There has been press coverage over the past couple of months relating to Nadhim Zahawi’s settlement with HMRC. There is a suggestion that he has agreed to pay a 30% penalty. This is on top of the £3.6m of the unpaid tax.
The language used by him and his advisers is that Mr Zahawi’s behaviour, which led to the inaccurate tax return, was brought as a result of his being careless. His actions were not deliberate, and as such, the appropriate penalty rate to apply is 30%.
I find the language interesting as they have not used the main behaviour…Reasonable Care…I will explain why later in the article.
So what is careless behaviour? HMRC’s penalty Fact Sheet (CC-FS7a) describes it as ‘This is where you failed to take reasonable care to get things right’.
Reasonable care is taken when taxpayers exercise reasonable diligence in completing and submitting their tax returns.
| Type of behaviour | Unprompted disclosure | Prompted disclosure |
| Reasonable care | No penalty | No penalty |
| Careless | 0% to 30% | 15% to 30% |
| Deliberate | 20% to 70% | 35% to 70% |
| Deliberate and concealed | 30% to 100% | 50% to 100% |
By all accounts, it was Mr Zahawi who approached HMRC. Putting him in the ‘unprompted’ range; that is a smart move, get in front of HMRC before they come to you.
HMRC were considering the representations given by his advisers on why his tax return was inaccurate. They agree the behaviour displayed by Mr Zahawi was careless.
As demonstrated by the above table, an unprompted careless inaccuracy has a penalty range of between a minimum of 0% and a maximum of 30%.
Next in a settlement negotiation is a discussion with HMRC to determine whether the maximum penalty can be reduced.
A reduction is available depending on the quality of the disclosure, often referred to as ‘telling, helping and giving’.
The reduction given depends on how cooperative and helpful you have been with HMRC:
The maximum penalty is reduced by 100% if the full deduction is given. A 30% penalty then becomes a 0% penalty.
If HMRC only allows a 70% reduction, a 30% penalty becomes a 9% penalty.
In the case of Mr Zahawi, the penalty rate remained at the top rate of 30%.
That suggests two things:
A no-reduction penalty is something I have yet to offer to HMRC for one of my clients. Still, I have never represented a current Member of Parliament who was (for a short time, Chancellor of the Exchequer).
To avoid protracted discussion with HMRC, he may have bitten the bullet and offered to pay a £1.1m penalty to make the whole thing go away as quickly as possible.
Or he should have approached ETC Tax to get his compliance affairs right from the start or put right with the lowest possible penalty rate available!
Earlier in the article, I mentioned the language used, careless not deliberate. I did so as I can sometimes have a suspicious (or curious) mind.
There has been talk that there was no ‘offshore’ matter to consider in this settlement, but we do know that Balshore Investments (which is referred to throughout the commentary) is a company registered in Gibraltar.
With this in mind, the language being used makes me start to wonder what kind of disclosure was made to HMRC and what penalty regime has been applied here.
The terms careless or deliberate are used together when applying penalties for offshore non-compliance when the category of ‘reasonable care’ is not a consideration.
I won’t go into the intricacies of the various penalty rates available on offshore non-compliance, and in overall terms, the penalty rate may still equate to 30% of the unpaid tax.
However, the point I think I am trying to make is that there are more questions than answers here, there is a lot of speculation, and surely it’s in the public interest for the sake of transparency that someone needs to offer an honest explanation.
At the time of writing, the Prime Minister has asked his independent ethics adviser to investigate, saying ‘there are questions that need answering’. He obviously had a preview of my article!
Please get in touch with us if you have any queries about this article or any other tax matters.
