Penalties for errors in tax returns – careless until proven otherwise?

Published on 17 June 2016

Getting your tax right is not always easy. Any mistakes can be picked up by HM Revenue & Customs and this could mean that you have extra tax to pay and might receive a penalty notice. But if you made a genuine mistake despite taking reasonable care, no penalty is due and you can appeal against a penalty notice. 

Where a tax return or other document submitted to them is incorrect, HMRC should only issue penalties in cases of careless or deliberate mistakes – not those where ‘reasonable care’ was taken and certainly not without checking all the facts and circumstances behind the error.

Make sure you know your rights, if HMRC try to charge you a penalty. Below we give you an overview of the rules, tell you what to do if you receive a penalty notice and include a sample letter to guide you further.  

What are the main rules on inaccuracy penalties?

An inaccuracy penalty is chargeable if you give HMRC a document (for example, submit a tax return) and both of the following apply:

the document contains a mistake or inaccuracy which results in you understating your liability to tax, or claiming too much by way of loss relief or repayment of tax;

the mistake was ‘careless’, deliberate, or deliberate and concealed.

So, for a penalty to be chargeable, it is not enough that there should be a mistake in the document. The mistake has to have resulted in you not paying enough tax and have been made carelessly or deliberately. ‘Careless’ is akin to the concept of ‘negligence’ and indicates that you have failed to take ‘reasonable care’ (see below).   

The level of penalty is normally worked out as a percentage of the ‘potential lost revenue’ (PLR) – that is, the extra tax that you have to pay as a result of correcting the inaccuracy. The percentage depends on your behaviour and whether you told HMRC about the error or whether HMRC found it first.

Type of behaviour                  You told HMRC                         HMRC found the error
                                                 ('unprompted disclosure')       ('prompted behaviour')

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%

But to reiterate the basic rule: if you have made a genuine error despite taking reasonable care – that is, you did your best to complete your return accurately, but still got something wrong – no penalty is chargeable.

What is reasonable care?

On their factsheet on inaccuracy penalties, HMRC say that some of the ways you can take reasonable care include:

  • keeping enough records to make accurate tax returns
  • keeping those records safe
  • asking HMRC or a tax adviser if you are not sure about anything, and following any advice you are given

However what is reasonable care is different for every taxpayer and depends on your own ability and circumstances. Indeed, HMRC’s official guidance says: ‘…we do not expect the same level of knowledge or expertise from a self-employed un-represented individual as we do from a large multinational company…’

This means that if there was anything about your personal circumstances (for example a health problem, a lack of numerical skills or a recent life event such as the death of a close relative) that made it difficult for you to take reasonable care, then HMRC should take this into account.

You may find it useful to see some examples of situations where HMRC say a penalty would not be due (found in their Compliance Handbook at CH81130  – we have copied their text and then tried to explain it more clearly in brackets after each point):

  • ‘a reasonably arguable view of situations that is subsequently not upheld’ (this means where you had reasonably thought the rules meant one thing, but it turns out they actually mean something else)
  • ‘an arithmetical or transposition inaccuracy that is not so large either in absolute terms or relative to overall liability, as to produce an obviously odd result or be picked up by a quality check’ (you made a mistake with your sums or you copied an amount wrongly that was so small or trivial it is likely you wouldn’t notice)
  • ‘following advice from HMRC that later proves to be wrong, provided that all the details and circumstances were given when the advice was sought’ (this means you can rely on what HMRC tell you when you ask their advice – provided you were honest about the situation you are asking advice on)
  • ‘acting on advice from a competent adviser which proves to be wrong despite the fact that the adviser was given a full set of accurate facts’ (this means you can rely on what a tax adviser or accountant tells you when you ask their advice – same as the above)
  • ‘accepting and using information from another person where it is not possible to check that the information is accurate and complete’ (for example your employer tells you the taxable ‘benefit’ amount you received from the medical insurance it arranged for you was X, when it was actually Y).

 I’ve received a penalty notice - what should I do now?

If the circumstances surrounding an error you made are similar to the examples above, or if you have been deemed careless but there is no sign of HMRC having considered your circumstances or abilities (that is, they have not asked you any questions such as how and why you made the mistake), you should challenge the penalty.

You should contact HMRC in writing to explain your circumstances and make an appeal, as necessary - within 30 days of the date of their notice to you. We attach below a sample letter to guide you – this was written by George, who had mistakenly written £10,205 for his state pension, rather than £12,050, resulting in him underpaying tax by £369 and receiving a 15% penalty of £55.35.

Please note that we cannot offer any guarantee that such a letter will work – however it might give you an idea of what to write and how to present your points. It goes without saying that you should insert your own details in the bracketed areas, for example (Your address). You should also tailor the letter to your individual situation in the area shown in italics.

What if this doesn’t work?

Even if HMRC insist that the mistake was careless, they:

  • are allowed to reduce a penalty or not enforce it ‘if they think it right because of special circumstances’; or
  • may suspend all or part of the penalty for up to two years. This means they don’t ask you to pay it for up to two years and you may not have to pay it at all if you meet certain conditions for that period.

If HMRC do not offer special reduction, or suspension, you may still ask for it. Ultimately, you can ask for your case to be reviewed by a different officer from the one who made the decision and/or have your case heard by an independent tax tribunal.

Useful links

There is more information on this website on the following topics:

Suspension of penalties

Tax appeals

More detailed information on suspended penalties and the appeals process, courtesy of HMRC can be obtained on the GOV.uk website, as follows:

Leaflet HMRC1: HM Revenue & Customs – what to do if you disagree

HMRC’s compliance checks factsheet CC/FS10 - Suspending penalties for careless inaccuracies in returns or documents

LITRG

(17-06-2016)

Contact: Meredith McMcCammond (please use form at /contact-us).