In part 2 of this short series, author and journalist Nick Morgan discusses how a taxpayer might prove he or she took "reasonable care" to mitigate penalties.
How Can I Prove ‘Reasonable Care’?
The HMRC factsheet, Penalties for Inaccuracies in Returns and Documents, is issued to your client when HMRC believes a penalty is likely to be due. The document is full of crucial information, most of which is buried in the text. The ebook Penalties for Inaccuracies in Returns and Documents DECODED is an analysis of the HMRC document; digging up true meanings and telling your clients what they need to know.
Client: So did John take Reasonable Care? How would you argue the case?
Expert: Here his how a typical dialogue with HMRC will progress in situations like this, we’ll call HMRC, HMRC and we’ll call the subject under investigation John.
HMRC: You claimed for an item, which is not allowable, I’m going to disallow the dinner jacket. As a result of this your expenses will go down and your taxable income will go up. So you will owe more tax, some interest and perhaps a penalty too.
John: I thought this was a legitimate expense.
HMRC: Well it’s not and I take the view that you did this deliberately. Everybody should know that an expense like this is not allowable.
John: I thought any item bought exclusively for work was deductible, and this item was.
HMRC: Clothing of this nature is not allowed. If you weren’t able to fill out a return accurately you should have had professional help.
John: But I thought doing a tax return was easy.
HMRC: It’s not.
John: But for years you’ve said ‘tax needn’t be taxing’. That’s saying how easy it is; I took you at your word. Plus there is no legal requirement to go to an accountant to prepare annual figures.
HMRC: At the very least you’ve been careless.
HMRC: Because you filled in the return wrong.
John: Look, I bought an item that was used exclusively for a function connected with my job, it seemed simple. I believed it was a legitimate expense. I haven’t been careless. I took Reasonable Care.
HMRC: If you had taken Reasonable Care you wouldn’t have made a mistake.
John: What you’ve done is set up a complex system with loads of loopholes and then called it simple. I did take Reasonable Care and, if you can't agree to this, we can go to the Tribunal for a judgment on this matter.
At this point HMRC are clearly on the back–foot and John is looking at a low to zero penalty on the dinner jacket. HMRC are likely to move on to areas in the investigation, which they hope will be more fruitful.
Did John take Reasonable Care?
There are no absolutes, but in this case he’d have a decent argument. He still would have to pay the extra tax plus interest, but it would be reasonable if no penalty were payable.
Nick will look at more ways to prove "Reasonable Care" in part 3.
Penalties for Inaccuracies in Returns and Documents DECODED costs £10. You can get more information and buy the ebook here