HMRC takeaway another important lesson in tribunal

In the recent case of Prutish Gopaul v HMRC, Mr Gopaul had received personal liability notices (PLN) regarding penalties incurred for VAT and corporation tax (CT) inaccuracies arising in returns submitted by a company of which he had been a director and shareholder.

HMRC had contended that Mr Gopaul, acting in his capacity as a director of Gopaul Limited (a pizza takeaway business), had deliberately suppressed sales resulting in inaccuracies in VAT and CT returns. In addition, the officer also treated the omitted sales as company funds misappropriated by its shareholder (effectively by way of loans to him), resulting in further tax charges on the company.

Such tax charges can arise when a company makes loans to its shareholders who are ‘participators’. Generally, if such loans remain outstanding more than nine months after the end of the company’s accounting period, a tax liability (currently at a rate of 33.75%) arises – this can ultimately be reclaimed by the company from HMRC when the loans have been discharged.

The officer issued penalty notices based on the ‘potential lost revenue’ for all three inaccuracies.

HMRC contended that the behaviour demonstrated for all three inaccuracies was deliberate, and due to the liquidation of Gopaul Limited, the officer was obliged to issue any liability notices to Mr Gopaul. This resulted in the associated penalties being transferred from the company to Mr Gopaul.

Mr Gopaul’s case was tested extensively at the tribunal, with a key part of his case centring on whether he had deliberately under-reported (or failed to report) amounts on the company’s tax returns.

Mr Gopaul lost his case in respect of the suppressed takings and the associated CT and VAT consequences, as HMRC was able to provide sufficient evidence of his deliberate behaviour.

However, HMRC had focused little attention on specifically addressing the deliberate behaviour associated with the liabilities arising from the alleged participator loans to Mr Gopaul, and the First-tier Tribunal found that HMRC had failed to prove that he had intentionally or knowingly understated the resulting tax liabilities of Gopaul Limited. As Judge Anne Redston stated:

‘The statement that Mr Gopaul 'knew or ought reasonably to have known' about his 'duties' is not the same as saying he knew that the Company had [participator loan tax] liabilities and 'intended to mislead' HMRC by filing corporation tax returns which excluded those liabilities.’

The burden of proof for deliberate behaviour rests with HMRC. In this case, and in all cases where deliberate behaviour by the taxpayer is cited, HMRC must prove not only that the taxpayer knew that a liability arose, but also that they intentionally omitted (or mis-reported) the liability on a relevant return. Whilst that was achieved in the context of the VAT and CT liabilities, HMRC had failed to demonstrate the same standard of proof in respect of the participator loan liabilities and, as a result, the PLN was reduced significantly.

This case is a timely reminder that the burden of proof falls on HMRC when deliberate behaviour is alleged. It also highlights the taxpayer’s right of appeal against any associated penalties, and that the interpretation of the relevant facts may not be consistent between the different heads of tax.

We are seeing HMRC cite deliberate behaviour more often in its penalty assessments, and that brings with it greater potential for it to collect higher levels of tax and penalties. It is important that when taxpayers face allegations of deliberate behaviour, they consult with specialist advisers to ensure they are fully protected.