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Mark McLaughlin CTA (Fellow) ATT TEP considers what constitutes 'reasonable care' in the new penalty regime.

Introduction

The new penalty regime for errors in tax returns, etc., is upon us in most cases, as it relates to returns covering periods that started from 1 April 2008, which are due to be filed from 1 April 2009. The expected effect of the new penalty regime is a higher level of penalties generally than under the previous system. However, no penalty will be charged by HMRC if an error is made in the return despite reasonable care being taken. The question therefore arises: what is ‘reasonable care’? In HMRC’s view, it would seem that the standard of reasonable care will vary from person to person, depending on their abilities and circumstances.

[For an overview of the new penalty regime, see Mark's previous article Reducing Penalties in Enquiries - Ed.]

HMRC state the following in their Compliance Handbook (CH81120):

“For example, we would not expect the same level of knowledge or expertise from a self-employed, un-represented individual as we would from a large multinational company. We would expect a higher degree of care to be taken over large and complex matters than simple straightforward ones.”

Professional advice

HMRC’s guidance indicates that if an individual acts on advice from a competent adviser which turns out to be wrong, then reasonable care has been taken and no penalty should be due, provided that the adviser was given the full, accurate facts. The same broadly applies to advice given by HMRC that proves to be wrong.

Nevertheless, taxpayers and advisers could feel under more pressure than ever before to protect themselves from the risk of a penalty. HMRC offer some comfort on this point (CH81140):

“People do make mistakes. We do not expect perfection.”

It goes on to say:

“We are simply seeking to establish whether the person has taken the care and attention that could be expected from a reasonable person taking reasonable care in similar circumstances.”

Examples of failure to take reasonable care are included in HMRC’s guidance at CH81142.

Conclusion

As in many areas of tax, the question of what constitutes reasonable care is likely to become something of a grey area. This is basically because the answer is a matter of opinion. In cases where the tax treatment of a particular item or transaction is uncertain (after advice from a tax specialist or HMRC), taxpayers should therefore make full disclosure on the tax return and draw the uncertainty to HMRC’s attention in the white space. HMRC confirm that in these circumstances the person will have taken reasonable care, and if the tax treatment is wrong it will not be considered careless. Of course, making full disclosure to HMRC’s satisfaction is not a straightforward exercise in itself, and extra care will therefore be required.

The above article is reproduced from ‘Practice Update’ (March/April 2009), a tax Newsletter produced by Mark McLaughlin Associates Ltd.