This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Enquiry Manual

Penalties: culpability: aspect enquiries

Exactly the same principles used in full enquiries apply to establishing culpability in aspect enquiries. Those principles cover the full range of aspect enquiries, from complex technical enquiries on large companies to simpler omissions from personal ITSA returns.

Although it is less likely that the findings of your enquiry will have any consequences for other taxes or duties, you must still take care to make sure that you do not give the taxpayer an unfounded expectation that fraud or dishonest or deliberate behaviour have been ruled out because the penalties may be based on negligent behaviour, see EM5103.

It may be more obvious in a full enquiry that a taxpayer has acted fraudulently or negligently, for example when business receipts have been understated or a source of income or gains has been omitted from a return. In aspect enquiries you must still give consideration to culpability whenever you make an adjustment to the taxpayer’s return leading to additional tax.

If culpability cannot be established you should record the reasons in the papers or in Caseflow.

The guidance that follows does not apply where the penalty is under FA07/SCH24. These penalties apply where there is an inaccuracy in a return for a period beginning on or after 1 April 2008 and the return has a filing date on or after 1 April 2009. You will find guidance on these penalties at CH80000+.

To find out more about the following select the headings.

Fraud or dishonest conduct
Default of the Taxpayer
Fact Finding
Agent Prepared Computations
Complex Technical Adjustments
Ability of the taxpayer
Avoidance schemes

Fraud or dishonest conduct

If you suspect fraud or dishonest conduct you must follow the guidance about evasion referrals. The guidance that follows concentrates on negligence and negligent conduct.


There is no statutory definition of negligence. The term is explained in a number of ways.

EM5125: Expectations of a ‘prudent and reasonable man’

EM5181: ‘Innocent Error’

EM4802: Taxpayer responsible for accuracy of returns etc

To impose a penalty you will need to establish the submission of an incorrect tax return giving rise to a tax difference and at least a lack of reasonable care by the taxpayer in submission of that return. Absolute proof is not essential. The evidence standard is the balance of probabilities. Would the tribunal believe, on the balance of probabilities, that the inaccuracy in the return was the result of at least carelessness by the taxpayer? The test as to whether a taxpayer has been negligent is an objective one.

Default of the Taxpayer

It is particularly important in aspect enquiries to show that the loss of tax is attributable to the taxpayer’s fraudulent or negligent conduct. For penalties, there is no extension of the definition to cover the taxpayer ’or a person acting on his behalf’ which enables you to make discovery assessments under TMA70/S29(4) and TMA70/S36(1). The provisions for CTSA at FA98/Sch18/Paras 43 and 46 are worded similarly.

If the incorrect return is completely the fault of an agent and the taxpayer is completely innocent, that is, they could not reasonably be expected to know of, or to have informed themselves of the inaccuracy when they checked and signed the return, then they will not be liable to penalties EM5180. (Unless they later discover the inaccuracy and fail to tell you about it: TMA70/S97(1), FA98/Sch18/Para20(1)(b) EM4805.)

Fact Finding

There is an obvious need to establish the facts because the onus is on HMRC to demonstrate negligence if we seek to impose a penalty. You must consider culpability as soon as it becomes apparent that there may have been an understatement of tax. Whilst enquiring into the facts that gave rise to the loss of tax you should ask as appropriate

  • what went wrong?
  • whose fault was it?
  • what could the taxpayer have done to prevent the error?
  • was the taxpayer careless?

For negligence it is a question of what a prudent and reasonable person would have taken steps to find out. If the taxpayer knew when the incorrect return was made that it was inaccurate, you will need to consider a referral to the Evasion Management Team, which may result in an extension of the enquiry or a criminal investigation.

You can find some points that are particularly relevant to company scenarios in the final paragraphs of EM5180.

Agent Prepared Computations

EM5182 makes it clear that even though an agent is employed we always in the first instance look to attach the responsibility for the error in the return to the taxpayer. The taxpayer has a personal duty to ensure that the return is correct. Although an agent may have prepared the return and computations this doesn’t diminish that personal responsibility.

Because the test of culpability is carelessness on the part of the taxpayer you need to ascertain what reasonable care the taxpayer has failed to exercise. For example, before signing or authorising the return, exercising reasonable care might include taking the trouble to:

  • discuss the figures inserted by the agent
  • find out or try to understand the basis, method and origin of the figures in the agent’s computations
  • compare the agent’s computations with the data and documents supplied to the agent
  • compare the agent’s figures with any earlier figures that were produced say for last year.

In other words, although employing a professional, did the taxpayer take all reasonable care to ensure that the return was right?

For example, say a business sold an item of machinery during the year for a substantial amount but this disposal could not be readily seen in the capital allowances computation. You would reasonably expect the taxpayer to have queried this before the accounts/computations/return were finalised and submitted.

Because of the impact on tax liability and cash flow you would expect a business person or company officer to have some knowledge of capital allowances. There is no need to have a detailed knowledge of capital allowances rules in order to query whether this substantial sum was included.

So if the taxpayer did not bother to check with the agent about the apparent absence of such a transaction before the return was submitted you would consider the taxpayer did not take reasonable care and was culpable.

If the taxpayer has a financial or accountancy background it may be more difficult for him to shift the responsibility for a mistake to the agent.

In avoidance cases, the technical lead will advise you on culpability. If you believe that there are particular features in your case that may not be present in other avoidance cases, you should consult the technical lead before considering culpability.

Complex Technical Adjustments

A taxpayer, who approaches professionals on whose advice the taxpayer can reasonably expect to rely, is unlikely to be found negligent if that taxpayer gives them the full facts and then precisely follows their advice. If the legal context of the tax adjustment established is complex, in many cases it will be unrealistic to expect the taxpayer to have sufficient understanding of the issues to have prevented the error in his return.

If the adjustment arises in an area where the law was genuinely unclear it might have been tenable when making a return to take a more advantageous view of the particular legislation than that held by the Revenue. If subsequently the taxpayer accepts HMRC’s interpretation of the law it would not necessarily make that taxpayer guilty of negligence.

Ability of the taxpayer

You may also need to consider the background of the taxpayer. A person with no particular financial ability might realistically find it difficult to understand the legislation or the work being done by their advisers. In instructing them to act the taxpayer acted prudently and reasonably, subject of course to seeking explanations of entries that the taxpayer is capable of understanding. By contrast a taxpayer with a financial or accountancy background could more readily be expected to understand the issues and spot any errors.

A company may only operate through its officers. In the case of a company you have to consider the conduct of the directors etc in relation to the CT return. They are responsible under the Companies Act for preparing accounts that show a true and fair view. Even if they do not have a specific financial or accounting background it will be difficult for them to avoid culpability on the grounds that they lack financial ability.

For example, suppose that the certified accounts show a tax provision. It would be reasonable to expect the director to compare the tax payable in the Corporation Tax computation with the tax provided in the accounts and to satisfy himself about any difference. The failure to do that sort of check could legitimately lead you to take the view that clear errors in the CT computation demonstrate some negligence by the company itself (rather than being laid exclusively at the door of the agents).


If a valuation from an appropriately qualified professional has been obtained to establish liability it may be difficult to show that the taxpayer has not taken reasonable care.

For property, you would expect the taxpayer to obtain a valuation from a qualified valuer. You may need to ascertain the instructions given to the valuer for the basis of the valuation. For example, there can be a wide variation between an open market basis and that of a forced sale or sale with a sitting tenant. For goodwill, a qualified accountant might suitably be in a position to provide a professional valuation.

Unless the taxpayer personally has the professional ability to make a realistic valuation, you could argue that not seeking professional help amounts to a lack of reasonable care.

Avoidance schemes

Taxpayers may attempt to use an avoidance scheme in order to reduce their tax bills. Sometimes you will need to consider avoidance schemes that fail.

For example a taxpayer may enter into an avoidance scheme after being shown written opinion of Leading Counsel, which says unequivocally that the scheme is legally correct. If the scheme is ultimately defeated you may find it difficult to show any negligence. You must however still consider the penalty position in the same way as you would for any other inaccuracy.

By contrast if the taxpayer purchased an avoidance scheme from a vendor of dubious standing or was told at the outset that it was risky and its legality could not be guaranteed, you could be on stronger ground. When the scheme unravels, it is more likely that the taxpayer failed to take all reasonable steps to ensure the return was full and correct, and they may be liable to a penalty.

In all cases involving avoidance schemes you must obtain advice on all aspects of the enquiry, including culpability, from the technical lead.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)