Honestly Deliberate?

Over the years, the tax tribunals have looked at multiple cases dealing with the meaning of “deliberate” in the context of tax disputes. Practitioners will know that the time limits for discovery assessments and the associated penalties are largely ‘behaviour’ related. This means that the definition of various behaviours needs to be understood by HMRC, the taxpayer and the adviser in order for cases to be dealt with correctly.

The legislation rewrite effective from 1 April 2010 amended the behaviour definitions of neglect and fraud to careless and deliberate respectively. Subsequently, many assessments and penalties have been applied and appealed using the old definitions interchangeably with the new.

s118(2), TMA 1970 states that “references to a loss of tax or a situation brought about deliberately by a person include a loss of tax or a situation that arises as a result of a deliberate inaccuracy in a document given to Her Majesty’s Revenue and Customs by or on behalf of that person.”

Recent cases from Tooth onwards have the turned on the definition of “deliberate” and the key points to arise are that whilst fraud requires dishonesty, deliberate behaviour may not. By rewriting the legislation, the bar for “deliberate” appears to have been significantly lowered.

In New Claire Wine v HMRC, the appellant appealed against the finding of deliberate behaviour by the FTT on the basis “that deliberate conduct … equates to dishonest conduct” and that HMRC had neither asserted nor demonstrated dishonesty on the part of the taxpayer. There followed an interesting discussion on the consultations and Parliamentary intention when drafting the new penalty legislation, in order to determine whether Parliament had intended for deliberate to mean dishonest.

In 2006, HMRC considered aligning the penalty regimes across taxes and issued a number of consultations in this regard. The December 2006 consultation suggested a definition of Deliberate understatement as possibly including “

• deliberately not doing something that ought to be done; or
• deliberately getting something wrong.
  This could be in relation to facts or to interpretation of the law.”

This suggested definition implies that the Taxpayer acts ‘with intent’ in a way that they ‘know’ is incorrect. This is highlighted in a further suggested definition in the same document:

““Deliberate understatement” requires conscious intention to do or not do something. If there is evidence to indicate that the taxpayer … knows what he or she was doing, then the case should be reviewed to see whether there is a good prospect of succeeding on the basis of “deliberate understatement” before an independent tax tribunal. And if there is, it should be treated accordingly.”

HMRC’s comment on the summary of responses to the same consultation stated that “The distinction between deliberate understatement and deliberate understatement with concealment reflects a step change in the underlying thinking of the taxpayer. Both are forms of fraud, but the distinction ensures that where systematic arrangements have been made to conceal the fraud, the highest level of penalty is appropriate”.

Fraud as a criminal offence requires intent and dishonesty, however the tax tribunals appear to say that for civil purposes, dishonesty is not required and the deliberate may also include recklessness or ‘turning a blind eye’.

That said, the consultation and HMRC’s responses demonstrate that at the time the new behaviours were defined for penalties, deliberate behaviour appeared to have been intended to indicate fraud, with or without the aggravation of concealment. There was no alternative definition of fraud and we can only assume that at the time of the consultations, fraud was defined as in the criminal sense.

The UT in New Claire Wine stated that “we cannot infer from [the consultations] that Parliament intended the new language to have anything other than its ordinary everyday meaning. If it was leaving the concept of fraud in place, it would have made specific and clear provision for a deliberate inaccuracy to involve dishonesty”.

So although HMRC believed at the time that all forms of ‘deliberate’ behaviour were fraud and communicated this to stakeholders, the fact that the behaviour is referred to as deliberate instead of fraudulent means that we need to take the dictionary definition of deliberate as “with intent” and effectively ignore anything else.

Does this mean that for tax purposes, the bar for deliberate behaviour was (inadvertently) lowered with the penalty legislation rewrite? Potentially, yes. In Tooth, HMRC asserted that “a loss of tax is brought about deliberately if it arises as a deliberate inaccuracy in a return. There is no further need for the taxpayer to intend to create an insufficiency as the legislation refers to deliberately not dishonestly.”

However the Supreme Court in Tooth confirmed that there needs to be intent: “a statement which, when made, was deliberately inaccurate. If (ii) is correct, it would need to be shown that the maker of the statement knew it to be inaccurate or (perhaps) that he was reckless rather than merely careless or mistaken as to its accuracy.”

The SC went on to say 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.”

If the intention to mislead someone about the truth requires dishonesty then it follows that a deliberately inaccurate statement per the above definition also requires dishonest. This however is contrary to the conclusion drawn in New Claire Wine.

As an aside, the Court of Appeal in R v Godir [2018] EWCA Crim 2294 said that recklessness1 was insufficient to convict a person of the fraudulent evasion of tax. The SC decision suggests that recklessness is sufficient to secure the higher civil penalties for deliberate behaviour but not sufficient to prosecute for fraud. It is unclear whether ‘recklessness’ would have a different definition for civil tax penalties.

In A Outram & Anor v HMRC, HMRC’s case was that “each Appellant deliberately brought about a loss of tax by claiming trading loss relief to which he knew he was not entitled or at least suspected that to be the case and therefore had ‘blind-eye’ knowledge.” The case was found in HMRC’s favour by the FTT and appealed to the UT who allowed the taxpayers appeal and required the case to be remitted back to the FTT and reheard.

Following the SC in Tooth and the FTT in Auxilium Project Management, the Outram FTT found that “The test [for a deliberate inaccuracy is] subjective. It is not enough that a reasonable taxpayer might have acted differently or that the taxpayer failed to take reasonable care. What matters is the taxpayer’s actual state of mind at the time the document was submitted.”

It also referred to Campbell v HMRC [2023] UKUT 265 (TCC) where the UT stated “in order for HMRC to discharge the burden of demonstrating that an act or omission by a taxpayer was deliberate, they will need to establish to the normal civil standard that the act or omission was intentional; the fact that an act or omission may have been careless, mistaken or stupid is not enough.”

While the courts may not believe that dishonesty is required for there to be a deliberate inaccuracy, when the test is subjective and reliant on determining the intention of the taxpayer, surely (dis)honesty plays a key role. Can someone submit a deliberately inaccurate return honestly if they know it is inaccurate?

Where an inaccurate return is submitted without knowledge or intention to mislead HMRC, then according to the SC, this is not deliberate (unless possibly if it was submitted recklessly).

In New Claire Wine, the FTT considered that the fact that the SC in Tooth said that the intention to mislead could be reckless was an “indication that the Supreme Court did not consider that deliberate conduct necessarily involved dishonesty.”

So we are now at the point where a deliberate inaccuracy requires intent or recklessness or wilful blindness but not necessarily dishonesty.

In 2006, when the new definitions were being considered, the consultations (in March 2006 and December 2006) stressed the importance of transparency in the concepts and that the new penalties should be easily understandable by all in order for them to serve their intended purpose; encouraging every taxpayer to take reasonable care in respect of their tax affairs.

With these cases going through the courts, the definition of deliberate behaviour is becoming more complex. Maybe it is time to rewrite the penalty/discovery legislation again to take into account all the ways someone could deliberately understate their tax liability or alternatively, clarify the definition of deliberate in TMA 1970.

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