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Understanding HMRC Penalties - What is "Reasonable Care"?
23/02/2015, by Nick Morgan, Tax Articles - Tax Investigations & Enquiries
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Author and journalist Nick Morgan explains HMRC's approach to penalties for inaccuracies in returns and other documents, in this short series.

What is ‘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 client what they need to know.

In this document there are three voices: the voice of HMRC, the voice of the client, and the voice of the expert.

HMRC: We may charge you a penalty if you send us a return… that contains an inaccuracy, and the inaccuracy results in tax being unpaid, understated or over–claimed, and was careless, deliberate or deliberate and concealed…

Client: What’s all this?

Expert: HMRC are saying that if you’ve paid less tax than they think you should have they will fine you. They are also saying; the reason for underpayment is important too – this is your behaviour.

Client: What are these ‘behaviours’?

Expert: The penalty system put you into one of two groups, ‘Innocent’ and ‘Guilty’. These are the first two “behaviours”.

Client: I get that.

Expert: Each group is now sub–divided. Under Innocent we have ‘Reasonable Care’ and ‘Carelessness’ and under Guilty we have ‘Deliberate’ and ‘Deliberate and Concealed’.

If you can make a strong argument that you took Reasonable Care then the penalty can be reduced to zero.

Client: So what is this Reasonable Care in the eyes of HMRC?

Expert: HMRC has to be flexible about what Reasonable Care is; every case has to be judged on its own merits. You can make that work in your own favour.

For example expenses are an area that many people get wrong because the rules look simple, but they are not.

Here is the rule: you can claim something as an expense if it’s used “wholly and exclusively” for the business.

So when John, a self–employed freelance journalist, is invited to a swanky black-tie awards night (by his editor) he buys a new dinner jacket “knowing” that it’s a legitimate business expense.

John is wrong! The only clothing that he can – legitimately – claim for is safety wear or a work uniform – preferably with his logo on it.

If John was a fashion journalist who needed to spend money on outfits for a fashion article he could claim it, if he was traveling into a war zone and needed a flack jacket he could claim it, but a dinner jacket is not covered.

In the investigation HMRC will disallow the jacket as an expense – there is no way around that – and as a result John’s expenses will go down, profits will go up and so more tax will be due.

So did John take Reasonable Care? How would you argue the case?

That will be answered in part 2. 

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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