HMRC Penalties and the “Answer to the Ultimate Question of Life, the Universe, and Everything”

In this article I will disclose to you the similarity to the way in which HMRC applies penalties and the Answer to the Ultimate Question of Life, the Universe, and Everything.  This disclosure you will find is as important to you as the output of Deep Thought in The Hitchhiker’s Guide to the Galaxy (Douglas Adams).  But, a bit like The Hitchhiker’s Guide, where we follow the journey of Arthur Dent and Ford Prefect, there is a story to follow here.  I’m not sure I would describe HMRC as The Vogons (I’ve never been quoted poetry by a tax inspector), but this tale is not fiction, so I’ll leave you to make up your mind.

 What underpins the tax penalty regime?

On 17 September 2015 HMRC published a Summary of Responses to document called “HMRC Penalties: A Discussion Document”.

In the introduction to that document, at paragraph 1.2 on Page 3, HMRC stated: –

“1.2. The Discussion document proposed five broad principles that HMRC consider should underpin any new penalty regime. These principles are:

  1. The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent noncompliance. Penalties are not to be applied with the objective of raising revenues.
  2. Penalties should be proportionate to the offence and may take into account past behaviour.
  3. Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
  4. Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.
  5. Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes. “

I am not aware of any legal changes to this approach.  Neither am I aware of any published change of policy.  This leads me to believe that this must still be the policy of HMRC and vicariously enacting the Intention of Parliament.

I think any right-minded taxpayer (and that includes advisers!) would not quibble with these aims.

But are these aims being met, or is something else happening?

However, it has long been my view that this is not how the tax civil penalty regime acts in practice in the UK.  And evidence is now starting to accrue which indicates that my view is more likely to be consistent with the reality than what HMRC had to say on 17 September 2015.

There are a number of issues with the civil penalty regime in the UK.  In theory such issues should not exist, but they do.


As a rule, the “carelessness” penalties – the frontline tax geared penalties – are not supposed to be applied for a simple mistake.  Yet it seems that the norm is for a penalty to be sought, leaving the taxpayer to fight that decision.

In direct taxation a carelessness penalty means that HMRC can assess the tax back six years instead of four (there is no such measure for VAT).  There is no doubt in my mind that penalties have been sought with the view to assessing tax back six years.  And of course, maximising the revenue from the penalty.  That is certainly an abuse of process, and probably an abuse of power.


Similarly, when it came to the deliberate penalties, when these were to be imposed the expectation, we heard from HMRC, was that for such a penalty to be applied the admission of deliberate behaviour would come from the mouth of the taxpayer.  We were assured that it would not be taken lightly and that HMRC would apply the penalty responsibly.  And HMRC’s guidance even now still appears to adhere to these principles.  For example, there is a definition of “Deliberate”: –

This is where you knew that a return or document was inaccurate when you sent it to us. Examples of deliberate inaccuracies include deliberately:

  • overstating your business expenses
  • understating your income
  • paying wages without accounting for Pay As You Earn and National Insurance contributions”

[Source: HMRC Compliance checks series – CC/FS7a]

I am not sure just how effective this guidance is as to the term” deliberate” since it uses the term to define itself, but if I am being fair, in normal usage I think we would all say we’d know this when we saw it.  Except of course that relies upon a subjective judgment, and you and I may have greatly differing views as to what is and what is not done “deliberately”.  The point is, however, that the term cannot be used subjectively – it must be used objectively if the penalty principles published on 15 September 2015 are to be abided by.  Why?

Use of penalties other than as Parliament intended?

Well, apart from the deliberate, and deliberate and concealed penalties having a tariff of up to 100%, they also open the door to HMRC to seek collect tax from up to twenty years ago.

And there is evidence that HMRC have increasingly used the deliberate category in a quite startling trend.

And there is now a case decision that makes it quite clear that the rule of thumb of being able to know it when you see it is not a reliable yardstick in the hands of HM Revenue & Customs.


However, there is something HMRC skips over.

A deliberate act is committed knowingly.  The perpetrator knows that he or she is doing it.  And in my view admission to that effect must come from the mouth of the person concerned.  It is not something to be assumed.  It is not something where an assertion could be relied upon.

There is no “should have known” test.

And frequently HMRC omits any work whatsoever in this respect and jumps straight into “deliberate”.  In the example of one case on a transfer of a going concern, the taxpayer was accused of a deliberate and concealed action because the transfer of a going concern treatment had not been disclosed separately to HMRC – there is no legal requirement or even guidance from HMRC that this is required to be done.

“Special knowledge”

And elsewhere you will also find a concept of what I call “special knowledge”.  This asserts that certain taxable persons, whether individuals or companies with internal advisers, know more about the taxation matter than Joe Public.

One such example we have dealt with is a physics teacher who HMRC is determined had special knowledge of taxation because of his professional qualification.  This particular taxpayer  took the advice of someone holding himself out to be an expert who missed out an important piece of advice, resulting in HMRC treating the case as “deliberate”.  Now, I would say that a physics teacher is likely to be a pretty bright person.  I would also say that a toolmaker, for example, is on a level with a physics teacher, but I suspect that a toolmaker may not have received such a challenge.

It is a bit like the Frost Report Sketch including John Cleese, Ronnie Barker and Ronnie Corbett; I look down on him etc.  HMRC won’t have it as they clearly look up to the physics teacher.  This may be because he speaks in a language that they do not understand.  But what they do not recognise is that the physics teacher does not speak their language either.

So, apart from a very useful piece of case law, we were tempted to send the inspector a Quantum Physics paper from the University of Southampton and ask him, without help or any other guidance, to answer all nine questions completely and correctly in two hours.  For this is no less than HMRC expects of a taxpayer, it would seem, in that unrealistically, and unreasonably, HMRC expects a taxpayer to know all about every tax, something I will illustrate that not even someone advising on tax is expected to be able to do.  Which then puts this “special person” status firmly at risk, or even completely debunked.


The commentary in the decision of Cannon TC6354 is, in my opinion, and excellent dissection of the relevant law for not only “reasonable care”, but also the meaning of “deliberate”.  It also looks at the concept of special knowledge and just how far that can be taken.  This is very relevant as Mr Cannon is a barrister who advises on Stamp Duty Land Tax.  He though sought and followed advice on his tax affairs from an adviser he believed knew what he was doing (we come back to that).  And let me make something very clear – Cannon breaks new ground.  It looks at the law as it stands.

In respect of “reasonable care” it argues that you have to look at each of the words – “reasonable” and “care”.  In tax law, certainly amongst VAT specialists, the separation of the elements of a phrase including “reasonable” is not at all a strange concept.  There the analysis fell upon the phrase “fair and reasonable”, mainly in the context of a partial exemption method.  Each element must be examined to determine that the test has been passed.

So it is, argues Judge Geraint Jones QC with “reasonable care”.

No room for subjective judgments by HMRC

And here it is also pertinent that the judge considered whether such an assessment was subjective or objective.  It is not sufficient for HMRC to assert subjectively that reasonable care has not been taken.  Nor indeed, that an act was deliberate. The judgement must be objective.  That should set alarm bells ringing in many penalty cases, whether appealed or not.  It also helps explain why we take the approach we have and will continue to do on penalties.

What is reasonable for a taxpayer to do?

In respect of what is “reasonable” for an ordinary taxpayer, like our physics teacher, to do – it is to take and implement advice received from a professional person acting as an adviser, and that will normally lead to the conclusion that the taxpayer has acted reasonably.

Negligent adviser

This is so even if the professional adviser has acted negligently, provided that the taxpayer has no reason to believe that the adviser did not know what he or she was doing.  This set of facts is not unusual in my opinion.  But HMRC argues, and indeed argued in Cannon, that a taxpayer is careless even if the negligence or carelessness is that, and only that, of the professional adviser even where that advisor is acting in a truly professional capacity.  The judge was of the opinion that this approach is wrong in law.

And once again, this is something we see and have fought on the same grounds.

What is “care”?

Having addressed “reasonable”, the judge in Cannon then examined “care”.

Now this is remarkable in that it goes back to precisely the training HMRC provided to accountants and advisers, which we were told was the same training officers and inspectors received, upon the introduction of the penalty regime.  I know, because I took that training.  More than once.  And I worked through the online packages provided by HMRC at the time.

The penalty regime is not there to penalise simple mistakes.  Indeed, I would argue that this is no more and no less than the intention of Parliament.

To quote from Cannon: –

We should also mention that the very phrase “reasonable care” indicates that the test will be satisfied, provided that the care taken is reasonable. It carries with it the implication that perfection need not be reached, and it necessarily recognises that errors might occur even when a reasonably prudent taxpayer has taken that degree of care which is requisite when dealing with the respondents. A taxpayer might genuinely and honestly misconstrue legislation; a taxpayer might inadvertently make an arithmetic error or press an inappropriate key on a computer keyboard (and fail to notice having done so); or genuinely mis-remember a salient fact. The test is not to ask whether any such error or failure would have occurred in a perfect world, because that would be to elevate the test beyond that which is applicable. The test is not to ask whether the taxpayer could have done something else which, if done, might have revealed the error unless the doing of that other task is itself something which a reasonable taxpayer ought to have done, and which, if done, would have revealed the initial error.”

Good law

Now dragging this back into the VAT world and indeed mainstream law, we already have the concept of what a reasonable taxpayer would reasonably have done, within a decision which called upon Lord Denning’s “man on the Clapham Omnibus”.

My point is simple, Judge Jones was not breaking new ground here.  This is good law and it is old law and it has already been applied in respect of the previous VAT penalty regime.

As such, as a basis of arguing cases, it is a sound footing and taxpayers and advisers should not be put off by the usual refrains from HMRC: –

  • “a Tribunal decision does not create law”. Correct, but it is persuasive as it help us to understand the law: and
  • each case turns on its own merits”. True, each case does indeed turn on its own facts, but each case will also address the law.  The facts will change, but the law does not.  This argument is also a double edged sword for HMRC.

Is HMRC “policy” a good enough reason?

Too often now we are told that something has been done because it is policy, or because that is what the officer or inspector has been told to do.

An example, here is penalties issued for failing to produce records where now officers are issuing the penalty warning at the first application for information, whereas , at least until quite recently, the application of the power relied upon a process which involved contacting the taxpayer first.  The penalty regime would only be applied in a case of lack of co-operation.  But if each case turns on its own merits, there cannot be a one size fits all approach by HMRC and the first step just cannot be a threat to impose a penalty.  As an example, we have a case where repeated penalties have been issued to a dyslexic taxpayer who was just issued the detailed letter and rights paperwork by HMRC with no attempt to establish the facts and, quite frankly, the taxpayer could not deal with it.  There is no doubt in our mind that the taxpayer’s human rights have been violated in this case – which again the Judge in Cannon has something to say about.

How the law on penalties should be interpreted

My point here is that HMRC will have difficulty is walking away from the law as interpreted in the Cannon case.  To summarise, the Judge in Cannon says

“it seems to us to be counter-intuitive to speak about a taxpayer being negligent when he has placed his affairs in the hands of an accountant or sought specific advice on a specific matter and the professional adviser has then been negligent in providing that advice.“

The Judge then looked at “deliberate” –

By contrast, a deliberate error in a tax return requires that the taxpayer knew about the error and intended to misrepresent the true position to the respondents. Nothing short of that will do, save in circumstances where a taxpayer has deliberately shut his eyes to the true factual position, sometimes referred to as “Nelsonian blindness.””.

So that is not subjective either; it requires knowledge to be proven – i.e. from the mouth of the taxpayer, and in my view does not include a “must have known” test.

The judge is clear that where such a serious allegation of deliberate conduct is made by HMRC, then the Tribunal will undertake more assiduous fact finding to ensure that the allegation being made by HMRC is sufficiently credible, relevant and cogent to warrant such an adverse finding.

Minimum standard of evidence of HMRC’s decision

I would argue that this standard of evidence is the one which HMRC must also rely upon when making such an allegation, and a mere assertion, perhaps related to the amount of the tax, or the continuity of an error is not sufficient.

The Judge in Cannon reminds us not only of the legal basis (once again the Judge does not break new ground), but also that the principle is not only well recognised, but also necessary to render a decision where such a serious allegation is made compatible with Article 6 of the European Convention on Human Rights.

Failed tax avoidance schemes – penalties

In this respect, you may also wish to have another look at what HMRC says in respect of penalties for failed tax avoidance schemes, where they seek to apply the dishonesty test, but where in reality the taxpayer is acting upon professional advice (setting aside the emotionally furore surrounding the phrase “tax avoidance”.

Correct deliberate approach

I would contend, therefore, that the approach I suggest in respect of the “deliberate” penalties is the correct one, and it is not the approach often taken by HMRC, and one which is resisted by HMRC when challenged.

Putting HMRC to Proof

Well the key to it all is that objective tests must be applied by HMRC when coming to their decisions, they must look at each element firstly, in my view, beginning at the “reasonable care” end of the spectrum, and then working up the scale toward “deliberate” or “deliberate and concealed”.  I have not tried to go into “concealed” here, as that too is contentious although suffice to say my view is clear in that following professional advice is not concealment.

HMRC must also be prepared to evidence their contention.  HMRC starting with an assertion, or an assumption, is just not good enough.  But many advisers would say that this is exactly what we see from HMRC.  For example, I personally have seen the physics teacher alleged to have “special knowledge”, which is patently incorrect, and a taxpayer appointing an accountant having carried out due diligence on that accountant who turned out to be both incompetent and a liar as to his professional qualifications being dismissed by HMRC as taking “reasonable care”.  It is clear that HMRC must be put to proof.

Grounds for complaint

And certainly in cases where HMRC say that a challenge to their decision would be seen as lack of co-operation, or else any concession given to date would be withdrawn, they should be put immediately into the HMRC complaints procedure as such coercion has no place in the penalty system and indeed may well be an abuse of power and contrary to Article 6 of the Human Rights Convention.

Vulnerable customers

Finally, whilst not part of the Cannon case, it is our view that HMRC must have proper regard to vulnerable customers before starting the penalty process.  For example, it is no good issuing pages of complicated paperwork to a dyslexic person, and expecting that person to deal with it in the same was as a director of a multinational company.

Number 42

To put what I argue in another way, the number 42 is, in The Hitchhiker’s Guide to the Galaxy by Douglas Adams, the “Answer to the Ultimate Question of Life, the Universe, and Everything”, calculated by an enormous supercomputer named Deep Thought over a period of 7.5 million years.

Unfortunately, no one knows what the question is.

Thus, to calculate the Ultimate Question, a special computer the size of a small planet was built from organic components and named “Earth”.

The similarity is that we are often asked by HMRC to have more faith in their penalty decisions than we place in the number 42.  I would contend that the Hitchhiker’s Guide contains more evidence than HMRC uses in many of the cases we see.

Penalty decisions need to be challenged to ensure that they have been properly made.

Quantum Physics

The quantum physics?  Well I do have the answer paper as well as the question paper.  Sadly, I understand the answers about as much as the average taxpayer understands the intricacies of tax law.  And that, of course, is at the heart of reasonable care as examined in the Cannon case.

As for the quote from 17 September 2015?

Analysis has been made of the number of “deliberate” penalties issued by HMRC.  It keeps increasing year on year at rates which cannot, in my view, be put down to better training, more fraudulent taxpayers, or chance.

I have heard from the mouth of an officer how HMRC looks towards penalties being issued at the outset.

I am not alone in thinking that penalties are being used as a revenue raiser by HMRC.  It may not be a diktat from the Treasury, nor even from senior management in HMRC, but many advisers feel that there are targets to be met and that meeting the targets has become the be all and end all.

One much maligned former Prime Minister talked about “outcomes” rather than “targets”.  And my suspicion is that the civil penalty system has become corrupted by targets and does not aim itself at outcomes, as indicated by the declaration by HMRC on 17 September 2015.

The system does not need reform.  It needs to be put back on track.  Perhaps this is one for The Public Accounts Committee?

Steve Botham