Its not deliberate, it was an accident! 

The average marriage in the UK is apparently thirty-two years ending with either divorce or death. The average jail sentence for murder is sixteen and a half years. Accountancy Age reports that the average length of a HMRC enquiry has extended to three years but how far can they look back? 

HMRC can, in some circumstances, seek to recover tax for up to the previous twenty tax years (not more than twenty years after the end of the year of assessment). The twenty-year period is invoked where the tax irregularity is brought about deliberately.  The cynic in me feels that many HMRC officers will try to find a loss of tax to be deliberate.  

An adviser who is not familiar with HMRC’s approach on information gathering may fall into traps easily. For example, one recent case started as a digital disclosure and HMRC made additional enquiries. The officer stated that ‘in the absence of a reasonable excuse HMRC can seek recovery for up to 20 years’. The adviser simply informed the client to provide HMRC with further information and computations stretching back to 2005/06. At no point did the adviser challenge HMRC on whether the act was careless or non-deliberate. HMRC could have been limited to 6 years if the act were not deliberate. Having provided further information to HMRC, that information could be ammunitioned to argue acts were deliberate.  

It is important to know what behaviour is deliberate. You would think, if someone were deliberately not paying tax, it would be obvious. Unfortunately, not! An eager HMRC officer might prefer for all behaviours to be deliberate because not only can they open more years, but they get to charge more penalties. But an officer wouldn’t be motivated by more years and higher penalties, would they. Surely, they would be motivated by collecting the correct amount of tax.  

What if you had not reported income, gains (or losses) for a long time – would that amount to deliberate? The longer you forget to report, the more likely HMRC are to argue the behaviour is deliberate but whether it is depends on whether the taxpayer was acting deliberately.  

In a recent case, an officer’s analysis that the behaviour was ‘deliberate’ was based on what the officer regarded as ‘year-on-year noncompliance, together with the awareness of the CGT and self-assessment regime’ and would ‘only lead to the conclusion that the disposals were deliberately not reported, or the required returns were deliberately not submitted’.  The taxpayer had previously incurred substantial capital losses, which had not been claimed on the self-assessment tax returns. The reason returns had not been submitted was because HMRC had informed the taxpayer he need not continue to submit returns. The taxpayer did not understand their requirement to file if they made disposals. If the taxpayer had made a return for those disposals, they would have likely included a claim for loss relief.  

HMRC argued that there was a deliberate loss because disposals had not been reported and earlier losses had not been claimed. It seemed an absurd approach because the taxpayer could not have considered he was acting deliberately, if he believed he had losses available for offset. Furthermore, under code of practice 9, guidance states that HMRC only want the taxpayer to pay the correct amount of tax and that principle would appear to be ignored by denying unclaimed losses: The tax only arose because the losses weren’t claimed and because HMRC contended the act of not reporting gains was deliberate.  

HMRC’s examples of actions that constitute deliberate but not concealed (concealing if something a little worse than being deliberate) behaviour include: 

• systematically paying wages without accounting for operating PAYE; 
• knowingly failing to record all sales, especially where there is a pattern to the under-recording, such as omitting all transactions with a particular customer or at a particular time of the week, month or year; 
• deliberately describing transactions inaccurately or in a way likely to mislead; 
• giving a VAT return to HMRC that includes a figure of net VAT due that is too low because the person does not have the cash at that time to pay the full amount, and later telling HMRC the true figure when they have the funds to pay; 
• claiming a deduction for personal expenses of such a size or frequency that the inaccuracy must have been known; 
• deliberately not making any attempt to ensure that money withdrawn for personal use from a limited company is treated correctly for tax purposes; and 
• deliberately omitting a known asset from an Inheritance Tax account (rather than making enquiries about its value) on the basis that the asset can be included in a corrective account later. 

HMRC provides examples of deliberate and concealed behaviour, which include: 

• creating false invoices to support inaccurate figures in a return; 
• backdating or postdating contracts or invoices; 
• creating false minutes of meetings or minutes of fictitious meetings; 
• destroying books and records so that they are not available; 
• systematically diverting takings into undisclosed bank accounts and covering the traces; 
• invoice routing, for example, the purported sale or purchase of goods through a tax haven company (with no activity undertaken by that company even though contracts exist showing the contrary) leaving profits untaxed in that company; 
• creating sales records that deliberately understate the value of the goods sold, the balance of the full price being paid separately to the person; 
• describing expenditure in the business records in such a way as to make it appear to be business related when it is in fact private (possibly with the supplier agreeing to change the description on the relevant invoices); and 
• altering genuine purchase invoices to inflate their value. 

Examples of concealment include:  

• falsifying evidence of a non-taxable source to explain undisclosed taxable income; 
• falsifying stock records; 
• falsifying invoices; 
• backdating/postdating contracts or invoices; 
• destroying books and records; 
• creating sales records; and 
• concealing excise goods on which the duty has not been paid or deferred with ‘innocent’ goods. 

For a taxpayer to obtain protection from prosecution under code of practice 9, they have to accept they have acted deliberately. If following an in-depth analysis it transpires the act was (or some of the acts were) not deliberate, an adviser will need to persuade HMRC the act was not deliberate. Although, upon appealing an assessment, the onus of  proof would be with HMRC. Care needs to be taken when preparing the initial disclosure and stating what is deliberate. 

HMRC also take a more assertive approach with tax irregularities arising from offshore structures. Due to the complexities with offshore structures and the involvement of professionals, HMRC naturally expect a taxpayer would take a higher level of care. For example, often advice will be provided ahead of the creation of an offshore structure although ongoing advice often lapses. HMRC often view the failing to take continued advice as not taking reasonable care and amounting to a deliberate act. However, the approach is not correct and simply failing to get updated advice does not necessarily mean that an act giving rise to a tax irregularity is deliberate.  

Other common examples where HMRC have asserted deliberate behaviour include those who have embraced the let property campaign and those that took part in a tax avoidance scheme. Often where a taxpayer has undeclared property income over a long period, HMRC will contend that year-on-year non-compliance amounts to deliberate conduct. Similarly, HMRC do try to treat those who used tax avoidance schemes over a prolonged period as acting deliberately especially where the user has relied upon generic advice. Again, we do not agree with HMRC officers who simply assert an act in either of these situations is deliberate.  

In Robert Don Hunter Dougan v HMRC [2022] TC8471, the First Tier Tribunal (FTT) ruled the taxpayer had not deliberately intended to bring about a loss of tax despite failing to file tax returns on time. The burden of proof was on HMRC to prove that discovery assessments had been validly issued, which depended on the taxpayer’s behaviour. If he had acted deliberately, all the discovery assessments would have been issued in time. If he had  acted carelessly, only the last discovery assessment would have been validly issued. 

HMRC failed to prove that the taxpayer deliberately intended to bring about a loss of tax. A failure to file a return was not enough to support a deliberate intention to bring about a loss of tax. The taxpayer was focusing on a new business, he had young children and he intended to catch up with his tax return obligations later, which he had done previously. The taxpayer considered his income would be offset by business losses. The behaviour was careless. 

The failure is non-deliberate unless HMRC can show that, on the balance of probabilities, the failure was deliberate. Whether the failure is deliberate is dependent on the taxpayer’s state of knowledge and mind. The burden of proof passes to HMRC.