Deliberate by default?

It is worthwhile considering the purpose of HMRC’s publishing deliberate defaulters (PDD) regime and some of the potential wider implications for those falling within it.

A deliberate tax defaulter is a taxpayer who has been investigated by HMRC and charged a penalty for either deliberate errors in their tax returns or a deliberate failure to notify a liability to tax.

HMRC introduced this naming and shaming policy in 2009 to deter people from becoming deliberate defaulters and to encourage those that do deliberately default to come forward and make an unprompted voluntary disclosure, which may prevent HMRC from publishing their details. Taxpayers can also avoid naming and shaming, even when HMRC has opened an enquiry and concluded there has been deliberate behaviour leading to a loss of tax, if they qualify for the maximum penalty reduction for assisting HMRC during the investigation, although, for offshore matters, this still may not be sufficient.

The final requirement is that the total tax at stake, referred to as the potential lost revenue, must exceed £25,000, which, if a failure or error has occurred over several years, is not a difficult threshold to exceed.

Once HMRC has made the decision to publish the taxpayer’s details it must advise them, to give them the opportunity to put forward any reason why they feel their details should not be published.

There are many who, for a variety of reasons, mostly financial, decide during the settlement of an investigation not to dispute HMRC’s opinion that their actions, which gave rise to a tax liability, constituted deliberate behaviour, in the mistaken belief that the worst that can happen is that their name appears on the HMRC website as a deliberate defaulter for a maximum period of one year. However, this may not be the end of the matter, as they can also find themselves in the managing serious defaulter (MSD) program. This regime involves HMRC closely monitoring their tax affairs for up to five years, and in the case of a limited company, the monitoring may also extend to the directors’ personal affairs including closer scrutiny of the content of their tax returns by means of enquiry if appropriate. It can also extend to unannounced visits to business premises to check business records.

The MSD regime can be invasive by nature, resulting in a longer period of HMRC scrutiny. This is something that taxpayers need to consider before accepting HMRC’s assessment that their behaviour was deliberate.