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Markel Tax

29 Jun 2017

HMRC gets tough over dubious expenses

After six years of Operation Edgewood – HMRC’s project to enquire into all the ex-clients of the jailed accountant Christopher Lunn – James Cordiner, Senior Tax Consultant, explores "where are we now?".

Given it was widely reported that Christopher Lunn & Co (CLAC) had more than 7,000 clients, and it is HMRC’s intention to establish the correct tax position in each case, we can expect these enquiries to continue for a long time. However, what the former CLAC clients and their current advisers need to appreciate is the hardening attitude of HMRC. 

Main areas of concern for HMRC

The main issues that have arisen in cases seen to date are the following:
  • Company deductions claimed for direct costs attributed to manufactured sole trades and partnerships
  • Overstated accountancy fees
  • Questionable travel expenses and other expenses
Despite assurances given by Lunn to his clients over a number of years that there was nothing amiss and therefore nothing to be concerned about it is quite clear from cases worked first hand and other published details that this is not the case.
In our recent experience, the specific issues identified above have been prevalent in all cases. Despite our ability to mitigate matters and challenge some of HMRC’s assertions, enquiries into corporate clients have nevertheless resulted in adjustments to profits with substantial corporation tax, interest and penalties arising. We have achieved the best possible outcome in these cases, calling upon all our experience as ex-Inspectors used to negotiating with HMRC. 

HMRC’s view on the years to assess

HMRC contend that the adjustments arising are as a result of deliberate action by Lunn and will consequently seek to assess all relevant years within the extended time limit of 20 years. Discovery legislation at s29(4) TMA1970 supports the view that all relevant years can be assessed where further tax is due to the deliberate behaviour of the taxpayer or a person acting on their behalf.
It is therefore vitally important for any ex-CLAC client to consider their position and work with their advisers in light of the action that can be taken by HMRC.

The penalty position

As with any disclosure opportunity the most favourable terms are given to those who come forward at the earliest opportunity and it has been no different here.
Whilst HMRC take the view that the assessable years can be extended to the maximum on the basis of deliberate or fraudulent behaviour, when it comes to charging a penalty they have been largely taking the view that the client has displayed careless rather than deliberate behaviour. Careless behaviour brings the 15-30% bracket into play. However, there is a caveat: where there is clear evidence of collusion with Lunn, this will give rise to a higher penalty.
Six years on, the penalties being charged now are significantly higher than those considered to be appropriate in the early days. In the case of ex-CLAC client Harriet Sheard (TC04027) heard at tribunal to contest the penalties, the tribunal found that there were simple checks that could have been carried out by the taxpayer which would have identified inaccuracies. Leaving everything to CLAC did not sit well with the tribunal and the penalties charged at a rate of 15% were found to be appropriate.
We have seen HMRC take a harder line on penalties in all areas in recent years. A consistent approach is being taken in these cases and HMRC do not consider suspension of penalties to be appropriate.
Currently, recently settled cases indicate that HMRC are charging a 25% penalty in all cases with the suggestion that this may rise to 30% in the months to come. So the incentive is there now to put matters right.
Ultimately, the only route to challenge HMRC’s view on the penalty position is at a tribunal, and, of course, the prospects of success in doing so are unknown. Consideration has to be given to the likely outcome against the time and costs involved in arguing the position further.  


For many years now, HMRC have encouraged taxpayers to find them before they find you. And that is still the case.
As far as CLAC clients are concerned, the cat has been out of the bag for some time, and those who have not yet disclosed irregularities, cannot expect the best possible outcome. And to reiterate, HMRC’s attitude is hardening. Nevertheless, all clients still deserve the best defence and that is exactly what we seek to provide.
Our message to CLAC clients is start that defence now and not at the point that HMRC’s penalty expectations become double what they were only a few years ago.
Tagged HMRC
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