© 2024 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Procedure.Tax
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V6: Mitigation of penalties
HMRC opaque approach to mitigation criticised
"[77] Equally surprising to us is the manner in which the Respondents have dealt with the reduction in the penalty for the quality of disclosure. Officer Henderson initially determined that the quality of the Appellant's disclosure merited a reduction in the penalty which was equal to 70% of the difference between the maximum and minimum penalty figures. That conclusion was adjudged by Officer Noble on review to be too harsh, with the result that the reduction was increased to 85% of the difference between the maximum and minimum penalty figures. However, when Officer Henderson reduced the penalty on 24 January 2024 to take into account the change in the status of the penalty from deliberate but not concealed to non-deliberate, she awarded no reduction whatsoever for the quality of disclosure. Moreover, there was no way that the Appellant or its representative could have realised from the information that was sent to them by Officer Henderson on that date that that was the case.
[78] We do not understand why the conclusions reached by Officer Henderson and Officer Noble in relation to the quality of disclosure at the time when they considered that the Appellant's act or failure was deliberate but not concealed should not have stood when Officer Henderson subsequently concluded that the act or failure was non-deliberate. As we have said in paragraph 51(4) above, Mr Holt was unable to shed any light on this at the hearing. It seems to us that, at the very least, the revised penalty on 24 January 2024 should have reflected that discount and should therefore have been 21.5% and not 30% of the excise duty in question - 20% plus 15% of the 10% difference between the maximum and minimum penalty figures - to take account of the 85% reduction which the Respondents had previously agreed to be due for the quality of disclosure." (Kent Couriers Limited v. HMRC [2024] UKFTT 145 (TC), Judge Beare)
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Meaning of disclosure to HMRC
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- Sufficient to notify failure to comply with relevant obligation, full detail not required
"[67] For a disclosure to be unprompted, it must be a disclosure of a "relevant act or failure" and it must be made when the taxpayer has no reason to believe HMRC are about to take action. The relevant failure is the failure to comply with a relevant obligation. In the present case, the relevant obligation is the obligation to give notice of liability to income tax under section 7 TMA. By his 11 December 2013 letter, the Appellant disclosed that he had failed to give notice of his liability to income tax on his rental properties. This was the disclosure of a relevant failure within paragraph 12(3) of schedule 41 and it was made before HMRC opened their enquiry.
[68] In our view, an approach to HMRC can constitute a "disclosure" if the taxpayer informs HMRC that they have not complied with the relevant obligation. It is not necessary at that point, to provide full details of the liability." (Khan v. HMRC [2024] UKFTT 615 (TC), Judge McKeever)
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- Level of detail goes to the quality of the disclosure
"[70] The amount of detail provided, including the timing, nature and extent of the disclosure goes to the "quality" of the disclosure, which feeds into the possible reduction to be allowed under paragraphs 12(2) and 13 of schedule 41. The mere act of telling HMRC about a relevant failure is a disclosure. The reduction in penalty depends in how much more the taxpayer tells HMRC." (Khan v. HMRC [2024] UKFTT 615 (TC), Judge McKeever)
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Telling, helping giving
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- Access to tills is significant, but so is failure to produce VAT workings
"[155] We consider that the permission for HMRC to extract data from the tills was significant, but so was the failure to produce VAT workings. Overall, and having considered all of the correspondence between AH and HMRC to which we were taken, we allow mitigation of 60% in total for telling, helping and giving. We would allow the same level of mitigation for each of the five periods in issue (as we do not consider that the quality of disclosure varied during this time, and the absence of till data for 11/14 was not the result of actions of the Appellants); however, we have not, for the reason set out above, reduced the 90% level which HMRC had decided to allow for 11/14." (Rai v. HMRC [2024] UKFTT 511 (TC), Judge Zaman)
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Failure to make return mitigation
"(1) Paragraph 15 provides for reductions in the penalty under paragraph 6(3) or (4) where P discloses relevant information that involves a domestic matter or 11(3) or (4) where P discloses relevant information.
(1A) Paragraph 15A provides for reductions in the penalty under paragraph 6(3) or (4) where P discloses relevant information that involves an offshore matter or an offshore transfer." (FA 2009, Sch 55, para 14)
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Domestic matters
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"(1) If a person who would otherwise be liable to a penalty of a percentage shown in column 1 of the Table (a “standard percentage”) has made a disclosure, HMRC must reduce the standard percentage to one that reflects the quality of the disclosure.
(2) But the standard percentage may not be reduced to a percentage that is below the minimum shown for it—
(a) in the case of a prompted disclosure, in column 2 of the Table, and
(b) in the case of an unprompted disclosure, in column 3 of the Table." (FA 2009, Sch 55, para 15)
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Standard 70%
Minimum for prompted: 35%
Minimum for unprompted: 20%
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Standard: 100%
Minimum for prompted: 50%
Minimum for unprompted: 30%
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Lower limits
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"(5) But HMRC must not under this paragraph—
(a) reduce a penalty under paragraph 6(3) or (4) below £300, or
(b) reduce a penalty under paragraph 11(3) or (4) below the amount set by paragraph 11(3)(b) or (4)(b) (as the case may be)." (FA 2009, Sch 55, para 15)
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Offshore matters/transfers
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"(1) If a person who would otherwise be liable to a penalty of a percentage shown in column 1 of the Table (a “standard percentage”) has made a disclosure, HMRC must reduce the standard percentage to one that reflects the quality of the disclosure.
(2) But the standard percentage may not be reduced to a percentage that is below the minimum shown for it—
(a) in the case of a prompted disclosure, in column 2 of the Table, and
(b) (b) in the case of an unprompted disclosure, in column 3 of the Table." (FA 2009, Sch 55, para 15A)
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See table here
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Lower limit
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"(3) But HMRC must not under this paragraph reduce a penalty below £300." (FA 2009, Sch 55, para 15A)
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- Relevant information
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"(A1) In this paragraph, “relevant information” means information which has been withheld by a failure to make a return." (FA 2009, Sch 55, para 14)
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- Disclosing information re domestic matter
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(1B) Sub-paragraph (2) applies where—
(a) P is liable to a penalty under paragraph 6(3) or (4) and P discloses relevant information that involves a domestic matter, or
(b) P is liable to a penalty under any of the other provisions mentioned in sub-paragraph (1) and P discloses relevant information.
(2) P discloses relevant information by—
(a) telling HMRC about it,
(b) giving HMRC reasonable help in quantifying any tax unpaid by reason of its having been withheld, and
(c) allowing HMRC access to records for the purpose of checking how much tax is so unpaid." (FA 2009, Sch 55, para 14)
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- Disclosing information re offshore matter/transfer
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"(2A) Sub-paragraph (2B) applies where P is liable to a penalty under paragraph 6(3) or (4) and P discloses relevant information that involves an offshore matter or an offshore transfer.
(2B) P discloses relevant information by—
(a) telling HMRC about it,
(b) giving HMRC reasonable help in quantifying any tax unpaid by reason of its having been withheld,
(c) allowing HMRC access to records for the purpose of checking how much tax is so unpaid, and
(d) providing HMRC with additional information." (FA 2009, Sch 55, para 14)
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Additional information
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(2C) The Treasury must make regulations setting out what is meant by “additional information” for the purposes of sub-paragraph (2B)(d).
(2D) Regulations under sub-paragraph (2C) are to be made by statutory instrument.
(2E) An instrument containing regulations under sub-paragraph (2C) is subject to annulment in pursuance of a resolution of the House of Commons." (FA 2009, Sch 55, para 14)
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- Prompted v. unprompted
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"(3) Disclosure of relevant information—
(a) is “unprompted” if made at a time when P has no reason to believe that HMRC have discovered or are about to discover the relevant information, and
(b) otherwise, is “prompted”." (FA 2009, Sch 55, para 14)
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- Quality
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"(4) In relation to disclosure “quality” includes timing, nature and extent." (FA 2009, Sch 55, para 14)
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Meaning of prompted
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- Whether the person had "no reason to believe" HMRC were about to discover is an objective test
[52] We were not referred to any authority on the meaning of “prompted” or “unprompted”. The only relevant decision of which we are aware is the decision of the Tribunal in United European Gastroenterology Federation v HMRC [2013] UKFTT 292 (TC). In that case, the Tribunal rejected the submission that the relevant test – that the person making the disclosure had “no reason to believe” that HMRC were “about to discover” the inaccuracy – was a subjective one. In its decision, at [60], Judge Poole said this:
“We reject Miss Bailey’s submission that the “no reason to believe” test is a subjective one. Paragraph 9(2)(a) of Schedule 24 requires the question to be asked: “At the time the disclosure was made, did the person making it have no reason to believe that HMRC had discovered or were about to discover the inaccuracy?” The question is not whether the person actually held that belief. It is whether there is any reason for them to hold that belief. To answer that question, an objective examination of the facts is required, not an enquiry into a subjective state of mind.”" (Mikhail v. HMRC [2016] UKFTT 363 (TC), Judge Greenbank)
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"[21]...However, whether or not a disclosure is prompted depends upon an objective assessment of the facts rather than an analysis of the disclosing party's subjective intention...." (Langdale Brewing Company Limited v. HMRC [2020] UKFTT 384 (TC), Judge Chapman QC)
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- Person who must have "no reason to believe" is the taxpayer
"[62] Since paragraph 9 is effectively an interpretation provision to explain paragraph 10, and paragraph 10 refers to the situation in which “a person who would otherwise be liable to a .... penalty has made [a prompted/an unprompted] disclosure”, it seems clear that the references to “person” in paragraph 9 are intended to refer to the person who may potentially benefit from mitigation of the penalty under paragraph 10. We therefore interpret the reference in paragraph 9(2)(a) to “the person making [the disclosure]” as referring, where a disclosure is made by an agent, to the principal on whose behalf it is made. In the present case, this means that the “person” in question for the purposes of paragraph 9(2)(a) is the Appellant, rather than Deloitte UK. Both parties at the hearing proceeded on the assumption (without addressing the point specifically) that this was correct.
[63] So if we are considering what the Appellant had “reason to believe”, we must surely do so by reference to the facts known to it at the time. It is clear from Dr Schuster’s evidence that (as you would expect) Deloitte Austria’s first step when it realised the problem was to contact the Appellant to inform it about it." (United European Gastroenterology Federation v. HMRC [2013] UKFTT 292 (TC), Judge Poole)
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- Some reason to believe the inaccuracy would be discovered is sufficient
"[66] This is clearly a much higher hurdle for the Appellant than if it had to establish, for example, that there was a reasonable possibility (or even a likelihood) that the inaccuracy would have escaped undetected. It is a hurdle which, in the circumstances, we consider the Appellant cannot clear. Whether or not it knew of the level of enquiry that HMRC would undertake during the course of the visit, it is quite clear to us that it had at least some reason to believe that the inaccuracy would be discovered as a result of it. It must therefore fail the “no reason to believe” test and this is fatal to the appeal. We should emphasise that this is the case, on our interpretation of the statutory test, even though we fully accept the Appellant’s evidence that the disclosure would have been made even if no HMRC visit had been arranged." (United European Gastroenterology Federation v. HMRC [2013] UKFTT 292 (TC), Judge Poole)
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- Might be possible to show that there was no reason to believe inaccuracy would be picked up during routine visit by HMRC
"[67] We see nothing in Miss Bailey’s submissions summarised at [53] above to the effect that this approach has arbitrary results. In the context of a large and complex business, it might be quite possible to demonstrate that some inaccuracy would be extremely unlikely to be picked up during a routine pre-arranged control visit and therefore a disclosure of such an inaccuracy might be unprompted, despite being made after a control visit had been booked. It would be a question of whether there was any “reason to believe” that the inaccuracy would be picked up on that routine visit. And in the case of two identical taxpayers with identical inaccuracies, we do not find it indefensibly arbitrary that they may be differently treated because one of them has received notice of a visit before it makes its disclosure of an inaccuracy that is likely to be picked up on the visit. This is akin to arguing that the speeding motorist who is caught should be let off because other speeding motorists have not been caught." (United European Gastroenterology Federation v. HMRC [2013] UKFTT 292 (TC), Judge Poole)
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- Disclosure prompted where HMRC open enquiry looking into general subject-matter
"[53] As we have discussed above, the only relevant inaccuracies in Dr Mikhail’s returns were the failures to include any reference to the annual allowance charge.
[54] In relation to the tax year 2012/13, HMRC had opened an enquiry by the letter dated 13 January 2015. That enquiry extended to the matter of pensions savings. Although HMRC’s enquiries, prior to the disclosure contained in Wall & Partners letter of 14 April 2015, focused incorrectly on the contributions that Dr Mikhail had made to his pension fund and not on the value of the fund, it could not be said that that there was no reason for Dr Mikhail or his advisers to believe that HMRC were about to discover the inaccuracy. For that reason, we agree with HMRC that the disclosure was “prompted”." (Mikhail v. HMRC [2016] UKFTT 363 (TC), Judge Greenbank)
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- Disclosure unprompted where HMRC have not opened enquiry and questions are looking at different issue
"[55] We take a different view in relation to the tax year 2011/12. Prior to the disclosure by Wall & Partners on 14 April 2015, there was no enquiry into the return for the tax year 2011/12 or any of the earlier periods. Given HMRC’s incorrect focus on the level of deductions claimed by Dr Mikhail for his contributions to the fund, HMRC had not discovered any inaccuracy in that return. Dr Mikhail and his advisers had no reason to believe that HMRC were about to discover that inaccuracy at the time at which the disclosure was made. Indeed, they had every reason to believe that HMRC was not going to discover it. It was only as a result of the intervention of Wall & Partners that the correct issue was identified, the enquiry opened and the correct (much higher) amount of tax was paid. For this reason, we take the view that the disclosure for the tax year 2011/12 was “unprompted”." (Mikhail v. HMRC [2016] UKFTT 363 (TC), Judge Greenbank)
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- Not unprompted if elicited by HMRC questions
"[25] Thirdly, further or alternatively, the disclosure in the January Visit about sales was an answer to a direct question by Officer Smith as to what happened to the beer. The unsolicited element of what Mr Fry had said was therefore as to the brewing of the beer without approval, not the sale of the beer. We find that if Officer Smith had not asked about what had happened to the beer, Mr Fry would not have disclosed its sale. We make this finding because Mr Fry did not say at the outset that Langdale had already sold beer (only saying that it had been brewed) and because Mr Fry said that he did not know about the need for AWRS approval until he was told about it by Officer Pervaiz. We find that a disclosure cannot be unprompted if it is elicited by a question from HMRC in such circumstances." (Langdale Brewing Company Limited v. HMRC [2020] UKFTT 384 (TC), Judge Chapman QC)
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Direct tax: HMRC power to mitigate
"The Board may in their discretion mitigate any penalty, or stay or compound any proceedings for a penalty, and may also, after judgment, further mitigate or entirely remit the penalty." (TMA 1970, s.102)
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VAT: power to mitigate
VATA 1994, s.70
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Tribunal power to mitigate
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- Tribunal not reducing mitigation in the absence of pleading by HMRC
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"[153] Whilst the Tribunal has jurisdiction to substitute its own decision as to the appropriate level of mitigation, we do not consider it would be fair or in the interest of justice to reduce the level of mitigation which has been allowed – this had not been pleaded by HMRC and the Appellants did not therefore address this possibility in submissions. Instead, we focus on the Appellants' submissions that higher mitigation should be allowed." (Rai v. HMRC [2024] UKFTT 511 (TC), Judge Zaman)
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