Penalties – is there no escape from HMRC’s continued attack

HMRC continues to chase us from all angles for penalties where tax is has been underpaid
How can you mitigate this when you have made a mistake?

The attack is wide-ranging. HMRC challenges abusive tax avoidance and evasion and is committed to ‘relentlessly pursue those who do not comply’. As well as compliance checks, HMRC’s considerable ammunition includes taskforces aimed at specific sectors, information powers, and ‘intelligent’ computer systems which identify risk.

All taxpayers now face the very real threat of an in-depth investigation, and checks can happen to anyone at any time. Businesses and individuals can strengthen their defences by:
• improving record keeping – a review by your adviser will help identify any necessary changes;
• taking care when signing tax returns – always ask questions of yourself and your adviser if you are uncertain;
• being prepared – by taking professional advice when subject to a compliance check.

If HMRC targets you, and finds that you do owe additional tax, then penalties will be considered.

How HMRC applies penalties

HMRC generally charges penalties for errors in tax returns, of up to 100% of the ‘potential lost revenue’ (normally the amount of tax lost).

The penalty percentage depends on:
• the type of behaviour that led to the error (from a mistake, despite taking reasonable care, through to a deliberate understatement with concealment);
• whether the disclosure was prompted or unprompted;
• the quality of the disclosure;
• the level of co-operation HMRC receives during the enquiry.

HMRC seeks increasingly high penalties and demonstrates a reluctance to accept that an error is a mistake. A typical HMRC interpretation is that the taxpayer has failed to take reasonable care. To reduce penalties to a mutually acceptable level, or even nil, professional representation is invaluable.

Other penalties arise if there is a ‘failure to notify’ a tax liability to HMRC or a failure to register for VAT on time. Penalties are also due for late filing of tax returns.

Reasonable care

HMRC considers that ‘failure to take reasonable care’ is synonymous with negligence. Recent case law, however, states “essentially the test is whether or not there has been carelessness judged against the actions of a prudent and reasonable taxpayer in the position of the taxpayer in question” and, “in normal circumstances, carelessness should not include simple errors of omission or mere oversights”.

Suspending penalties

Where an incorrect return error is categorised as a ‘failure to take reasonable care’ HMRC may agree to suspend the penalty for a period of up to two years. If, during the suspension period, no further errors are made and all the conditions imposed by HMRC are met, the penalty is cancelled.
Whilst HMRC is often reluctant to suspend penalties, a taxpayer is in a better position to secure suspension if proactive action is taken to reduce the chance that a mistake will re-occur. Specialist professional advice is essential when agreeing the conditions with HMRC and Lindsay can help with this.