How To Avoid A Tax Investigation

An HMRC tax penalty for deliberate inaccuracy can be appealed successfully but how about avoiding an HMRC tax investigation in the first place?

This article How To Avoid A Tax Investigation flows from the case of Omolade v Revenue and Customs [2021] UKFTT 41 (TC) (“Omolade”), which was about whether deposits or transfers into the taxpayer’s bank accounts were income for income tax purposes and whether tax return submitted justified a tax penalty for deliberate inaccuracy.

The taxpayer’s bank account was examined for receipts and HMRC issued a penalty due to deliberate inaccuracy. The taxpayer appealed. The Tax Tribunal accepted that some of the receipts into the taxpayer’s bank account were for transfers from his other bank accounts or deposits from family and friends subsequently paid over to them. However, this did not account for all of the transfers that HMRC was concerned about.

This case highlights a specific feature explored in the guide on How To Appeal A Tax Penalty ie. an appeal against a tax penalty for deliberate inaccuracy.

HMRC publishes a general guide on Penalties For Failure To Notify.

Why Had A Tax Investigation Been Opened?

Thinking about this will help you learn how to avoid a tax investigation.

In Omolade the tax enquiry had been opened due to a low net taxable profit:

Here, the correct position, if it is known at all, would be known by Mr Omolade. HMRC have analysed the Lloyds Statements and must work off inferences, including that the means position of Mr Omolade is very low, with an original net profit of £3,223.00 – it is unlikely that he could live off such low means.

Top Tip: How To Avoid A Tax Investigation

Perhaps a golden rule might be to look closely at what you are saying your taxable income is and if it looks improbable and implausible the chances are your calculations might need to be reviewed for errors. Anyone can make an error in a spreadsheet but the burden is on the taxpayer to ensure the tax return is accurate. This position perhaps ought to be abundantly clear but in general, if you have a mortgage of £500 per month to pay, can you really afford it for example only, on taxable income of say £2,500 per year?

Make sure your numbers make sense otherwise you are going to highlight an issue that HMRC will be obliged to investigate.

The HMRC Flaw

The HMRC Flaw was apparently the failure to take into account transfers into a relevant bank account from the taxpayer’s other bank accounts. Simply because money has been received into a bank account does not mean it is necessarily income.

What The Tax Tribunal Said:

2. HMRC had opened an enquiry to Mr Omolade’s return as he had declared a low net profit for the tax year. As further set out below, having received copies of some of Mr Omolade’s bank statements, HMRC identified various deposits and transfers into his accounts which, being unsatisfied by explanations provided by Mr Omolade, they considered represented additional turnover. HMRC considered that the inaccuracy was deliberate, and the disclosure prompted, and issued a penalty under Schedule 24 FA 2007. They allowed a reduction to that penalty for disclosure, and that reduction was increased following a review.

3. Mr Omolade appealed to the Tribunal, denying that any of the amounts were additional income.

4. Having considered all of the evidence, and bearing in mind that the burden of proof is on Mr Omolade to establish that he has been overcharged by the assessment, we concluded that some of the amounts treated by HMRC as being additional turnover were either transfers from another bank account of Mr Omolade which had been round-tripped or were cash deposits on behalf of friends and family which were then paid across to such persons. However, these explanations could not account for all of the transfers and to that extent we considered that Mr Omolade had not established that he had been overcharged. We have therefore allowed his appeal in part. As regards the penalty, we have concluded that Mr Omolade did know that his self-assessment return was inaccurate. A penalty for a deliberate inaccuracy was thus appropriate, although it needs to be re-calculated in the light of our conclusions as to amendments made by the closure notice.

28. Mr Omolade’s evidence was difficult. The written explanation of the payments which HMRC sought to treat as additional income was that set out in his correspondence with HMRC (described in the Facts below) and his grounds of appeal. Those explanations were very vague, although HMRC had accepted a large part of what he had said and concluded that several large sources of funds were not themselves his income but were short-term interest-free loans. Mr Omolade’s evidence during the hearing was also vague – he was adamant that the amounts HMRC identified were not income, but were cash he deposited on behalf of others, or transfers between his accounts. Ms Arnold challenged him on his position. He did not produce any evidence to corroborate these statements as to the loans – either evidence from these other people or any correspondence (however informal) that he might have had with them. We were not able to accept Mr Omolade’s oral evidence alone, as we had doubts as to the lack of documentation, how and why amounts were deposited by him and then accounted for to others, how he was managing to repay the sums which he stated were being lent to him, how he managed his household expenditure and why he had not been able to provide any copies of financial paperwork himself – either for his bank accounts or credit cards, not accepting that closure of an account will necessarily prevent a person from being able to request copies later. Instead, we have looked for evidence which corroborates his explanations, whether that be directly or by drawing inferences. We have analysed the Lloyds Statements very carefully for this purpose.

120. In respect of the penalty which has been issued, the burden is on HMRC to establish, on the balance of probabilities, that the penalty is due – this includes both its calculation and imposition. We treat Mr Omolade as having appealed against both HMRC’s decision to issue a penalty (as he argues that his behaviour was not deliberate and any inaccuracy was a mistake) and against the amount of the penalty (arguing that he has cooperated fully, which we take to mean that he considers he should be allowed the maximum reduction for disclosure and cooperation).

121. Schedule 24 FA 2007 allows a penalty to be charged where it is found that the inaccuracies have occurred due to careless or deliberate behaviour. HMRC have issued a penalty of £4,516.86. This amount has been charged on the basis that Mr Omolade’s behaviour was deliberate and that the disclosure was prompted. They have allowed an 80% reduction by way of mitigation, but concluded that there were no special circumstances to justify a further reduction.

122. HMRC refer to the following by way of support for their conclusion that the behaviour was deliberate:
(1) The amounts of money that were not declared are large (over £46,000), in comparison to business income declared of £10,234).
(2) The amounts were received regularly throughout the tax year.
(3) He cannot have been unaware of the existence or significance of these amounts.
(4) Failure to declare these amounts cannot be explained by reference to his van having been stolen – that was in September 2012, part way through the tax year, and further records would have been available to Mr Omolade by the end of the year. The records that were in the van and thus stolen would not have assisted Mr Omolade in preparing his return. He should have some documents for the period from October 2012 to April 2013. He referred to using paperless documents for the purpose of preparing his return – no copies of these had been downloaded and sent to HMRC.

123. Ms Arnold submitted that Mr Omolade knowingly submitted an inaccurate document which he hoped HMRC would rely upon. HMRC’s position was that if we did not agree that the behaviour was deliberate, it was at the very least careless, referring to:
(1) Mr Omolade’s self-assessment had included amounts that “someone had told him to include”, thus indicating that the turnover declared had not been based on robust record keeping.
(2) The amount which Mr Omolade now acknowledges as his income does not match that which was declared on his return. The amounts received from Thames Distribution and Lyon UK are £9,102.85, whereas his return declared income of £10,234.

124. Mr Omolade denied that any inaccuracies were deliberate; they were mistakes. Furthermore, he resisted any suggestion that he had not cooperated fully with HMRC, stating that post could go astray and not arrive. He emphasised his willingness to sign the bank mandates (noting that he had signed these twice), and that he had nothing to hide.

125. We adopt the explanation of a deliberate inaccuracy set out by Judge Greenbank in Auxilium Project Management v HMRC [2016] UKFTT 249 (TC) at [63]:

“…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.”

126. Whilst we have found that Mr Omolade was overcharged by the assessment issued by HMRC, and that it should be reduced significantly, we have found that the assessment for additional undeclared income of £6,767 stands.

127. There is minimal information included on Mr Omolade’s self-assessment. The business is described as “TRADING”, with turnover stated as £10,234 and total allowable expenses in Box 19 of £7,011. This box should have been the aggregate of expenses set out in categories elsewhere, but there is no other information.

128. We agree with Ms Arnold that Mr Omolade’s own evidence supports a conclusion that he was careless in preparing his return. However, we have concluded that the behaviour goes beyond that and was deliberate. A friend of Mr Omolade’s had helped him prepare his return, and he explained that they had struggled with the fact that his bank statements had been taken with the van in September 2012. However, Mr Omolade was in a position to know about his activities during the tax year, and about the money that was being transferred into his bank accounts on multiple occasions throughout the tax year. His evidence several years after the event was vague but we consider it inconceivable that when submitting his return Mr Omolade did not know that he had received income other than that from Thames Distribution and Lyon UK (plus the amount declared from PayPal). This is particularly the case in a situation where he had not declared any income (leaving aside the PayPal amount) for the second half of the tax year. We find that he did know that the return had not declared all of his income.

129. We agree that the behaviour was deliberate. We also agree that the disclosure was prompted, as Mr Omolade did not make HMRC aware of the errors before they were found.

130. Paragraph 4(2)(b) of Schedule 24 FA 2007 sets the penalty percentage as no more than 70% of the PLR for a deliberate but not concealed penalty. Paragraph 10 sets the minimum percentage that a penalty can be reduced to – for deliberate and prompted behaviour the minimum is 35% of the PLR, therefore the overall range of the penalty is 35-70% of the PLR. Paragraph 9(1) allows a reduction from the statutory maximum penalty for telling, helping and giving.

131. HMRC have applied a reduction of 80% to the overall penalty percentage, broken down as follows: 20% for telling, (the maximum) 40% for helping and 20% for giving.

132. Whilst we accept that Mr Omolade has generally sought to cooperate, and there is evidence from the enquiry process that he had not received all post (eg he received a letter from HMRC in November 2017 which had been sent in October, which referred to a letter sent in August which he said he had not received). Nevertheless, he failed to produce any papers to HMRC when initially requested and only produced some papers after they issued an information notice (having first received a £300 penalty for non-compliance), he completed the bank mandates as requested by HMRC but only for Lloyds Bank and did not explain that the account ending 0665 was with Halifax Bank and did not provide any copies of bank statements or transaction reports from online banking, and he did not respond to provide any additional information when HMRC asked (in their letter of 13 April 2017) for further information or explanations in relation to the three categories of payments which are in issue. HMRC have allowed 80% of the maximum reduction available and we do not consider that there is any basis to allow a greater reduction.

133. HMRC have considered whether there are special circumstances and concluded that there are none. We do not consider that this decision is flawed, and accordingly we cannot disturb it.

134. As a result of our decision in relation to the closure notice, the amount of the PLR is reduced. Mr Omolade shall be liable for a reduced penalty which shall be calculated by HMRC on the basis of the reduced PLR, that his behaviour was deliberate, the disclosure prompted, allowing a reduction of 80% and no further reduction for special circumstances.

135. For the reasons set out above, we have decided that Mr Omolade has been overcharged by the assessment issued for the tax year 2012-2013 and his appeal is accordingly allowed in part. The amount of the assessment shall be reduced:
(1) taxable income shall be £15,869.85 (£7,860.85 from Thames Distribution, £1,242 from Lyon UK and £6,767 of the Halifax Transfers and Other Transfers); and
(2) allowable expenditure shall be £3,173.97, being 20% of the amended taxable income.

136. HMRC are directed to re-calculate Mr Omolade’s tax liability for the tax year accordingly.

137. The penalty shall also be reduced. The PLR shall be the (reduced) tax liability which is calculated in accordance with the above direction, and the penalty shall be amended on the basis that the behaviour was deliberate, disclosure was prompted and mitigation of 80% is allowed.

Observation: How To Avoid A Tax Investigation

Make sure your numbers make logical sense, can be justified and do not wait until served with an information notice to provide information.

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Disclaimer: Tax Penalty For Deliberate Inaccuracy

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