Are Taxpayers Really That Naughty?

Penalties for deliberate errors soar

A recent Freedom of Information request, made by top 10 accountancy firm, Baker Tilly, has revealed that HMRC penalties imposed for ‘deliberate’ inaccuracies in Self Assessment Tax Returns has rocketed virtually threefold. In 2012/13, 5,162 individual penalties were levied but this figure was blown own of the water in the following tax year by a staggering 14,401 penalties. What makes this figure even more remarkable is that 80% of all penalties are incurred for a failure to take ‘reasonable care’.

The penalty system, which has been in place since 2008, is based on the additional tax arising and the taxpayer’s behaviour which determine the level of penalty.

Reasonable care

Where someone takes reasonable care when completing their tax return then no penalties will be levied where an inaccuracy is discovered. Reasonable care varies according to a taxpayer’s ability and particular circumstances and can include:

• Taking care of records and systems
• Acting on advice from a competent adviser
• Seeking advice when dealing with something new or unfamiliar

Careless

This could be an inaccurate record being sent without the taxpayer taking reasonable care or failure to bring an error to HMRC’s attention upon discovery.

Deliberate but not concealed

This is where a taxpayer knowingly and intentionally gives HMRC an inaccurate document or return , e.g. omitting takings.

Deliberate and concealed

This is the most serious level of evasion and refers to active steps being taken to hide an inaccuracy before or after a document is submitted to the Revenue.

Penalties

Where there is more than one inaccuracy a penalty will charged for each inaccuracy unless they can be grouped together as one.

The manner in which HMRC discover the inaccuracy influences the penalty, ie whether or not a person discloses the error without being prompted. Unprompted refers to a taxpayer who has no reason to believe that HMRC has or is about to discover an error.

Reductions are also available for the quality of disclosure, be they prompted or unprompted, and are achieved by:

• Telling HMRC about the inaccuracy
• Helping HMRC quantify the inaccuracy
• Giving HMRC access to records

These however are dependent on:

• Timing of the disclosure
• Nature of the disclosure
• Extent of the quality of the disclosure

Whilst penalties range from 0 – 100% they can be reduced as follows:

• Up to 30% for telling HMRC about the inaccuracy
• Up to 40% for helping HMRC quantify the inaccuracy
• Up to 30% for giving HMRC access to the business records

Careless penalties can, in certain circumstances, also be suspended.

HMRC are currently carrying out a review of its penalty regime following a recommendation by the Office of Tax Simplification. This is the subject of ‘HMRC Penalties: a Discussion Document’, which closes on 11th May.