Have you taken enough care with your tax affairs?

HMRC are continually assessing whether a taxpayer has taken “reasonable care” in the preparation of their tax return. If errors are found, were they deliberate” or “careless” mistakes, the outcome of this question determining the penalty, from fines to prosecution.

What types of errors are HMRC looking for? And what if a “careless” error is accused of being “deliberate”?

HMRC are on the attack to tackle tax fraud and subsequently there is an increase in the number of investigations per year.
Should HMRC find errors, it is their responsibility to prove whether an error is deemed “deliberate” or “careless” and then apply the penalty to fit the offence. However, as the taxpayer you may be required to stand your ground if a careless offense is in fact accused as deliberate.

Deliberate v Careless tax offences

Deliberate tax offenses are considered highly serious matters and professional help is absolutely required to assist with the investigation. Whilst being “careless” is not a valid excuse and its highly unlikely that you will be just let off the hook, typically, careless errors don’t involve prosecution and a number of other rules apply that can mean lower penalties and being able to close down your investigation much sooner. This especially applies with high levels of co-operation from the taxpayer. For the purpose of this article it is assumed errors were “careless”. Here are three reasons why you want to ensure this is the outcome.

1) Penalties – how much could you be liable for?

Understated or undeclared income is one of HMRC’s key target areas and one of the more common errors found as part of investigations. Using this as an example, as a general rule of thumb the maximum penalties as a % of additional tax due, could be:
  • 30% for a careless error
  • 70% for a deliberate but not concealed error
  • 100% for a deliberate and concealed error
  • 200%+ for those involving an offshore structure
This is one primary reason why it is vital to be able to demonstrate that any errors made were careless, there is a significant difference in the levels of penalties. Broadly the same pattern of penalty system applies for another classic tax offence, called “failure to notify”. This relates to when a taxpayer has a change in situation and “fails to notify” HMRC. A good example is earning rental income from property.

 2) Lengthy investigations – how many years can HMRC go back?

When under investigation, HMRC have the right to also investigate previous years. Typically they can go back four years but if errors are found then this could change to:
  • Six years for careless errors
  • 20 years for deliberate errors
For example, should it be proved that there was a deliberate mistake relating to understated or undeclared income in one tax return, HMRC could in fact go back 20 years to look for the same error in previous years. This is another reason why it is essential to be able to demonstrate that errors made were “without care and attention” else you could be in for a lengthy investigation process plus it widens the scope significantly for HMRC finding further tax arrears.

3) Named and shamed – the tax defaulters list

Deliberate tax offenders could be named and shamed by being published on HMRC list of deliberate tax defaulters.  This is usually where tax penalties exceed £25,000 but a deterrent nonetheless.

Standing your ground – when under investigation

As detailed, deliberate tax offences can incur higher penalties, a much longer investigation process and public announcement of the offence, all of which are not favorable in any way. If under investigation and your “un-deliberate“ errors are deemed by HMRC as “deliberate”, taxpayers should take professional help to ensure that you stand your ground.

Protecting yourself – before investigation occurs

Of course, it goes without saying that avoiding making any deliberate or careless tax offenses is the best start to keeping yourself above board! Appointing an accountant will help reduce the risk of careless errors as will using a robust system to record your income and expenses. Both of these go in favour with HMRC if under inspection. In addition, fee protection insurance, which protects against the costs of an investigation, will help in the event you are investigated. Figurit work with all our clients to reduce the risk of investigation and eliminate careless errors. Read more about our accountancy & tax solution that includes fee protection insurance and a monthly license to use our online bookkeeping software, helping to keep you compliant. Call us on 020 7376 9333.