The revelation that former Tory party chairman Nadhim Zahawi paid a penalty worth millions for a “careless and not deliberate” tax error highlights a broader issue: what does HM Revenue & Customs (HMRC) consider an innocent mistake and a punishable offence?
HMRC generally categorises tax errors under four categories:
- Reasonable care: an error occurred despite a taxpayer taking reasonable care to submit their return correctly.
- Careless: the taxpayer failed to take reasonable care but the error wasn't deliberate.
- Deliberate: a taxpayer made a deliberate error but didn't attempt to hide it.
- Deliberate and concealed: a taxpayer made a deliberate error and attempted to hide it.
| Penalties for tax errors | ||
|---|---|---|
| Type of behaviour | Unprompted disclosure* | Prompted disclosure* |
| Reasonable care | No penalty | No penalty |
| Careless | 0% to 30% | 15% to 30% |
| Deliberate | 20% to 70% | 35% to 70% |
| Deliberate and concealed | 30% to 100% | 50% to 100% |
| Source: HMRC | ||
| *If you tell HMRC about an inaccuracy before it has discovered it, it is an ‘unprompted disclosure’. If you tell HMRC about an inaccuracy at any other time it is a ‘prompted disclosure’ | ||
HMRC may reduce penalties if you provide assistance when making a disclosure or take action to correct your affairs.
If HMRC deems that you made a mistake despite taking reasonable care, you shouldn’t face a penalty. An example of this type of error would be declaring income on a tax return but putting figures the wrong way around by mistake, but it can extend to obtaining incorrect advice from HMRC or a professional tax adviser.
“If the advice was wrong, HMRC accepts you have taken reasonable care,” says Dominic Arnold, partner at Evelyn Partners. “But if you don’t tell the adviser all the information it may be considered careless. It may also be considered careless if, say, you got advice five years ago but didn’t get more recent advice – tax changes a lot.”
Careless errors include not keeping accurate records, so the return cannot be completed properly, or failing to take advice on something you don’t understand.
HMRC says that “ways you can show that you took reasonable care include keeping accurate records and checking with a tax adviser or with us if you’re not sure about anything”.
Forgetting to declare a source of income or a chargeable gain, or gifting shares to someone and not paying the right amount of capital gains tax (CGT), even if you didn’t know what this was, could be treated as careless.
“Although HMRC wouldn’t necessarily expect a taxpayer to know they could owe a liability on a gift, a taxpayer taking reasonable care is likely to conduct research, call HMRC or take professional advice,” says Craig Harman, partner at Perrys Chartered Accountants. “There are a few limited circumstances where failing to declare something may be accepted as careless, for example if interest is paid on a fixed-term savings account which is automatically reinvested rather than paid to the taxpayer.”
Forgetting to declare something might not be penalised due to circumstances such as an accident or medical reason.
HMRC also looks at your circumstances, background and knowledge. So, for example, if you are experienced in financial affairs it will hold you to higher account than someone who is not experienced in that area.
Mistakes to avoid include not correctly recording the sale price, cost of sale or acquisition cost if you have sold or gifted shares; and not retaining the records to support the sale and acquisition costs on your return. Other mistakes to avoid include forgetting to report investment income such as interest and/or dividends, which can be more easily done if you are employed and don’t otherwise need to fill in a tax return. People “forget to declare sales of second properties because they used to live in them”, adds Arnold. Or if you sell “a property [that’s not been your main residence] to your brother there might be tax because it is deemed a market value transaction, so why [didn’t] you ask someone [qualified to advise]?”
Deliberate but not concealed errors include putting incorrect figures on your tax return by overclaiming expenses or omitting offshore bank interest when knowing it should be declared. “It also covers situations where a taxpayer knows they should do more to ascertain their tax position but doesn’t,” adds Dawn Register, head of tax dispute resolution at BDO.
Examples of deliberate and concealed errors include putting a wrong figure on your tax return and backing it up with false invoices, back-dated and post-dated contracts, and invoices; and destroying books and records.
