Mark McLaughlin highlights a strange anomaly involving the difference between ‘careless’ and ‘deliberate’ behaviour in taxpayer errors.
Mistakes by taxpayers in tax returns are common but might go undetected until it is too late for HM Revenue and Customs (HMRC) to open an enquiry into the return within normal time limits.
However, HMRC may make a discovery assessment outside the normal enquiry ‘window’ broadly if HMRC can demonstrate that the taxpayer’s mistake was careless or deliberate (TMA 1970, s 29(4)) (N.B. there is an alternative condition, which is not considered in this article).
How long?
If a tax loss was careless, the normal time limit for HMRC to raise a discovery assessment is extended from four years to six years after the end of the tax year to which it relates. On the other hand, if the tax loss was deliberate, the discovery assessment time limit is extended to 20 years (s 36). Separate time limits apply to an ‘offshore matter’ or ‘offshore transfer’ (s 36A).
Clearly, whether a tax return error was ‘careless’ or ‘deliberate’ can make a huge difference to how many years HMRC can go back and assess additional tax in respect of an error, etc. It might be assumed that careless behaviour is less serious than deliberate behaviour, in view of the shorter assessment period. That is generally the case – until recently, it seems.
Deliberate act
In Cliff v Revenue and Customs [2019] UKFTT 564 (TC), the taxpayer was a self-employed tax consultant. He also considered himself to be self-employed as a “dealer in thoroughbreds” (this was the term used by the taxpayer to describe his purchase of shares in racehorses and horseracing partnerships). He subsequently informed HMRC that he ceased treating his activity as a commercial venture on 31 December 2012, after incurring losses of approximately £160,000 over the preceding five years.
Following an enquiry into the taxpayer’s self-assessment return for the tax year 2012/13, HMRC issued a closure notice and raised discovery assessments for 2007/08, 2009/10, 2010/11, and 2011/12, disallowing the losses claimed. The taxpayer appealed. The First-tier Tribunal concluded on the facts and evidence that the appellant was not a dealer in thoroughbreds. The taxpayer had not demonstrated that he was trading, or that he was trading commercially, or that he was trading with a view to a profit.
The tribunal also considered whether HMRC’s discovery assessments were validly made and within the statutory time limit. HMRC argued that the taxpayer had carelessly or deliberately brought about a loss of tax, on the basis that the taxpayer acted deliberately because he made a conscious choice to use the phrase “dealer in thoroughbreds” rather than giving a more accurate description of his activities.
The tribunal concluded that the taxpayer’s behaviour was deliberate. Worryingly, the tribunal added: “…deliberate behaviour is purposeful or consciously undertaken and it does not have to be accompanied by an intention to deceive”.
In another case, losses from an ultimately failed tax avoidance scheme, which were disclosed in the wrong box on a tax return following tax return software difficulties, was held to be a deliberate inaccuracy (Revenue and Customs v Tooth [2019] EWCA Civ 826). This decision is subject to appeal.
Practical tip
A deliberate error has other possible adverse implications (e.g. higher penalties). Be prepared to challenge HMRC where appropriate if an inaccuracy is alleged to be deliberate.
