Trouble with the Taxman

In this episode, Mark Morton explores the complexities of tax penalties, prompted by a recent high-profile case involving a significant understatement with no penalty applied. He breaks down key concepts like reasonable care, voluntary disclosure, and HMRC’s approach to enforcement, highlighting the nuances that often go unnoticed by both taxpayers and advisors.

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Transcript

Hello, it's Mark Morton here, and nice to be talking to you again. And just a quick podcast prompted by recent events, actually by certain government ministers that should remain nameless. But before you sink into despairs, think this is something about the prime ministerial challenge stroke, no challenge. 

It's actually about tax penalties. And I'll let you read between the lines there, but I was intrigued to know exonerated used as a word and deliberate was floating around and reasonable care was floating around. Frankly, I'm a little surprised that the messaging seems to be no penalty on an understatement of 40,000 pounds. 

And I don't think, you know, within the general population, I would be alone in that. But I think what it did prompt is without the detail of precisely what has gone on, it is very difficult to make a judgement , and it does highlight the nuances of the penalty regime. There is a quite a distinction between tax and penalties. 

Generally the taxpayer is gonna be liable for penalties, whether the error is theirs or an error is made on their behalf by somebody, whether that's you, me, professional person, whoever it may be. Penalties are a bit different. So penalties there is legislation which essentially says providing the taxpayer took reasonable care, then there is generally no penalty. 

And reasonable care could involve, of course, the appointment of a tax advisor giving them all relevant information and the tax advisor drop in a complete cl. So there is an interesting distinction. The revenue in my view experience over the years have never been particularly keen on accepting, oh you know, it's your, all your advisor's fault, hence you don't pay a penalty. 

That's been something that has floated around throughout my career, but I think the revenue's general view would be, hold on. You know, you should vaguely check what they're doing. Clearly the more technical the issue, the less chance of a penalty. So there's an interesting aspect, you know, is that why there is no penalty? 

There is, of course then the next stage you accept there was reasonable there was carelessness, i, a lack of reasonable care, whatever that may or may not mean. But there's a full voluntary disclosure. Hence the revenue mitigate that penalty down to possibly zero ultimately. Of course, then there is the next standard of this, that there were special circumstances, which may reduce that penalty, I would've thought. 

Unlikely down to a balance of zero. But it is possible. And of course, suspension. So there is a penalty, but it's been suspended and it's quite interesting. You know, this legislation came in many years ago certainly changed a bit from when I was a young lad, but what really interests me, we have a whole generation of advisors who have never seen an assessment from the revenue, never had to deal with a contentious case, never seen a penalty. 

And I think what becomes very interesting to me are those nuances of legislation. And it's not trying to be smart after the event. This has been my area that I've dealt with for a long time. But I think what has changed in that time is that you cannot trust the revenue necessarily to be telling you the right thing. 

And the revenue are far more driven by the financial results of a particular inquiry than I was when I was trained. I can remember a particular phrase being taught to me when I joined my first tax office in 1989, rather frighteningly my job was to collect the right amount of tax, whether that was zero, having raised some questions and walked away, whether that was a fraud, whether that was actually looking at something and saying, we owe you more money. 

Which, which seems to have completely gone missing within HMRC nowadays. But, you know, that is not, I don't think what you will generally find from most revenue offices now, it's not about the right amount of money, it's about generating further yield. So the mindset behind a lot of what you see is actually you must be wrong and you can see the eyes lighting up with, you know, tax interest and penalties, which leads me back to where I started. 

I am somewhat surprised based on my reading of the details which are available that there was no penalty in a particular case, which had hit the headlines in the last few days, but it would be really interesting to know what the precise mechanisms were which prompted that. We will never know because it's confidential. 

So unless somebody on this side of the fence is gonna give us more information, nobody from the revenue is gonna pass, comment clearly one way or the other. So anyway interesting times, but it prompts maybe greater thought process in terms of clients and what they do and what you may encounter in due course. 

So take care everybody. Enjoy the increasingly warm weather after rather mixed few days. Anyway, take care.