New penalty regime for tax errors

The new penalty regime for errors on tax returns commenced on 1 April 2009.  Mistakes on returns will be penalised depending on the behaviour of the taxpayer which led to the inaccuracy.

Innocent mistake

Where the taxpayer has taken reasonable care to ensure that his return does not understate the tax due, there will be no penalty. It would seem that HMRC does now understand that “people do make mistakes” but that provided everyone takes reasonable care, an innocent mistake will not be punished.

Lack of reasonable care

Where the error arises through carelessness, and the taxpayer did not take sufficient care over his return he will be liable to a penalty of 30% of the tax understated. Where the taxpayer comes forward and notifies HMRC of the error it is possible to significantly reduce the rate of penalty. Depending on the circumstances the penalty can be reduced to nil in the case of an unprompted disclosure, and 15% when the disclosure was prompted.

Dishonesty

Where the taxpayer deliberately understated his liability the penalties range from 70% for deliberate understatements to 100% for deliberate understatements that have been concealed. Again, larger reductions are available for unprompted full disclosure rather than after a request for information by HMRC.

What is reasonable when taking care?

All taxpayers are expected to keep sufficient records on which to base their return, and sufficient to ensure that any return prepared is correct. Beyond that, taxpayers should seek advice if they are unsure about something and if they remain unsure should disclose the uncertainty on their return.

Taxpayers with an accountant

When a taxpayer has an accountant there is in theory more scope for error in terms of a breakdown in communication between the taxpayer and the accountant. There will be no penalty for careless error when the return is dealt with by an accountant if HMRC is satisfied that the taxpayer took reasonable care but the accountant just made a silly mistake.

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