More Penalties - deliberately withholding information

Following my previous article (penalties for late returns, Sch 24, Finance Act 2021), I now look at the next set of penalties in Finance Act 2021.

Schedule 25, Finance Act 2021 addresses penalties applicable when a taxpayer fails to provide HMRC with sufficient information to raise assessments when the person has not submitted a tax return. The reason for this legislation seems to be that the new points system for failure to file returns on time does not allow for different levels of behaviour and also to further penalise any deliberate behaviour.

Unless stated otherwise, all legislation references are to Sch 25, FA 2021.

This legislation applies where an individual has been sent a return to complete by HMRC and not only fails to file it on time, but also deliberately withholds information which would allow HMRC to assess a liability to tax (s1). It applies to personal and trustee returns for income tax and capital gains tax and also to corporation tax returns.

Penalty amounts (s3)

The penalties applicable are the greater of 100% of the tax due and £300 for deliberate and concealed behaviour, or the greater of 70% and £300 for deliberate and not concealed behaviour. These penalties apply if the information requested involves any category 1 offshore or domestic matter.

The percentages mentioned are increased by 50% (to 150% or 105% of tax due) for information relating to matters or transfers involving territories in category 2, or are doubled where the information required involves matters or transfers in category 3 territories.

For both category 2 and 3, the information must also be “information which would enable or assist HMRC to assess the person’s liability to the tax in question.” Surprisingly, for category 1 territories, this is not a requirement.

The legislation does not define what deliberate means, but states that penalties for deliberate behaviour are applicable if a “person deliberately withholds the information but does not make arrangements to conceal the fact”. For further discussion of the meaning of deliberate, I direct you to case law (specifically Tooth, paragraph 37 onwards).

What is an offshore transfer?

An offshore matter is one where a liability to tax is charged on or by reference to income arising from an offshore source or assets held or activities undertaken outside the UK.

An offshore transfer is one which “does not involve an offshore matter” and:

• for income tax purposes: the income is either received outside the UK or transferred to a territory outside the UK
• for capital gains tax: if the proceeds of the disposal are received in or transferred to a territory outside the UK.

The relevant category for calculating the penalty percentage will be the highest category out of the ones involved in the transfer.

Reductions for disclosure (s7 onward)

As always, we have an incentive for taxpayers to make a disclosure of any previously undisclosed information, by a reduction in penalties. For an unprompted disclosure with full cooperation, penalties can go down to 30% for deliberate behaviour and to 40% for deliberate and concealed behaviour. For information relating to tax from offshore matters/transfers, the minimum penalties are increased depending on the categories (as above), and to obtain the reductions, the taxpayer also has to provide HMRC with “additional information”.

“Additional information” is not defined in the schedule. The failure to correct legislation states that “a person discloses a matter” for the purposes of a reduction in penalties only if they inform “HMRC of any person who acted as an enabler of the relevant offshore tax non-compliance … and [by] ..allowing HMRC access to records..for the purpose of ensuring that HMRC can identify all persons who may have acted as an enabler of the relevant offshore tax non-compliance or the failure to correct it.” (s16, Sch18, Finance (No 2) Act 2017).

We can therefore expect similar provisions to apply for the “additional information” criteria in relation to penalties for withholding information.

The amount of the penalty will be reduced by any other penalties payable in relation to the same tax liability except penalties in relation to

• a penalty for failure to pay tax (sch 26, FA 2021);
• a penalty for a late payment of tax (sch 56, FA 2009); or
• penalties in relation to a follower notice.

HMRC must apply any penalties (s14) within the later of:

• two years from the due date of the return;
• 12 months from the end of any appeal period against and assessment; or
• the date the liability is determined (for example, the date a return is filed).

The taxpayers safeguards here would be to demonstrate on the balance of probabilities that the taxpayer did not deliberately withhold information and/or appealing (ss17-19) any penalties raised by HMRC. Any appeal against the penalties would be undertaken in the same way as an appeal against an assessment – first to HMRC and then if necessary to Tribunal.

In a situation where there is a deliberate failure to pay tax, it is easy to see how this schedule can apply in addition to other late payment penalties and they can rack up. If HMRC apply a penalty under this schedule, it is important to push case officers to demonstrate their belief that the withholding of information was deliberate or deliberate and concealed. In particular, if a taxpayer makes a disclosure or HMRC investigate on the basis of deliberate behaviour, consider carefully whether these penalties may also apply.

This article by Mala Kapacee was originally published on the Bloomsbury Professional Tax blog on 15 December 2021.

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