Tax return errors: persuading HMRC that it was not deliberate

Making mistakes

HMRC categorises mistakes in tax returns and other documents as innocent, careless or deliberate. If in the deliberate category and they result in too little tax being paid, the rules allow HMRC to hike the penalties. The level of extra penalties and the chance to reduce them persuaded Mr Issa (I) to challenge HMRC’s view at a First-tier Tribunal (FTT).

The case

I made errors on his tax return. This resulted in him underpaying tax by more than £60,000. He hadn’t included pay from his employer when made redundant, and he didn’t mention that a loan from his employer had been written off. His argument was that he’d followed HMRC guidance because he had used figures from his P45 and P60 on his tax return. Plus, he didn’t know the loan write off counted as taxable income. When he completed his tax return he hadn’t realised that his employer had failed to send him a P60 or P11D covering all the earnings and the benefit in kind (the written-off loan). HMRC decided these errors were deliberate errors so in addition to the tax it demanded a penalty of nearly £25,000. Individuals are not expected to be a tax expert but should realise if a matter is complex or unusual, such as redundancy or property sales. They must take “reasonable care” in deciding what figures to put on the tax return. If they're not sure, they should take extra steps to get it right, e.g. consult HMRC’s guidance or a tax advisor.

Two strikes

HMRC said it had challenged one of I’s tax returns before when he had not declared a benefit in kind and charged a penalty for a careless rather than a deliberate error. Because of this HMRC argued that this time I should have known the additional amounts needed to go on his tax return or at least investigated the matter further.

Deliberate errors

There’s a lot at stake if HMRC alleges deliberate behaviour; remember the burden of proof is on it to show it and not the taxpayer to disprove it. A deliberate error is when someone knowingly provides a document containing an error, intending HMRC to rely on it as accurate, or they consciously choose not to find out the proper tax treatment.  HMRC can go back up to 20 years to collect tax (plus interest and penalties) if an error was deliberate. If the error is careless, it can only go back six years. Plus, for deliberate errors, penalties start at 35% of the underpaid tax and can be up to 70%. Where the error is concealed from HMRC, the minimum penalty is 50% and the maximum is 100%.

Persuading HMRC

The FTT decided in favour of I. It wasn’t satisfied that HMRC had shown he intended to mislead or that it was reasonable that he should have taken additional advice. His past errors did not prejudice the more recent ones.

It’s always a good idea to consider how taxpayer behaviour might look to HMRC. Before filing, individuals should check that the information used to complete the tax return is reliable, and it’s the sort HMRC would expect to be used. It's also helpful if it can be shown that there was a genuine attempt to follow HMRC guidance. As a minimum, taxpayers should read basic HMRC guidance on filling in tax returns. If they follow these steps HMRC will find it hard to argue any mistake made is deliberate.