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Practical points compliance and HMRC powers

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This page has been archived because it is no longer current information but is still relevant, or it is current but over 12 months old
  • Publish date: 04 January 2017
  • Archived on: 31 December 2017

Guidance from ICAEW's Tax Faculty for practitioners on the latest developments in policy, practice and legislation related to tax compliance and HMRC powers.

Practical points
199 What is deliberate behaviour?

Whether a taxpayer has acted with reasonable care, carelessly or deliberately in connection with their tax affairs has important implications as far as their liabilities to tax and penalties are concerned. For example, a discovery assessment can only be made outside the four-year window if the taxpayer has been careless, that is to say has failed to take reasonable care, and can only be made after six years if the taxpayer’s conduct is deliberate in connection with the irregularities in their tax affairs. Furthermore, the penalties for deliberate conduct are rather higher than those for merely careless conduct.

Unfortunately, there is no statutory definition of deliberate behaviour so it was interesting to read the recent tribunal case of Dr Baloch v HMRC TC06092 where the meaning of deliberate behaviour was examined.

Dr Baloch had decided, following advice from his accountant, that he should conduct his company and duly did so. Well, sort of.

Unfortunately, he failed to undertake any of the necessary procedures or deal with any paperwork which would evidence (or indeed cause) the business to be carried on by the company. HMRC successfully argued that Dr Baloch carried on the same business and simply paid his income into a company with a view to saving tax.

HMRC raised the appropriate assessments on Dr Baloch and sought a penalty on the basis that his failures in connection with his tax affairs were deliberate. Interestingly, HMRC said that his behaviour was deliberate because it had guidelines that said so – and furthermore the tax officer had taken advice from an HMRC accountant and had been told that a deliberate penalty was appropriate.

The tribunal, noting that there was no statutory definition for this purpose, examined a number of tribunal decisions which provided helpful guidance on the matter.

There is a bit of a difficulty here because almost anything somebody does wrong will be deliberate, unless it is done by accident. However, that would mean that conduct would be regarded as deliberate and worthy of increased penalties when it did not even reach the threshold of being careless. If you do something wrong even if you were not careless, it would still be deliberate. Clearly that would be a bit perverse.

The tribunal got to grips with this and said that in order for the taxpayer to have acted deliberately he must have submitted an incorrect document knowing that it did not represent the true position, and he must have intended HMRC to accept the incorrect position as being correct. The judges also said that HMRC was wrong to suggest that a failure to check the correctness of something amounts to deliberate behaviour – although it may well indicate careless behaviour.

Moving from this helpful statement of the general principles to the particular case of Dr Baloch, the tribunal concluded that the inaccuracies in his tax returns were deliberate in the sense that he knew the income shown did not reflect the reality and he intended HMRC to rely on them as if they correctly stated the position.

Contributed by Peter Vaines, Field Court Tax Chambers

145 HMRC gets information from foreign governments

HMRC has almost doubled its number of requests to foreign governments for assistance in cases of suspected tax evasion over a five-year period, according to figures obtained by Pinsent Masons. High profile cases, including those linked to the so-called Panama papers leak of April 2016, have increased public pressure on HMRC to pursue those suspected of hiding income and assets offshore.

Enlisting the assistance of foreign tax authorities in tax investigations is a powerful weapon in HMRC’s arsenal – one that it is not hesitating to use in its pursuit of suspected tax evaders. A sizeable number of UK-based high-net-worth-individuals and businesses will have complex tax affairs across multiple jurisdictions. As the amount of information available to HMRC increases, they are likely to come under more scrutiny. HMRC made 1,096 information requests of overseas tax authorities overseas, up by 7% from 1,025 in 2015, according to the figures. These requests were made under ‘direct tax instruments’ including bilateral double taxation agreements, bilateral tax information exchange agreements and OECD information exchange agreements, all of which allow tax authorities to exchange information on taxpayers cross-border on request.

Only 591 requests of this nature were made by HMRC in 2012. A number of new initiatives have been introduced in recent months to make it easier for tax authorities in different jurisdictions to share information on tax avoidance and evasion. The UK now automatically receives information about taxpayers in the Crown Dependencies and British Overseas Territories with tax authorities in those jurisdictions and exchanges information in return, while the OECD’s Common Reporting Standard introduces similar arrangements on a global level. Now is certainly the time for those with tax irregularities involving overseas income and assets to correct any historical non-compliance, as draconian penalties of between 100% and 200% of any unreported tax will bite after 30 September 2018 for those who have made errors in their UK tax returns relating to offshore tax matters.

Ahead of this, a new legal obligation will give taxpayers a final opportunity to correct any returns that fail to properly report offshore matters that would give rise to a UK tax liability. The new penalty will start at 200% of the tax liability. It can be reduced to 100% of the tax liability, but no lower.

In addition, in the most serious cases a further penalty of up to 10% of the value of the relevant asset can also be imposed and HMRC will be able to ‘name and shame’ on their website. Note: The new rules and penalties are covered in the Tax Faculty’s July ‘Compliance update’ webinar, free to view for faculty members.

From PM-Tax, published by Pinsent Masons LLP

124  Another penalty case
  You cannot resist a wry smile reading the case of Fergus Anstock v HMRC TC05784. 

Mr Anstock received a letter from HMRC informing him it was in possession of information giving it reason to suspect he had committed tax fraud. Only a knave or a fool would not treat such a letter with the greatest seriousness. HMRC required him to provide certain documents and when he failed to do so, imposed a penalty for non-compliance. 

The onus of proof is on HMRC to show that the penalty notice has been sent or received by the taxpayer. HMRC provided no evidence in support of its case. Their representative assured the tribunal that the notice had been sent – but the tribunal explained that assertions of advocates do not amount to evidence. It concluded that in the absence of any evidence, HMRC’s case was bound to fail. 

If that was not bad enough the tribunal went on to say: “Even if the respondents had overcome the first hurdle, this appeal would still have succeeded. The notice offends just about every tenet for the proper drafting of the document which is intended to have legal effect.”

The tribunal then set out a whole list of drafting defects, concluding that the notice relied on by HMRC was so poorly and inadequately drafted that it failed the requirement of certainty and precision which is fundamental. These inadequacies robbed the notice of any validity – and the taxpayer cannot be in breach of a notice unless it is valid. 

This is a very robust judgement – and you can bet that had the taxpayer produced documents of this nature, they would have been roundly criticised (and no doubt would have been penalised) by HMRC for their inadequacy. However, there is no sanction on HMRC – and poor Mr Anstock had to go through all the trouble and expense of a hearing before the tribunal which surely should have been unnecessary. 

It may seem amusing, but it isn’t really. For HMRC to behave in this way simply brings it into discredit. Such episodes do absolutely nothing to promote the proper respect for HMRC which is so important. The effective operation of the tax system requires compliance by taxpayers and such conduct can only diminish the likelihood of taxpayers wishing to comply. 

Contributed by Peter Vaines, Field Court Tax Chambers
123  Another discovery assessment case
  The law relating to discovery assessments seems to have a never-ending supply of interesting aspects. The recent case of Gareth Clark v HMRC TC05856 provides a new one. 

What happened here is that HMRC issued a discovery assessment because it took the view that there was a liability to tax which had not been assessed. However, in due course, HMRC concluded that there were actually no grounds for the loss of tax it thought existed. 

However, HMRC found another area where it thought there was a loss of tax and said that the discovery assessment which had previously been issued was sufficient to cover this as well. 

The FTT judge, Mr Clark, said no. He said that the awareness of the hypothetical HMRC officer of the possible loss of tax can only refer to that loss of tax for which the discovery assessment is issued. 

The tribunal said that for the purposes of determining whether a discovery assessment had been validly made, it is necessary to identify the loss of tax that has been asserted by the officer and then test whether the further conditions in s 29, Taxes Management Act 1970 have been met by reference to that loss of tax. That sounds fair enough. 

However, the FTT went on to say  that the tribunal is entitled to apply the law to the facts as it finds them and to form its own view without being confined to the reasons advanced by HMRC nor indeed being constrained by the arguments of either party, before or at any stage in the proceedings. 

That is all very well but it surely means that HMRC can issue a discovery assessment and if that is found to be wrong, can thrash around indefinitely to find something (anything) to which the assessment might apply. That must be a recipe for abuse. It enables HMRC to keep the time limit for an assessment open indefinitely simply by raising a discovery assessment which is groundless in the hope that something will turn up eventually. 

The tribunal did suggest that there was a limitation on the scope of the discovery assessment. It said that it cannot extend to a loss of tax for which no valid assessment was capable of being made by reason of a specific prohibition under s29 – for example, if HMRC was already aware of the relevant facts. Unfortunately, a review of earlier cases on the subject indicates that such limitation is largely illusory. 

Accordingly, it will be increasingly difficult to close down a discovery assessment because while it is alive, it can cover anything. Some reference to the intention of parliament might be appropriate here.

Contributed by Peter Vaines, Field Court Tax Chambers
122  HMRC's current campaigns 
  For some years HMRC has run a series of campaigns – opportunities for taxpayers to come forward and bring their tax affairs up to date. Each campaign is targeted at a specific taxpayer group or type of taxable activity.

There have been no new campaigns launched recently, and most campaigns have now closed, but HMRC has been updating its guidance on the ones that are open. We thought it would be useful to summarise the current campaigns and explain how a taxpayer with arrears – whether or not they fit the terms of a campaign – can contact HMRC to ‘come clean’.

There are three current campaigns. Unlike some previous campaigns, there is no closing date for taking advantage of these.
Let Property Campaign: aimed at individual landlords letting out residential property in the UK or abroad who have not declared their letting income. 
Second Incomes Campaign: aimed at employees resident in the UK who have additional freelance or self-employed income. 
Card Transaction Programme: aimed at those in business who accept credit or debit card payments but have not declared that income to HMRC.

In all these cases, the taxpayer must notify HMRC and then make a disclosure and pay the tax within 90 days. The taxpayer has to self-assess the tax and any penalties, although each campaign does offer a helpline. HMRC may allow time to pay, depending on circumstances.

Agents can notify and make disclosure on behalf of clients.

Disclosures outside the current campaigns

If a disclosure can’t be made under a current open campaign, you can use HMRC’s online Disclosure Service (tinyurl.com/GOV-Disclose-Serv) or telephone the voluntary disclosure helpline on 0300 123 1078. 

If the undeclared UK tax relates wholly or in part to an offshore issue, you can use the online Worldwide Disclosure Facility (WDF). However, if tax fraud is in point, it may be better to ask HMRC to deal with the case under the Contractual Disclosure Facility (Code of Practice 9). See John Cassidy's comments in our Conference report.
New online service to appeal to the tax tribunal
  A new tax tribunal online service is reaching the final stages of its development and is almost ready to go public. It is in the ‘private beta’ stage. As part of the testing, the Ministry of Justice (MoJ) is inviting people to submit appeals to the tax tribunal online, ahead of the full launch of the new service.

The online service offers an alternative to the Notice of Appeal or Close Enquiry paper forms. It includes step-by-step guidance on completing an appeal and gives a reference number instantly when an appeal is submitted successfully.
The MoJ is looking for taxpayers and representatives to submit appeals online. If you are interested in being one of the first to use this service, and in giving feedback to help improve the experience, email taxtribunalshelpdesk@digital.justice.gov.uk

The Tax Faculty would also welcome feedback on how this system is working. Contact Caroline Miskin.
70  Inaccuracy penalties and losses 

The first element of a behavioural penalty for inaccuracy in a return is a percentage based on whether the taxpayer’s mistake was careless, deliberate, or deliberate and concealed, which is further adjusted depending on how the error was disclosed. This percentage is multiplied by the potential lost revenue (PLR) (Sch 24, Finance Act 2007). 

Where the error or mistake relates to a loss claim, the PLR is calculated as the tax which would be avoided/refunded should the loss be set against the taxpayer’s income or gains. HMRC generally insists that the PLR must be based on the whole loss, even if some of the loss has yet to be used against income or gains. However, para 7(5), Sch 24, FA 2007 requires the PLR calculation to ignore any part of the loss that has no prospect of being used. 

In Simon Fry v HMRC TC05651, Mr Fry claimed a capital loss of over £10.7m as an unrecoverable loan to a trader (s253, Taxation of Chargeable Gains Act 1992). He used £202,071 of this loss against other gains, and then left the UK permanently. HMRC challenged the £10.7m loss claim and Mr Fry withdrew that claim. He had to pay £34,554 in CGT on the £202,071 gain previously covered by the loss. 

HMRC imposed an inaccuracy penalty of 15% of the PLR, which was calculated as the CGT paid late plus 10% of the unused loss balance of £10.7m. Mr Fry successfully argued that there was no reasonable prospect of using the balance of the loss, so the penalty should be reduced from £163,192 to £5,183.

From the weekly update published by the Tax Advice Network 

69  Reasonable excuse for late payment of VAT 

The recent case of MOC (Scotland) Ltd v HMRC TC05672 on late payment penalties was successful for the appellant and raises some interesting points – not least that the lack of response from HMRC, despite the appellants’ best efforts to contact it and seek time to pay, constituted a reasonable excuse.

At the hearing, the appellant suggested that the amount HMRC was claiming was incorrect, and it appears that HMRC agreed and lowered it to around £8,000. The appellant was a limited company and the husband and wife who ran it had gone to considerable effort to liaise with HMRC and keep them informed of the difficult financial position they had encountered. This led the tribunal to state in its judgement: “It is to be hoped that the facts in this case in relation to the taxpayer’s contact with HMRC are relatively unique. Judge Mure was very concerned about the possibility of time to pay arrangements. Indeed, at the original hearing when he granted a recess to Mr Boyle [the HMRC presenting officer] to consider the quantum of liability, he asked him to consider the efforts made by Mrs Cook to meet with HMRC officers directly. It was very evident from the correspondence produced that Mr and Mrs Cook had repeatedly contacted HMRC with a singular lack of success.”

The tribunal observed that the appellant undoubtedly and repeatedly attempted to make time to pay arrangements. Had that been successful, one or more of the default surcharges would not have arisen. There was no lack of effort on the part of Mr and Mrs Cook to deal with the matter. The cause of the late payment in each of the periods in question was an insufficiency of funds, but the question for the tribunal was: did the appellant do enough to try to find alternative funding or take other action to counteract the insufficiency?

Mr Cook found full-time employment elsewhere (Mrs Cook was also employed elsewhere), they both obtained personal loans to clear VAT bills, they put the business on the market as a going concern and they also told HMRC that if the sale of the business was not successful then they would put their home up for sale and whichever asset was sold first would clear their VAT liability. They had unsuccessfully attempted to seek a bank overdraft. Thankfully, they were ultimately successful in finding a purchaser for the business.

The tribunal therefore found that the appellant, in the face of very shoddy service from HMRC, repeatedly took considerable time, trouble and effort to try to make acceptable proposals for payment to HMRC, and had a reasonable excuse for late payment of VAT liabilities. The penalties were ordered to be rescinded.

From KS Weekly VAT Update published by Kingston Smith LLP

68  Reasonable excuse  and reliance on an adviser 
  HMRC is not keen on accepting that reliance on an agent or accountant who deals with your tax return (and whose error gives rise to a penalty) can represent a reasonable excuse. Fortunately, the courts do not usually share their reluctance. 

This issue seems to have settled down into the proposition that a taxpayer who relies on a reputable adviser for advice in respect of his or her tax affairs will not be liable to a penalty if they get something wrong. A person who perceives the need to take professional advice, and relies on that advice, will not be negligent even if the advice turns out to be wrong. However, if the taxpayer has reason to believe the advice may not be correct, he or she will not be protected if they just close their eyes to those doubts and hide behind the adviser. 

The recent case of David Steiner v HMRC TC05650 brings a new dimension to this subject. In this case, Mr Steiner’s tax return was dealt with by his accountant. When he changed accountants, they reviewed the position and decided that there were errors in his tax return. They corrected the errors and Mr Steiner made a further payment of tax. HMRC imposed a penalty. 

Mr Steiner claimed that a penalty should not arise because he had a reasonable excuse. He had followed the advice of his accountant and as soon as the error was discovered by his new accountants, the matter was corrected. The FTT did not accept that a reasonable excuse existed. It did not reject it in principle, but because of a lack of evidence. No details were provided of the mistake or how and why it was made, and there was nothing to show that the conditions for the existence of a reasonable excuse existed.

The principle therefore appears to be safe but the tribunal clearly needs more than a general statement that it was the accountant’s fault. It needs sufficient evidence to satisfy it that the taxpayer did behave reasonably in relying on his or her accountant’s advice.

Contributed by Peter Vaines, Field Court Tax Chambers
1 Webinar on PCRT
  The updated professional conduct in relation to taxation (PCRT) was published on 1 November 2016 and comes into effect on 1 March 2017.

The new version includes some important new standards that members must follow when advising on tax avoidance arrangements which build on the existing fundamental ethical principles.

A webinar presented by Nick Parker (ICAEW deputy president), Frank Haskew (head of ICAEW Tax Faculty) and Sophie Falcon (ICAEW Professional Standards), providing a general overview of the PCRT followed by a specific focus on the new standards, is available to view.

The webinar also addresses questions about how these standards are likely to apply in practice.

If you advise on tax, then you should watch this webinar.