Those of us who are prone to leaving things to the last minute can take some comfort from the fact that in January 2019 over 700,000 people in the UK left it to the 31 January to file their personal tax returns, with over 1000 filed per minute from 4 pm to 5pm.
With all this last minute filing, inevitably some of these 750,000 returns will contain errors, and so the penalty problems begin.
Penalties can be raised where returns are filed late, tax is paid late, where returns are inaccurate or where there is a failure to notify HMRC that tax is due.
When assessing inaccuracies or failures to notify, HMRC look to raise penalties where a tax payer has failed to take ‘reasonable care’ over their tax affairs.
The amount of any penalty assessed is calculated as a percentage of the tax understated, with the percentage depending on the type of behaviour resulting in the error and whether an unprompted disclosure is made to HMRC:
Type of behaviour
Unprompted disclosure to HMRC
HMRC come to you
0% to 30%
15% to 30%
20% to 70%
35% to 70%
Deliberate and concealed
30% to 100%
50% to 100%
Increased penalties apply in various circumstances, including penalties of up to 200% of under-declared tax where offshore assets and transfers are involved.
In the distant past HMRC were often willing to accept that despite taking reasonable care, mistakes happen, so that a normally compliant taxpayer could make an ‘honest mistake’ and would not be penalised. The day-to-day experience of dealing with HMRC in 2019 is somewhat different.
While most of us would agree that punitive penalties are appropriate for the worst offenders, more challenging for well-meaning taxpayers is HMRC’s current view on penalties for misdemeanours at the lower end of the scale.
It is rare that HMRC will accept that a tax payer took ‘reasonable care’ but still made a mistake – the only position which guarantees that penalties will not be levied. Increasingly HMRC also look to argue that mistakes were not ‘careless’ but were instead ‘deliberate’. This is important as not only do deliberate mistakes carry higher penalties, they also potentially expose the taxpayer to public naming and shaming.
Experience shows that HMRC will look to raise penalties even where the right amount of tax is paid at the right time, but where it is paid by the wrong person or entity.
HMRC’s tough stance on penalties has resulted in numerous penalty cases appearing before the tax tribunal. Several recent cases have been found in favour of the taxpayer, but despite this evidence that the courts find HMRC’s approach to penalties harsh, there is no sign at present of a change of attitude. For those taxpayers who do not have the stomach for appealing to the Tribunal this is frustrating.
What then are our options?
As always, taking good advice is vital in preventing errors in the first place. The best protection against penalties is to make sure everything is accurate and filed on time. Get a good advisor, tell them everything and let them help you.
Good ‘white space’ disclosure in a tax return is vital in protecting against penalties on those occasions where the position is unclear and a view has been taken.
Where you become aware that something is wrong or undeclared, don’t put your head in the sand. Penalties are significantly reduced where a taxpayer makes a full, unprompted, disclosure to HMRC and can often be reduced to nil or almost nil. Waiting for HMRC to come to you is a recipe for higher penalties and possibly worse.
Explore options for suspension of penalties. Whilst HMRC will waive penalties only in exceptional circumstances, the same result can often be achieved for careless errors through penalty suspension. Where this applies HMRC will set conditions which apply throughout an agreed suspension period of up to two years. If complied with, at the end of the period the penalty will be cancelled.
HMRC will not always offer suspension without prompting so advisors and taxpayers should be prepared to ask for it. Sometimes HMRC will argue that appropriate conditions cannot be set, but in this case it is always worth putting forward your own suggested conditions.