Deliberate Allegation Test

Deliberate Allegation Test

When HMRC contends that a taxpayer has made a deliberate failure to declare tax, the consequences are severe. A finding of deliberate behaviour provides HMRC with a 20-year lookback period and the ability to transfer penalties to directors personally.

The Historical Position

Previously, there was no established requirement for HMRC to prove dishonesty or to include the allegation of deliberate behaviour in its Statement of Case with the same rigour required for fraud allegations in civil proceedings. This gave HMRC a significant advantage in pursuing deliberate penalties.

CTM’s Challenge

CTM represented New Claire Wine Limited and submitted amended grounds to the Upper Tribunal arguing that HMRC cannot succeed in a deliberate allegation without properly pleading dishonesty. The argument was that a deliberate inaccuracy necessarily involves an element of dishonesty, and that HMRC should be required to plead and prove it to the appropriate standard.

Supreme Court: HMRC v Tooth [2021]

The Supreme Court decision in HMRC v Tooth [2021] established that a deliberate inaccuracy requires an “intention to mislead” HMRC. This decision raised the bar for HMRC, requiring them to demonstrate not merely that an inaccuracy existed, but that the taxpayer intended to mislead.

The Counterargument

However, the position is not entirely settled. In CF Booth Ltd v HMRC [2022], the Tribunal held that there is no requirement to prove dishonesty for a finding of deliberate behaviour. This created a tension in the case law between the requirement for intention to mislead and the question of whether this equates to dishonesty.

Upper Tribunal Permission to Appeal

The Upper Tribunal granted permission to appeal in CTM’s case, acknowledging the potential ramifications for numerous ongoing appeals. The outcome of this appeal has the potential to clarify the legal test for deliberate allegations and could significantly affect how HMRC pursues deliberate penalties across a wide range of cases.

This remains one of the most important developing areas of tax penalty law, and the resolution of the competing interpretations will have far-reaching consequences for taxpayers and their advisers.