When assessing culpability for tax non-compliance, HMRC considers whether a taxpayer has been either careless, deliberate, or deliberate and concealed.

Their conclusion on this will have a direct impact on how severely they treat tax offences and can be the difference between a simple fine, or criminal prosecution.

Careless Deliberate

Carelessness is obviously the least serious transgression, with deliberate concealment suggesting fraud. The “behaviour-based” penalties surrounding this were introduced in 2009 by the Finance Act 2007.

HMRC’s Approach to ‘Careless Errors’

Company directors are expected to be able to demonstrate ‘reasonable care’ in the tax affairs. That means keeping appropriate tax records and submitting complete and factually correct tax returns. What exactly constitutes ‘carelessness’ is, of course, not an exact science and the burden of proof is on HMRC to back up whatever assertion they are making. HMRC’s Compliance Handbook manual (CH54300), makes reference to this when it states: “the onus of proof of careless or deliberate behaviour is on HMRC” and that the standard of proof is on the ‘balance of probabilities’.

HMRC’s Compliance Handbook links carelessness to negligence and, to that effect, they offer the following quote:

Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do. The defendants might be liable for negligence, if, unintentionally, they omitted to do that which a prudent and reasonable person would have done, or did that which a person taking reasonable care would not have done.” (Baron Alderman, from the 1856 case of Blyth v Birmingham Waterworks Co)

When Assessing Carelessness HMRC take into Account:

  •   How significant error is within the context of the taxpayer’s liability for the year
  •   The taxpayer’s abilities – HMRC would hold a finance director to a higher account than the owner of a hair salon
  •   Supporting evidence – does the client have a health issue or another reason why they have made the mistake.

HMRC’s Penalties for Careless Mistakes

In cases of ‘unprompted disclosure’ HMRC will charge 0% to 30% of lost revenue as a penalty. This rises to 15 to 30% when HMRC has discovered the error themselves and confronted you about it.

HMRC’s approach to Deliberate Mistakes

For obvious reasons, deliberate mistakes are considered significantly more serious by HMRC because they indicate a clear decision to break the law. Deliberate tax mistakes include supplying false information or deliberately withholding information in connection with a return or document. The key point here is that deliberate acts are ones done consciously, although of course, the burden of proof is on HMRC to verify this. HMRC’s Compliance Handbook Manual at CH81150 makes clear that where figures have been given HMRC inaccurately does not need to prove that the individual knew what the accurate figure was mere that they knew what they’d submitted was wrong.

In recent years, there’s been a lot of evidence to suggest that HMRC has significantly toughened its stance on deliberate mistakes, pushing many taxpayers into this category who, previously, might have got away with a careless assessment. During 2012-23, HMRC issued only 5000 deliberate action penalties to British taxpayers, and yet a year later this figure had risen to almost 15,000. In 2016, In 2015-16, the taxman imposed 28,663 penalties related to deliberate mistakes!

HMRC’s Penalties for Deliberate Mistakes

Where HMRC finds evidence of fraud, they do not hesitate to impose significant tax penalties.

Deliberate Errors for Errors and Failures to Notify – These are laid out in the Finance Act 2007. SCH 24 and the Finance Act 2008, SCH 41 which list penalties from 30% to 100% of any revenue HMRC may have lost. There will consider reductions where the taxpayer makes an ‘unprompted disclosure’.

Deliberate penalties for late submission of tax returns – these are explained in the Finance Act 2009, SCH 55. Penalties may be up to 100% of the correct tax that should be found in return.

Penalties may increase further if related to ‘offshore tax’ – As HMRC continues to toughen its stance against offshore tax evasion, these penalties can increase by a further 200% when they’re related to assets located in jurisdictions outside the UK.

HMRC’s Approach to Deliberate and Concealed Mistakes

Deliberate and concealed mistakes are those where HMRC finds evidence that someone has either falsified documents, or made other sorts of deliberately false representation to conceal their true tax situation. A simple example of this would be where an individual reports a sum of money in their bank account to be a gift, where in fact it is legitimate business income. Another example of this would be where someone creates a false invoice to cover a non-existent stock purchase.

HMRC’s Penalties for Deliberate and Concealed Mistakes

In cases of unprompted disclosure, HMRC will charge 30% to 100% of any lost tax, and where this disclosure had to be prompted 50% to 100%.

When do HMRC Prosecute

Given the high costs of criminal prosecution, the vast majority of HMRC prosecutions use the Code of Practice 9 (COP9) which are their official guidelines for civil investigation of fraud. Under these guidelines, individuals are given the right to make a complete disclosure of their situation (Contractual Disclosure Facility (CDF)) within 60 days. Signing a CDF means that HMRC will guarantee not to proceed with a criminal prosecution and can result in reduced penalties.

When the CDF is not signed, however, (meaning you have not admitted that the failure to pay tax was a result of your deliberate conduct), it may trigger a criminal investigation.

In serious cases, however, where HMRC feel the serious criminal intent is suggested, a criminal investigation may be pursued from the start with no offer of civil measures.

» MORE Read our full article on Accelerated Payment Notices

What may Trigger HMRC to Proceed with Criminal Prosecution?

(1)  Where false or forged documents, statements or accounts are submitted

(2)  Where organised criminal gangs or systematic frauds are suggested

(3)  Where individuals in positions of high responsibility or trust are involved

(4)  Where there is concealment, deliberate deception, conspiracy or corruption

(5)  In cases involving breach of import or export restrictions

(6)  Any case involving money laundering

(7)  Any case involving theft or misuse of HMRC documents

(8)  Where there is a link to, or suspicion of, wider criminality

(9)  VAT ‘Bogus’ registration repayment fraud

(10)  Organised Tax Credit fraud

For free confidential advice on HMRC problems such as non-payment of tax please call 0800 074 6757.