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Defending deliberate HMRC penalties

Tax director Gary Rowson looks at the alarming increase in deliberate penalties from HMRC and suggests ways to help defend clients, including examples of recent case law, the meaning of ‘deliberate’ and burden of proof.


The HMRC data recently published by fee protection insurance experts PFP confirms my practical experience – HMRC is increasingly seeking to charge deliberate penalties for inaccuracies in a tax return. Over the last three years, there has been a 64% increase in the number of people penalised for deliberate errors. In the same period, there has been a fall in the number of penalties charged for carelessness. Is this a coincidence or does it show a hardening in HMRC’s attitude? Are taxpayers becoming more dishonest or is it simply down to HMRC being better at catching those who set out to break the law? More worryingly, is it because agents are not properly defending their clients’ position? 

Let’s not kid ourselves, HMRC checks tax returns because it believes that the person’s tax affairs are (or may be) incorrect. All HMRC checks and enquiries should be managed with that in mind. Agents should also remember that, if inaccuracies are established, HMRC will look to impose a penalty. Proper case management throughout the compliance check will help protect the client throughout and retain the flexibility to argue against the imposition of penalties.

In some scenarios, an early admission of deliberate conduct is required. For example, any taxpayer wanting to take advantage of the assurances against criminal investigation offered by HMRC’s Contractual Disclosure Facility must accept that they have deliberately brought about a loss of tax. In such cases, a properly presented disclosure will help mitigate the penalty, but the conduct involved will not be in dispute.

Meaning of deliberate

Somewhat unhelpfully, the word deliberate is not defined in statute. However, the Oxford English Dictionary defines it as “well weighed or considered; carefully thought out; formed, carried out etc with careful consideration and full intention; done of set purpose; studied; not hasty or rash”.

In December 2006, HMRC published a consultation document entitled A new approach for penalties for incorrect tax returns, which preceded the introduction of the new penalty legislation in Sch 24, Finance Act 2007 (FA 2007). Annex A provides an “early draft of guidance and glossary of terms” and defines ‘deliberate understatement’ as requiring “conscious intention to do or not do something”.

I will come to more recent case law on deliberate conduct shortly. However, the Upper Tribunal (UT) considered similar provisions in the case of Khan v Financial Conduct Authority FS/2013/002 and opened its decision by finding that the term ‘deliberate’ imports the meaning of ‘dishonesty’. It then went on to say that its task was to determine whether Mr Khan’s behaviour was “dishonest, reckless or negligent”.

In the case of Sch 24, FA 2007, the phrase ‘deliberate’ replaces ‘fraud’ and ‘careless’ replaces ‘negligence’. The thrust of the consultation document is that the new terms are more easily understood and the Explanatory Notes to the 2007 Finance Bill say: “These definitions of behaviour are designed to replace the current concepts of misdeclaration, repeated misdeclaration, dishonest conduct and reasonable excuse (in relation to inaccuracies) for VAT and, for direct taxes, they replace fraudulent and negligent conduct. They provide a uniform language for behaviours using more accessible language across the taxes covered.”

There is no indication anywhere in the pre-enacting history or in Hansard that parliament intended to lower the threshold. In Wellington v Reynolds Ch D 1962 40 TC 209, a judgement later approved by the Court of Appeal in Lack v Doggett CA1970 46 TC497, Wilberforce J examined the meaning of the statutory phrase ‘fraud or wilful default’ saying that: “… it is clear that what I have to find is some deliberate or intentional failure to do what the taxpayer ought to have done, knowing that to omit to do so was wrong.”

So, it seems clear from the pre-enacting history, from historic cases on fraud and from the UT decision in Khan that for an action to be ‘deliberate’ within the meaning of Sch 24, FA 2007, a person must have acted ‘dishonestly’ as that term is understood by “the ordinary standards of reasonable and honest people” and must also have known that it was wrong.

Recent case law

The tax tribunals have repeatedly stated that whether behaviour is ‘deliberate’ is a subjective test. In the recent case of Patrick Cannon v HMRC TC06254, the First-tier Tribunal (FTT) adopted the position taken in Auxilium Project Management v HMRC TC05024, where the tribunal said 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”.

The view I have outlined above is also in line with the FTT’s decision in Dr Baloch v HMRC TC06092. In deciding whether a deliberate penalty should be applied, the tribunal considered a number of other decisions (which are too numerous to mention here, but are a useful point of reference) and said that for the taxpayer to have acted deliberately he must have submitted an incorrect document knowing that it did not represent a 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.

Burden of proof

A fact that is often forgotten (by agents and HMRC officers alike) is that the burden of proof in penalty cases is on HMRC. This is confirmed in HMRC’s published manuals. In the Appeals reviews and tribunals guidance manual at ARTG8395, HMRC says: “The Statement of Case should also say on which party HMRC believes the burden of proof rests, for example in cases of penalties, the burden is on HMRC to prove that a penalty is due, while in assessments or return amendments, the burden is on the customer to prove that the amount of assessed tax or profits is wrong.”

In the Compliance Handbook at CH81195, HMRC’s guidance on inaccuracy penalties makes the same point and says “the onus of proof for penalty decisions falls upon us”.

The penalty guidance in the Enquiry Manual at EM4512 also states that “in any penalty appeal the onus of proof is on HMRC to establish the penalty not on the taxpayer to displace it”.

Although the civil standard of proof is simply the balance of probabilities, HMRC should (if necessary) be reminded of the comments reaffirmed by the tribunal in Cannon, that: “...it is a general requirement of a fair trial that the more serious the allegation relied upon by one party, such as an allegation of dishonesty or the making of a deliberate misrepresentation to [HMRC], the fact-finding tribunal must be the more assiduous to ensure that the evidence relied upon by the person making that allegation [ie, HMRC] is sufficiently credible, relevant and cogent to warrant such an adverse finding.”


The key question here is whether the taxpayer acted ‘deliberately’ in allowing an inaccurate tax return to be filed. Did they know that the return was wrong when it was submitted? The law penalises the filing of an incorrect document. The fact that the returns might later be shown to be incorrect does not retrospectively cause the taxpayer’s earlier behaviour to be categorised as deliberate.

For any allegations of deliberate wrongdoing to be upheld, HMRC must prove that the taxpayer knew that what they were doing was wrong, but did it anyway. It is not enough for HMRC to show that they ought to have taken further advice or that they ought to have known.

In all cases, agents should ask themselves: has HMRC proved its case? If not, then they should be prepared to robustly defend their client’s position and, if necessary, appeal to the tribunal. HMRC should be put to the task of proving that there has been a loss of tax attributable to deliberate conduct.

Furthermore, agents should consider: is the alternative credible? If it is, a detailed, well-constructed counter-argument can, in my experience, often secure the desired result. The removal of a deliberate penalty can also lead, among other things, to fewer years being assessable and your client not being considered for the Managing Serious Defaulters Regime.

About the author

Gary Rowson is tax director at Lancaster Knox and member of the Tax Faculty’s Tax Investigation Practitioners Group Committee and Enquiries & Appeals Committee