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Penalties for errors in returns or documents
Every year HM Revenue & Customs (HMRC) undertakes 'Compliance Checks' of Individual, Partnership and Company Tax Returns to ensure those taxpayers are paying the correct amount of tax and claiming the right amount of allowances and reliefs. When an error is discovered or disclosed, HMRC wants to understand how and why the error occurred so as to decide whether a financial penalty should be charged.
On this page:
Have HMRC's powers to charge penalties recently changed?
Under new legislation introduced on 1 April 2009 and 1 April 2010, HMRC launched an updated penalty regime for inaccuracies in tax returns or other documents. The new legislation seeks to harmonise the different penalty powers that previously existed for individual taxes or duties.
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What taxes/duties and tax periods does the new penalty regime encompass?
The new penalties apply to Income tax, Capital Gains Tax, Corporation Tax, National Insurance (Classes 1 and 4), Pay As You Earn, VAT and the Construction Industry Scheme for tax returns or other documents due to be sent to HMRC on or after 1 April 2009 (and relating to a tax period beginning on or after 1 April 2008). For all other duties, levies and taxes, the new penalties applied for tax returns or other documents due to be sent to HMRC on or after 1 April 2010 (and relating to a tax period beginning on or after 1 April 2009).
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What conditions or circumstances must be satisfied before a penalty can be charged?
Before HMRC can consider charging you a penalty two qualifying conditions must be satisfied:
1. Your inaccurate tax return or other documents must contain an error that results in:
- an understatement of your tax liability;
- a false or inflated statement of a loss by you; or
- a false or inflated claim by you to repayment of tax.
2. Your error must be either careless, deliberate or deliberate and concealed.
Penalties can also be charged if you either don't notify HMRC of an understated assessment or don't tell HMRC about an error that you discover after you have filed a document.
The new regime also introduces powers to allow HMRC to potentially seek payment of a company penalty from a Director provided that the error was deliberately caused by the Director and he/she then gained personally from it. In addition, HMRC can also charge a penalty where a business has made a loss (and would not normally be paying any tax).
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Are there any other factors that HMRC takes into consideration?
The main focus and rationale underpinning the new regime is 'taxpayer behaviour'. If you submit an inaccurate tax return or other document then your 'behaviour' will be considered. This 'behaviour' will determine the range of financial penalties you will face. The categories of behaviour considered by HMRC are: -
- an error arose, but the taxpayer took 'reasonable care';
- a 'careless' error;
- a 'deliberate' error; or
- a 'deliberate and concealed' error.
If it can be shown/proved that an error occurred but that you took reasonable care when preparing the return or document, HMRC will not charge a penalty.
Once your behaviour has been categorised, the amount by which any potential penalty might be reduced will depend on: -
- whether your disclosure of the error is/was prompted;
- whether you make/made an unprompted disclosure to HMRC (one where you have/had no reason to believe that HMRC has/had discovered (or is about to discover) the inaccuracy or under-assessment); and
- the quality of the disclosure, which can be enhanced by you telling and helping HMRC and then responding positively to requests for access to records.
Penalty percentages are applied to the Potential Lost Revenue ('PLR') – i.e. the additional tax payable or not repayable. All other allowable deductions and reliefs (except Group Relief) can be taken into account when calculating PLR.
The maximum and minimum penalties that can be applied to the PLR where you have delivered an inaccurate return or other document are: -
- if the error was careless – a maximum of 30% (potentially reduced to a minimum of 0% for an unprompted disclosure and 15% for a prompted disclosure);
- if the error was deliberate – a maximum of 70% (potentially reduced to a minimum of 20% for an unprompted disclosure and 35% for a prompted disclosure); and
- if the error was deliberate and you concealed it – a maximum of 100% (potentially reduced to a minimum of 30% for an unprompted disclosure and 50% for a prompted disclosure).
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Can penalties be suspended?
If a penalty arose due to carelessness, HMRC can agree to suspend it for up to two years. If you meet all the conditions set by HMRC in this period and do not make any further errors, HMRC will cancel the penalty at the end (Suspending penalties for careless errors in returns and documents).
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Will there be common agreement on behaviours and the nature of a disclosure?
Under the previous penalty regime, taxpayers and their professional advisors frequently disagreed with HMRC over whether a taxpayer had been 'negligent' in submitting an incorrect return. These disputes are now likely to be replaced by debates over the appropriate behaviour category and whether the disclosure is/was full and unprompted or prompted. These arguments can significantly affect the potential financial penalties that will/can be charged so specialist advice to help mitigate potential penalties can be invaluable. Additionally, if you are able to secure the minimum penalty for all the behaviour categories then you will not have your details published on HMRC's website ('Naming & Shaming' Deliberate Tax Defaulters) as a deliberate tax defaulter.
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What should I do if an error is identified?
If errors are identified in your tax affairs, you need to robustly present your arguments to demonstrate that you either took reasonable care in the preparation of your return/document or that the errors arose due to carelessness. This will help best mitigate any financial penalties. If the errors arose as a result of your deliberate conduct or deliberately with concealment then the best way to mitigate any financial penalty is to make an early, full disclosure to HMRC.
To properly present a reasonable care argument, you will need to demonstrate that although an error did occur, you have adequate systems and procedures in place to minimise the potential for such errors. Genuine mistakes do happen!
If the error arose because of carelessness, you will need to demonstrate this and refute any suggestion that you acted deliberately or deliberately with concealment. If you can, this will allow you to further argue that any penalty be suspended.
If an error arose because you either deliberately did something wrong (or failed to do something that you should have done) or, worse still, that you did something wrong and then tried to conceal it, all is not lost. You need to consider making a full (and, if possible, unprompted) disclosure to HMRC at the earliest opportunity. This will not only help mitigate any potential penalty, but also avoid your details potentially being published as a deliberate tax defaulter on HMRC's website ('Naming & Shaming' Deliberate Tax Defaulters).
If you discover an error and are not already subject to a HMRC Compliance Check then you may qualify to make a disclosure via one of HMRC's Campaigns, which typically have guaranteed beneficial penalty arrangements.
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How can OneE TDI help?
If you are contacted or challenged by HMRC, the best thing you can do is the 'right thing; the worst thing you can do is nothing. OneE TDI will help you make the right decisions.
At the core of OneE TDI is a highly experienced team specialising in all areas of tax disputes and investigations work. We offer confidential, non-judgemental advice to best defend our clients and have a proven track record in successfully managing all contentious tax matters. We provide a comprehensive service to accountancy and legal practitioners and their clients. Our advice saves our clients time and money and helps reduce their potential exposure to tax, interest and penalties.
Putting it simply, we take control and manage all issues relating to HMRC Compliance Checks so that our clients can get on with your life. What price peace of mind?
Please see the Testimonials kindly provided by our clients (or their accountants or lawyers), which confirm our levels of client service.
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How can I contact OneE TDI?
If you would like a free, no obligation discussion with us please contact either Gary Rowson or Mark Taylor on 0800 652 6156 or complete and submit the form below.
Whilst we endeavour to provide informative and accurate information, the content on this site is for general information purposes only and should not be taken to constitute tax or legal advice which must always be tailored to individual circumstances. Please contact us if you would like to discuss matters.
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HMRC Compliance Checks