Last reviewed 23 October 2018
HM Revenue & Customs (HMRC) is looking to increase penalties and interest charges to encourage taxpayers to submit returns on time but also to improve the accuracy of returns. There has been a significant increase in penalties imposed and the seriousness of the penalties over recent years.
All businesses need to review their tax accounting procedures to ensure that they are not at risk of making careless or deliberate errors and, when errors have been made and discovered, these are dealt with appropriately. Businesses unavoidably will make errors on tax returns. John Davison outlines frequent errors and penalties which businesses may be liable for, with the possibility to reduce penalties.
The penalty regime for self-assessed tax returns is rather harsh, so harsh that last year HMRC cancelled thousands of penalties. This has led to a call for the regime to be overhauled, but no overhaul seems to be insight.
The deadline for paper returns is the end of October, where online returns can be submitted up until the end of January. Previously, there was no penalty if no tax was due, but now there is a £100 automatic penalty if the return is only a day late. Penalties also accrue at the rate of £10 a day for 90 days if more than three months late, plus 5% of the tax due (or £300 if greater) after six months and the same again after 12 months. There is no penalty if there is a reasonable excuse, but these are limited with HMRC only accepting 7% of taxpayers who had a reasonable excuse for being late.
The deadlines for corporation tax differ, but generally the return is due 12 months after the accounting period it covers. Penalties for late returns are £100 if a day late, a further £100 if three months late, 10% of the tax due if six months late and a further 10% of the tax due if 12 months or more late. These penalties increase if returns are regularly late.
Errors are easy to make on tax returns. Whether a penalty is incurred or not, the severity of any penalty which is imposed will depend upon how the penalty arose and how the business dealt with it once it realised there was an error. The penalties liable for errors on self-assessment returns are:
Type of behaviour
Deliberate and concealed
No penalties are incurred if reasonable care was taken when preparing returns, HMRC do not intend to penalise innocent errors, but it can be difficult to convince them that an error is innocent. What is reasonable care will depend upon the type of business and the circumstances. Clearly, the larger the business, the better the systems should be, with more specialists employed.
HMRC expect all businesses to maintain enough records to ensure returns are accurate and to seek and follow professional advice when appropriate (such as when undertaking a different type of transaction, for example, a property disposal).
Failing to pay sufficient attention to the tax affairs of the business, or failing to seek professional advice will be seen as a lack of reasonable care. HMRC may allow some leeway when there has been an unexpected absence of key staff, but where this is prolonged, HMRC will expect the business to take the appropriate steps to remedy this. Similarly, where a business has seen a busier period, HMRC will expect the business to take on appropriate additional staff or contractors. When looking at whether the error is careless or not, HMRC will consider how significant the error is in the context of the taxpayer’s overall liability, the expected skills of the taxpayer and any other supporting evidence (such as illness of key staff or unexpected systems failures).
Deliberate errors are classed as inaccuracies that are not mistakes. HMRC gives examples of deliberate inaccuracies as deliberately understating income, overstating expenses or paying wages without accounting for PAYE. Where such inaccuracies are significant, HMRC may prosecute rather than apply civil penalties. A concealed inaccuracy will be taking steps to hide the inaccuracy (such as the production of false invoices). For an error to be deliberate, it is only necessary to show that the taxpayer knew the figures were inaccurate, rather than knowledge of what the correct figure was. In addition, HMRC seems to be exercising stricter control on what it regard as a deliberate error. Over recent years the number of deliberate penalties have doubled.
As can be seen from the ranges of penalties, there is a degree of subjective judgment in their application. Consequently, the way matters are portrayed to HMRC is very important and it is HMRC’s judgment to show that the error has been careless (or deliberate). HMRC’s internal guidance states that carelessness is negligence in dealing with tax affairs. Somebody is negligent (or careless) if they unintentionally fail to do something that a prudent or reasonable person would do. It should be noted, however, that hindsight is “perfect”. What seems to be prudent or reasonable in hindsight may not have been so at the time the error was made. It is essential to put the error in the context of the time the error was made, rather than looking at what was done in isolation. What was known at the time, rather than what is known now, is the key to understanding what should have been done at the time.
There are similar, but different, penalty regimes for VAT and corporation tax returns.
Penalties can be reduced significantly by co-operating with HMRC. The following reductions can be made to the penalty that has been imposed. This includes reductions of:
30% for informing HMRC of the inaccuracies
40% for helping HMRC to calculate the quantum of the errors
30% for giving access to records when requested by HMRC.
HMRC rarely gives a 100% reduction.
Appeals against penalties
Where the business disagrees with the penalty that has been imposed, the taxpayer can appeal. The first stage is for an independent HMRC officer to review the case. Appeals need to be made within 30 days of the penalty notice. If the review is unsatisfactory the taxpayer can then appeal to a Tax Tribunal. There are slightly different procedures for indirect taxes such as VAT. Appeal details can be found here.
HMRC only prosecutes the most serious of cases, mainly due to the cost of prosecution. Where there is a civil investigation, the taxpayer is given the opportunity to make a complete disclosure of their tax situation using the Contractual Disclosure Facility (CDF). Use of a CDF reduces penalties and means there will be no criminal prosecution. Where a CDF is not signed, this can trigger a criminal investigation. Where HMRC suspects serious criminal intent, no civil procedure will be offered and there will be a criminal investigation. HMRC will use criminal prosecution where:
false documents are used if there is misuse of HMRC documents
there is systematic fraud
individuals in a position of trust or qualified persons or persons if significant responsibility are involved
there is deliberate deception or corruption or connection to wider criminality
there is a breach of import or export regulations
money laundering is involved
there is bogus VAT repayment fraud
there is organised tax credit fraud.
It is likely that most businesses will, at one time or another, make a mistake. Penalties can be reduced by complying and disclosing such errors to HMRC and this is clearly the course of action advised. The natural temptation to cover up mistakes will only make matters worse. Where errors are significant, it is advisable to seek professional advice from a tax investigations specialist.