Deliberate Behaviour

In general, where an inaccuracy comes about as a result of a simple error the case is treated more leniently than where the under-declaration of tax (or excessive repayment claim) is made where the taxpayer acted deliberately.

Until recently, the definition of “deliberate” was fairly straightforward; that the taxpayer had to have known that the return was incorrect and submitted it knowing that the resulting tax liability would result in an under-declaration of tax or an excessive repayment claim.

There have been a number of cases going through the UK courts recently and rather than rehash these here, we look at HMRC’s interpretation of “deliberate” and how this, together with case decisions, can affect future proceedings.

Potential Effects on the Taxpayer

Apart from financial (penalty loading) repercussions on the taxpayer, an assertion of deliberate behaviour can affect:

• how far back HMRC can go to assess the outstanding tax due;
• whether the taxpayer is put in the Managing Deliberate Defaulters and Publishing Details of Deliberate Defaulters (PDDD) regimes;
• reputational consequences of the above, particularly PDDD.

Definition of “Fraud”

HMRC in their Enquiry Manual helpfully provide the definition of fraud to their officers in EM5106:

“Not only is a misrepresentation fraudulent if it was known or believed by the representor to be false when made, but mere non-belief in the truth is also indicative of fraud. Thus, whenever a person makes a false statement which he does not actually and honestly believe to be true, for purposes of civil liability, that statement is as fraudulent as if he had stated that which he did not know to be true, or knew or believed to be false…A representor will not, however, be fraudulent if he believed the statement to be true in the sense in which he understood it, provided that was a meaning which might reasonably be attached to it, even though the court later holds that the statement objectively bears another meaning, which the representor did not believe.”

The manuals also state at CH81159 that “A deliberate but not concealed inaccuracy occurs when a person gives HMRC a document that they know contains an inaccuracy. It is not necessary to demonstrate that the person knew what the accurate figure was, only that they knew that the figure they put on the document was not accurate.”

In Finance Bill 2007, the penalty regime was restructured to introduce (among other changes) stepped penalties and new wording; the word “deliberate” replaced “fraud” and “careless” replaced “negligence.” There is no implication in the consultation document that the thresholds for deliberate or careless behavior were intended to be reduced as compared to the previous wording of “fraud” and “negligence.”

The Cambridge English Dictionary refers to “fraud” as “the crime of getting money by deceiving people.” Most people would understand that deception is deliberate and fraud contains an inherent intention to mislead, as suggested in Changtel Solutions Limited and another v HMRC [2016] 25 UKFTT 399 (TC):

“When it comes the imposition of a penalty, inaccuracy is not, in and of itself, enough. That is simply the act. There has to be more—namely, a mental element. The penalty regime is fault-based (‘degrees of culpability’). The basic structure is to divide inaccuracies into ‘careless’ (less serious) and ‘deliberate’ (more serious). Unfortunately, the legislation does not provide any further guidance as to where the dividing line between the two classes of inaccuracy is to be found. It is an important line to draw, or to discern, since the penalties are levied with reference to that element…We consider that ‘careless’ for these purposes can be equated with ‘negligent conduct’ in the context of discovery assessments, which is to be judged with reference to the reasonable taxpayer, and what the (hypothetical) reasonable taxpayer, exercising reasonable diligence in the completion and submission of his return, would have done…’Deliberate’ goes beyond that. In terms of inaccuracy, we consider it to mean ‘done with a set purpose’. That purpose must be to produce an inaccuracy, within the meaning of Schedule 24. There is an element of intent in ‘deliberate’ which is not present in ‘careless’. It represents a higher degree of fault.”

In Rhodes & Anor [2013] TC 02825, the tribunal stated that “Negligent conduct is qualitatively different from fraud or deliberate concealment, in that negligence arises from a careless act of falling below the standards of a prudent taxpayer, and does not involve a deliberate act as characterised in fraud or deliberate concealment” when referring to the thresholds for fraud as defined in section 32 of the Limitation Act 1980, section 32. Common understanding of “deliberate” is that it requires a conscious act to take place or a conscious inaction.

Despite this, there are provisions in tax legislation that do not provide for careless behaviour. One example is Schedule 41 of the Finance Act 2008, where a failure to notify chargeability to tax will result in repercussions consistent with deliberate behaviour (e.g. a 20-year assessment period) unless reasonable excuse can be demonstrated: worrying if we consider that a failure to notify may not indicate that a conscious act has taken place, rather a misunderstanding of deadlines or whether there is a requirement to notify if no profits have been made.

We have seen this brought into legislation again in SI2017/970, where no intention is required for deliberate behaviour to be asserted and penalised in relation to lost tax revenues arising from overseas assets. In this case, it appears that since it is more difficult for HMRC to obtain information in relation to overseas assets, the taxpayer “must” have assets overseas with a view to committing tax fraud. HMRC are effectively shifting the responsibility for collecting tax on to the taxpayers, and rather than assisting them to do so, will penalise them if they get it wrong.

While this level of culpability for a (possible) mistake may appear surprising to non-lawyers, it is one of the reasons that the judges in HMRC v Tooth [2019] EWCA Civ 826 (“Tooth”) considered the definition of “deliberate” to be broader than the dictionary definitions and commonly understood meaning.

In Tooth the judges dissected the legislation word by word, highlighting that “The deliberateness requirements of section 29(4) and 36(1A)(a) require HMRC to prove that the taxpayer intended to bring about a particular fiscal result. In the case of section 29(4) it is an intention to bring about a situation in which an assessment to tax is insufficient, and in the case of section 36(1A)(a) it is an intention to bring about a loss of tax.”

These comments refer to the conditions required from HMRC to raise a discovery assessment and how far back these assessments can go (as per TMA 1970). They do not apply to penalty legislation contained in different Finance Acts. However, if extended time limits apply, then generally speaking, penalties applied will be increased.

“… section 118(7) is a deeming provision which means that HMRC can establish the relevant intention by showing that there was a deliberate inaccuracy in a document given to HMRC by or on behalf of the taxpayer, and that the loss of tax followed “as a result of” the deliberate inaccuracy.”

The judgment goes on to say that “Section 29(5) extends the availability of a discovery assessment to certain cases where HMRC could not be expected to be aware of the situation … on the basis of the information available to them within the time period for launching an inquiry. These are cases, therefore, where HMRC is blameless in not raising the assessment earlier, but do not depend on proving any blameworthy conduct by the taxpayer. The triggers for the 20 year time limit identified in section 36(1A)(a) to (d) also do not include a consistent requirement of blameworthy conduct by the taxpayer. Subparagraph (b) includes a failure by a person who is chargeable to income tax for any year of assessment and who has not delivered a return of his profits, gains or income for that year to give notice that he is so chargeable. The failure is not required to be negligent or deliberate. Such a failure could occur, for example, as a result of incorrect advice. In the light of these considerations, I do not regard it as surprising that, as a result of the expanded meaning given to the sub-sections by section 118(7), conduct which is overall not blameworthy is brought within the definition.”

The UK tax legislation referred to above (section 117 of the TMA 1970) states that “references to a loss of tax or a situation brought about deliberately by a person include a loss of tax or a situation that arises as a result of a deliberate inaccuracy in a document given to Her Majesty’s Revenue and Customs by or on behalf of that person.”

We note that as the discussion around deliberate behaviour was irrelevant to the judgement of the case at hand, the Court of Appeal (CoA) decision is not binding on lower tribunals. Nonetheless, its seniority does exert some influence and we are likely to see other cases on deliberate behaviour being construed in line with the Tooth judgement.

Disappointingly, the CoA appear to have effectively penalised Mr Tooth for highlighting the “error” and going out of his way to draw attention to the “deliberate inaccuracy.” I am surprised also at the interpretation of the deeming provision at section 117. It seems odd to suggest that any inaccuracy in a document is deliberate, without taking into account whether it was corrected elsewhere. This seems the complete opposite of purposive interpretation, which surely should take a commonsense approach to the legislation. My view is that the judges’ opinion may have been coloured by the fact that the “inaccuracy” pertained to a tax avoidance case.

This interpretation of the legislation is a slippery slope. Following the reasoning of the CoA, it could follow that submission of any tax return is deliberate and any inaccuracy could therefore be interpreted as being deliberate. If HMRC then find or consider that a loss of tax has arisen, the taxpayer may well be open to assessments going back 20 years. Even if this is unfounded, the taxpayer would in the first instance have to employ the services of a professional adviser to respond to the assertion.

Deliberate behaviour for the purpose of penalties was not addressed in Tooth and we therefore conclude that intention is still relevant in this regard. However, since penalties tend to follow the assessment time limits it is likely that deliberate penalties may begin to be imposed even where intention is still unclear.

As if tax legislation was not complex enough, these comments have provided us with an alternative definition of what should be a straightforward concept. Thankfully, the CoA judgement on this point is not binding, though as shown in Leach v HMRC [2019] UKFTT 352, lower tribunals may use it to determine similar arguments. HMRC may also base their arguments on these comments in future. Tax advisers should keep an eye out for this and challenge HMRC’s interpretation where appropriate.

Planning Points

• Determine at the outset what the behaviour was that led to the intervention.
• Explain the possible repercussions to the client in respect of both assessments and penalties and any associated reputational issues. This is particularly relevant for interventions where the client admits deliberate behaviour in order to benefit from immunity from investigation by HMRC with a view to criminal prosecution.
• Ensure that, particularly where a client holds overseas assets, they are aware of the “strict liability” offence and that all overseas income and gains that should be reported on the tax return have been reported.
• If in doubt, request assistance from a qualified adviser, particularly where more complex structures (e.g. multi-jurisdiction corporate structures or trusts) are concerned, to review the structure. Providing no issues are found, anything uncovered in future can be defended on a “reasonable care” basis.
• During an investigation or inquiry by HMRC, when the discussion of behaviour arises, if there is any doubt of whether the legislation is being applied correctly, professional advice should be sought.