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Understanding HMRC Penalties - Proving You Took "Reasonable Care"
02/03/2015, by Nick Morgan, Tax Articles - Tax Investigations & Enquiries
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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.

John: Why?

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

About The Author

At the start of 2005 Nick Morgan was working as a self-employed freelance journalist. HMRC opened an investigation into his tax return.

Nick attended an interview (unrepresented) and was both open and truthful. He also supplied all the documents asked for.

An investigation like this which is small and where there is full cooperation shouldn’t have lasted more than 12 months. But this went on for five years.

The investigators were bullish and petty with HMRC showing neither proportionality nor regard to the cost (to the taxpayer) of running such a small investigation for so long.

Nick used his journalistic skills to expose HMRC; he recorded telephone calls and interviews and carried out Freedom of Information and Data Protection searches. These investigations broke new ground and exposed the investigators as incompetent and vindictive. All this information was uploaded on a website for anybody to see.

It soon became apparent that what was happening to Nick was typical of what was happening up and down the country.

Nick further exposed HMRC’s underhand practices in a Sunday Times spread and other national papers.

Since then HMRC has put pressure on its investigators to be more proportionate and to be more mindful of expense.

To help others Nick built tax-hell.co.uk where he’s written broadly about tax investigation, tax law and the tactics of HMRC.

The website has helped 100s of 1000s. Some leave comments about how Tax-Hell.co.uk has helped them. Many say, “I don’t know what I’d have done without you.”

He’s written three ebooks which translate HMRC-speak into clear English and he also offers free tax advice (from a fully qualified advisor) to anybody who needs it.

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