Penalties for tax errors
Written by Ray Coman
The penalty system is designed to encourage taxpayers to be take care in managing their affairs and to be transparent with HMRC. The current penalty system was introduced for Tax Returns to be filed on or after 31 March 2009. The system applies to the majority of taxes including income tax, capital gains tax, corporation tax, Construction Industry Scheme (CIS), PAYE, NIC and VAT.
Penalties for errors are based on the amount of tax underpaid and the reason for the inaccuracy. The calculation of the penalty is as a percentage of the tax underpaid resulting from the error. If the error has not led to any tax further liability then no penalty would be issued. The percentage depends on the behaviours that led to the error, and increases depending on whether the error was caused deliberately and if it was concealed.
If HMRC deem that the taxpayer has taken reasonable care in ensuring the correct amount of tax payable, then the percentage would be nil. Nonetheless, additional tax, plus interest, and possibly late payment penalties would be due.
If the error is deemed to be careless, the penalty would be 30% of the tax due, if it is deemed to be deliberate 70% of the tax due would be issued as a penalty, and if deliberate and concealed, 100% of the tax due would be charged as a penalty. In the worst case scenario, any additional tax due would effectively be doubled with the penalty.
The penalty can be reduced where the taxpayer discloses the information to HMRC. Therefore the percentage used to calculate the penalty is halved, where the taxpayer has responded fully to HMRC when HMRC have requested a disclosure. Therefore, for a prompted disclosure the penalty percentage is reduced to 15% where the error is careless, to 35% where it is deliberate and to 50% where it is deliberate and concealed. The above reductions are intended to be an incentive to co-operate with HMRC over their enquiry.
Where the inaccuracy is volunteered by the taxpayer, without any prompting the percentages are reduced still further. For careless errors, the percentage is reduced to nil, meaning that there will be no further penalty due. Where the error is deliberate, an unprompted disclosure reduces the penalty percentage to 20% and where it is deliberate and concealed, the percentage is reduced to 30%.
A summary of the percentage penalties can be understood in the following table:
| Reason for error | Original penalty | Prompted disclosure | Unprompted disclosure |
| Careless | 30% | 15% | nil |
| Deliberate | 70% | 35% | 20% |
| Deliberate and concealed | 100% | 50% | 30% |
What is meant by 'unprompted'
A disclosure is considered to be unprompted where the taxpayer has no reason to believe that HMRC is about to make an enquiry into their affairs. For instance, if a taxpayer is under enquiry for a particular tax year, and makes a disclosure regarding an earlier tax year, this would not necessarily be regarded as an unprompted disclosure. It may be evident from the error in the year under enquiry that the error is likely to have also occurred in an earlier year, and pre-empting HMRC's next line of enquiry may not be considered as an unprompted disclosure.
Reasonable care
HMRC have indicated that what constitutes 'reasonable care' would vary depending on the situation. For instance, the possibility for error is likely to increase as the accounting system becomes more complex, which tends to occur as organisations grow in size. Reasonable care is easier to demonstrate where HMRC are satisfied that you have a reliable system for record keeping.
Errors caused by the accountant
The position is less clear where the error resulted from an agent, such as the taxpayer's accountant. Where there is carelessness, the extent to which the taxpayer would be liable may depend on the extent to which they could have prevented the agent from making the error. Where the inaccuracy is deliberate, the liability of the taxpayer may depend on the extent of their complicity with their agent. Accountants who deliberately provide false information to their clients are open to being charged a penalty by HMRC.
Suspended penalties
In cases where an error has resulted from carelessness, HMRC can agree to suspend the penalty, provided the taxpayer adheres to conditions to prevent the error recurring. HMRC can impose the conditions for a period of up to two years. For instance, where a taxpayer has made an error due to his or her use of a poor system of record keeping, HMRC can outline improvements to the system, which if kept to, will result in HMRC cancelling the penalty.
Examples of a deliberate inaccuracy
An inaccuracy is deliberate, but not concealed, where the taxpayer makes no additional steps to hide the understatement of profit on their tax return. For example, the taxpayer has kept a record of a transaction, and knowingly omitted it from their tax return it in the hope that their return would not be selected for enquiry. A simple example being where a person records cash sales but does not report these on their Tax Return.
Instances of concealed and deliberate errors
A more serious offence occurs where a person falsifies documents, or makes other false representations, to cover up an understatement of taxable profits. A simple example being where a person claims money received in their bank account was a gift, where in fact it is business income.
Further advice
Whether you are concerned about an inaccuracy in your taxes, or you have yet to notify HMRC about your liability to tax, we would be pleased to provide advice and act as your agent. We offer a fully agency service and have experience in dealing with assessing tax liabilities, penalties and appeals. Please contact us for a consultation
