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HMRC’s penalties for so-called “careless’ tax errors” are often unfair

HMRC’s penalties for so-called “careless’ tax errors” are often unfair

Most Accountants consider that HMRC’s penalties for so-called “careless’ tax errors” are often unfair, generally unclear and invariably hard to challenge. The above scorecard represents the results of a number of recent tribunal decisions.

As accountants well know, mistakes happen. But there’s an added complication if the mistake shows up in a tax return. If HMRC decides it’s a “careless error” it can charge a penalty. If there is evidence to show that the taxpayer took “reasonable care” to avoid an error but still made an error there’s no penalty as it’s seen as a genuine mistake.

When the new tax penalty system was introduced in 2009 it was intended to make things clearer but most accountants say it has caused more confusion.

Careless Error Penalties

Under the tax system there are four degrees of guilt: a genuine mistake after taking reasonable care (no penalty); careless action, or lack of reasonable care, (penalty of between zero and 30% of extra tax due); deliberate error but not concealed (20%-70%); a deliberate and concealed error (30%-100%).

Every individual or business is expected to keep records that allow them to provide a complete and accurate return. But there isn’t a legal definition of reasonable care as it differs according to each client’s circumstances and abilities.

Penalties can be reduced by telling HMRC about the errors; helping HMRC work out what extra tax is due and giving HMRC access to check the figures. The feeling within the profession is that as HMRC comes under pressure to collect more tax and reduce avoidance it is trying to categorise more tax errors as careless. Lots of these disputes end up at tribunals that are already struggling to cope with a record backlog of cases.

“I’m getting the impression that HMRC is being more aggressive on penalties including careless errors,” says John Cassidy, partner at Crowe Clark Whitehill. “The words, careless errors, are being bandied about a lot more and challenging penalties for careless errors in a tribunal can be difficult, expensive and stressful for taxpayers and their tax advisers”.

Guy Smith, tax investigations manager at Abbey Tax, which provides tax advice and insurance for accountants, says HMRC has become tougher on penalties for careless errors in the last year. ““The normal default position of tax inspectors is that errors are deliberate unless proved otherwise.”

This is of course in direct contradiction to the standard legal assumption of, innocent until proven guilty.

Not surprisingly HMRC disagreed and a HMRC spokesman said, “Claims that we are taking a harder line on penalties to raise revenue are nonsense. The sole purpose of penalties is to encourage taxpayers to comply with their obligations; It has nothing to do with raising revenue.” Bovine excrement I say

Cartoon of Bull on a Toilet

Is one conclusion we can draw

There are no definitive figures on the number of tax disputes about careless errors, although it certainly features regularly in tax tribunals along with cases based on reasonable excuses for paying the wrong amount of tax or paying it late.

Mike Down, tax investigations partner at Baker Tilly, says penalties for careless errors are a “moving target”. HMRC is trying to define careless error more clearly while also pushing for more penalties for deliberate errors.

George Rowley QC has also written of tricky situations that can arise when taxpayers blame their accountant. The law (para 20(2)(b) Sch 21 FA2008) says relying on another person does not absolve the taxpayer from taking reasonable care, but several appellants have had their penalties suspended on that basis.

To help those facing such penalties, my accounting forum Accounting WEB, has analysed a sample of tribunal cases about careless errors from the past two years and has put them into a number of broad categories and I have listed below an example from each.

Andrew Banks vs HMRC – Taxpayer win

The taxpayer was charged a penalty for “careless inaccuracy” after omitting just over £200,000 employment income from two jobs from his online tax return. Banks appealed against the penalty, arguing that when he completed the forms online it showed no more tax due. He said that it was not his fault that HMRC’s system had failed to register the details submitted, so he should not be penalised. HMRC argued that Banks had omitted the details because he thought his employers had dealt with all the tax under PAYE. It said it had checked its system and found no faults and denied the taxpayer’s claim that the system was “beset by well publicised technical challenges.” Tribunal judges agreed with the taxpayer on the “balance of probabilities”. They ruled that the burden of proof was on HMRC to show that Banks had been careless and HMRC’s records were inadequate to meet this test.

Julie Ashton vs HMRC – HMRC win

Taxpayer appealed against a penalty for an error in her self-assessment tax return which understated her tax due because she claimed she had been misled when phoning HMRC for advice. The Tribunal said that there were no special circumstances which would justify a reduction in the 30% penalty for carelessness, commenting, “We do not accept that he was given misleading information by HMRC’s helpline.”

David Jones vs HMRC – Taxpayer win (not me!)

Mr Jones made an error in his tax return that meant his income tax liability was understated by £8,238. When the taxpayer was told about his tax mistake he immediately repaid HMRC. HMRC said the error was attributable to carelessness and charged a penalty at 15% of the understated tax liability. On his appeal, the tribunal said the taxpayer was “honest and sincere” and had made a genuine mistake despite taking reasonable care in completing his tax return. Therefore he had not been careless.

Timothy Harding vs HMRC – HMRC win

Mr Harding was given a compensation payment of £30,000 when he left a job, but didn’t include this payment in his tax return. The first-tier tribunal ruled that Harding had been careless and this decision was upheld by the upper tier tribunal. The inaccuracy was careless because Harding “knew, or should reasonably have known, that there was at least a possibility that the ‘severance payment’ was liable to tax,” the upper tribunal ruled.

David Tesla vs HMRC – Taxpayer win

This was an important decision because it was a one-off error by Mr Tesla who admitted to carelessness in underdeclaring nearly £39,000 of tax due on redundancy payment. Penalties are supposed to change taxpayers’ behaviour and HMRC normally doesn’t suspend penalties for one-off errors because there is no way to measure if the taxpayer has learned their lesson. The tribunal said HMRC’s refusal to suspend the penalty was “flawed” and allowed the taxpayer’s appeal for the penalty to be suspended – as long as he retained a qualified accountant to prepare his tax return for the next two years.

Richard Summersell vs HMRC – HMRC win

In this case the taxpayer admitted carelessness in part of his return by omitting a one-off bonus payment into his bank account; but appealed on the basis that his record on all previous tax returns was exemplary and cited this as evidence of taking reasonable care. “Before completing his tax return the appellant should have checked his bank statements for money received during the year and if in any doubt should have checked with HMRC. If Mr Summersell had checked the various emails from his company he would have known exactly how to treat the one-off bonus payment”, the tribunal ruled.

Francis Berrier vs HMRC – Score Draw

A quantitative analyst was given a £25,000 welcome bonus (described as a loan because of the conditions attached) when he joined a company. He forgot to include the loan being written off in his tax return but told HMRC about the error. HMRC’s decision not to give a reduced penalty for special circumstances was flawed, the tribunal ruled. The tribunal agreed that HMRC was right to charge a penalty because the taxpayer was careless in his tax return, but found that “HMRC had not given proper consideration to the potential for there to have been special circumstances” and reduced his penalty by 50%.

An Accountant’s View

Knowledge saves you  Money

Knowledge saves you Money

In my opinion the vast increase in careless error penalties and the consequential and equally large rise in tribunal cases could be easily addressed by simply adopting the tribunals’ decision in the David Tesla case.

If a taxpayer makes an error that could be considered carless, but hasn’t made a similar error in the past, they should be automatically given a suspended penalty. This will not only act as a deterrent, but will also be seen as fair and reasonable by both taxpayers and accountants alike.

Also the drop in revenue to HMRC by the suspension of many of the fines will be more than made up by the millions of pounds a year saved by HMRC and the courts by not pursuing these cases.

In my humble opinion, this is a win-win suggestion and should be adopted.