Introduction

The case of Lyth v. Revenue and Customs ([2017] UKFTT 549 (TC)) presents a significant examination of the nuances surrounding the classification of inaccuracies in tax returns as either deliberate or careless. The appellant, Dorothy Lyth, contested a substantial inaccuracy penalty imposed by Her Majesty's Revenue and Customs (HMRC) under Schedule 24 of the Finance Act 2007. The core contention revolved around whether the omission of a capital gain from her Self-Assessment tax return for the fiscal year 2010-11 was a deliberate act or a result of carelessness.

Mrs. Lyth, a finance director and a Fellow member of the Association of Chartered Certified Accountants (FCCA), had sold shares in a private limited company, resulting in a net capital gain of £907,523.40. This gain was not declared in her tax return, leading HMRC to impose a penalty of £31,409.80. Mrs. Lyth acknowledged the inaccuracy but disputed its classification as deliberate, attributing it to her mental health struggles and the complexities involved in the return process.

Summary of the Judgment

The First-tier Tribunal (Tax Chamber) meticulously reviewed the circumstances surrounding the inaccuracy in Mrs. Lyth's tax return. The Tribunal affirmed that while there was indeed an inaccuracy, it was not deliberate but rather careless. The Tribunal evaluated evidence from both HMRC and Mrs. Lyth, including her medical history indicating severe depression and the context in which the tax return was completed. The Tribunal concluded that Mrs. Lyth did not knowingly or intentionally omit the capital gain from her return.

Consequently, the Tribunal allowed Mrs. Lyth's appeal against the deliberate inaccuracy penalty and substituted it with a penalty for careless inaccuracy. The revised penalty was set at £13,340.15, representing 15% of the corrected capital gains tax assessment of £88,934.34. This adjustment reflects a more appropriate classification of the inaccuracy, considering Mrs. Lyth's co-operation and the contextual factors affecting her capacity to accurately complete the tax return.

Analysis

Precedents Cited

The judgment references several key cases to elucidate the definition of "deliberate" inaccuracies:

• Auxilium Project Management v HMRC [2016] UKFTT 249 (TC): Established that deliberate inaccuracy requires knowledge and intention to provide an inaccurate document.
• Salim Miah v HMRC [2016] UK FTT 644 (TC): Reinforced that deliberate actions involve conscious decisions to omit or misstate information.
• Bhagya Raj Subbrayan t/a Swiss Cottage Diet Clinic v HMRC [2013] UKFTT 161 (TC): Applied a knowledge test to determine deliberate inaccuracy.
• Anthony Clynes v HMRC [2016] UKFTT 644 (TC): Introduced a broader test where deliberate inaccuracy could involve consciously choosing not to verify information.

These precedents collectively highlight that deliberate inaccuracy hinges on the taxpayer's knowledge and intention at the time of filing, rather than merely the objective possibility of an error.

Legal Reasoning

The Tribunal examined whether Mrs. Lyth knowingly omitted the capital gain or whether the omission resulted from carelessness. Central to this was Mrs. Lyth's mental state, particularly her struggle with depression, which may have impaired her ability to process and complete her tax affairs accurately.

The Tribunal considered:

• Mrs. Lyth's admission of inaccuracy but denial of deliberate intent.
• Her medical history indicating significant mental health challenges during the tax filing period.
• Inconsistencies in her statements, which the Tribunal attributed to confusion stemming from her mental state rather than intentional deceit.
• Her professional background and whether it implied knowledge beyond her actual understanding of capital gains tax complexities.

The Tribunal concluded that Mrs. Lyth was not aware of the inaccuracy at the time of filing and did not intentionally avoid reporting the capital gain. Her actions were deemed careless—resulting from a lack of reasonable care—rather than deliberate.

Impact

This judgment clarifies the threshold for distinguishing between deliberate and careless inaccuracies in tax returns. It underscores the importance of considering the taxpayer's mental health and overall circumstances when assessing intent. The decision emphasizes that professional qualifications alone do not presuppose complete competence in all areas, especially when personal health issues may impede accurate reporting.

Future cases will likely reference this judgment to argue for the reclassification of penalties based on individual circumstances, particularly when mental health factors are involved. It also indicates HMRC must thoroughly assess the taxpayer's state of mind and not solely rely on objective indicators of potential knowledge.

Complex Concepts Simplified

Deliberate vs. Careless Inaccuracy

Deliberate Inaccuracy: Occurs when a taxpayer knowingly provides incorrect information with the intent to deceive or mislead HMRC. It requires evidence of the taxpayer's awareness and intention at the time of filing the return.

Careless Inaccuracy: Involves errors made without intention to deceive, resulting from a failure to take reasonable care in preparing the tax return. This classification is based on an objective standard of what a reasonable taxpayer would have done under similar circumstances.

Penalty Calculation under Schedule 24 Finance Act 2007

Penalties are calculated based on the severity and nature of the inaccuracy:

• Deliberate Inaccuracy: Minimum penalty is 35% of the additional tax due.
• Careless Inaccuracy: Minimum penalty is 15% of the additional tax due when the disclosure is prompted.

In this case, the initial penalty was set at 35% due to the assessment of deliberate inaccuracy. However, upon reassessment as a careless inaccuracy, the penalty was reduced to 15%.

Conclusion

The Tribunal's decision in Lyth v. Revenue and Customs serves as a pivotal reference in understanding the differentiation between deliberate and careless inaccuracies in tax filings. By meticulously evaluating the taxpayer's state of mind, mental health, and the context surrounding the error, the Tribunal provided a fair and nuanced assessment rather than a purely objective one.

This judgment reinforces the principle that penalties should be proportionate to the nature of the inaccuracy, taking into account the taxpayer's circumstances. It highlights the judiciary's role in ensuring that tax enforcement is both just and considerate of individual taxpayer's situations, thereby promoting fairness within the tax system.