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HMRC internal manual

Excise Civil Evasion Penalty

Calculating an excise civil evasion penalty: mitigation

A penalty imposed under Section 8 of Finance Act 1994 is equal to the amount of duty evaded or sought to be evaded.

However, a penalty assessment can be reduced to any amount (including nil) at the Commissioners’ discretion, or on appeal at a tribunal’s discretion. The law governing mitigation of the civil evasion penalty is contained in Section 8(4) and (5), stating:

(4) where a person is liable to a penalty under this section

  1. the Commissioners or, on appeal, an appeal tribunal may reduce the penalty to such amount (including nil) as they think proper

(5) neither of the following matters shall be a matter which the Commissioners or any appeal tribunal shall be entitled to take into account in exercising their powers under subsection (4) above, that is to say -

  1. the insufficiency of the funds available to any person for paying any duty of excise or for paying the amount of the penalty;
  2. the fact that there has, in the case in question or in that case taken with any other cases, been no or no significant loss of duty.

Mitigation of a penalty to below 20%

The most common reason for a further reduction would be if the trader has made a genuinely unprompted voluntary disclosure of dishonest evasion, in which case a lower penalty may be applied. In most cases this will be no lower than 15%.

A measure of whether a voluntary disclosure is truly unprompted may be whether it was motivated by conscience or because of the fear of imminent discovery. A useful guide is to consider whether we would have found out about the evasion had the trader not disclosed it. If we would, for instance because of an arranged compliance visit, then the voluntary disclosure should not be treated as unprompted. However, if we would not have found out about it, for example if the disclosure was only as a result of an accountant’s advice to regularise matters, then the voluntary disclosure may be deemed unprompted and the appropriate mitigation applied.

In the appeal by James Ashworth Waterfoot (Successors) Ltd [MAN/95/782], the appellant argued that one of the circumstances of the case that the Commissioners had failed to take into account when considering mitigation was that the disclosure of the evasion had been made voluntarily and unprompted to Customs & Excise. However, the disclosure had only been made after the company had received a letter from the Inland Revenue querying its annual accounts. The Chairman was satisfied that ‘the dishonesty was admitted only because of the Inland Revenue’s letter.’ In dismissing the appeal he commented on the use of the word ‘unprompted’ in Public Notice 730.

‘In my opinion, however, the expression is not misleading since it draws attention to the obvious distinction between a trader whose disclosure is motivated by his conscience, and the trader who is motivated by the fear of imminent exposure.’

Whilst this guidance does not seek to restrict HMRC’s discretion on mitigation, Departmental policy is not to mitigate a civil evasion penalty below 20%, unless there are exceptional circumstances. This is to ensure that there is a suitable differential between the punishment for dishonest persons and those who have simply made careless or reckless mistakes.

In an appeal by James Ashworth Waterfoot (Successors) Ltd (1996) V & DR 66 the tribunal Chairman upheld our (then) policy of maintaining a minimum penalty of 25% in normal circumstances.

One of the Appellant’s submissions was

‘that the mitigation allowed, of 75%, represented insufficient recognition of the co-operation which the directors had offered’.

To counter this, the Department contended that

‘in the absence of special factors, there had to be a margin between penalties for careless or reckless behaviour on the one hand, and for dishonesty on the other’.

This principle was supported by the Chairman who commented,

‘it is a necessary principle for the proper operation of a self-assessed tax such as VAT that the traders concerned deal with the calculation and disclosure of their liabilities honestly. Parliament has decreed a system for penalising traders who, carelessly or recklessly but not dishonestly, make mistakes. While I accept that recklessness may sometimes border on dishonesty I am nevertheless satisfied that dishonesty should be distinguished and visited by more severe penalties’.

In the circumstances of the case the tribunal found that it was not appropriate to mitigate the penalty any more than had already been done and the appeal was dismissed.