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HMRC internal manual

Compliance Handbook

Charging Penalties: establishing penalty behaviour: examples of deliberate behaviour: small business - income tax - example 1

The example below shows deliberate behaviour where a taxi driver did not account for all his takings and filed an incorrect return.

During a compliance check on a taxi driver who claimed to have banked all of his net takings, the caseworker identified clear discrepancies between the records of daily takings, expenses and the amounts paid into the business account. Using business economics he established that approximately £8,000 of the taxi driver’s takings had not gone through the books. This calculation was based on the mileage shown on the taxi’s MOT certificates after taking account of private mileage and unengaged mileage.

The taxi driver accepted the caseworker’s figures but gave the following explanation for the inaccuracy.

He had kept a cash float of about £300 on his person for several years for petrol, emergency repairs and as a general safeguard. Sometimes he would lend some of the float to colleagues in the taxi office, but he was not certain if he got all of it back. Because he was so busy at the time he must have forgotten to record the fares he had used to top up the float. He agreed he needed to take more care about his record keeping and have a proper routine rather than completing his books when he could find time at the end of the day.

Based on this explanation alone the inaccuracy appeared to be careless, being the result of poor (careless) record keeping. Before the caseworker accepted this explanation he tested it further to consider if it really was tenable. The caseworker requested the taxi driver’s and his wife’s joint private bank statements. There were no savings or credit card statements. There were no deposits that could not be accounted for or which did not match the record of drawings transferred from the business account. The taxi driver’s wife was paid monthly wages by a company called KTS.

However, the caseworker identified a pattern of periods when no cash was withdrawn from the bank to fund any cash expenditure and recognised that this could indicate that cash might have been knowingly taken from unrecorded receipts, rather than having been carelessly unrecorded. Consequently the caseworker asked the taxi driver the following questions.

Question: What expenditures were paid out of the float, but not recorded?
Answer: He was not certain because the receipts were lost, though it was probably petrol.
Question: When he lent money, was the float topped up straight away?
Answer: Yes, but this was taken from recorded takings.
Question: What did he do with the money when the debt was repaid?
Answer: He put it back in the float.
Question: What if this took the float above £300, what did he do then?
Answer: He could not remember but thought he must have put the balance back with the takings.
Question: Which colleagues did he lend money to, how often, how much and how long for? Why did he lend the money out of the float and not out of recorded takings?
Answer: He could not remember and kept no records of what he lent. There was no particular reason why he lent money from the float.
Question: Did he or his wife have any other sources of income?
Answer: No.
Question: Who did the main shopping? When was it done and how was it paid for?
Answer: His wife did the shopping. She did a big shop every Friday. He did not know how she paid for it.
Question: Why were there periods, some being more than 2 weeks, when no cash was withdrawn? How did his wife pay for the shopping when she did not have a credit card and there were no debit card transactions from supermarkets on the bank statements?
Answer: He did not know.

The caseworker put the following facts to the taxi driver.

There was no evidence to corroborate that the float was used in the way that had been described or that it was topped up on a regular basis from takings, whether they were recorded or not. Crucially, insufficient cash had been withdrawn from the bank to pay for the weekly shopping: a non-business cash flow test showed negative cash every Friday. With no other identified sources of income the shortfall could have come only from unrecorded takings.

The caseworker stated that on this basis the taxi driver’s explanation was not correct. The taxi driver was asked if he could offer any other explanation. He was not able to offer any. The caseworker explained that having established that the return understated profit by around £8,000 he had to decide the behaviour underlying that inaccuracy; that is whether on the balance of probabilities and the available evidence, the taxi driver had submitted an inaccurate return

  • despite having taken reasonable care to get it right
  • as a result of carelessness or
  • knowing the return was not accurate (whether or not he knew what the true figure of profit was).

The caseworker asked the taxi driver whether the inaccuracy was deliberate but the taxi driver did not accept this. The caseworker explained his conclusion - that from the available evidence and on the balance of probabilities the funding of personal expenditure with unrecorded takings was a regular and planned arrangement. This was not the accidental result of poor cash management. Consequently, because the taxi driver had known that not all of his takings had been recorded, he must also have known that his return was inaccurate. Delivering a return which he knew to be inaccurate is deliberate behaviour.

Learning Points

  1. Test explanations, either by obtaining further documentary evidence or careful questioning, or both.
  2. After challenging a person’s explanations always allow them the opportunity to provide further information.
  3. In the absence of any other reliable explanation, it would be reasonable to conclude that shortfalls in declared income for private expenses came from undeclared business takings.
  4. You must make your decision on the behaviour based on the evidence you have been able to obtain.