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Earlier this week it was widely reported that HMRC tax investigations had increased significantly during the last tax year. Figures disclosed under the Freedom of Information Act showed that HMRC made about 237,215 inquiries into people's tax affairs last year, compared with about 119,000 in 2011/12. An almost 100% increase. As a result they collected £24 billion in extra revenue. 

There are some important differences in the way that taxpayers may be treated in connection with tax inquiries, depending on the taxpayer's actions. They may sometimes be probed by HM Revenue & Customs (HMRC) about their actions or 'behaviour', with a view to HMRC seeking to determine whether the taxpayer has taken 'reasonable care', or has committed a 'careless' or 'deliberate' tax offence.

Under-declared income

For example, if you under-declare your income, HMRC may seek to establish whether you have made a careless error, or have deliberately under-declared your taxable income. 

A deliberate tax offence is a serious matter, which in some cases could lead to prosecution. Even if the offence is not serious enough for HMRC to consider prosecution, it is important that 'non-deliberate' taxpayers stand their ground, and do not allow HMRC to treat their behaviour as deliberate.

Taxpayers who have committed a deliberate tax offence, or are accused by HMRC of so doing, should seek expert professional advice without delay. Even if the error is treated as careless, HMRC will probably seek to charge a penalty in respect of, for example, under-declared income (under FA 2007, Sch 24 ('Penalties for errors')). 

The maximum penalty for a 'careless' error is 30% of the additional tax. By contrast, the maximum penalty is 70% for a 'deliberate but not concealed' error, or 100% if the error is 'deliberate and concealed'. If the error involves an offshore matter, the penalties are potentially much higher, increasing to a maximum of 200% in some cases.

Reopening earlier years

Aside from penalties, there are other reasons why a 'careless' taxpayer should not accept an allegation by HMRC that their behaviour was 'deliberate' in relation to certain tax offences.

For example, if a loss of income tax or capital gains tax was brought about by the taxpayer's careless behaviour, HMRC can assess the lost tax up to six years after the end of the tax year to which it relates (instead of the ordinary time limit of four years). However, if the loss of tax was brought about deliberately, the time limit is increased to 20 years (TMA 1970, s 36(1A)(a)).

So in the case of under-declared income, HMRC will try to ascertain whether the under-declared income was a 'one-off', or whether the error was repeated in earlier tax years. In the latter case, by contending that the error was deliberate, HMRC has the opportunity to go back 20 years, as opposed to six years if the error was careless.

It will generally be for HMRC to show that, for example, a tax return error is deliberate (or careless, for that matter), or that failure to notify a tax liability was deliberate. In its guidance on time limits for raising assessments HMRC states: "the onus of proof of careless or deliberate behaviour is on HMRC" and that the standard of proof is on the 'balance of probabilities'. The guidance adds: "the quality of evidence should be higher for the more serious behaviour."

Taxpayers who have committed a 'non-deliberate' tax offence should resist any accusation by HMRC that their behaviour was 'deliberate', and obtain expert professional advice.

Noel Guilford