Jumping the gun - HMRC's increasing trend towards penalties for 'deliberate' errors

01 June 2016

Mike Down

We’ve commented recently on an increasing trend by HMRC to argue that errors when completing tax returns are the result of ‘deliberate’ behaviour rather than genuine mistakes.

When the new ‘behaviour-based’ penalty regime was introduced eight years ago, HMRC’s initial stance was to start on the pretext that a simple mistake had occurred and only if not, then to work upwards through ‘carelessness’ to ‘deliberate’, and ultimately to ‘deliberate with concealment’ - the latter being the most serious. In monetary terms, ‘prompted’ irregularities attract no penalty if behaviour represents a simple mistake or misunderstanding, a minimum of 15 per cent if ‘careless’, and 35 per cent if ‘deliberate’. In addition to this, other sanctions such as ‘20 years of back year assessments’ and ‘naming and shaming’ could follow if ‘deliberate’ behaviour was established.

Over the past year or so we’ve seen HMRC’s approach change. Tax officers now seem to start at the top end, then work downwards through to the less serious behaviour categories.

A recent First tier Tribunal case gives a clear example of this.

A taxpayer died in October 2012 with the executors filing an inheritance tax return in January 2013 and seeking probate. A 2012/13 self-assessment income tax return to the date of death was submitted to HMRC in August 2013, and the executors sent HMRC a cheque in final settlement of the tax due a month later, indicating they were finalising and distributing the estate. HMRC responded some 12 months later querying the accuracy of the income shown in the tax return, and an assessment was raised to collect the additional income tax due.

Whilst accepting HMRC’s figures, the executors made a formal complaint about HMRC’s delay – they had after all already distributed all monies. A penalty determination followed on the grounds that the executors had deliberately understated the income. At a later tribunal hearing, HMRC accepted that ‘insufficient care had been taken to ascertain all the circumstances before categorising the executors action as deliberate’, and saying they now accepted the errors could be put down to ‘carelessness’. The question of mitigation for ‘special circumstances’ was then considered. Although the tribunal was unable to comment on maladministration, it concluded that HMRC’s delay represented a ‘special circumstance’ and reduced the net penalty to nil.

We would urge HMRC to take a more careful and considered approach to inaccuracy penalties. After all, taxpayers are only human…

For more information please get in touch with Mike Down, or your usual RSM contact.