Cliff: Tax tribunal considers the meaning of ‘deliberate’

06 November 2019

In Cliff v HMRC [2019] UKFTT 564, the First-tier Tribunal (FTT) has held that the taxpayer had 'deliberately' submitted an inaccurate tax return to HMRC.

This blog is cased on an article which was first published in Tax Journal on 18 October 2019. A copy of the article can be viewed here


Mr Cliff was a tax consultant who also considered himself to be self-employed as a ‘dealer in thoroughbreds’. He purchased shares in racehorses, or in horse racing partnerships. Over a five-year period, Mr Cliff lost £160,000 and accordingly claimed loss relief. The relevant tax years were 2009/10, 2010/11 and 2011/12. 

In June 2017, HMRC issued assessments, under section 29, Taxes Management Act 1970 (TMA), disallowing Mr Cliff's loss claims (the discovery assessments) and in July 2017 it assessed Mr Cliff to penalties under paragraph 1, Schedule 24, Finance Act 2007 (FA 2007) (the penalty assessments). 

The relevant legislation 

Under section 29, TMA, a discovery assessment can only be issued if one of two conditions are fulfilled: 

1.  the loss of tax was brought about ‘carelessly or deliberately’ by the taxpayer (or someone acting on his behalf); or

2.  the relevant officer of HMRC could not have been reasonably expected to be aware of the loss of the tax at the time when they ceased to be entitled to give notice of an enquiry. 

HMRC relied only on the first condition, and its primary case was that the loss of tax had been brought about deliberately. 

Under paragraph 1, Schedule 24, FA 2007, HMRC can issue penalties for inaccuracies in a return which has led to an understatement of tax, but only if the inaccuracy was careless or deliberate. Deliberate inaccuracies carry higher penalties than careless inaccuracies. 

HMRC sought penalties from Mr Cliff on the basis that his inaccuracies were deliberate. 

The key question was whether Mr Cliff could be said to have acted deliberately if he had no intention to deceive. 

Mr Cliff appealed the discovery assessments and the penalty assessments to the FTT.

FTT decision

The appeals were dismissed.  

The FTT first considered whether the description ‘dealer in thoroughbreds’ was an accurate description of Mr Cliff's activities. It determined that it was not, because he did not buy or sell horses, but rather shares in horses. Furthermore, he was not a ‘dealer’, because he did not, at least in respect of the partnerships, expect or intend to make a profit, and he took no part in training the horses or in deciding when they should be sold. 

The FTT then considered whether this inaccuracy was deliberate.  
Mr Cliff argued that the inaccuracy was not deliberate because there was no conscious decision to act deceitfully, or with illicit intentions. HMRC’s case was that any considered choice, knowingly made, was deliberate. 

The FTT accepted HMRC’s view, stating at paragraph 23: 

"We conclude, in agreement with the Respondents, that 'deliberate' means a conscious choice to act in a certain way ... We also agree that this choice does not have to be accompanied by an intention not to pay tax or be made without good faith, as a loss of tax can be brought about by a taxpayer making a purposeful but poor decision". 

The FTT gave only one normative reason for this conclusion. It said, at paragraph 29, that if ‘deliberate’ required an intention to deceive, then "it would be difficult to see what meaning should attach to 'fraudulent'". The FTT applied this meaning of deliberate both to the discovery assessments and the penalty assessments. 

Implications of the decision 

If this decision is correct, it potentially has a number of serious consequences for taxpayers: 

the time limit for discovery assessments will be greatly extended in many cases, as the limit is 20 years where a deliberate loss of tax is involved, rather than four years (in the ordinary case) or six years (in cases of carelessness) (see sections 34 and 36, TMA); 

• this consequently extends the time limits for issuing penalties, as a penalty assessment can be made up to 12 months after the discovery assessment is issued (or, if the assessment is appealed, 12 months after the end of the appeal process) (see paragraph 13(3), Schedule 24, FA 2007); 

the penalties for inaccuracies will be significantly higher, as a deliberate inaccuracy carries a penalty of up to 100% of the potential lost revenue (for domestic matters) or 200% (for offshore matters) (see paragraph 4, Schedule 24, FA 2007); 

HMRC cannot suspend Schedule 24 penalties if it has levied the penalties on the basis of deliberate behavior (see paragraph 14, Schedule 24, FA 2007); 

the taxpayer is placed in HMRC’s ‘managing serious defaulters’ regime and the taxpayer’s details may be published (see section 94, FA 2009). 

Fundamentally, the FTT's reasoning erodes the behavioral distinction between careless and deliberate behavior. Further, if deliberate conduct requires only a conscious action and an inaccuracy, taxpayers filing returns on the basis of a bona fide but ultimately incorrect interpretation of the law will find themselves subject to a 20-year discovery period and, potentially, higher penalties. This is plainly not the policy intention behind the behavior-based regimes. In our view, this erosion cannot be justified either on policy grounds, or as a matter of statutory interpretation. 

Unanswered questions 

The FTT’s reasoning leaves several questions unanswered. 

The word ‘fraudulent’ is no longer used in the legislation. Accordingly, it is difficult to understand why it should matter that Mr Cliff's  interpretation of ‘deliberate’ leaves no room for a different meaning for ‘fraudulent’. Must a special meaning also be given to ‘carelessness’, as otherwise there would be no room left for ‘negligence’? In any event, is ‘deliberate’ not the modern word for ‘fraudulent’? Section 36, TMA, was (until 1 April 2010) headed ‘fraudulent or negligent conduct’. 

In fact, does the context not compel the conclusion that ‘deliberate’ does mean fraudulent: the most draconian penalties should be reserved for fraudulent behavior in order to incentivise honest and conscientious tax returns. In the context of the Schedule 24 penalty provisions, the term ‘deliberate’ has usually been interpreted by the tax tribunals as requiring blameworthy or dishonest conduct, in contrast with the purely mechanical error in the return that was present in HMRC v Tooth [2019] EWCA Civ 826. For example, in Auxilium Project Management v HMRC [2016] UKFTT 249 (TC), the FTT said (at paragraph 63): "A deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely on it as an accurate document". 

HMRC’s official publications and procedures recognise that an allegation of deliberate conduct is an allegation of fraud. HMRC’s  Code of Practice 9 guidance is headed ‘investigations where we suspect tax fraud’ and goes on to say: "Under the investigation of fraud procedure, the recipient of COP9 is given the opportunity to make a complete and accurate disclosure of all their deliberate and non-deliberate conduct ... The term ‘deliberate conduct’ means that the recipient knew that an entry or entries included in a tax return and/or accounts were wrong, but the recipient submitted it/them anyway, or that the recipient knew that a liability to tax existed but chose not to tell HMRC at the right time." (Emphasis added). 

‘Carelessness’ is defined in the legislation as ‘a failure to take reasonable care’ (paragraph 3(1), Schedule 24, FA 2007 and section 118(5), TMA). But the meaning attached by the FTT to ‘deliberate’ is in fact a lower standard than carelessness, because all it requires is that the taxpayer made a conscious decision to use the inaccurate words. Accordingly, a taxpayer might take all proper care (including by instructing a professional adviser) and have acted deliberately but not carelessly. 

As the FTT in Leach v HMRC [2019] UKFTT 352 (TC) noted, the explanatory notes to Schedule 24 refer repeatedly to the level of penalty being based on ‘behaviors’, with the most serious penalties being reserved for "deliberate and concealed behaviors". The notes say that the concepts set out in the schedule provide "a uniform language for behaviors", and that "where a person has taken reasonable care in completing their return … no penalty will arise". The FTT’s decision in that case was that this behavior-based approach shows that the meaning of ‘deliberate’ cannot extend to purely mechanical errors, where there is no intention to mislead. 

The FTT’s decision in Cliff, however, leads to the perverse result that a taxpayer is better off stating that he completed his tax return without properly considering his answers, so that he can be said to have acted carelessly rather than deliberately. 

The FTT also relied on the obiter comments of the Court of Appeal in Tooth on the meaning of ‘deliberate’. The decision in Tooth is itself concerning for taxpayers, but in our view it does not support the reasoning in Cliff. That is because, in Tooth, the taxpayer knew that he was filling out his return incorrectly, and the issue was the extent to which this could be cured by clarifying the situation elsewhere on the return. That was not the case in Cliff

Different meanings of ‘deliberate’ for different provisions? 

In Cliff, the FTT applied the same meaning of ‘deliberate’ both to discovery assessments and the penalty assessments. However, in Leach, the FTT applied different meanings of deliberate to (a) penalties under Schedule 24, and (b) assessments under section 77(4A), Value Added Tax Act 1994. 

The FTT’s view in Leach was that a Schedule 24 deliberate penalty required the taxpayer to knowingly provide an inaccurate document, with the intention that HMRC should rely on it as an inaccurate document. That effectively means that there must be an intention to mislead. In our view, this must be correct. Tax penalties, unlike provisions extending time (eg in the context of discovery cases), are ‘criminal’ for the purposes of Article 6 of the European Convention on Human Rights (see Euro Wines (C&C) Ltd v HMRC [2012] UKUT 0359 (TCC)). Schedule 24 contains no ‘reasonable excuse’ defence and, as the FTT in Leach observed, had Parliament intended that penalties should be charged under Schedule 24 for purely mechanical errors (such as those in Tooth), where there was no intention to mislead, a similar ‘reasonable excuse’ defence would have been necessary to avoid injustice. 


If this decision is correct, and HMRC is acting lawfully in issuing deliberate penalties in circumstances where there is no blameworthy conduct attributable to the taxpayer, it could undermine the vital safeguards previously thought available to taxpayers taking ‘reasonable care’. 

The purpose of penalty provisions is to penalise and discourage certain types of behavior. Whether a taxpayer deliberately intends to mislead HMRC, or is merely careless, is therefore critical to determining what level of penalty (if any) should be applied. 

Fundamentally, a taxpayer acting with care (for example, on professional advice) and taking a bona fide and considered view of the law should not be subjected to penalties for deliberate behavior, or at all. The issue with the decision in Tooth is that the meaning of the word ‘deliberate’ may be context specific as between penalty and discovery cases. Whilst this form of inconsistency is undesirable, it is perhaps the inevitable effect of the Court of Appeal’s obiter comments in Tooth. It is in any event hoped that a higher court will review the reasoning of the FTT in this case and clarify the position further. 

The decision can be viewed here.

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