How Taxpayer Behaviour Shapes Schedule 24 Penalties

When HMRC discovers an inaccuracy in a tax return, it is rarely the case that the taxpayer will simply be asked to pay the difference. Schedule 24 to the Finance Act 2007 (Schedule 24) empowers HMRC to raise punitive financial penalties that increase in proportion with the taxpayer’s culpability and the nature and quality of a taxpayer’s disclosure to HMRC, namely, whether the taxpayer disclosed the error to HMRC with or without prompting, as well as the quality of a taxpayer’s disclosure. These behaviour-based penalties can have a considerable financial impact on the taxpayer, with inaccuracies (excluding those with an offshore element) giving rise to a maximum penalty equating to 100% of the potential lost revenue (“PLR”), this being the additional amount payable as a result of correcting the inaccuracy. 

Schedule 24 sets out three behaviours as the basis for the penalty regime: careless, deliberate and concealed. 

Careless:

Careless behaviour is the lowest level of culpability for which a penalty for an inaccuracy can be imposed and arises when a taxpayer did not take reasonable care. Circumstances in which a taxpayer may be found not to have taken reasonable measures include:

• A failure to take advice from an appropriately qualified advisor
• Not obtaining updated advice after a change in the law or when the taxpayer’s circumstances have changed
• An innocent omission from a tax return
• Carelessness on the part of a person acting on the taxpayer’s behalf

It should be noted that the standard of care is not static, and an individual with a modest income would not be held to a lower standard than a multinational company. 

Deliberate:

Deliberate conduct is not defined within Schedule 24, however in Auxilium Project Management v HMRC [2016] UKFTT 249 (TC) the FTT held at [100] that “a deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document".    HMRC’s own guidance notes that deliberate conduct can be difficult to prove, and that it will likely emerge from documents obtained under HMRC’s information powers. 

Deliberate and Concealed:

 Again, Schedule 24 does not define ‘concealed’ however the Courts have found it should be given its plain and ordinary meaning.  In Leach v HMRC [2019] UKFTT 352 (TC), the FTT at [105] held that “An inaccuracy is therefore "concealed" if the person makes arrangements to conceal "it", ie the inaccuracy, so this is a transitive usage.  The question is therefore whether [the taxpayer] prevented the inaccuracy from being visible?” Examples of concealment would include falsifying documents and invoices to support the inaccuracy, destroying records and providing a false explanation during an investigation. 

The standard penalties for each behaviour, as set out within Schedule 24, are: 

Careless: 30% of potential lost revenue

Deliberate but not concealed: 70% of potential lost revenue

Deliberate and concealed: 100% of potential lost revenue

These penalties can be significantly reduced as a result of a taxpayer’s disclosure to HMRC being prompted or unprompted, and the quality of the taxpayer’s disclosure. The taxpayer’s culpability (careless, deliberate or deliberate and concealed), coupled with whether the disclosure was prompted or unprompted, determines a penalty range.  Penalties at the lower end of the range will be imposed when the taxpayer makes a high-quality disclosure (e.g., full and frank and in an easily digestible format) whereas where there is limited cooperation on the part of the taxpayer, it is likely that any penalty will be towards the higher end of the range.  An unprompted, high-quality disclosure provides the best mitigation, with it even being possible to completely avoid a penalty for a careless inaccuracy in such circumstances. The table below sets out the potential penalties that may be imposed depending on the taxpayer’s culpability and disclosure:

 

 

 

In order to minimise or even avoid a penalty entirely, it is important that a taxpayer takes the following steps:

• Move first: If possible, contact HMRC.  Whilst it might be tempting to wait and see if the error is detected, this is a potentially expensive gamble.  An unprompted disclosure provides the best mitigation and can even potentially eliminate a penalty in the case of careless inaccuracies.
• Frame the behaviour correctly. In borderline cases, it’s crucial to demonstrate why the error is careless rather than deliberate, or if it is deliberate, that it is not concealed.
• Make a high-quality disclosure. Provide HMRC with comprehensive responses and do so in an organised way so HMRC can follow the facts quickly. That keeps you at the bottom of the range. 

At all stages, it is important to consider whether there is any potential criminal liability, as this may dictate a different approach. 

Given that even the most inadvertent errors can look suspicious at first glance, especially where there are complex structures involved, it is therefore important to seek expert advice and representation as early as possible. Early advice can help ensure the best possible outcome in terms of the penalty classification and ensure an investigation remains within the civil track.