Reasonable Care

HMRC Penalty Regime

Inaccuracy

The new Inaccuracy penalty regime was introduced last year and applies to returns and documents submitted after 1st April 2009 for most business taxes and extended from 1st April 2010 to cover all taxes.

Consideration of this penalty will apply if by reason of an inaccuracy not enough tax is paid or where an assessment issued by HMRC is too low and no disclosure is made.

Much has been made of the fact that the penalty could amount to 100% of the tax unpaid under the new regime but this really does only apply to the worst case of deliberate and concealed act where the defaulting taxpayer offers no co-operation or assistance to HMRC in putting the matter right.

Apart from co-operating with HMRC when an issue arises whether disclosed by the taxpayer or discovered by HMRC which can reduce the % penalty charge considerably HMRC place a great deal of emphasis on taking “reasonable care” and where reasonable care has been taken the penalty is reduced to nil.

So what does reasonable care mean? HMRC say that reasonable care varies according to the person, their circumstances and their abilities bringing an element of judgement into play. In the case of uncertainty reasonable care can only be established if advice has been sought from HMRC or a competent adviser and there is an example of a zero penalty where HMRC give inaccurate advice on their website. They then go on to say that they expect all to make and keep sufficient records to provide a complete and accurate return.

There are a number of examples on the HMRC website of circumstances that do and do not amount to taking reasonable care for penalty purposes. One example - “Graeme makes a transposition inaccuracy when filling in his self assessment return by writing down his car benefit as £5,190 instead of £5,910”. This is classified as an honest error not involving carelessness and no penalty is due.

Anyone want to hazard a guess or provide a considered answer on these variations on the above example in terms of exposure to penalty?

1.Graeme's wife, who happens to be a qualified financial advisor, made the transposition inaccuracy while helping Graeme to fill in his return.

2.Graeme makes a transposition error when filling in his tax return by writing down his self employed turnover as £109,000 instead of £190,000.

What do you think?

Barry

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OK I'll tell you what I think and you can pull it to bits:

1. No difference - There is no reason to believe that a qualified financial adviser is any more capable of filling in a tax return than Graeme! Although I think that the real reason this would not attract a penalty is that the potential tax loss, even at 40% is very low.

2. Depends:
a. If it was a paper return and Graeme copied over all the other figures correctly from his accounts, including the profit figures then apart from correcting the turnover figure no real or potential loss of tax - no penalty.
b. If the return was done on-line the automatic calculation of profit and tax liability should have alerted Graeme that something was amiss simply because the effect on profit calculation and tax payable is substantial and so substantial that any time lag before it is put right will count against mitigation of penalties and if only sorted after queried by HMRC the penalty could amount to 15% and up to 30% of the tax loss e.g. £81,000 * 40% * 30% worst case = £9720.
c. Lets assume that Graemes' error leads to taxable profit at nil and he is very pleased to receive a refund of all of the contractors tax deduction credits for that tax year. The potential tax loss is still £32,400 but the penalty range is likely to increase to 35% to 70% of the tax lost and the longer it is before it is put right the worse it will be. Additionally the receipt of monies in the form of a tax refund knowing that there is no entitlement may lead to criminal sanctions.

The determination of penalties under this new power is entirely in the hands of HMRC unless an appeal is launched and the reality is that these powers will be wielded and tested by appeal to establish precedents - I am aware of a case where the refund scenario is relevant but the mitigation argument is very strong and it will be interesting to see what transpires.

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Email: enquiries@barrynudds.co.uk