Insights

If HMRC spot an error on your tax return which results in an underpayment of tax (or claiming too large a refund) a penalty is likely to be charged. This happens even if it was an entirely innocent error with no deliberate intent to avoid paying the right amount of tax. A penalty charge can even apply if you rely on someone else’s advice to complete your tax return, unless you can show that it was reasonable to do so and disclosed full facts to that person.

Legislation sets out that it is the taxpayer’s responsibility to take reasonable care to a) maintain adequate records to be in a position to submit accurate tax returns, b) be aware of tax and compliance obligations and to seek professional advice if required, and c) either complete the required returns with due care and attention or seek assistance from a professional advisor if necessary.

This article outlines some of the most common reasons why a penalty would be issued and what options you as a taxpayer have to either appeal the penalty or negotiate an alternative outcome. In most cases, where the taxpayer is unable to demonstrate that they took reasonable care in completing their tax returns, the penalty charge can be up to 30% (raising to 100% if HMRC feel it was a deliberate error).  

1. Failure to take reasonable care

Although HMRC wouldn’t expect a layperson to have specialist knowledge, they do expect them to get things right to the best of their ability. This includes being diligent about what your responsibilities and liabilities are and providing full information to your tax advisor when sending in the information for them to complete your tax return. It’s one of the reasons why we produce articles and blogs, to help our clients keep up to date with everything they need to be aware of.

2. Reasonable excuse

Depending on the circumstances it may be possible to agree a reduced penalty, or get it removed entirely; for example if you are diagnosed with a serious illness or there is a bereavement within the close family, HMRC could accept that there are grounds for you to have not complied with the filing requirements. It should be noted that ‘reasonable excuse’ is notoriously difficult to achieve as to qualify the ‘excuse’ needs to be unexpected, i.e. a long-term illness would not count as a reasonable excuse for not filing your tax return on time.

3. Request a suspension

If you are in receipt of a penalty charge it is possible to agree with HMRC for some or all of it to be suspended. Before agreeing to suspend a penalty HMRC will set out certain criteria that must be met in order for the penalty not to be chargeable. The criteria will be set according to the issues that gave rise to the penalty, with a view to avoid it happening again. Generally HMRC are open to suggestions as to what to include within the criteria, which means it’s very important to ensure you can meet all the conditions well in advance of agreeing them as failure to comply will mean the penalty is payable in full and immediately.

We recently used this option to good effect when a client made an unintentional mistake on their tax return. Initially HMRC issued a penalty charge of £30,000; we were able to negotiate with HMRC that this be suspended (based on the conditions of the case) and obtain agreement to the conditions that we wanted. The suspension penalty period was also reduced from 24 months down to 12.

4. Request a second opinion

If a penalty is applicable and HMRC will not agree to a suspension, or you can’t agree terms, you are able to ask for an independent review of your case.

Whilst this would be carried out by someone else from within HMRC, they would be independent of the case to date and with no links to the any personnel involved previously.

Although the penalty regime undoubtedly raises extra funds for the Treasury, the stated aim is to encourage compliant behaviour and, where there are extenuating circumstances, HMRC can be relatively understanding about genuine mistakes.

It is also worth remembering that if you spot a mistake on your tax return before HMRC do, if you make a voluntary disclosure you will benefit from reduced penalties, if not avoid them completely.

If you have any concerns about tax compliance, want to discuss making a voluntary disclosure to HMRC or wish to discuss a penalty notice issued by HMRC, please contact Anne Eager by emailing partners@rjp.co.uk.