Auxilium Project Management Ltd v HMRC [2016] UKFTT 249 (TC)

The most quoted definition of “deliberate” in the penalty code, from a decision that binds nobody. Auxilium holds that a deliberate inaccuracy requires actual knowledge of the error and an intention that HMRC rely on it. Failing to take reasonable steps to check is carelessness, and HMRC blurs the two constantly.

Why This Formulation Is Cited So Often

“Deliberate” is the single most valuable word in the penalty code. Under Schedule 24 FA 2007 the penalty range for a careless inaccuracy in a prompted disclosure is materially lower than for a deliberate one, and a deliberate inaccuracy also opens the twenty-year assessment window under s36(1A) TMA 1970, permits publication of deliberate defaulters’ details, and can support a personal liability notice against a company officer under paragraph 19 of Schedule 24.

The statute does not define it. Auxilium supplied a workable definition that tribunals have used ever since.

The Auxilium Formulation

“A deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document. This is a subjective test. The question is not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate. It is a question of the knowledge and intention of the particular taxpayer at the time.”

The three elements

1. Knowledge. The taxpayer must know that the document contains an error. Not suspect that it might; not have been in a position to find out; know.
2. Intention that HMRC rely on it. The document must be provided with the intention that HMRC treat it as accurate.
3. Subjectivity. The test is about this taxpayer’s actual state of mind at the time, not about what a reasonable taxpayer would have known or done.

The Statutory Framework

Schedule 24 FA 2007 sets three behaviour categories for an inaccuracy in a document given to HMRC which leads to an understatement, a false or inflated loss, or a false or inflated claim to repayment:

• Careless: a failure to take reasonable care;
• Deliberate but not concealed;
• Deliberate and concealed, where the taxpayer also makes arrangements to conceal the inaccuracy.

The penalty ranges rise sharply across the categories, and the reduction available for disclosure depends on whether the disclosure was prompted or unprompted and on the quality of telling, helping and giving access. The behaviour finding therefore drives both the range and the practical outcome.

The parallel concept in the assessment code is s118(7) TMA 1970, which brings a “deliberate inaccuracy in a document” within the twenty-year window. That is the provision the Supreme Court construed in Tooth.

The Relationship With Tooth

In HMRC v Tooth [2021] UKSC 17 the Supreme Court held that “deliberate inaccuracy” in s118(7) means a statement that was deliberately inaccurate, one the maker knew to be inaccurate and intended should be relied on, and not merely a statement deliberately made which turns out to be wrong. That is binding, and it is materially the same proposition as Auxilium.

Tooth adds two things Auxilium does not:

• The whole-document rule. A return must be construed as a whole, including white space narrative, when deciding whether it contains an inaccuracy at all. A taxpayer who explains an unusual entry may have made no inaccuracy in the first place, so the behaviour question never arises.
• Appellate authority. Tooth binds; Auxilium does not.

Blind-Eye Knowledge and the Boundary Cases

The hardest question in this area is what to do with a taxpayer who suspects a document is wrong and deliberately declines to check.

• The argument for treating it as deliberate. A taxpayer who suspects an inaccuracy, chooses not to look, and submits the document intending HMRC to rely on it does intend HMRC to rely on something they believe may be false. On that analysis the Auxilium elements are satisfied in substance.
• The argument against. The formulation requires knowledge of the error, and suspicion is not knowledge. Extending the category to cover suspicion collapses the boundary with carelessness, which is precisely what the three-tier structure is designed to preserve.
• Where the tribunals have landed. The better view, and the one most consistently applied, is that a genuine blind-eye, a deliberate decision not to enquire because the taxpayer suspects what the answer would be, can amount to deliberate conduct, while a failure to check arising from disorganisation, over-reliance on an adviser or simple inattention is carelessness. The distinction is evidential and turns on the taxpayer’s own account, tested in cross-examination.

Practitioner Application

Resisting a deliberate finding

• Make HMRC identify the knowledge and the intention separately. Ask, in writing, what evidence HMRC relies on to show (a) that the taxpayer knew the document contained an error, and (b) that they intended HMRC to rely on it. Vague references to the size of the understatement are not evidence of either.
• Do not let HMRC reason backwards from quantum. A large error is not a deliberate one. This is the single most common flaw in HMRC penalty explanations.
• Reframe as carelessness where that is the truth. Poor records, misplaced reliance on an adviser, a misunderstanding of the law, or failure to check are all carelessness. Say so plainly and evidence it. A candid carelessness case is far more persuasive than a denial that everything was fine.
• Run the Tooth whole-document point first. If a white space entry, covering letter or schedule explains the position, argue there was no inaccuracy at all. That defeats the penalty entirely rather than reducing the category.
• Prepare the client to give evidence. The test is subjective; the tribunal needs to hear from the person whose state of mind is in issue. An appellant who does not attend is at a serious disadvantage.
• Address disclosure quality in the alternative. Even within the deliberate band, telling, helping and giving access drive the reduction. Do not fight the category and ignore the mitigation.

Why the category matters beyond the penalty

• The twenty-year assessment window under s36(1A) TMA 1970.
• Publication of deliberate defaulters’ details.
• Managing serious defaulters monitoring.
• A personal liability notice against a company officer under paragraph 19 of Schedule 24 FA 2007.
• The risk of the matter being considered for the Contractual Disclosure Facility under Code of Practice 9, or for criminal investigation.

Frequently Asked Questions