Tax penalties for “carelessness” and “deliberate inaccuracy”

The Upper Tribunal has provided significant clarification on the application of penalties for inaccurate tax returns under Schedule 24 of the Finance Act 2007, including the meaning of "carelessness", the causation test, and the threshold for "deliberate inaccuracy", in its decision in Delphi Derivatives Limited v HMRC [2026] UKUT 00021.

Background

Delphi Derivatives Limited (Delphi) implemented an Employee Benefit Trust (EBT) scheme, aiming to provide tax-free remuneration to directors and secure a corporation tax deduction. Following the Supreme Court's decision in Rangers, such schemes were found to be ineffective for avoiding PAYE and NICs. HMRC imposed two penalties on Delphi: one for "careless inaccuracy" in its PAYE returns for the year ended 5 April 2009, and one for "deliberate inaccuracy" for the year ended 5 April 2010.

Delphi appealed to the Upper Tribunal, arguing (i) that it had taken reasonable care, (ii) that any inaccuracies were not deliberate, and (iii) that the penalties were not justified.

Carelessness and the Standard of Reasonable Care

The Tribunal confirmed that "carelessness" means failing to take reasonable care, judged by the standards of a prudent taxpayer. Delphi's directors received advice highlighting significant risks and were recommended to seek independent tax advice, but took no further action. The Tribunal found that this omission amounted to carelessness. However, it went on to clarify that the relevant test is not whether the taxpayer took care to ensure the legality of the scheme, but whether it took reasonable care to avoid inaccuracies in its tax returns. Ultimately, the Tribunal found that the inaccuracies in the returns were not caused by carelessness but by a reasonable (even if mistaken) view of the law at the time, supported by professional advice and case law. The penalty for careless inaccuracy was therefore set aside.

Causation

A central issue in the case was the correct test for causation. The Tribunal, following the Court of Appeal in Mainpay, held that there must be a direct causal link between carelessness and the inaccuracy. The statutory phrase "due to" means "caused by", rather than "attributable to". Since it was concluded that Delphi's view was reasonable at the time, the penalty could not stand.

Deliberate Inaccuracy

The Tribunal reaffirmed that a "deliberate inaccuracy" requires an intention to mislead HMRC or recklessness, following the Supreme Court's decision in Tooth. There was no evidence that Delphi intended to mislead HMRC in its PAYE returns. The Upper Tribunal found that the First-tier Tribunal had erred in law by focusing on the taxpayer's actions rather than whether the inaccuracy itself was deliberate, and thereforethis penalty was also set aside.

Agency

The Tribunal rejected the argument that the absence of carelessness by Delphi's advisers,  Dickinsons, meant Delphi could not be liable. A taxpayer's own carelessness is sufficient for a penalty, regardless of whether its agent was also careless. The Tribunal clarified that paragraph 18(1) of Schedule 24 provides an additional, not exclusive, basis for liability, and that a taxpayer cannot escape liability for its own carelessness simply because its agent was not careless.

Fairness

Delphi also argued that the First-tier Tribunal hearing was unfair due to the conduct of the judge. The Upper Tribunal, after reviewing the transcript, found no evidence of unfairness or bias.

Comment

This decision provides welcome clarity on the standards expected of taxpayers in relation to tax return accuracy and the circumstances in which penalties may be imposed. The Tribunal's emphasis on the need for a direct causal link between carelessness and inaccuracy, and its high threshold for "deliberate inaccuracy", will be of particular interest to taxpayers and advisers involved in complex tax arrangements.

For businesses, the judgment highlights the importance of:

• Taking, and documenting, robust, independent advice on tax arrangements
• Ensuring that advice addresses not only the legality of a scheme but also the accuracy of tax reporting
• Reviewing historic positions in light of evolving case law and HMRC guidance.

While the courts will not excuse carelessness, they will not impose penalties where a taxpayer's actions were reasonable in light of the law and professional advice at the time.

It is recommended that businesses review their compliance processes and seek specialist advice to manage penalty risks effectively.