When HMRC investigate a taxpayer (on a civil basis), the outcome will be a Settlement if there has been a loss of tax as a result. A Settlement identifies and quantifies the cause of the inaccuracy and the loss of tax that has resulted as a consequence of a taxpayer’s behaviour. The loss of tax will be payable together with interest on late payment on that tax and a financial penalty.
The level of an “inaccuracy penalty” will depend upon a taxpayer’s behaviour that brought about that loss of tax in the first place.
Types of penalties
HMRC can issue either fixed penalties or tax-geared penalties as a result of a taxpayer’s behaviour.
A fixed penalty for example might be a £100 penalty issued for a particular offence such as the late submission of a tax return.
Whereas a tax geared penalty is a percentage of the tax again. For example, if the loss of tax is say £2.000 and the tax-geared penalty is 50%, the inaccuracy penalty equates to a further £1,000.
Types of behaviour
HMRC states that there are three types of behaviour:
- Careless;
- Deliberate; and
- Deliberate and concealed.
Careless behaviour is where an inaccuracy has been made despite the taxpayer having taken reasonable care to get things right.
Deliberate behaviour is interchangeable with actual “intent”, i.e. something was done with prior thought. Something that was done deliberately cannot be done accidentally.
Behaviour that is both deliberate and concealed is viewed by HMRC as the most heinous. Such behaviour involves covering up the action and/or hiding the outcome – the outcome typically being the financial benefit obtained.
Why is determining the type of behaviour so important?
Each type of behaviour determines a range in which a tax-geared penalty will fall.
In order for HMRC to work out the penalty to be charged, HMRC will need to establish:
- the underlying behaviour that gave rise to the inaccuracy;
- whether the inaccuracy was due to the deliberate behaviour of another person;
- the Potential Lost Revenue (PLR);
- whether the disclosure (of the inaccuracy caused) made to HMRC was prompted or unprompted by HMRC;
- whether the inaccuracy involves an offshore matter;
- the quality of the disclosure.
Can a penalty be negotiated?
Yes, but only to a limited extent.
Today, HMRC has a “formulaic approach” such that A x B = C. The negotiation, such as it may be, is in determining the type of behaviour from the outset.
It is therefore important to the outcome of an investigation to establish the client’s behaviour as part of gathering all the relevant facts. It may be for example, that the behaviour changed – and more than once over time.
In summary
HMRC want to see a change in a taxpayer’s behaviour as a result of HMRC’s intervention. The change may not be immediate, but steps need to be taken before the investigation has been concluded wherever possible. That way the change can more demonstrated clearly.
If HMRC subsequently identify a resumption of the same behaviour, if the matter is considered to be a civil matter (if), a far higher penalty will result.
HMRC will monitor a taxpayer for a period after their intervention to ensure a taxpayer’s continuing compliance.