HMRC launched the above programme aimed at closely monitoring the tax affairs of individuals and businesses classed as ‘deliberate defaulters’. HMRC have openly stated that a key objective of the new programme will be to ensure taxpayers in the programme are compliant with their tax obligations and “have demonstrated a permanent change in their behaviour”.

This new programme is in addition to existing legislation allowing HMRC to publish the names of those with errors resulting in a tax loss in excess of £25,000.

The programme is not voluntary in nature and thus any taxpayer classed as a DD may become part of this enhanced monitoring and activity programme known as Managing Deliberate Defaulters (MDD). In the accompanying Press Release, HMRC have announced that the first programme of work to notify those affected has commenced with 900 letters due to start landing on doormats in the coming weeks.

In future, if a person is classed as having deliberately evaded tax, HMRC will normally write to warn them that they may be included in MDD. When HMRC considers that enhanced monitoring should apply, it will advise the taxpayer in writing of their inclusion in the programme at the end of the relevant compliance check.

HMRC's accompanying Q & A guidance on MDD, defines deliberate default for the purposes of the programme as follows:-

• “Generally speaking, deliberate default will be most easily identified where a penalty under Schedule 24 Finance Act 2007 or Schedule 41 Finance Act 2008 for Deliberate or Deliberate with Concealment applies.”

Furthermore, the programme will be applied retrospectively to any taxpayer having already been charged with a penalty under this behavioural penalty regime effective for tax periods beginning on or after either 1 April 2008 or 2009 (depending on the nature of the tax concerned). For more information, see the relevant HMRC factsheet.

However, where a full unprompted disclosure is made, the defaulter will not be placed into the MDD programme, subject to having been given the maximum 50% penalty reduction for deliberate without concealment behaviour, having reduced the maximum possible penalty from 70% to 20% (maximum 70% penalty reduction for deliberate with concealment behaviour reducing the maximum possible penalty from 100% to 30%).

It should be noted that there is no de-minimis penalty limit which would apply to allow taxpayers to avoid inclusion in the programme thus the MDD programme applies to businesses and individual taxpayers who have been found to have made a deliberate understatement of any size (whether or not concealed) resulting in a ‘tax loss’ (over claims and overstatements are similarly targeted).

HMRC have also made it clear that DD may also be identified without a compliance check having been carried out, for example where a person has been convicted of a criminal offence involving tax evasion. Other instances of deliberate evasion may be identified through Civil Investigation of Fraud or specific disclosure campaigns.

It is also important to note that the MDD programme extends across all the defaulter's tax affairs rather than just the area(s) from which the initiating behaviour originated.

In addition to the penalty for the original offence, for a five year period afterwards, the taxpayer may be subject to additional monitoring with the level and term of monitoring depending on the seriousness of the offence. However HMRC do not envisage that anyone will be released from the programme within a two year period.

HMRC will continue to check that returns are filed on time and that any tax that is due is paid on time, but there will also be regular reviews of deliberate defaulters’ tax affairs to check that any errors or failings have been rectified. There are a variety of measures HMRC may use to monitor a DD's tax affairs.

These include:

• making announced or unannounced inspection visits to carry out pre-return checks of books and records;
• asking for certain records so that they can be checked;
• requiring that additional information or documents are sent in with the relevant tax returns;
• conducting in-depth compliance checks into all or any part of the person's tax affairs;
• observing and recording the person's business activities and cross-checking details in their accounts. For example, HMRC may make test purchases or inspect the records of one or more of their suppliers or customers;
• for VAT customers HMRC may:
  • –require submission of quarterly or monthly VAT returns;
  • –require the same accounting periods for VAT and Income Tax or Corporation Tax;
• withdraw the use of certain schemes (for example, cash accounting, annual accounting, flat-rate scheme, retail schemes) if HMRC deem this necessary for the protection of tax revenue.

Those who fail to keep their tax affairs in order will face increasingly intrusive interventions from HMRC and if ‘deliberate evasion’ continues, HMRC may also start criminal proceedings.

Monitoring will continue until HMRC has been satisfied that the defaulter has demonstrated a sustained and permanent change in behaviour at which time HMRC will write to the taxpayer to advise them of this change in status.

When included in the programme, HMRC will explain the minimum requirements that the person will need to meet and what, if any, additional documents or information will be required with future tax returns. At a minimum level, the scheme will require that persons submit all relevant returns and make all relevant payments on time, including tax under a Time to Pay arrangement.

Furthermore, a DD will not be entitled to take advantage of the three-line account facility or the use of the “Short” pages option therefore when filing returns they must complete the full Statement of Account and Balance Sheet on Self-Assessment Returns including the use of the “full” versions of the self-employment and partnership pages.

And, in cases where the DD tax ‘loss’ is £5,000 or more, HMRC may also require the following additional information to be submitted with the relevant tax returns for a period of up to five years:-

• A copy of the detailed trading and profit and loss accounts (and property income accounts if relevant);
• A detailed balance sheet;
• Detailed computations and explanations that identify and explain the nature and amount of any figures contained in the accounts that cannot be vouched by physical or electronic records made at the time that the underlying transactions took place. If there were no such figures, HMRC will require written confirmation of this;
• Defaulting businesses registered for VAT may be required to submit VAT accounts for any and all periods included within the period of the trading accounts required.

The above information will be required regardless of the additional cost involved.

Given the potentially serious consequences for taxpayers coming under the auspices of this new programme, practitioners should be fully aware of the implications of MDD status when discussing with clients disclosures opportunities of any nature or for those clients currently in the process of reaching any settlement of tax with HMRC likely to result in a penalty categorised in the ‘deliberate category’.

And, given the opportunity to avoid inclusion in the programme by making a full unprompted disclosure, the negotiation of such deliberate penalties to their minimum level will become even more important for practitioners and taxpayers alike in the future.

Interestingly, HMRC state that taxpayers have no right of appeal against their inclusion in the MDD programme. It is also HMRC's view that inclusion of a taxpayer in the programme does not contravene a person's ‘right to privacy’ under the European Convention on Human Rights. It would not be surprising to see either of these assertions tested in a court of law sometime in the future.

The initiative was announced by HMRC last month, more information can be found on HMRC's website at http://www.hmrc.gov.uk/about/tax-defaulters.htm and at http://www.hmrc.gov.uk/compliance/cc-fs14.pdf.