Deliberate or careless inaccuracy penalties

The Upper Tribunal has held that, for HMRC to apply the penalty provisions applicable to deliberate inaccuracies in a return, the taxpayer must have subjective knowledge that the return is inaccurate or have "blind-eye" knowledge of the inaccuracy: CPR Commercials Ltd v HMRC [2023] UKUT 61. On the facts of this case, the FTT's findings that the taxpayer could not reasonably have concluded that the return was accurate was insufficient to support a penalty for a deliberate inaccuracy.

The decision leaves open the question whether recklessness as to the accuracy of a return (which falls short of blind-eye knowledge) might be sufficient to justify a deliberate inaccuracy penalty as HMRC did not argue the point in this case.

Background

The case concerned a company, CPR, which supplied vehicles, some of which were supplied for export and zero-rated as such. CPR had zero-rated exports to VAT registered businesses in Ireland, but held no actual evidence that the cars had been exported. CPR knew of the requirements in VAT Notice 725 regarding exports and had previously been assessed for VAT on the grounds that it lacked evidence of export in 2008 and 2011. HMRC again assessed CPR to VAT for the periods 2015 to 2017 in respect of its failure to hold evidence of export and these assessments were upheld on appeal by the FTT. In its decision, the FTT also upheld HMRC's decision to apply penalties under FA 2007 Sch 24 para 1 on the basis that the inaccuracies on CPR's VAT return were, in the circumstances, deliberate.

The FTT held that CPR had simply "assumed" that the vehicles had been exported (rather than having evidence of export) and, given CPR's previous assessments and information provided to it by HMRC on the requirements for zero-rating, the FTT held that CPR could not reasonably have concluded that it had sufficient evidence to zero-rate the exports. The FTT also took the view that "deliberate" conduct could encompass recklessness". CPR appealed against the imposition of a deliberate inaccuracy penalty.

Upper Tribunal decision

The Upper Tribunal reviewed the case law on the requirements for the imposition of a deliberate inaccuracy penalty in both Auxilium Project Management v HMRC [2016] UKFTT 249 and HMRC v Tooth [2021] UKSC 17. In Auxilium, the FTT held 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. This is a subjective test. The question is not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate. It is a question of the knowledge and intention of the particular taxpayer at the time".

In Tooth, the Supreme Court held (in a different context) that "for there to be a deliberate inaccuracy in a document ... there will have to be demonstrated an intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so".

The Upper Tribunal concluded, therefore, that the test for a deliberate inaccuracy in FA 2007 Sch 24 is a subjective one which requires proof that the taxpayer knowingly provided HMRC with a document which contained an inaccuracy intending that HMRC rely upon it as accurate.

HMRC contended that this test may, however, be satisfied by proof of "blind-eye" knowledge of the inaccuracy and the Upper Tribunal has agreed with that proposition. "[W]here a taxpayer suspects that a document contained an inaccuracy but deliberately and without good reason chooses not to confirm the true position before submitting the document to HMRC then the inaccuracy is deliberate on the part of the taxpayer. If it were otherwise then a person who believed there was a high probability that their return contained errors but chose not to investigate would never be subject to a deliberate penalty. However, the suspicion must be more than merely fanciful."

In this case, the FTT had applied the wrong test. The FTT had failed to address the subjective knowledge of CPR and its decision must be set aside.

Was the test for a deliberate inaccuracy met on the facts?

The Upper Tribunal also considered that the findings of fact made by the FTT in this case did not support the imposition of a deliberate inaccuracy penalty. They amounted to a finding that there was a failure by CPR to take reasonable care but fell short of a finding that CPR had actual knowledge or blind-eye knowledge of the lack of export evidence. The finding that CPR had been at least reckless was not a finding that it had any actual or blind-eye knowledge of any error.

Comment

This decision is important for emphasising the importance of a finding of actual knowledge for the imposition of a deliberate error penalty - or at least blind-eye knowledge. However, it may not be the last word on the issue.

In this case, HMRC explicitly did not ask the Tribunal to consider whether an inaccuracy is deliberate where a taxpayer is reckless as to whether the document contains errors, despite the fact the Supreme Court in Tooth raised the possibility (without deciding the issue) that recklessness may be sufficient. This appears to have been on the basis that HMRC did not advance any case on recklessness before the FTT. As such, in the absence of any argument from HMRC, the Upper Tribunal did not consider the issue of whether recklessness might be a sufficient basis for determining that an inaccuracy is deliberate - although it did note that the concepts of blind-eye knowledge and recklessness as to the truth may intersect. Clearly, however, this decision does not prevent HMRC from raising the question of whether and in what circumstances recklessness on the part of a taxpayer might justify a penalty for deliberate inaccuracies in future litigation.