CPR Commercials Ltd v HMRC [2023] UKUT 61 (TCC)

HMRC frequently treats a serious failure to check a return as good enough to justify its highest penalty band. The Upper Tribunal drew a sharp line: recklessness, however serious, is not the same as deliberate behaviour, and conflating the two is one of the more common, and more successfully challenged, errors in HMRC's penalty decisions.

Why This Case Matters

CPR Commercials is an important practical counterweight to HMRC's frequent tendency to treat any significant compliance failure as evidence of deliberate behaviour. It confirms, at Upper Tribunal level, that the deliberate threshold under Schedule 24 FA 2007 genuinely requires a subjective mental element, and that even serious carelessness, described by the Tribunal itself as recklessness, falls short of it. Given how much turns on the deliberate/careless distinction, including the size of the penalty, the extended assessment time limits, and potential personal liability notice exposure for directors, this is one of the more consequential recent penalty decisions for practitioners to know well.

The Facts

CPR Commercials Ltd submitted VAT returns treating certain supplies as zero-rated exports, but did not hold, at the time the returns were submitted, adequate evidence to substantiate that the goods had actually left the country as required for zero-rating to apply. HMRC denied the zero-rating and assessed CPR for the underdeclared VAT, totalling around £98,820, and imposed penalties under Schedule 24 FA 2007 of approximately £58,340, calculated on the basis that the inaccuracy in the returns was deliberate.

CPR did not seriously dispute that its evidence of export was inadequate, or that the underlying VAT assessment was correctly raised. The dispute was confined to the characterisation of the inaccuracy for penalty purposes: was it careless, or was it deliberate?

Procedural History

• First-tier Tribunal: upheld HMRC's deliberate inaccuracy penalty.
• Upper Tribunal (Tax and Chancery Chamber): allowed CPR's appeal, holding that the correct characterisation of the inaccuracy was careless, not deliberate, and remitting the penalty to be recalculated on that basis.

The Issue

Whether a taxpayer who submits VAT returns claiming zero-rating without holding adequate supporting evidence, in circumstances amounting to a serious and repeated failure to check the position, has thereby acted "deliberately" for the purposes of Schedule 24 FA 2007, or whether such conduct, however serious, is properly characterised as careless.

The Ratio Decidendi

The Tribunal's reasoning drew a careful distinction between the objective and subjective elements of the test. An objective assessment of CPR's conduct, judged against what a reasonable and prudent trader would have done, plainly supported a finding of carelessness and, on these facts, a serious one. But the deliberate threshold is not simply an aggravated version of the careless threshold reached by turning up the dial on how bad the conduct was; it requires crossing into a qualitatively different, subjective territory, actual knowledge or a genuine, consciously suppressed suspicion. HMRC's evidence, including the scale and pattern of the failures, went to how careless CPR had been, but did not establish what CPR actually knew or suspected at the time each return was submitted.

Recklessness Versus Blind-Eye Knowledge

The case is best understood as sitting on a spectrum of fault running from innocent error, through carelessness, to recklessness, and finally to deliberate conduct including blind-eye knowledge. CPR Commercials confirms that this is not a single, sliding scale on which sufficiently bad carelessness automatically becomes deliberate conduct; there is a genuine categorical boundary between the objective, care-based tests and the subjective, knowledge-based test, and HMRC must produce evidence capable of crossing that boundary, not merely evidence of a worse-than-average failure to take care.

• Carelessness is failing to take reasonable care, assessed objectively against a prudent taxpayer in the same position.
• Recklessness, as used by the Tribunal here, describes a serious, aggravated failure of that kind, but remains an objective characterisation of conduct rather than a finding about the taxpayer's actual state of mind.
• Blind-eye knowledge requires the Tribunal to find, as a fact, that the taxpayer actually held a genuine suspicion that something was wrong, and chose not to investigate it in order to avoid confirming that suspicion. This is a finding about subjective mental state, not merely about how poor the taxpayer's systems or diligence were.

Practitioner Application

• Scrutinise HMRC's evidence for the subjective element specifically. Where HMRC's case for deliberateness rests mainly on the scale, pattern or seriousness of a compliance failure, rather than on specific evidence of what the taxpayer actually knew or suspected at the time, CPR Commercials is directly in point.
• Do not concede deliberateness simply because carelessness is admitted or obvious. A taxpayer can accept that its systems and checks were seriously inadequate while still properly disputing that it had the necessary knowledge or suspicion for a deliberate finding.
• This distinction has consequences well beyond the immediate penalty. A successful challenge from deliberate to careless materially reduces the penalty percentage range, removes exposure to the 20-year assessment window, and can be decisive in defending an associated personal liability notice, as in Bachra v HMRC [2023] UKFTT 91 (TC).
• Build the evidential record around actual knowledge and belief, including what the taxpayer or its staff understood about the export evidence requirements at the time, rather than focusing solely on what systems should have been in place.

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