Penalties - OLD ONES_ NEW ONES by sdsdfqw21



       I   I
               t is March 2013. In a grey HMRC
               building somewhere in Britain, Mrs
               G Keeper, a senior compliance
           manager, has just reviewed the
           investigation papers for Wright and
           Rong, solicitors, and has called her
           trainee inspector Mr Gillie in for a chat.
              Mrs K: Interesting. Entertaining
           expenses not added back and inadequate
           private motoring adjustments. How
           many earlier years can you assess?
              Mr G: The firm has been on the go
           since August 1989. So we’re talking about
           extended time limit assessments back till
                                                        host events like boxes at the races and
                                                           Anyway, they were baffled that
                                                        entertaining wasn’t allowable as they said
                                                        they didn’t do it for fun, costing about
                                                        £3,000 a year. They hadn’t asked their
                                                        accountant for advice before this year
                                                        and because of the way they recorded
                                                        the expenditure it was never coded as
                                                        entertaining, although their system did
                                                        have that facility.
                                                           Mrs K: Suspicious. Everyone knows
                                                        entertaining isn’t allowable.
                                                            Mr G: They said it made sense to
                                                                                                         two years after the end of the prescribed
                                                                                                         accounting period, the assessment must
                                                                                                         be made within 12 months of the date
                                                                                                         that evidence of the facts that justify
                                                                                                         making the assessment came to our
                                                                                                            Remember too that the penalty
                                                                                                         provisions in FA 2007, Sch 24 only apply,
                                                                                                         generally, where the under-assessment
                                                                                                         relates to a return or other document that
                                                                                                         was due to be filed on or after 1 April 2009
                                                                                                         and is for a tax period beginning on or
                                                                                                         after 1 April 2008. So, for this partnership
                                                                                                         the new penalty rules only apply for the
           1992/93, and old and new penalties.          code it under client costs so they could         2008/09 income tax returns and, for VAT,
              For convenience I’ll talk about the       identify the true costs of servicing a           the quarter to March 2009 onwards.
           partnership as a whole, although the final   client, and entertaining of targets etc was         Mr G: I wondered whether I should
           contract settlements for income tax wll      coded business development.                      mention suspension of any penalties
           be with the individual partners. Also,          Anyway, they now accept it’s not              related to the entertaining. I think the
           their VAT returns were on a quarterly        allowable for income tax and                     errors were careless and FA 2007, Sch 24,
           basis.                                       non-deductible for VAT. They didn’t take         para 14 says the penalty may be

           Assessments and penalties –

Iain Macleod turns eavesdropper as carelessness and deliberate error are discussed

              Mrs K: I didn’t see any protective        reasonable care and so penalties will be         suspended only if compliance with a
           discovery assessments or amendments of       due.                                             condition of the suspension would help
           partnership returns in the file. Did you         But I don’t think we could show that         the taxpayer – sorry, customer – avoid
           make any?                                    the understatements of tax were                  becoming liable to further careless
              Mr G: No, they were cooperating so I      deliberate, far less deliberate with             inaccuracy penalties.
           thought it might spoil the atmosphere.       concealment.                                        If they changed their system so that
              Mrs K: Mmm. Since FA 2008, Sch                Mrs K: Well, if that’s your view I’m         the entertaining codes were used and
           39, para 9 came into effect on 1 April       afraid you can only get the income tax           gave some training to their accounts
           2010, we have to show that the loss of       back to 2006/07. Since the rules on              staff, the disallowable amount would be
           tax was brought about deliberately to        assessing time limits changed in April           picked up.
           assess more than six previous years for      2010, TMA 1970, s. 36 has been                      Mrs K: If we’re quite sure it was
           income tax and to assess more than           amended to allow an assessment, where            careless then discuss suspension,
           four for VAT. And to get more than four      a loss of tax was brought about                  although it will only apply to periods
           years for income tax we have to show         carelessly, to be made not more than six         affected by the new penalties, ie,
           carelessness. Under the old income tax       years after the end of the year of               2008/09 onwards.
           rules you could assess 20 tax years          assessment.                                         Of course if it was deliberate inaccuracy,
           purely on the basis of negligence.               Also, make sure that if this isn’t settled   suspension wouldn’t be possible and we
              Mr G: Ah. Showing a deliberate error      by 5 April 2013 you’ve got a protective          could assess more years too.
           could be tricky with the entertaining.       discovery amendment and individual                  Anyway, what about the private
              Mrs K: Tell me more.                      assessments in place for 2006/07, or             motoring? I’m pleased you’re thinking
              Mr G: The enquiry began when they         you’ll lose that year too.                       about penalties, because sometimes it’s
           wrote to say they’d wrongly claimed              And for VAT you can only go back four        assumed that such so-called technical
           entertaining expenses. They take clients,    years if the error wasn’t deliberate. Also,      adjustments aren’t liable to penalties.
           targets and financiers out for meals and     if the VAT assessment is made more than             Mr G: Yes – it sounds trivial, but there

34   TAXADVISER – April 2010

are four partners and each with a decent       in quantifying it worth another 40% and          disclosure is 70% of the difference
car. All the motoring costs – fuel,            allowing access to the records, which can        between the maximum penalty of 70%
insurance, car tax, repairs and                get up to a further 30%.                         and the minimum of 35%. If we multiply
maintenance – went through the                    We’ve got to assess the quality of the        that difference of 35% by the discount of
business. But they only added back 40%         disclosure under these headings above            70% we get 24.5%, which comes off the
of the expenses and capital allowances         by reference to its timing, nature and           maximum of 70% leaving a 45.5%
each year.                                     extent.                                          penalty under FA 2007. Assuming tax of
   But VAT’s not a problem; as the input          Mrs K: What do you work it out as             £20,000, that’s a penalty of £9,100.
VAT on the cars was blocked, they’d            then?                                               Mrs K: OK. How would you assess the
notified us that no input tax on fuel             Mr G: On telling I think they get the         penalty under the old rules? They still
would be reclaimed and as long as there        whole 30%.                                       apply on both issues for income tax for
is some business travel, repairs and              They eventually asked their accountant        the years before 2008/2009, although
maintenance can be reclaimed for VAT.          whether entertaining was allowable and           VAT’s not relevant for these earlier
I’ve mentioned the VAT scale charge            he of course said ‘No’. So they                  periods.
rules, and once this is all settled they may   immediately contacted us to say there               Mr G: The maximum penalty under
revisit that issue.                            was a problem.                                   the old income tax rules was 100% of
   Mrs K: OK. And you think the private           I think they could and should have            the tax whether it was fraud or
motoring adjustment should have been           done more in quantifying the error. They         negligence. So no point in mentioning
90%?                                           seemed to think it was the inspector’s job       fraud. The penalty would be mitigated
   Mr G: Yes. They had no mileage              to work it all out and they did little other     taking account of disclosure, cooperation
records at all and told their accountant       than to tell us there was a problem, with        and the seriousness of the offence.
each year that 40% was the appropriate         estimates of what it might be, and                  If they had disclosed all irregularities
adjustment.                                    provide their papers. So only 30% for            before we were aware of problems they
   This was worse than careless. Even          helping.                                         could have got an extra 10% discount for
though they made a disclosure on the              And they get the maximum for giving           disclosure – but they only disclosed the
entertaining, they didn’t give any             access to records. Another 30%.                  entertaining. On disclosure we’d
thought to other parts of the return.             All in all the reduction for the quality of   probably give mitigation of 15%, for
They knew there was no way they were           disclosure comes to 90%, and when                cooperation the maximum 40% and
driving those miles on professional            that’s applied to the 30% gap between            although the amounts are quite big these
business.                                      the maximum of 30% and the minimum               are not the most grave offences, so
    I think we can show these were             of 0%, the maximum is reduced by 27%,            probably we’d allow mitigation of 25%
deliberate errors, although there was no       leaving a penalty of 3%.                         for seriousness. So the overall penalty
attempt at concealment. So we can get             Mrs K: Let’s stay with the new rules          under the old rules might be 20%. At
the tax right back to 1993. Penalties          and discuss the penalty on the private           £45,000 tax on both points, that’s a
should be more too.                            motoring.                                        penalty of £9,000.
   Mrs K: How much do you make the                Mr G: As I said, I think the error was           Mrs K: If you say the behaviour was
tax on the motoring back to 1993?              deliberate and so the maximum penalty            negligence under the old rules, does that
   Mr G: In the current year it looks like     rises to 70% and, because it was                 not mean it must have been carelessness
about £5,000. It’ll probably come to           prompted, the minimum is 35%.                    rather than deliberate under the new
about £60K once we scale it back to               On telling, helping and access my             rules? Or to put it another way – if you
1993.                                          reasoning is a little different.                 argue that the private motoring
   Mrs K: Talk me through the penalties.          I think they knew what I was on about         behaviour was deliberate, thus allowing
   Mr G: I think the entertaining error        straight away, but for a while it was like       higher penalties under FA 2007 and
was careless, so the maximum penalty           drawing teeth. When I first asked about          assessments back to 1992/93, aren’t you
under the new rules is 30% – FA 2007,          mileage records and usage they were              obliged to allege fraud for penalty
Sch 24, para 4. As they wrote to say they      pretty vague. Then there was an attempt          purposes in the years before 2007/08?
had made an error the disclosure was           to argue that part of the reason for the            Mr G: But I thought only inspectors
unprompted by HMRC, so the penalty             low private percentage was that lawyers          using the Civil Investigation of Fraud
could be as low as 0%.                         needed access to a car and they all had          procedures under Code of Practice 9
   Mrs K: OK. Go on.                           second cars for personal motoring                were allowed to accuse taxpayers of
   Mr G: The penalty will be between 0%        anyway. It was only after a couple of            fraud?
and 30% of the potential lost revenue          months that their accountant wrote to               Mrs K: Well – (opens the Enquiry
and can be reduced from the maximum,           say there were no mileage records and            Manual on her screen), it says here at EM
depending on the quality of disclosure.        accepting adjustments were due.                  5102:
The maximum possible reduction is                 So telling maybe only 15%.                       ‘Traditionally, it was often not cost
therefore 30%.                                    Helping wasn’t perfect, as they tried to      effective for an HMRC officer to allege
   Under FA 2007, Sch 24, paras 9 we’ve        argue about the amounts too. So maybe            fraud, which can be an emotive term,
got to consider telling us about the           25% for helping.                                 when the same result could be achieved
inaccuracy – worth up to (we say, not the         Access to records deserves the                in terms of neglect, without any
legislation) 30% of the maximum                maximum 30%.                                     implication of intent.
reduction, giving HMRC reasonable help            So the reduction for quality of                  ‘In fact, civil fraud can be a less

                                                                                                                  TAXADVISER – April 2010     35

                     heinous matter than many imagine, see             motoring under the new rules and to                 3% of the income tax and VAT,
                     EM5106. Now in the wider HMRC,                    assess back to 1992/93, we have to be               although we’ll probably agree to
                     enquiry officers need to consider VAT and         prepared to argue for fraud under the old           suspension.
                     possibly other liabilities.                       income tax penalty rules and, if VAT was                For 2006/07 and 2007/08 the old
                        ‘It is self evident that a VAT officer         relevant, prove dishonesty.                         rules apply: the penalty would be 20% of
                     seeking the VATA94/S60 civil evasion                 Mrs K: Yes – it’s a tricky one. I doubt if       the income tax and could not be
                     penalty for dishonesty will be seriously          it was thought about when FAs 2007 and              suspended.
                     hampered if direct colleagues settle,             2008 were enacted. As usual we’ll make                 On the motoring, I think the error was
                     propose to settle or even comment                 the best of it.                                     deliberate and so we can assess back to
                     upon, the same trader’s action as being              I suggest on the penalties you make              1993. Under the new rules the penalty
                     only negligent or otherwise.’                     your case for deliberate behaviour for              will be 45.5% of the tax, applying to
                        Mr G: Could we say that negligence             2008/09 onwards, say you’ll only                    2008/09 onwards, and 20% under the
                     and careless behaviour are not quite the          allege negligence for the earlier years and         old rules for all the other years.
                     same, and so justify negligence for               deal with the problem if it comes up.                  Mrs K: OK. Anything else?
                     penalty purposes pre-2008 and                         Of course if they persuade you the                 Mr G: I now wonder if the
                     deliberate behaviour afterwards?                  motoring was just careless inaccuracy               entertaining error was deliberate after
                        Mrs K: Yes – that’s possible, although         then not only will the penalty be smaller           all?
                     we have always said (EM 5125) that                but, more importantly, you’ll only be able             Mrs K: Good man.
                     negligence was a failure to do what a             to assess back to 2006/07 rather than
                     reasonable person would do. And the               1993.
                                                                                                                            Iain Macleod MA CTA heads the
                     Compliance Handbook at CH81140                       Anyway, summarise where we are.
                                                                                                                            tax investigations department at EDF
                     says: ‘Failure to take reasonable care can           Mr G: On the entertaining I thought
                                                                                                                            Tax LLP. He can be contacted on 0115
                     be likened to the longstanding concept            the error was careless inaccuracy, which
                                                                                                                            983 5580; mobile 07920 146800;
                     in general law of “negligence”.’ And it           means we can only assess income tax
                     quotes the same case as EM 5125.                  from 2006/07 onwards and VAT from
                        Mr G: So if we want the higher                 the quarter to 31 March 2009. The
                     penalty for deliberate inaccuracy on the          penalty for 2008/09 onwards should be

                                        Income tax            VAT assessments:                Income tax                   Income tax
                               assessments: FA 2008,            FA 2008, Sch 39         and VAT penalties:              penalties: TMA              VAT penalties:
                          Sch 39 and TMA 1970, s.36         and VATA 1994, s.77           FA 2007, Sch 24              1970, s. 95/95A            VATA 1994, s. 60

 Error but not careless          Not more than 4 years           Not more than 4
                            after the end of the year of     years after the end of
                                            assessment              the prescribed
                                                             accounting period or

 Careless error                  Not more than 6 years             Not more than                  Broadly *, an
                            after the end of the year of   4 years after the end of   inaccuracy is contained
                                            assessment              the prescribed         in a return or other
                                                             accounting period or     document which is due
                                                                              event   to be filed on or after 1
                                                                                           April 2009, and the
                                                                                                return or other
                                                                                        document relates to a
                                                                                         tax period beginning
                                                                                      on or after 1 April 2008

 Deliberate error              Not more than 20 years              Not more than                     As above
                            after the end of the year of    20 years after the end
                                            assessment           of the prescribed
                                                             accounting period or

 Deliberate error with                        As above                   As above                    As above

 Negligence                                                                                                             From the earliest
                                                                                                                  assessing period up to
                                                                                                                    the commencement
                                                                                                                      of FA 2007, Sch24

 Fraud                                                                                                                         As above

 Civil evasion                                                                                                                                      From the earliest
                                                                                                                                              assessing period up to
                                                                                                                                             the commencement of
                                                                                                                                                     FA 2007, Sch24

                                                                                                                   *See the head note to FA 2007, Sch 24 for the detail

36   TAXADVISER – April 2010

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