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HMRC internal manual

Compliance Handbook

HM Revenue & Customs
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Charging Penalties: establishing penalty behaviour: example of deliberate behaviour: introduction

In some cases establishing deliberate behaviour can be difficult. The person will usually wish to show themselves in the best light during the compliance check. In order to establish the person’s behaviour you will often have to test their explanations to ensure they are providing the full picture.

You should note that a penalty is due if the behaviour is deliberate. This is the term used in legislation in Sch24 FA07, see CH81100 onwards. While other terms are often used in this area, such as ‘evasion’ and ‘fraud’, you should focus your attention on evidence for deliberate behaviour.

The key to correctly establishing the behaviours is

  • preparation
  • effective questions
  • the use of information powers, where appropriate.

There are a number of factors that will influence your decision as to whether to continue a compliance check in order to test a person’s explanations. These include

  • the person’s previous compliance history
  • your and your manager’s experience in previous similar cases
  • the absolute and relative size of errors
  • your instincts where you have had your concerns raised.

You should always try to get a person’s agreement to the behaviours involved. Nonetheless, during the check you should also obtain the necessary evidence to allow you to proceed without agreement if you need to.

The evidence you will need to demonstrate to the standard of balance of probability will vary. A case may require significant documentary evidence or the behaviour may be implied from the basic facts.

For example, in cases of no or little cooperation, you can use documents obtained using formal information powers to demonstrate that a person could not have supported their lifestyle on the reported drawing from a business.

The 1926 comments of Rowlatt J underline this approach. This was a case in which Mr Johnstone had understated his profit by £1,500 a year, which would be the equivalent of £71,000 in 2013. After failing to pay his contract settlement he appealed that he should not be held to the penalties in the settlement. In the following quotation Rowlatt J concludes that an understatement of this size must have been made knowingly.

‘Do you tell me that a man who can conduct a successful business making £1,500 a year does not know at the end of the year what his books show? His bank account will tell him; his household expenses will tell him; what he has in his pocket will tell him. He would know if he made £300 or £1,500. It is no use putting up his argument to me or to anybody else who knows anything of human affairs… Year after year a false statement was put forward, and knowingly put forward.’ (Attorney-General v Johnstone 10TC at page 763)

The following three sections, CH402334, CH402336 and CH402338, give examples where a penalty for deliberate behaviour is appropriate. Their purpose is to widen awareness of some of the different things that can be considered deliberate behaviour.

To make the examples more realistic, they include some of the detail around a case. Some of these details indicate deliberate behaviour; some indicate other relevant factors and others turn out to be just some of the background noise we see around every case. At the end of each example there is a list of learning points to show which details are important.

These are a small selection of illustrative examples rather than models. Every case is different and it is not possible to cover all situations. You must consider your evidence in your case on its own merits. Do not try to overextend these examples to fit your case.