A watchful eye

It is rare these days to go more than a few days without news of tax dodging celebrities, or banking scandals involving tax havens and wealthy clients. Amid the continuous press coverage, George Osborne announced the previous government's latest measures in the March 2015 budget, to tackle tax evasion and aggressive tax avoidance.

But it's not just the rich and famous that HMRC are getting tough with. A string of recent inheritance tax cases show that HMRC are getting tough across the board.

Cases in point

Last month a woman was jailed for two years and eight months after she lied to avoid paying more than £500,000 in inheritance tax (IHT), due on her wealthy aunt's estate. Theresa Bunn, whose aunt died in 2010, reported to HMRC that her aunt's estate was worth £285,000.

However Bunn's finances became
the subject of an HMRC investigation after officers discovered that she had been financially supporting a friend,
and using her friend's bank accounts
to hide money. The investigation revealed the estate was worth more than £1.5m, and Bunn was charged with cheating the public revenue.

This follows on from the case of a Sussex man, Clayton Hutchings, who received an £87,000 penalty from HMRC, for failing to tell his father's executors about a cash gift he received the year before his father's death. In that case, the executors wrote to the family beneficiaries asking if they had received any gifts from their late father in the preceding seven years.

There was also a meeting between the executors' representative and the family,
at which the family were asked to disclose lifetime gifts. No disclosures were made. Nearly two years later, HMRC received an anonymous tip-off that Mr Clayton's father had transferred nearly £450,000 into an undisclosed offshore bank account before his death. The First tier Tribunal found that Hutchings had deliberately withheld the information, resulting in the £87,000 fine.

Most recently a leading barrister is reportedly facing a penalty of £1.25m, after a tribunal ruled he had breached inheritance tax rules following the death of his father. In that case there was a failure to comply with a number of HMRC information notices and, a failure to provide full information about the estate (and a failure to provide the information on time) which led to the maximum penalty, equal to 100 per cent of tax at stake in the estate.

What all these cases demonstrate is the importance of making full, honest, accurate, and timely disclosures to HMRC about the assets of a deceased individual.

The taxpayer's duties

So what are the obligations on the taxpayer when dealing with an IHT assessment?

And what powers of investigation and enforcement do HMRC have in the event that they are not satisfied with the information that the taxpayer provides?

IHT assessments present a unique problem for the taxpayer (which in the case of an estate will be the personal representatives (PR) of the deceased) because the individual with the best knowledge of the relevant financial information is no longer around.

The onus therefore is on the PRs
of the estate to carry out an information gathering exercise to: (a) establish the extent of the assets and liabilities of the estate; and (b) to value those assets and liabilities in order to assess whether the estate is liable to IHT.

As well as establishing the extent of the deceased's estate at the date of death, it is also incumbent on the PRs to establish whether the deceased made gifts during the seven years leading up to their death and/or, whether the deceased settled assets into trust during that period.

HMRC will expect the PRs to have made enquiries with relatives and friends in order to establish the extent of any lifetime giving by the deceased, and will ask PR's to produce documentary evidence to show what enquiries have been made.

Enquiry letters to family and friends, notes of meetings with family members and, evidence that the deceased's bank statements have been reviewed, will be the minimum expected.

HMRC's watchful eye

As a matter of course, in estate's where there is tax at stake, HMRC will review the IHT account submission closely, and it is common in all but the most simple of estates for HMRC to carry out their own due diligence about the information provided.

For example, in most cases HMRC will refer the valuation of private company shares and property valuations to their own specialist valuers to review; this is standard practice. However when HMRC know of, or suspect that full disclosure has not been given, they can also rely on legislation to carry out more detailed compliance checks and issue 'information notices' to taxpayers.

HMRC can use these notices to require the taxpayer to provide information or produce a document for the purpose of checking a tax position. The notices often set out the time-fame within which the information or documents are to be provided.

Failure to comply with these notices can result in an initial fine of up to £300, with additional fines of up to
£60 per day imposed for each day after the initial penalty is determined.

If an IHT submission is found to contain inaccurate information, or if information comes to light that the taxpayers failed to appropriately disclose, then HMRC has the power to levy a penalty. A penalty can be raised if the inaccuracy:

• results in tax being unpaid, understated or over-claimed; and

• was careless, deliberate or deliberate and concealed.

The level of the penalty will be calculated as a percentage of what HMRC call the 'potential lost revenue', or PLR. The PLR is the amount of tax that arises as a result of correcting an inaccuracy in a return. HMRC will assess the behaviour of the taxpayer to determine the percentage of the penalty and lists four categories of behaviour relating to this.

1. Reasonable care - HMRC say that if the taxpayer took reasonable care to get the tax return right but it still contained an inaccuracy, then they will not levy a penalty.

2. Carelessness - where the taxpayer has failed to take reasonable care to get things right.

3. Deliberate - where the taxpayer knew that a return was inaccurate when it was submitted.

4. Deliberate and concealed - where the tax return was inaccurate and the taxpayer took steps to hide the inaccuracy from HMRC.

Where the taxpayer's behaviour falls into the final three categories, then HMRC will levy a penalty.

The table below (table 1) sets out the range of penalties that can be levied. The quality of disclosure (i.e. how open, honest and co-operative the taxpayer is) determines where the penalty will fall within the penalty range, as will whether or not the disclosure of the inaccuracy was prompted by HMRC.

Anecdotal evidence suggests that the use of information notices by HMRC is on the increase, as is its willingness to levy penalties for inaccuracies in returns.

While the recent case law is evidence of HMRC's hardline stance when taxpayers deliberately withhold information, a tougher approach across the board which comes amid a general clampdown on tax avoidance and tax evasion, shows the need for taxpayers to take care and get it right the first time. 

 

Nick Mendoza is an associate in the private client team at Howard Kennedy