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HMRC internal manual

Compliance Handbook

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Publishing details of deliberate tax defaulters: time limits: case study

The following scenario about Arthur brings together most of the core elements of the decision-making process for PDDD and explains how HMRC would apply them.

Arthur

The investigation

Arthur is a market trader. In his income tax return for 2012/13 he shows a change of address from a modest semi-detached house to a large farm property. HMRC identifies that, as well as any profit from the sale of his previous home and his new mortgage borrowings, Arthur has put £100,000 towards the purchase of the farm. We cannot reconcile this funding gap with his income tax returns.

We begin an investigation by opening an enquiry into Arthur’s income tax return for 2012/13.

Arthur initially explains that the funding gap was filled by a loan from a relative. Further investigation reveals that the loan from the relative was only £50,000 and uncovers information that in 2009 Arthur had begun to run a second stall, on a market in another town. Faced with the evidence gathered Arthur concedes that he has deliberately omitted the income from the second stall from the trading accounts. As he had achieved his objective of funding the purchase of the farm, Arthur ceased operating the second market stall in March 2013. We are satisfied that Arthur’s VAT returns for the year ending 31 March 2014 are accurate.

Based on Arthur’s stock purchases and selling prices, the potential lost revenue (PLR) from the omitted income is agreed. Arthur also agrees that he cannot earn the full reduction for quality of disclosure in respect of any penalties for deliberate inaccuracies (FA07/Sch24) because he did not disclose the deliberate defaults when we first asked about the funding gap.

In his VAT return for January to March 2013 Arthur had also claimed input tax of £4,000 on the purchase of a car. We spot this and, on checking our records, find that he has done this before. Previously, on his VAT return for January to March 2009, Arthur had similarly claimed £3,000 input tax on the purchase of a car. On that occasion we sent Arthur an assessment for the tax and a penalty assessment for a careless inaccuracy under FA07/Sch24. We also wrote to him explaining very clearly why it was extremely unlikely that input tax could be claimed on car purchases.

Because we had issued a clear ruling after the 2009 claim, we consider that the 2013 claim of £4,000 input tax on a car purchase is a deliberate inaccuracy. Arthur initially refused to explain what the £4,000 claim was for. He argued that HMRC had carried out enough enquiries into his tax affairs and should make no more. Because of this lack of cooperation we do not consider that any penalty under FA07/Sch24 relating to the £4,000 claim should be awarded the full reduction for the quality of disclosure.

Arthur disagrees with HMRC’s conclusions on the amount of tax and penalty due in respect of the £4,000 input tax claim on the purchase of a car.

The tax and penalty assessments

We close the enquiry into the 2012/13 income tax return by issuing a closure notice. On 1 October 2014, we assess

  • 2009/10, 2010/11, 2011/12 and 2012/13 to recover the income tax and VAT lost from the omitted income,
  • the £4,000 VAT wrongly claimed on the purchase of the car in 2013,
  • the penalties due under FA07/Sch24/para1 in respect of the deliberate inaccuracies.

These assessments are set out in the table below. To simplify the information for the purpose of this case study we have presented the income tax assessments and penalties as being for accounts periods ending 31 March.

Similarly, the VAT assessments and penalties are summarised into years ending 31 March. The second VAT penalty assessment for the year to March 2013 relates to the VAT wrongly claimed on the purchase of a car.

Year to 31 March Income tax
PLR VAT
PLR Deliberate inaccuracy penalty percentage
(minimum 35 %)          
           
  2010 1860 1350 50%  
  2011 4496 2940 50%  
  2012 5666 3750 50%  
  2013 6000 3850 50%  
  2013 (car) - 4000 50%  

Arthur agrees all the tax and penalty assessments relating to the omitted income. However, he does not agree those relating to the purchase of a car and he appeals against those.

The publication questions

Applying the five publication questions, see CH190620, to the penalty information above the results are as follows.

Question 1 - Is this a relevant penalty?

Yes. All of these penalties relate to deliberate inaccuracies under FA07/Sch24 and are therefore relevant penalties.

Question 2 - Does this relevant penalty relate to a PDDD period?

None of the penalties for deliberate inaccuracies in the year ending 31 March 2010 relates to a PDDD period and we do not have to consider publication questions 3-5 in respect of these. We cannot publish details of these penalties.

All the remaining penalties, highlighted in the table below, are for accounting periods commencing on or after 01 April 2010 and do relate to PDDD periods. 

Year to 31 March Income tax
PLR VAT
PLR Deliberate inaccuracy penalty percentage
(minimum 35 %)          
           
  2010 1860 1350 50%  
  2011 4496 2940 50%  
  2012 5666 3750 50%  
  2013 6000 3850 50%  
  2013 (car) - 4000 50%  

Question 3 - Was this relevant penalty found as a consequence of an investigation?

Yes. All of the remaining penalties were found as a result of a single investigation begun by opening an enquiry into Arthur’s income tax return for 2012/13. We began an enquiry into one type of tax (income tax) but found information that meant we must expand our check to include Arthur’s VAT affairs. The initial income tax enquiry has become part of a single investigation for PDDD purposes.

Question 4 - Is this relevant penalty a qualifying relevant penalty?

Yes. Full reduction for the quality of disclosure was not applied to any of the remaining penalties so they are all qualifying relevant penalties.

Question 5 - Does the qualifying potential lost revenue exceed £25,000?

Yes. The total qualifying potential lost revenue (PLR) for the remaining penalties is £30,702.

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Which qualifying relevant penalties are final?

Arthur has appealed against the VAT assessment of £4,000 on the grounds that he is entitled to claim it as input tax. He has also appealed against the related penalty assessment on the grounds that any inaccuracy in the VAT return was caused by confusion about the rules for claiming input tax on cars and therefore was not deliberate. This penalty is not final.

All the other penalties become final on 31 October 2014 because Arthur does not appeal against any of these tax or penalty assessments. The total PLR of these penalties (£26,702) still exceeds £25,000.

The referral to Managing Serious Defaulters Programme (MSD)

Referral is required when the total PLR for qualifying relevant penalties from an investigation exceeds £25,000 and those penalties are final, that is when the answer to all five publication questions is “yes”.

Referral should still be made even if there outstanding penalty or other issues yet to be resolved.

In accordance with operational guidance, see CH500600, the case is referred to MSD to consider publication.

HMRC can consider publishing Arthur’s details in respect of the final penalties and, if there are no other qualifying relevant penalties from the same investigation, must do so on or before 30 October 2015.

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Consideration by MSD

There is a real prospect that the dispute about the input tax claim on a car will not be resolved before 30 October 2015.

Although we have confidence in our case, the outcome might be that Arthur is found not to have incurred a qualifying relevant penalty in respect of the input tax claim. This might happen if, for example, the tribunal were to find Arthur’s conduct careless rather than deliberate or that there should have been full reduction for the quality of disclosure. In either case we would not be allowed to publish details in respect of that penalty.

If we delay considering publication until the appeal is concluded (which could be after 30 October 2015) and Arthur is found not to have incurred a qualifying relevant penalty in respect of the input tax claim, there is a risk that we will not be able to publish details of the qualifying relevant penalties relating to the omitted income.

Having considered that possibility, shortly after the appeals against the tax and penalty assessments relating to the input tax claim are received MSD begins the process to publish details of the qualifying relevant penalties relating to the omitted income.

MSD checks that the answers to all five publication questions are ‘yes’.

MSD writes to Arthur to confirm that HMRC intends to publish his details in respect of the qualifying relevant penalties for omitted income and to invite him to make any representations as to why HMRC should not publish those details.

Arthur does provide representations and the nominated Deputy Director at MSD considers these carefully.

However, having done so, the nominated Deputy Director decides that HMRC will publish Arthur’s details.

Publication

MSD arranges for Arthur’s details to be placed on the GOV.UK website on 31 March 2015. They are removed before 30 March 2016.