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HMRC internal manual

Compliance Handbook

Charging Penalties: establishing penalty behaviour: examples of deliberate behaviour: non-cooperation

The example below shows a deliberate behaviour where the customer gives little or no cooperation with the compliance check.

A caseworker opened a compliance check into a small incorporated husband and wife company, NickNacks UK Ltd, in the wholesale clothing accessories trade. The identified risk was that the directors’ lifestyle appeared out of line with reported income.

After some delay the basic records of the company were provided. The review identified some areas of concern about the records. However, the directors refused to have a meeting. The caseworker asked the directors to provide their personal bank statements. The directors refused to provide these and complained that the caseworker was intruding on their rights by requesting these when it had not yet been established anything was wrong.

The caseworker considered issuing a third party notice to the directors seeking their personal bank statements in order to check the company’s return. However, in discussion with the authorising officer she decided that before approaching a tribunal for a third party notice she would need further evidence that the directors’ personal bank statements were reasonably required to check the company’s tax position.

The caseworker reconsidered the record review and what form any off record transactions would take. One area identified was a number of purchase invoices for classified advertisements. She decided to review the actual adverts in newspaper back issues at the library. The adverts indicated that certain items of stock were being offered for sale to private individuals by mail order. However, the caseworker had not identified any sales invoices for these items of stock and there were no records to indicate that the proceeds from these sales had been recorded in the company accounts.

This information highlighted a risk and gave the caseworker evidence that the bank statements were reasonably required. With the agreement of the authorising officer she was able to get tribunal approval for a third party notice to obtain bank statements for all the directors’ bank accounts. After she had issued initial penalties to the directors for not complying with the notice they produced statements for three accounts.

The caseworker found numerous bank transfers in one savings account. She could not trace the source of these to any of the directors’ other accounts nor to the business account.

The caseworker asked the directors for an explanation. They did not specifically identify the source of the transfer but responded that the transfers may have been from selling private items or gifts from family to private individuals. They again refused a meeting and did not provide any corroborating evidence or further details of their explanation.

The caseworker concluded that as the company and its directors would not provide any further information she would need to make her decision on the basis of the information she had. She then concluded that, on the balance of probabilities, all the transfers represented sales of stock to individuals and that the alternative explanations were not credible without any corroborating evidence. She amended the return to reflect an outstanding balance on the Directors’ Loan Accounts.

The caseworker identified two types of penalty position.

  1. An inaccurate Corporation Tax return.
  2. A failure to notify that the company should have registered for VAT on the real turnover which narrowly exceeded the VAT threshold.

The caseworker then had to decide on the type of behaviour based on the information she had been able to obtain, given the lack of cooperation. She concluded that for the Corporation Tax returns the inaccuracy was not merely careless. On the balance of probabilities the company would have known the return was inaccurate. This is because there were numerous transfers and, despite being given the opportunity, the directors had given no evidence to support their explanation for the bank transfers.

The caseworker then addressed whether this was concealed or not. Although the sales were omitted, there was no evidence the underlying purchases had been manipulated or that the advertising costs had been concealed. The sales went into the savings bank account. A check revealed the interest on this account had been included on the individual directors’ returns. The account itself was also used normally for other income, for example salary and expenditure. There was no evidence of concealment.

The caseworker considered the failure to notify liability to VAT. Although sales had been deliberately suppressed this was not in this case sufficient to conclude the failure had been deliberate.

The caseworker looked into the directors’ backgrounds. This was their first business venture and so they had no history of experience with VAT. The sales suppression gave no indication of a pattern to stay below the VAT threshold. There was nothing to indicate that the directors had ever calculated the total sums transferred into the savings account, and if they would have been aware they could have breached the VAT threshold.

Note: While the caseworker must consider all relevant circumstances, in other situations the Department will not normally accept lack of information or ignorance of basic law as an excuse for failure to notify. What is or is not a reasonable excuse is personal to the individual’s abilities and circumstances. Those abilities and circumstances may mean that what is a reasonable excuse for one person may not be a reasonable excuse for another, see CH92000.

In this case the caseworker concluded that the failure to notify liability to VAT was a non-deliberate failure.

In both cases disclosure was prompted rather than unprompted and the level of the penalty must reflect the company’s failure to cooperate with the check.

Learning Points

  1. A lack of cooperation should not put caseworkers off continuing their checks.
  2. Non-cooperation is not non-compliance. Customers do not have to have meetings with caseworkers or provide information without a statutory notice. This does not indicate deliberate behaviour.
  3. Similarly, non-compliance with an information notice does not indicate deliberate behaviour, though combined with other factors it may do so.
  4. Caseworkers should use third party notices and other statutory powers in appropriate circumstances, see CH402650.
  5. The person being checked should be asked to provide evidence to corroborate explanations. If they cannot, HMRC is entitled to take a reasonable view.
  6. Repetitions of actions can be indicative of deliberate behaviour.
  7. For each penalty type caseworkers should consider the behaviours on their own merits, even if the situation arose from the same underlying facts.