Penalties For Errors
Over the last month we’ve been looking at Penalties – it’s such a key issue in tax investigation at the moment – so much so that there is an ebook dedicated to the subject.
But for today let’s hand over to tax expert Mark McLaughlin to get his take on how to avoid a penalties in an investigation. Always remember EVERYBODY HAS TO BE JUDGED ON THEIR OWN MERITS. So, let’s say you are a sole trader and you do your own return and you put in an expense that’s not allowed (example here) well you could argue that it was reasonable to believe that this expense was allowed. If HOWEVER you are an accountant or a large company you would not be able to use this argument – HMRC would simply say you should know better.
HMRC is much harsher on tax professionals; in cases of blatant fraud the public is rarely imprisoned, but accountants who cheat regularly get banged-up.
Anyway, over to Mark…
Mark McLaughlin looks at how penalties for careless errors can be suspended, and ultimately cancelled.
Everyone makes mistakes; no-one is perfect. Fortunately, the penalty regime for errors in tax returns, etc (FA 2007, Sch 24) recognises that fact. For example, no penalty is charged in respect of a tax return error if ‘reasonable care’ has been taken.
Penalties can be charged by HM Revenue and Customs (HMRC) if a tax return error was ‘careless’ or ‘deliberate’. A deliberate error is more serious than a careless error, and in general terms the level of penalties for deliberate errors is accordingly higher than for careless errors.
The calculation of penalties for errors is beyond the scope of this article, although it should be noted that the amount of penalty otherwise chargeable for a tax return error may be subject to a discount depending on the quality of disclosure by the taxpayer, and may also be subject to a ‘special reduction’ at HMRC’s discretion in special circumstances (FA 2007, Sch 24, paras 9, 11).
Even if a penalty is reduced, that is not necessarily the end of the story. A penalty may be suspended in some cases, and possibly cancelled at a future time.
No penalty…for now
HMRC has the power to suspend penalties in cases involving careless error (FA 2007, Sch 24, para 14). Note that penalties can only be suspended in respect of careless errors (within FA 2007, Sch 24, para 1); penalties cannot be suspended for deliberate errors.
The good news for taxpayers is that HMRC officers are instructed to consider the suspension of every penalty for a careless error (CH83131). However, in the author’s experience this does not always happen. A gentle reminder might therefore be required in some cases.
If HMRC decides to suspend all or part of a penalty for a tax return error, the taxpayer must be notified as to what part of the penalty is to be suspended. HMRC must also specify a period of suspension, which cannot exceed two years. HMRC will set conditions of suspension (e.g. action to be taken, and a timeframe for taking it), which the taxpayer must comply with throughout the relevant period.
At the end of the suspension period, if HMRC is satisfied that the conditions of suspension have been satisfied, the suspended penalty (or part) is cancelled. Otherwise, the relevant penalty becomes payable. If the taxpayer makes another careless (or a deliberate) tax return error and becomes liable to a further penalty (under Sch 24, para 1) during the period of suspension, the suspended penalty (or part) becomes payable.