People often ask us to explain why HMRC is interested in the circumstances surrounding their tax behaviour, such as paying late or not reporting certain income on their tax return. This is linked to how many years HMRC can go back to recover unpaid tax if a problem is discovered. In most circumstances, where a genuine mistake has been made, the normal time limit is four years. In situations where the person was in some way at fault, this is very much dependent on the reason that the tax was not declared or paid.
HMRC’s powers where the person was at fault are based on whether they were careless or acted deliberately. In addition to determining the amount of tax owed, the type of behaviour also impacts the level of penalty charged. This is why HMRC will ask questions to establish the reason as to why the tax was not paid. The relevant time limits and penalties can be summarised as follows:
- Where the person was careless, HMRC can go back six years and if they acted deliberately, HMRC can go back up to 20 years.
- The tax-geared penalties that HMRC can charge for deliberate behaviour range from 35% to 100%. With careless behaviour, the penalties are normally 15% to 30%.
- If a person failed to file a tax return and did not have a reasonable excuse, HMRC can go back up to 20 years. The penalties can range from 10% to 100%.
Significant savings can be made where it can be shown that the tax owed was due to an error rather than the person intentionally not disclosing the income or gains.
This raises the question as to what HMRC’s definition of deliberate conduct is. Their stated view is set out below:
“a person submitted documents to HMRC containing information that they knew was incorrect, and/or they did not tell HMRC at the right time about information that they knew was relevant to a liability to tax or duty, and/or they made a claim for a payment from HMRC to which they knew they were not entitled.”
This is a subjective test, as the person must have been aware that there was something wrong or that they needed to tell HMRC about a tax liability but did not do so. It can also apply where someone claims a relief or payment and knew at the time that they were not entitled to it.
Where someone has been careless, they have failed to do what a normally prudent and compliant person would do in their position. This is an objective test and compares the actions of the person to someone who took reasonable care to ensure that their tax affairs were correct.
Burden of proof
In civil investigations, the burden of proof rests with HMRC to show that the person knew that what they did or did not do was wrong.
HMRC is increasingly challenging the type of tax behaviour so that they can either go back further to recover unpaid tax or charge a higher tax-geared penalty on the amounts owed.
In cases where the person has been offered the contractual disclosure facility (CDF) to disclose deliberate behaviour, HMRC has tightened up the CDF procedure. Now, any protection from criminal investigation is removed where the person changes their mind as to the type of behaviour that led to the tax liability – deliberate to non-deliberate
What does this mean? It is critical when dealing with HMRC that careful consideration is given to what happened and why. There is the risk, where a person changes their view as to the behaviour that led to the loss of tax, that HMRC will undertake a criminal investigation if they suspect the person was attempting to minimise their exposure to penalties or the number of years open to recover the tax owed.
We are aware that HMRC has considered whether people acted to mislead them in tax avoidance or tax planning arrangements. Most tax schemes are conceived and promoted by tax advisers and take advantage of what is termed a ‘loophole’ in the tax legislation to achieve a tax advantage. While legal, this was not the intention of the government when the legislation was drafted. Anecdotal evidence suggests that there have been limited situations where participants in schemes have been encouraged to back-date documents or mislead HMRC in some way. It is dangerous to assume that just because the promoters have suggested this is legal that this is the case.
For further advice on any of the points covered in this article, please contact your usual Moore adviser.