When it comes to tax, don’t hide the details

An interesting case in the Tax Tribunal demonstrated that when it comes to dealings with HMRC, failing to reveal relevant information can be just as expensive as providing false information.

The case was that of 'Timothy Clayton Hutchings -v- HMRC [2015]'.

Mr Hutchings was the residuary beneficiary of the estate of his late father but not the executor. When a person dies, any gifts they have made in the last few years of their life can affect the inheritance tax payable. The executors therefore asked Mr Hutchings whether he was aware of any gifts his father had made, both in a letter and also in a conversation. Mr Hutchings failed to respond to either enquiry. The executors took this to mean that he was not aware of any gifts and submitted the required form to provide details of the estate to HMRC accordingly.

A silent argument.

It subsequently transpired that Mr Hutchings' father had, in fact, transferred £450,000 from an offshore bank account to Mr Hutchings during his lifetime, which Mr Hutchings Junior had failed to reveal. HMRC became aware of this through an anonymous tip off and claimed the additional tax due of around £47,000 from Mr Hutchings Junior, together with a penalty of £87,553.00.

The relevant statutory provision states that a penalty is payable by a person where they have deliberately supplied false information or deliberately withheld information with the intention that a declaration of tax liabilities to HMRC would be inaccurate.

While he accepted that he was responsible for the additional tax of £47,000, Mr Hutchings argued in the Tribunal case that he should not have to pay a penalty because he had not actually said that no gifts had been made. He also argued that he should not be responsible for the penalty because he had no legal obligation to report the gifts and it was the responsibility of the executors to report the relevant information to HMRC.

Silence is not a defence

The Tax Tribunal, however, upheld the penalty, finding that Mr Hutchings had deliberately and dishonestly withheld information about the offshore bank accounts and held that the penalty provisions applied regardless of whether a tax payer had an underlying legal duty to provide information to the executors.

The Tribunal also considered whether the executors should be responsible for the penalty but found that they should not. On the facts of the case, it was held that having asked Mr Hutchings twice whether he was aware of any gifts, they were entitled to rely on the fact that he did not reveal any in submitting the form to HMRC.

The case highlights a number of points of importance in relation to estates:

• Don't assume that if you do not tell HMRC about something, they won't find out.
• If you are asked about information in relation to an estate by the executors, you should reveal everything you know openly. Keeping quiet and not revealing information will not protect you from a potentially hefty penalty even if you have not actually lied.
• Where a penalty is incurred, it can come to significantly more than the tax involved.
• You can incur a hefty penalty if you cause an incorrect amount of tax to be paid by failing to reveal information when asked regardless of your actual connection with the estate. Penalties can be applied to third parties and not just those who are legally responsible for submitting the information.
• If you are an executor, it is crucial to make the appropriate enquiries before submitting an inheritance tax form to HMRC. Had the executors not done so in this case, they could have been personally responsible for hefty penalties themselves.

The moral is that when it comes to dealings with HMRC, you should tell the truth, the whole truth and nothing but the truth.

If you'd like to discuss any of the issues raised in the article please contact any member of our Personal Law Team