CEP4150 - Civil evasion penalties for Customs, Excise and VAT: how civil evasion penalties are calculated: mitigation

General

For the purposes of reducing the penalty these criteria will be taken into account from when the opening letter is issued. We will also look at the behaviour during the compliance check which precede the issue of the opening letter, and if appropriate, will take into consideration when reducing the penalty.

The main components:

1. Up to 40% - for an early and truthful explanation as to why the arrears arose and the true extent of them. This is essentially about disclosure. We are giving a reduction for admissions the taxpayer makes about the reason or reasons they knowingly did the act or acts or omission or omissions, the period of time the acts and/or omissions cover and how much the acts and/or omissions amount to.
2. Up to 40% - for fully embracing and meeting responsibilities under the investigation procedure, by for example, supplying information promptly, quantification of irregularities, attending meetings and answering questions. This is essentially about cooperation. We are giving a reduction for the cooperation the taxpayer gives us (to the best of their ability) so as not to cause us significant extra work.

Reducing a penalty below 20%

The most common reason for a further reduction would be if the customer has made a genuinely unprompted voluntary disclosure of dishonest evasion, in which case a lower penalty may be applied. In most cases this will be no lower than 15%.

A measure of whether a voluntary disclosure is truly unprompted may be whether it was motivated by conscience or because of the fear of imminent discovery. A useful guide is to consider whether we would have found out about the evasion had the customer not disclosed it. If we would, for instance because of an arranged compliance visit, then the voluntary disclosure should not be treated as unprompted. However, if we would not have found out about it, for example if the disclosure was only as a result of an accountant’s advice to regularise matters, then the voluntary disclosure may be deemed unprompted and the appropriate mitigation applied.

In the appeal by James Ashworth Waterfoot (Successors) Ltd [MAN/95/782], the appellant argued that one of the circumstances of the case that the Commissioners had failed to take into account when considering mitigation was that the disclosure of the evasion had been made voluntarily and unprompted to Customs & Excise. However, the disclosure had only been made after the company had received a letter from the Inland Revenue querying its annual accounts. The Chairman was satisfied that ‘the dishonesty was admitted only because of the Inland Revenue’s letter.’ In dismissing the appeal he commented on the use of the word ‘unprompted’ in Public Notice 730.

‘In my opinion, however, the expression is not misleading since it draws attention to the obvious distinction between a trader whose disclosure is motivated by his conscience, and the trader who is motivated by the fear of imminent exposure.’

Whilst this guidance does not seek to restrict HMRC’s discretion on mitigation, Departmental policy is not to mitigate a civil evasion penalty below 20%, unless there are exceptional circumstances. This is to ensure that there is a suitable differential between the punishment for dishonest persons and those who have simply made careless or reckless mistakes.

In an appeal by James Ashworth Waterfoot (Successors) Ltd (1996) V & DR 66 the tribunal Chairman upheld our (then) policy of maintaining a minimum penalty of 25% in normal circumstances.

One of the Appellant’s submissions was

‘that the mitigation allowed, of 75%, represented insufficient recognition of the co-operation which the directors had offered’.

To counter this, the Department contended that

‘in the absence of special factors, there had to be a margin between penalties for careless or reckless behaviour on the one hand, and for dishonesty on the other’.

This principle was supported by the Chairman who commented,

‘it is a necessary principle for the proper operation of a self-assessed tax such as VAT that the traders concerned deal with the calculation and disclosure of their liabilities honestly. Parliament has decreed a system for penalising traders who, carelessly or recklessly but not dishonestly, make mistakes. While I accept that recklessness may sometimes border on dishonesty I am nevertheless satisfied that dishonesty should be distinguished and visited by more severe penalties’.

In the circumstances of the case the tribunal found that it was not appropriate to mitigate the penalty any more than had already been done and the appeal was dismissed.