© 2024 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Procedure.Tax
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V6: Mitigation of penalties
HMRC opaque approach to mitigation criticised
"[77] Equally surprising to us is the manner in which the Respondents have dealt with the reduction in the penalty for the quality of disclosure. Officer Henderson initially determined that the quality of the Appellant's disclosure merited a reduction in the penalty which was equal to 70% of the difference between the maximum and minimum penalty figures. That conclusion was adjudged by Officer Noble on review to be too harsh, with the result that the reduction was increased to 85% of the difference between the maximum and minimum penalty figures. However, when Officer Henderson reduced the penalty on 24 January 2024 to take into account the change in the status of the penalty from deliberate but not concealed to non-deliberate, she awarded no reduction whatsoever for the quality of disclosure. Moreover, there was no way that the Appellant or its representative could have realised from the information that was sent to them by Officer Henderson on that date that that was the case.
[78] We do not understand why the conclusions reached by Officer Henderson and Officer Noble in relation to the quality of disclosure at the time when they considered that the Appellant's act or failure was deliberate but not concealed should not have stood when Officer Henderson subsequently concluded that the act or failure was non-deliberate. As we have said in paragraph 51(4) above, Mr Holt was unable to shed any light on this at the hearing. It seems to us that, at the very least, the revised penalty on 24 January 2024 should have reflected that discount and should therefore have been 21.5% and not 30% of the excise duty in question - 20% plus 15% of the 10% difference between the maximum and minimum penalty figures - to take account of the 85% reduction which the Respondents had previously agreed to be due for the quality of disclosure." (Kent Couriers Limited v. HMRC [2024] UKFTT 145 (TC), Judge Beare)
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Meaning of disclosure to HMRC
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- Sufficient to notify failure to comply with relevant obligation, full detail not required
"[67] For a disclosure to be unprompted, it must be a disclosure of a "relevant act or failure" and it must be made when the taxpayer has no reason to believe HMRC are about to take action. The relevant failure is the failure to comply with a relevant obligation. In the present case, the relevant obligation is the obligation to give notice of liability to income tax under section 7 TMA. By his 11 December 2013 letter, the Appellant disclosed that he had failed to give notice of his liability to income tax on his rental properties. This was the disclosure of a relevant failure within paragraph 12(3) of schedule 41 and it was made before HMRC opened their enquiry.
[68] In our view, an approach to HMRC can constitute a "disclosure" if the taxpayer informs HMRC that they have not complied with the relevant obligation. It is not necessary at that point, to provide full details of the liability." (Khan v. HMRC [2024] UKFTT 615 (TC), Judge McKeever)
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- Level of detail goes to the quality of the disclosure
"[70] The amount of detail provided, including the timing, nature and extent of the disclosure goes to the "quality" of the disclosure, which feeds into the possible reduction to be allowed under paragraphs 12(2) and 13 of schedule 41. The mere act of telling HMRC about a relevant failure is a disclosure. The reduction in penalty depends in how much more the taxpayer tells HMRC." (Khan v. HMRC [2024] UKFTT 615 (TC), Judge McKeever)
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Telling, helping giving
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- Access to tills is significant, but so is failure to produce VAT workings
"[155] We consider that the permission for HMRC to extract data from the tills was significant, but so was the failure to produce VAT workings. Overall, and having considered all of the correspondence between AH and HMRC to which we were taken, we allow mitigation of 60% in total for telling, helping and giving. We would allow the same level of mitigation for each of the five periods in issue (as we do not consider that the quality of disclosure varied during this time, and the absence of till data for 11/14 was not the result of actions of the Appellants); however, we have not, for the reason set out above, reduced the 90% level which HMRC had decided to allow for 11/14." (Rai v. HMRC [2024] UKFTT 511 (TC), Judge Zaman)
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Failure to make return mitigation
"(1) Paragraph 15 provides for reductions in the penalty under paragraph 6(3) or (4) where P discloses relevant information that involves a domestic matter or 11(3) or (4) where P discloses relevant information.
(1A) Paragraph 15A provides for reductions in the penalty under paragraph 6(3) or (4) where P discloses relevant information that involves an offshore matter or an offshore transfer." (FA 2009, Sch 55, para 14)
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Domestic matters
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"(1) If a person who would otherwise be liable to a penalty of a percentage shown in column 1 of the Table (a “standard percentage”) has made a disclosure, HMRC must reduce the standard percentage to one that reflects the quality of the disclosure.
(2) But the standard percentage may not be reduced to a percentage that is below the minimum shown for it—
(a) in the case of a prompted disclosure, in column 2 of the Table, and
(b) in the case of an unprompted disclosure, in column 3 of the Table." (FA 2009, Sch 55, para 15)
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Standard 70%
Minimum for prompted: 35%
Minimum for unprompted: 20%
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Standard: 100%
Minimum for prompted: 50%
Minimum for unprompted: 30%
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Lower limits
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"(5) But HMRC must not under this paragraph—
(a) reduce a penalty under paragraph 6(3) or (4) below £300, or
(b) reduce a penalty under paragraph 11(3) or (4) below the amount set by paragraph 11(3)(b) or (4)(b) (as the case may be)." (FA 2009, Sch 55, para 15)
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Offshore matters/transfers
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"(1) If a person who would otherwise be liable to a penalty of a percentage shown in column 1 of the Table (a “standard percentage”) has made a disclosure, HMRC must reduce the standard percentage to one that reflects the quality of the disclosure.
(2) But the standard percentage may not be reduced to a percentage that is below the minimum shown for it—
(a) in the case of a prompted disclosure, in column 2 of the Table, and
(b) (b) in the case of an unprompted disclosure, in column 3 of the Table." (FA 2009, Sch 55, para 15A)
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See table here
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Lower limit
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"(3) But HMRC must not under this paragraph reduce a penalty below £300." (FA 2009, Sch 55, para 15A)
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- Relevant information
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"(A1) In this paragraph, “relevant information” means information which has been withheld by a failure to make a return." (FA 2009, Sch 55, para 14)
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- Disclosing information re domestic matter
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(1B) Sub-paragraph (2) applies where—
(a) P is liable to a penalty under paragraph 6(3) or (4) and P discloses relevant information that involves a domestic matter, or
(b) P is liable to a penalty under any of the other provisions mentioned in sub-paragraph (1) and P discloses relevant information.
(2) P discloses relevant information by—
(a) telling HMRC about it,
(b) giving HMRC reasonable help in quantifying any tax unpaid by reason of its having been withheld, and
(c) allowing HMRC access to records for the purpose of checking how much tax is so unpaid." (FA 2009, Sch 55, para 14)
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- Disclosing information re offshore matter/transfer
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"(2A) Sub-paragraph (2B) applies where P is liable to a penalty under paragraph 6(3) or (4) and P discloses relevant information that involves an offshore matter or an offshore transfer.
(2B) P discloses relevant information by—
(a) telling HMRC about it,
(b) giving HMRC reasonable help in quantifying any tax unpaid by reason of its having been withheld,
(c) allowing HMRC access to records for the purpose of checking how much tax is so unpaid, and
(d) providing HMRC with additional information." (FA 2009, Sch 55, para 14)
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Additional information
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(2C) The Treasury must make regulations setting out what is meant by “additional information” for the purposes of sub-paragraph (2B)(d).
(2D) Regulations under sub-paragraph (2C) are to be made by statutory instrument.
(2E) An instrument containing regulations under sub-paragraph (2C) is subject to annulment in pursuance of a resolution of the House of Commons." (FA 2009, Sch 55, para 14)
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- Prompted v. unprompted
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"(3) Disclosure of relevant information—
(a) is “unprompted” if made at a time when P has no reason to believe that HMRC have discovered or are about to discover the relevant information, and
(b) otherwise, is “prompted”." (FA 2009, Sch 55, para 14)
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- Quality
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"(4) In relation to disclosure “quality” includes timing, nature and extent." (FA 2009, Sch 55, para 14)
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Direct tax: HMRC power to mitigate
"The Board may in their discretion mitigate any penalty, or stay or compound any proceedings for a penalty, and may also, after judgment, further mitigate or entirely remit the penalty." (TMA 1970, s.102)
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VAT: power to mitigate
VATA 1994, s.70
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Tribunal power to mitigate
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- Tribunal not reducing mitigation in the absence of pleading by HMRC
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"[153] Whilst the Tribunal has jurisdiction to substitute its own decision as to the appropriate level of mitigation, we do not consider it would be fair or in the interest of justice to reduce the level of mitigation which has been allowed – this had not been pleaded by HMRC and the Appellants did not therefore address this possibility in submissions. Instead, we focus on the Appellants' submissions that higher mitigation should be allowed." (Rai v. HMRC [2024] UKFTT 511 (TC), Judge Zaman)
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