CH402254 - Charging Penalties: establishing penalty behaviour: planning what questions to ask: withholding information by not filing a return within 12 months of the filing date

When a return is more than 12 months overdue and you have information that identifies a tax liability you need to establish if, by not filing their return, the person deliberately withheld the information in order to evade tax.

To do that you need to ask questions about why the return was not filed on time and whether or not the person knew that tax was payable.

If the person has an agent you should find out if the person asked them for advice and if so what advice they received.

If you are dealing with a case where there is a suspicion that a return was filed over 12 months late to postpone declaring a significant tax liability, it will be harder to prove that the person deliberately withheld the information, especially if the return was filed without being prompted by your compliance check. You will need to ask more questions to establish a link between say cash flow problems and the failure to file. It may be that you can establish that the person was seeking to sell assets in the intervening period where the proceeds could have covered the tax liability. Other sources of evidence could be the person’s dealings with their bank during this time.

You can find examples of questions to establish deliberate withholding of information at CH402305.

Before you ask the person about their behaviour you must issue and explain the HRA and late filing penalty factsheets, see CH402350.

Example

Judy has filed all her tax returns on time with the exception of her return for 2012/13 which is still outstanding, even though she has filed her 2013/14 return. A determination was issued based on her previous year’s profits as a sole trader for 2012/13, which she paid on time.

We have received information from the Land Registry showing that she sold a property for £1.5m in September 2012 which was not her principal private residence. We also have information that shows she inherited the property in 1994 and it was valued at £450,000 for Inheritance Tax purposes.

You ask Judy why she didn’t file her return and whether or not she wants to disclose any information about her liability to tax for the missing return period. She begins by telling you that she was too busy to fill out the return and she assumed that once she had paid the determination that was the end of the matter. When asked about the sale of the property she confirmed that she had sold a property but claimed that she didn’t know she had to pay Capital Gains Tax (CGT). She said she had not discussed this with her agent because it was not business income. She was unable to explain why her agent had not prepared her 2012/13 return and she now had a new agent.

You ask Judy for her authority to issue a third party information notice to her previous agent to confirm these details, which she refuses. You tell her that you intend to apply to a tribunal for authority to issue the information notice.

She then admits that she knew that the property disposal should have been declared on her tax return and that CGT was payable. When her agent gave her a completed return without details of the gain she decided that she would be in less trouble for not filing her return than if HMRC did an enquiry into the return and discovered that she had not declared the disposal. When her agent had pressured her to let them file the return she had changed agent. Judy agrees to send in the correctly completed return, which her new agent will prepare.