Tax penalties, and particularly tax-geared penalties, imposed by HMRC can be both substantial and unexpected, in some cases amounting to as much as 200% of the relevant tax. Moreover, they are invariably imposed in addition to an underlying tax charge, which itself carries late payment interest. If funds are not readily available to meet these liabilities, which often they are not, this can lead to considerable stress and worry.
When confronted by HMRC, a taxpayer could be forgiven for assuming that HMRC’s actions fall squarely within the statutory powers conveyed to it, that its assessments comply fully with the letter of the law and that its computations are beyond impeachment. In many instances, that will undoubtedly be the case.
But the subject of tax can be exceptionally complicated, both from a legal and an accounting perspective, and it is certainly not the case that HMRC gets it right every time. Where it does not, there may be justifiable grounds upon which to challenge its position. Alternatively, and even where it does, there may still be scope to recover some or all of the liabilities it imposes from a third party, along with the associated costs of doing so.
As leading professional negligence solicitors, we have advised numerous clients facing tax penalties on claims for compensation, where that liability is believed to have arisen as a result of errors or omissions on the part of an accountant, a solicitor or other professional adviser.
The tax penalty process
There can be a number of sequential steps in this process, each of which we summarise below.
· Penalty assessment
Having assessed the amount of undeclared tax due, HMRC will often be under a statutory obligation to impose a corresponding penalty upon the culpable taxpayer.
HMRC will usually calculate that penalty as a percentage of lost revenue (‘PLR’) i.e. as a percentage of the undeclared tax that HMRC has assessed as being unpaid. In assessing the appropriate percentage to charge by way of a penalty, HMRC will consider three elements:
- Behaviour – the nature of the behaviour that led to the tax going unpaid and whether it was deliberate or careless;
- Disclosure – whether the disclosure to HMRC was prompted by HMRC’s actions or unprompted i.e. it was made at a time when the taxpayer had no reason to believe that HMRC was aware of the situation; and
- Assistance (also known as quality of disclosure) – the extent to which the taxpayer assisted by telling, helping and giving relevant information and documents to HMRC as part of its tax assessment.
The first two considerations enable HMRC to determine the applicable penalty range. The third consideration enables HMRC to determine what, if any, discount should be applied in return for the co-operation it has received. The applicable percentage is then calculated by deducting any discount from the penalty range and then deducting that sum from the maximum potential penalty. A further reduction to the penalty may then be applied for special circumstances or to make adjustments for other penalties that have been imposed on the same tax charge.
· Penalty explanation
HMRC will usually send a penalty explanation letter to the taxpayer to explain how the penalty it is proposing to impose has been calculated and to invite the taxpayer to provide any further relevant information it has which might affect HMRC’s final assessment. It is not uncommon for HMRC to take a hard line at this stage, leaving the taxpayer to explain why no penalty or a lower penalty ought to be imposed.
· Notice of penalty assessment
If HMRC does not receive any further information, or of it does not consider that the further information it has received affects its assessment, it will issue a notice of penalty assessment. This allows it to then collect the tax penalties due.
· Personal liability notice
Where HMRC is satisfied that a tax penalty imposed on a company or LLP for a deliberate inaccuracy, failure to notify or wrongdoing was attributable to any of the entity’s directors, shadow directors, managers or company secretary, HMRC can seek to recover the penalty from one or more of them, if they gained or attempted to gain from the inaccuracy or if the entity is insolvent or likely to become insolvent. In this event, HMRC will also serve a personal liability notice on the relevant individual(s).
How to appeal tax penalties
Any decision of HMRC to impose a tax penalty has the potential to be challenged and is open to appeal. However, the prescribed appeal process will depend on whether the underlying tax is a direct tax (such as corporation tax, income tax, capital gains tax or inheritance tax) or an indirect tax (such as VAT, excise duty or customs duty).
As a first step, HMRC offers taxpayers an internal appeal process. While taxpayers of indirect tax are not obliged to follow this ‘in-house’ route and can instead embark upon an appeal to the Tax Tribunal (in relation to which, see further below), it can offer time and cost efficiencies. For these reasons, a sequential approach is commonplace.
· ‘In-house’ penalty appeals
For penalties arising from a direct tax, the taxpayer usually has 30 days from the notice of penalty assessment within which to notify HMRC of their desire to appeal and their grounds of appeal. The case worker who made the original decision will then determine the appeal.
If the appeal is unsuccessful, HMRC will typically offer a review. In this event, the original decision will be reconsidered by an officer within HMRC’s Solicitor’s Office and Legal Services directorate. If that review is also unsuccessful, the taxpayer can then appeal to the Tax Tribunal, which is a step that can also be taken as an alternative to a review.
For penalties arising from an indirect tax only the review process is available, which is optional i.e. the taxpayer can choose to go straight to the Tax Tribunal.
As confirmed within HMRC’s Compliance Handbook, if HMRC receives an appeal of a penalty it will not seek to collect payment of the penalty until the appeal process has concluded and must instead take steps to inhibit debt management action. The position is different for an appeal of tax assessed, which must be paid unless HMRC agrees otherwise.
· Tax tribunal penalty appeals
If an ‘In-house’ appeal is either unsuccessful or undesirable, an appeal can be made to an independent tax tribunal. However, time limits do apply as HMRC will advise in its correspondence.
The First-Tier Tribunal (Tax), as its name suggests, is the first (and the principal) forum for hearing any tax appeal. It is independent of HMRC and falls within the administrative ambit of HM Courts and Tribunals Service.
Most hearings take place before a legally qualified Tribunal Judge, who may sit with up to two non-legally qualified Tribunal Members. The workings of the Tax Tribunal are governed by The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, which are supplemented by various guidance notes and practice statements.
As a general rule, costs incurred in pursuing an appeal in the Tax Tribunal are not recoverable from HMRC, even if an appeal is successful. However, that also means that costs are generally not awarded against a taxpayer if the appeal is unsuccessful. While this leads to a significant percentage of appeals being pursued by taxpayers acting as litigants in person, this can be a false economy. As we explain below, it can also be an unnecessary one.
If a decision of the First-Tier Tribunal contains a material error of fact or law, it may then be possible to appeal to the Upper Tribunal (Tax and Chancery). Permission to appeal is required, which is usually sought from the Tax Tribunal in the first instance and, if refused, from the Upper Tribunal. Relatively few penalty challenges get this far.
How we can assist you to avoid tax penalties
Determining whether the tax penalties (and/or the underlying tax charge) HMRC has imposed are lawful can often involve both an accounting and a legal analysis. In the case of the former, this can be particularly complicated where the assessment period is extensive and/or where the primary accounting records are in either a disorderly or incomplete state. This same combination of expertise is also frequently required for taking a penalty challenge forward.
While it may be tempting to rely on an existing accountant or tax adviser for guidance and support with this process, that is less likely to be appropriate where an error or omission by the accountant or other tax adviser may have caused the penalty to arise.
In those circumstances, there is likely to be an actual or potential conflict, as the interests of the professional diverge from those of the taxpayer. In this event, the actions and advice of the accountant can become tainted by self-interest and a desire to deflect or undermine the risk of a professional negligence claim being pursued against it.
In many cases, and particularly where the penalties in issue are significant, the taxpayer would be wise to retain a new and independent accountant, usually as part of a team of professionals, each of whom can provide an essential and complimentary skill set from a different discipline.
Happily, we have experience of working closely with a number of different forensic accountants, tax consultants, specialist tax solicitors and tax specific counsel. This enables us to make introductions to a range of experienced professionals and to curate a formidable and cohesive team when the circumstances require.
How we can assist you to recover unavoidable HMRC tax penalties
As leaders in our field, with extensive experience of professional negligence claims, we are uniquely placed to advise on the merits of, and an appropriate litigation strategy for, tax related professional negligence claims.
At an early stage, and during the tax assessment process, we are able to offer guidance on the initial steps that should be taken to preserve and support a professional negligence claim, as well as those pitfalls that could prejudice such a claim and that should be avoided. We can also advise on the timing for such claims, which can be pursued concurrently with or consecutively to any tax dispute or tax penalty appeal.
Where tax penalties cannot be avoided, we can then work with the team to prepare, present and prosecute a claim for damages in relation to those penalties.
How we can assist you to recover additional tax charges and interest
Depending on the circumstances of the case, and as part of a professional negligence claim, it may also be possible to recover compensation for some or all of the underlying tax charge, in addition to any tax penalties imposed.
This can occur where it can be established that the underlying tax charge would not have been incurred ‘but for’ the error or omission by the defendant professional. In such cases, it is often argued that an alternative tax planning arrangement would have been put in place, which would either have avoided any tax or would have resulted in a lesser tax charge.
How we can assist you to recover the costs of challenging tax penalties
The costs of responding to an assessment with HMRC can be substantial, as can the costs of challenging its decisions to charge additional tax, tax penalties and interest.
However, in appropriate circumstances and as part of a professional negligence claim, it may well be possible to recover much of these costs from the defendant professional whose errors or omissions caused these liabilities to be incurred. That is so, even where a challenge to HMRC’s decision proves unsuccessful.
While this does not alleviate the burden of funding those costs in the first instance, it can make a professionally resourced appeal a much more economical option overall.
Get in touch with us
If you or your business is facing the prospect of having to pay significant tax penalties, we would be happy to discuss with you the assistance that we can offer.
Working with other professionals, we act for clients nationwide to resolve tax disputes and the related claims that they can give rise to against a range of errant tax professionals, including solicitors, accountants, financial advisers, barristers and chartered tax advisers.
To arrange an initial consultation with us, free of charge or commitment, please contact us on 0800 195 4983 or by email at mail@pnclegal.com.
