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HMRC internal manual

Enquiry Manual

Penalties: culpability: degree of culpability

The Compliance Handbook describes the penalties introduced by Finance Acts from 2007 onwards.

Before the introduction of these ‘new’ penalties, which make a clear distinction between behaviours, there was no need for enquiry officers to establish anything other than negligent behaviour. This was because whether the behaviour was negligent or fraudulent had little bearing on the size of the relevant penalty. For example, there is no requirement in S95 TMA70 to make a distinction between fraud and neglect.

This has now changed because of

  • the introduction of penalty regimes and assessing time limits that require you to identify the behaviour, and
  • the expansion of cross tax compliance checks where legacy penalties for other tax regimes, VAT for example, require us to establish dishonest conduct.

Once you have established the facts, you can decide the appropriate degree of culpability and apply the appropriate penalty.

The action to take in explaining the behaviour will depend on the scope of the compliance check.

When only negligent or careless behaviour is relevant in establishing culpability for

  • the whole period covered by your enquiry, and
  • any periods covered by related compliance checks or identified risks into any other tax or duty

you can tell the taxpayer that you have concluded that their behaviour was negligent.

Where however, fraudulent, deliberate, or dishonest behaviour may be relevant in establishing culpability for any periods covered by your enquiry or related compliance checks or identified risks relating to other heads of duty, you must not suggest to the taxpayer that their behaviour has “only” been negligent. You must instead tell that taxpayer that their behaviour has been fraudulent or negligent.

Although it is still unlikely that you will have to consider fraud, you must not give the taxpayer an unfounded expectation that their behaviour is negligent when it may be either fraudulent or negligent, even though you do not have to establish whether it is fraudulent or not to charge a penalty.

A VAT officer seeking the VATA94/S60 civil evasion penalty for dishonesty will, for example be seriously hampered if direct colleagues settle, propose to settle or even comment upon, the same trader’s behaviour as being only negligent.

In practice there are similarities between fraud, see EM5105 and EM5106 and deliberate behaviour, see CH81150.