An unexpected windfall led to an unexpected penalty – How HMRC considers intent when issuing penalties

Our client was gifted shares in a business they were not directly involved in.

When this business was sold and the client received their share of the sale, they had no idea they were exposed to capital gains liabilities.

While HMRC decided this ignorance was deliberate and issued a penalty, our tax experts stepped in to negotiate and save our client around £60,000.

A windfall that had tax implications

Our client had been gifted some shares in a company when it was set up but had nothing to do with its day-to-day operations or management.

The company became very successful and was later sold, resulting in a substantial payment to our client for their few per cent of ownership.

As our client had very limited interaction with the tax system, they were not aware that they would be liable for capital gains tax because of the sale, or that they would become personally involved.

The advisers and lawyers involved in the sale probably did not have any responsibility to discuss tax concerns with our client.

However, not mentioning any potential tax liabilities meant our client was under the impression that there was nothing else that needed to be done, aside from signing paperwork to sell their shares.

Unexpected capital gains

HMRC became aware of the sale and sent a letter to our client. After reaching out to an accountant, our client was informed they had a capital gain to report.

The accountant filed a late return on behalf of our client, paid the tax and a letter was sent to HMRC describing the circumstances.

However, HMRC imposed a failure to notify penalty based on ‘deliberate behaviour’, which is where we were asked to get involved.

Alternative Dispute Resolution – Building our case

There were two main components of HMRC’s initial reasoning behind the ‘deliberate behaviour’ classification.

The first was that it was a relatively large sum, suggesting our client must have known that tax was due to be paid.

The second was that our client had once submitted a self-assessment return around 14 years ago in relation to income from self-employment and therefore must have knowledge of the tax system.

We believed that both arguments were misconceived and did not meet the evidential bar for what is classed as deliberate behaviour.

While we appealed and sent representations as part of the review process, HMRC upheld, in the most part, its original decision. As a next step, we then applied for Alternative Dispute Resolution (ADR).

Typically, ADR would involve a meeting between us, HMRC and our client to resolve matters.

However, we believed that there were serious flaws in HMRC’s review and original decision, which we thought could be more effectively addressed through written correspondence.

The ADR mediator put this proposition to HMRC and HMRC agreed to consider our further arguments in writing.

We believe HMRC did not have enough evidence to support their case. Instead of relying on evidence, they argued that a ‘reasonable person’ in this situation would have acted differently to our client.

While we acknowledged that we did not believe that our client had ‘reasonable excuse’, which would mean no penalty, we drew a distinction between acting deliberately and acting reasonably.

Our client probably should have sought advice, but not doing so was not a deliberate attempt to avoid tax liabilities. Instead, it was the result of a naïve and limited knowledge of the tax system.

Reducing the penalty for a ‘non-deliberate’ mistake

HMRC considered the further argument and agreed to amend the penalty from ‘deliberate’ to ‘non-deliberate’, saving our client around £60,000. This also meant that our client would not get published on the ‘deliberate defaulters’ list.

HMRC was paid the correct amount of tax, alongside what we believed was a fair penalty for the mistake our client made.

The gap between the different ‘behaviours’ can be narrow, relying on a very careful consideration of the evidence, guidance and case law.

As HMRC will often start with the most serious interpretation of the situation, it can take some work to change their position.

If you find yourself in a similar position and need help building a case HMRC will recognise, please get in touch.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email info@intaxltd.com.

Or, to learn more about how HMRC penalties and personal ‘behaviour’ are closely intertwined, please follow this link.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. However, we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients.