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HMRC internal manual

Compliance Handbook

Charging Penalties: establishing penalty behaviour: examples of deliberate behaviour: small business - income tax - example 2

The example below shows the type of case in which the tribunal has agreed the behaviour was deliberate. It is an example of pursuing a case where records are sparse.

The caseworker opened an enquiry into the return of Dr Harper, a self-employed doctor in private practice. The return showed a profit of £21,000.

In response to a request for various records Dr Harper provided only some of what had been requested, stating that he had not retained cheque book stubs and paying-in books.

At an initial meeting the caseworker explored with Dr Harper his accounting and record keeping processes and was told that the only financial records Dr Harper maintained were appointment books, cheque book stubs and paying-in books. Although he had not previously mentioned it, to explain his inability to produce these records Dr Harper said that the records had been badly damaged during a break-in and he had therefore arranged for them to be disposed of. This took place after Dr Harper had completed his return.

Because the prime records were not available, the caseworker conducted a cash flow test to identify whether the reported figures could support Dr Harper’s personal and business expenditure. He then conducted a business economics exercise to check the general findings of the cash flow test using the information from the initial meeting. Both tests indicated that a substantial level of income had not been declared and that the actual profit was in the region of £39,000.

Having concluded that the return of profit was inaccurate by around £18,000, the caseworker then considered the penalty position and further concluded that, on the balance of probabilities, the inaccuracy was deliberate for the following reasons.

  • Dr Harper was an educated person who, again on the balance of probabilities, would have known that the amount of profit declared in the sum of £21,000 was incompatible with his lifestyle and that the return he submitted grossly understated his taxable income. The understatement of circa £18,000, both in absolute and relative terms, was such that it was more likely than not that he would have known that the return he was submitting was inaccurate.

Note: If the profit returned had been £110,000 and the discrepancy had been £18,000 it is unlikely that the evidence of the size of the inaccuracy on its own would be sufficient to conclude that Dr Harper was more likely than not to have known that the figure returned was inaccurate. This is because the relative difference is smaller and more likely to be overlooked by a careless customer. Nonetheless, it could stand alongside other evidence as part of a case for deliberate behaviour.

  • In addition to the evidence above (£21,000 returned against a true profit of about £39,000), which alone would be sufficient to bear a conclusion that Dr Harper was more likely than not to have known that his return was inaccurate, he had made no mention of a break-in before the meeting. Nor had he provided evidence to corroborate this story, for example reports made to the police or evidence of payments made to repair the damage caused by the alleged break-in. Taking account of these factors the caseworker formed the view that the explanation for the absence of the prime records was not plausible. There was no evidence to show that Dr Harper deliberately destroyed the records which would have amounted to concealment. But there was sufficient evidence to suggest that he had been dishonest in his account of why the records could not be produced and that this was an attempt to cover for the inaccuracies that he knew were contained in his return.

Dr Harper did not accept the caseworker’s conclusion and disputed that any inaccuracy in the return was deliberate.

The caseworker explained that having concluded that the true figure of profit was in the region of £39,000 and not £21,000 he then had to decide the behaviour underlying that inaccuracy. He had to decide whether, on the balance of probabilities and the available evidence, Dr Harper 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 explained that on the basis of the size of the inaccuracy alone, both in absolute and relative terms, he concluded that it was more likely than not that Dr Harper knew that his profit was not £21,000 and so had deliberately submitted an inaccurate return. In addition he found the explanation for the absence of records implausible which reinforced that conclusion.

This example is based on a case in which the First Tier Tribunal upheld the behaviour as being deliberate, appeal number TC/2012/03906.

Learning Points

  1. A lack of records is not a reason for not continuing to pursue a check.
  2. Caseworkers need to consider the specific facts in a case. Here the person’s education was a relevant factor.
  3. A lack of records is not evidence of a behaviour. However, caseworkers may make inferences if it is linked to other factors, in this case to unsupported explanations and inaccuracies.
  4. A large discrepancy can itself be a strong indicator of deliberate behaviour, so long as it is large both in itself and in relative terms. The inference is that the person ought to have known that the position put forward was not correct.