28 July 2011
Tax penalties - take care!
At a time when the legislation affecting tax penalties puts an emphasis on taxpayers taking care over their tax affairs, it is important to understand what ‘reasonable care’ really means. We also consider whether HMRC are always achieving the required standard of proof to levy a penalty...
The change in the structure of the penalty regime over the last few years has been designed to promote good behaviour, by penalising taxpayers who make careless inaccuracies, but not penalising those who make mistakes despite taking reasonable care.
Legislation does not define the phrase ‘reasonable care’. HMRC has published its views on the matter in its manuals. The lack of a statutory definition means that the general guidance in case law has to be used. Broadly, this defines “reasonable care” as the care that a reasonable man would exercise under the circumstances.
HMRC states that what is “reasonable care” will depend on the capabilities and circumstances of the taxpayer, whether that is an individual, an unincorporated business or a company. It is only right that HMRC recognise that “reasonable” is subjective, but it does of course require HMRC to make a judgement on what the abilities and circumstances of each taxpayer might be.
Where complex or unusual transactions are undertaken, the taxpayer is expected to take extra care. In HMRC’s view it is reasonable to expect a person who encounters a transaction or other event with which they are not familiar to take care to find out about the correct tax treatment or to seek appropriate advice. It would not therefore be enough to claim that a transaction was beyond the capabilities of the person or company if advice should have been sought in the circumstances.
HMRC’s view is that larger businesses will have taken reasonable care if arrangements or systems exist that, if followed, could reasonably be expected to produce an accurate basis for the calculation of tax due by the internal tax department or external agent; and despite these procedures, inaccuracies arise which result in a misstatement of the tax liability, and the effect of the inaccuracies is not significant in relation to the overall tax liability. It is worth noting that the guidance regarding large businesses was developed jointly between HMRC and the CBI.
For smaller businesses and individual taxpayers, HMRC note that errors may arise if record-keeping is poor and whilst there are penalties for failure to keep adequate records, if that failure has resulted in the inaccuracy in the return, this would also be viewed as a failure to take adequate care and penalties levied accordingly.
Where an agent is acting on behalf of the taxpayer, HMRC state that the requirement for the officer to show that the taxpayer did not take reasonable care is replaced by a requirement for the taxpayer to show that he did.
HMRC state that reasonable care will have been taken where the taxpayer can show he has:
- Appointed an agent competent to deal with his affairs;
- Given the agent all of the relevant information; and
- Checked the return, as far as possible, before it is submitted.
It is important for taxpayers to seek advice on their affairs and in particular to consult with their advisors when dealing with unusual, one-off or unfamiliar transactions.
With regard to the burden of proof, the onus is on HMRC to show that the taxpayer failed to take reasonable care. HMRC often overlook this, and also frequently regard their own internal guidance as a statement of law.
There is little case law about reasonable care and penalties in the tax field, but a decision of the European Court of Human Rights in Jussila v Finland is important here. This was referred to in (among others) the recent First-tier Tribunal Decision of Ballysillan Community Forum v HMRC. The Tribunal reaffirmed the view that tax penalties are criminal in nature, and therefore the standard of proof that HMRC has to achieve is to show beyond reasonable doubt (rather than just on the balance of probabilities) that the taxpayer is at fault. Taken more broadly, Article 6 of the Human Rights Act applies to tax penalties, and so, at least in theory, legal aid might be available to challenge penalties before the courts.