Credit card spending can be a costly business

In the case of Keighley & Anor v HMRC, James Keighley, a director at Primeur Limited, admitted to using his company credit card to meet his personal expenditure. He did not reimburse the company, no adjustments were made in the company's accounts, and his tax return did not report the expenditure as additional income.

HMRC can raise discovery assessments to collect additional tax where it discovers that income which ought to have been assessed has not been. Where such errors have arisen because of deliberate behaviour, HMRC can look back to assess the additional taxes falling due over a period of up to 20 years.

In this case, HMRC held four years' worth of personal expenditure data, for the tax years 2013/14 to 2016/17, so extrapolated back to arrive at the calculations of underassessed tax, scaling back in line with the Retail Price Index measure of inflation. Mr Keighley was assessed to an additional £177,043 of tax, and penalties of £59,912 on the basis he acted deliberately. This also had a knock-on effect for the company in respect of employer National Insurance contributions (NICs) it should have made on the additional income in the hands of the director.

To reach these figures HMRC acted under the presumption that the behaviour leading to the under assessment of tax was deliberate and dated back as far as 2001. The burden of proof for demonstrating a taxpayer acted deliberately rests with HMRC and, where relevant, it will commonly apply a presumption of continuity when issuing discovery assessments, taking the view that on the balance of probabilities the same behaviour was also in point for earlier years.

However, Mr Keighley argued that the income had not been reported as a result of carelessness, and that personnel changes at Primeur Limited in 2012 meant that personal expenditure incurred on his behalf had no longer been properly recorded in the company’s accounts. Had this argument of careless but not deliberate behaviour been successful, the maximum period over which HMRC could assess the underpaid tax would have been reduced from 20 years to just six.

Mr Keighley further supported his argument by referring to an employer compliance check by HMRC in 2012, which sought information in relation to Primeur Limited's credit card statements. No additional tax was found to be due following the check. However, disclosures were subsequently made by the company in relation to credit card payments for later years whilst its company tax return and wider tax affairs were under HMRC enquiry.

Mr Keighley was unsuccessful in his argument that his behaviour was careless but not deliberate, the tribunal deciding that he knew his tax returns were incorrect and turned a blind eye to this, which is a positive enough act to amount to deliberate behaviour. However, the tribunal ordered the penalty assessed on the company in respect of NICs to be recalculated based on its behaviour being careless and not deliberate, given the company’s systems had been insufficient to identify the personal expenditure but that there was no evidence it intended to mislead HMRC.

This case is complex and involves a number of other disputed issues, including the tax treatment of loan write offs and petty cash expenditure in addition to personal expenditure on credit cards. However, it demonstrates that although HMRC's approach can often be challenged, it can be more difficult for taxpayers to shake off HMRC evaluations of the nature of their behaviour. Experience also indicates that HMRC is taking a tougher stance on the application of penalties, which can be a costly addition to any tax investigation.