Sanctions against Deliberate Defaulters

As the initial furore over CoVid-19 dies down and the CJRS is phased out, HMRC are starting to ramp up their enquiries again. The quickest way for HMRC to get money back in the coffers is to focus on tax evasion – i.e. those who have deliberately underdeclared their income – and specifically undeclared income and gains from overseas assets. At the end of a tax investigation, HMRC has powers to issue non-financial sanctions against Deliberate Defaulters. 

The reasons for this is two fold. Firstly, the penalties for deliberate behaviour are much higher than for those who have taken reasonable care or were simply careless. The penalties for tax offences relating to overseas assets are even higher and can result in a jail sentence so in practice could be a good deterrent. I will address overseas penalties specifically in a separate article.

Secondly, generally speaking, individuals with assets overseas tend to be wealthier. The tax take from overseas assets also tends to be higher than the majority of UK tax enquiries and with the amount of information coming to HMRC from overseas as a result of the Automatic Exchange of Information under the Common Reporting Standard, HMRC are ahead of the game. Advisers may only become aware that their clients have overseas assets when their clients receive a letter from HMRC.

In addition to facing higher penalties, those who are deemed to have acted deliberately in underdeclaring their UK tax liabilities also face non-financial sanctions.

Publishing Details of Deliberate Defaulters (PDDD)

The legislation giving HMRC the right to publish details of deliberate defaulters is at s94, Finance Act 2009 and all legislative references in this article refer to this section. The criteria for publishing details is that the individual or entity has been charged a penalty for deliberately understating their tax liability, “in consequence of an investigation” (paragraph 1, s94 FA2009) by HMRC and where the tax at risk was greater than £25,000.

This sanction also applies to some VAT and excise penalties though this article will focus on income tax and capital gains tax.

According to the legislation, HMRC cannot publish details if there is any mitigation of the deliberate penalty for an inaccuracy in relation to tax arising from UK assets (para 10a), or full mitigation of an inaccuracy penalty as a result of an unprompted disclosure in relation to an overseas matter (para 10aa). For failure to notify, taxpayer details should not be published if a full reduction is given for disclosure. Again for offshore matters, this only applies if the disclosure was unprompted (para 10b and 10c).

Referring back to paragraph 1 of the legislation, advisers should be aware that where a disclosure is made and HMRC then request further information, they may consider this to be “an investigation”. Depending on the amount of information being requested and whether the client is then charged a deliberate penalty, HMRC may assert that the penalty was charged “in consequence of an investigation”, which could then result in the publication of your client’s details.

HMRC have 12 months from the day the penalty becomes final to publish details of the defaulter (para 8), including name, address, nature of their business, tax at stake, the period over which the tax became payable and penalties. The details are published online and remain online for a maximum period of 12months (para 9). Where the penalty relates to a business, HMRC may publish details of the person(s) who controlled the entity and obtained the tax advantage. This includes partners, directors, trustees etc (para 4A to 4D).

For many people, having their details published is not a major issue. The people it is likely to affect more are those who are in the public eye – TV personalities, sportspeople etc. The more high profile the client, the more the adviser needs to be aware of the legislation and make the client aware of it from the beginning of the process.

Readers may have seen articles in the media about Adil Rashid, an England World Cup Cricketer whose details were published by HMRC under the PDDD regime on 19 March 2020. His tax liability was £100,280.89 and the penalties were 38608.13. The mathematicians of you will see immediately that the penalties were less than 40% (where the lowest for deliberate inaccuracies are 35% for a prompted disclosure or 20% for unprompted). Assuming that the disclosure was prompted, say under a CoP9 investigation, it is clear that there was a huge amount of cooperation to limit the penalty.

Another two people on the same list of defaulters have a penalty of 36.75% and it would be interesting to see the reasons why HMRC did not give full mitigation; we are seeing more and more that penalties are mitigated almost to the full extent to allow HMRC to publish details and it is becoming more difficult to dissuade them. Call me cynical but where individuals are in the public domain, HMRC may wish to publish details as a deterrent to the general public and to send the message that HMRC are “cracking down on tax evaders”. It seems the higher profile the client the more at risk they are of being published – and not in a good way.

An appeal against HMRC’s decision to publish a client’s details can only be made via Judicial Review, not the tax tribunal. At tribunal, the person can only appeal against the tax and penalties due if they consider them to be incorrect and a win at tribunal on this basis may then affect whether details are published.

The decision to publish a person’s details is made by the nominated Deputy Director of Managing Serious Defaulters Programme who will ask if there are any reasons why the tax payer considers that their details should not be published. HMRC note in CH19040 that there may be “exceptional circumstances where publication of some or all of the details are not appropriate” and they specifically quote a risk to the individual’s safety or potential prejudice to an ongoing criminal investigation.

Clearly it is very difficult to change HMRC’s decision to publish and in practice, the majority of appeals against publication are refused.

In addition to publishing details of deliberate defaulters, HMRC may also put the individual into a program for Managing Serious Defaulters.

Managing Serious Defaulters (MSD)

Broadly speaking, the MSD program is for people who have deliberately underdeclared their tax liabilities and were charged a penalty. Specifically, they

• were identified during a civil investigation of fraud, as presenting an ongoing high risk of tax evasion;
• were charged a civil evasion penalty for dishonesty;
• paid a security for VAT, Environmental Taxes, PAYE or National Insurance contributions;
• tried to get around paying outstanding tax liabilities by becoming insolvent; or
• were successfully prosecuted for a tax matter;

If a person is going to be brought into this regime, HMRC will notify them in writing explaining what this means. People under the MSD program will be monitored for up to five years. This means that their tax returns will undergo additional scrutiny and HMRC may require them to produce supporting documentation underpinning the tax return.

In some cases, HMRC may also, depending on their resources, make unannounced visits to business premises to check controls. Where HMRC issue Schedule 36 information notices, whilst it is important for clients to comply, advisers should also ensure that information provided is in line with what legislation allows HMRC to request (see this article for more details on Sch 36 information notices).

In terms of going insolvent to avoid paying what they owe, this is likely to be a bigger problem for HMRC now, following the CoVid pandemic. Finance Act 2020 contains legislation allowing HMRC to go after Directors/key personnel in corporates for outstanding tax liabilities, where the company engaged in tax avoidance and the relevant person benefited from those arrangements.

In my view, those who engaged in tax avoidance are not serious defaulters on the basis that many Tax Avoidance Schemes have not yet been litigated and of course, at the time they were entered into, relevant tax avoidance legislation may not have existed. Nonetheless, HMRC consider that where there are (in their opinion) artificial arrangements, they must do what it takes to reclaim the taxes. Whether or not HMRC will look to put all these individuals in the MSD regime remains to be seen, particularly if the individuals have since come out of the avoidance schemes and depending on whether HMRC have the resources to subject each return to scrutiny.

Being put into the MSD regime means that taxpayers and their advisers will need to ensure more than ever that each entry on the tax return can be supported by relevant workings and documentation. Should HMRC request further information, this can be costly to produce and the client should be made aware that additional fees may be charged.

If a client is making a disclosure or being investigated, the possibility of having their details published or being put into the MSD regime should be brought to their attention sooner rather than later. It can impact the client’s cooperation and in general, where sufficient and accurate information is provided by the client in a timely manner, investigations can be concluded sooner and with lower risk of being put into the PDDD and MSD regimes.

This article by Mala Kapacee was originally published in the Taxation Magazine on 8 September 2020.

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