EM5102 - Penalties: Culpability: Meaning and Degree of

As always, the first stage is seeking the evidence and establishing the facts. As well as identifying failures/ understatements and quantifying the tax lost, enquiry officers must use their investigation skills to establish how and why the failure/error occurred.

Only when those facts have been gathered should any opinion on culpability be formed and agreed with management, and be the subject of any necessary referral to the evasion referral team, before finally being discussed with taxpayer and agent.

Culpability is not ‘established’ by an enquiry officer simply asserting it at a meeting or in correspondence. It is established when the officer has brought the taxpayer to acknowledge his default or, in the absence of such agreement, when the officer has assembled a case to prove the default before the tribunal at a hearing of an appeal against a formal penalty determination.

For failure offences, the question is whether the taxpayer

• was allowed more time by an Officer of Revenue and Customs (ORC), or
• had reasonable excuse for the failure and remedied it without unreasonable delay once that obstacle was out of the way. (In some more recent legislation this is worded as a reasonable excuse ‘throughout the period of default’ which amounts to the same thing), see EM5105.

For error offences, the question is whether the taxpayer acted

• fraudulently, see EM5105, or
• negligently, see EM5125, or
• deliberately or carelessly where we have been given a return or other document containing an inaccuracy, and

• the return relates to a period beginning on or after 1 April 2008, and
• has a filing date on or after 1 April 2009, see CH80000+.

Traditionally, it was often not cost effective for an HMRC officer to allege fraud, which can be an emotive term, when the same result could be achieved in terms of neglect, without any implication of intent.

In fact, civil fraud can be a less heinous matter than many imagine, see EM5106. Now in the wider HMRC, enquiry officers need to consider VAT and possibly other liabilities.

It is self evident that a VAT officer seeking the VATA94/S60 civil evasion penalty for dishonesty will be seriously hampered if direct colleagues settle, propose to settle or even comment upon, the same trader’s action as being only negligent or otherwise.

Once the true facts have been established, the appropriate degree of culpability and the appropriate penalty should be applied.