpayer, and (c) state in the notice the period in respect of which the penalty is assessed.
Careless Conduct
A penalty for careless conduct arises where the inaccuracy results from the failure by the person to take reasonable care. The standard by which this falls to be judged is that of a prudent and reasonable taxpayer in the position of the taxpayer in question. You have to be completely honest with yourself as to what you knew and what you have disclosed. Those facts will need to be considered based on your anticipated degree of sophistication about tax matters. For example, only, it is improbable that a qualified accountant will attain the same level of forbearance as a qualified plumber. Both undoubted experts in their chosen fields but the accountant will be expected to be able to find the correct position with some relative ease. So if he or she has not taken steps to discover the accurate position the Tax Tribunal might not be sympathetic.
Deliberate Conduct
When a tax error is made that is deliberate then there is a big jump from the ‘careless’ threshold. The penalty that HMRC can levy on a person in relation to a UK matter is up to 70% of the tax revenue in question.
In cases where the assessment of the conduct complained about is more difficult to establish, one needs to look into it in more detail to consider how an independent Tax Tribunal is going to view matters. 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 (see Clynes v HMRC [2016] UKFTT 369 (TC)). 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 question is not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate. It is a question of the knowledge and intention of the particular taxpayer at the time.
Inaccuracy may be held to be deliberate where it is found that the person consciously or intentionally chose not to find out the correct position, in particular, where the circumstances are such that the person knew that he should do so. 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. Where a person makes a conscious choice not to take such steps with the result that an inaccuracy occurs, that is considered no less of a “deliberate inaccuracy” on that person’s part than making the inaccuracy with full knowledge of the inaccuracy.
Concealed Conduct
This is by far the most serious of the criteria to be judged and if you are considered to not only have deliberately misled HMRC in your tax return but attempted to and or in fact, concealed the error or omission, then you can suffer a penalty at up to 100% in a UK tax matter of the tax in question.
Reasons For HMRC Tax Penalty
When HMRC levy a tax penalty they will have to provide their reasons for the way that they have determined if a penalty is due to careless, deliberate, or concealed behaviour by the taxpayer. Usually, the lowest level ie. ‘careless’ conduct will be evident and not be in great need of explanation. However, it is possible that a tax penalty for careless behaviour could be erroneously levied, which is in need of being appealed. When HMRC says that the conduct leading to the tax error is deliberate or even concealed then the burden of proof is with HMRC to show that this is in fact the case.
Successful Appeal Of An HMRC Tax Penalty
The Dolan Case is an example where a successful appeal was lodged by Simon Dolan in the Tax Tribunal in circumstances where HMRC considered that the error on Mr Dolan’s personal tax return was deliberate. Mr Dolan disagreed. He said the error was at worst careless and amounted to a mistake after taking reasonable care such that no penalty ought to be due. The appeal was successful because the Tribunal considered the error to have been careless, not deliberate.
Why Did Mr Dolan’s Appeal Succeed
What Mr Dolan did to succeed was as follows:
- There was no dispute about the inaccuracy and he fully accepted the position.
- He was held by the Tribunal to be a credible witness.
- HMRC did not discharge the burden of proof to show deliberate conduct.
