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Mistakes in your tax return could mean that you have extra tax to pay and might receive a penalty notice, but there are rules governing the treatment of genuine mistakes.

Introduction

Getting your tax right is not always easy. Any mistakes can be picked up by HM Revenue & Customs and this could mean that you have extra tax to pay and might receive a penalty notice. But if you made a genuine mistake despite taking reasonable care, no penalty is due and you can appeal against a penalty notice.

Where a tax return or other document submitted to them is incorrect, HMRC should only issue penalties in cases of careless or deliberate mistakes – not those where ‘reasonable care’ was taken and certainly not without checking all the facts and circumstances behind the error.

Make sure you know your rights, if HMRC try to charge you a penalty. Below LITRG gives you an overview of the rules, tells you what to do if you receive a penalty notice and includes a sample letter to guide you further.

What are the main rules on inaccuracy penalties?

An inaccuracy penalty is chargeable if you give HMRC a document (for example, submit a tax return) and both of the following apply:

• the document contains a mistake or inaccuracy which results in you understating your liability to tax, or claiming too much by way of loss relief or repayment of tax;
• the mistake was ‘careless’, deliberate, or deliberate and concealed.

So, for a penalty to be chargeable, it is not enough that there should be a mistake in the document. The mistake has to have resulted in you not paying enough tax and to have been made carelessly or deliberately. ‘Careless’ is akin to the concept of ‘negligence’ and indicates that you have failed to take ‘reasonable care’ (see below).  

The level of penalty is normally worked out as a percentage of the ‘potential lost revenue’ (PLR) – that is, the extra tax that you have to pay as a result of correcting the inaccuracy. The percentage depends on your behaviour and whether you told HMRC about the error or whether HMRC found it first.

                                                                             
But to reiterate the basic rule: if you have made a genuine error despite taking reasonable care – that is, you did your best to complete your return accurately, but still got something wrong – no penalty is chargeable.

What is reasonable care?

On their factsheet on inaccuracy penalties, HMRC say that some of the ways you can take reasonable care include:

• keeping enough records to make accurate tax returns
• keeping those records safe
• asking HMRC or a tax adviser if you are not sure about anything, and following any advice you are given.

However, what is reasonable care is different for every taxpayer and depends on your own ability and circumstances. Indeed, HMRC’s official guidance says: ‘… we do not expect the same level of knowledge or expertise from a self-employed unrepresented individual as we do from a large multinational company …’

This means that if there was anything about your personal circumstances (for example a health problem, a lack of numerical skills or a recent life event such as the death of a close relative) that made it difficult for you to take reasonable care, then HMRC should take this into account.

You may find it useful to see some examples of situations where HMRC say a penalty would not be due (found in their Compliance Handbook at CH81130  – LITRG has copied their text and then tried to explain it more clearly in brackets after each point):

• ‘a reasonably arguable view of situations that is subsequently not upheld’ (this means where you had reasonably thought the rules meant one thing, but it turns out they actually mean something else)
• ‘an arithmetical or transposition inaccuracy that is not so large either in absolute terms or relative to overall liability, as to produce an obviously odd result or be picked up by a quality check’ (you made a mistake with your sums or you copied an amount wrongly that was so small or trivial it is likely you wouldn’t notice)
• ‘following advice from HMRC that later proves to be wrong, provided that all the details and circumstances were given when the advice was sought’ (this means you can rely on what HMRC tell you when you ask their advice – provided you were honest about the situation you were asking advice on)
• ‘acting on advice from a competent adviser which proves to be wrong despite the fact that the adviser was given a full set of accurate facts’ (this means you can rely on what a tax adviser or accountant tells you when you ask their advice – same as the above)
• ‘accepting and using information from another person where it is not possible to check that the information is accurate and complete’ (for example your employer tells you the taxable ‘benefit’ amount you received from the medical insurance it arranged for you was X, when it was actually Y).

I’ve received a penalty notice - what should I do now?

If the circumstances surrounding an error you made are similar to the examples above, or if you have been deemed careless but there is no sign of HMRC having considered your circumstances or abilities (that is, they have not asked you any questions such as how and why you made the mistake), you should challenge the penalty.

You should contact HMRC in writing to explain your circumstances and make an appeal, as necessary - within 30 days of the date of their notice to you. LITRG reproduce below a sample letter to guide you – this was written by George, who had mistakenly written £10,205 for his state pension, rather than £12,050, resulting in him underpaying tax by £369 and receiving a 15% penalty of £55.35.

Please note that LITRG cannot offer any guarantee that such a letter will work – however, it might give you an idea of what to write and how to present your points. It goes without saying that you should insert your own details in the bracketed areas, for example (Your address). You should also tailor the letter to your individual situation in the area shown in italics.

What if this doesn’t work?

Even if HMRC insist that the mistake was careless, they:

• are allowed to reduce a penalty or not enforce it ‘if they think it right because of special circumstances’; or
• may suspend all or part of the penalty for up to two years. This means they don’t ask you to pay it for up to two years and you may not have to pay it at all if you meet certain conditions for that period.

If HMRC do not offer special reduction, or suspension, you may still ask for it. Ultimately, you can ask for your case to be reviewed by a different officer from the one who made the decision and/or have your case heard by an independent tax tribunal.

Sample letter

(Your address)   

HMRC                                     
Self-Assessment
BX9 1AS

[Date]
[Enter year, e.g. 2015/16] Tax Return - Inaccuracy Penalty Appeal

Dear Sir or Madam

UTR: [Your ‘Unique Tax Reference’ or ‘UTR’ is your ten-digit Self Assessment taxpayer reference – enter this here in the format XXXXX XXXXX]

I refer to your notice dated [enter date] stating that you wish to charge me an inaccuracy penalty in respect of the mistake on my [enter year] tax return which you say was ‘careless’.

It is my understanding that penalties for carelessness are only chargeable if I have not taken reasonable care. I also understand that before making a judgement about whether I failed to take reasonable care, you should consider matters such as my personal circumstances and background, my experience with tax matters and how I prepared and checked my return.

I consider that I have taken reasonable care with my tax return and although you have not asked for them, I am writing to set out some factors that I think support this. 

[Here you should state the reasons why HMRC are wrong in deeming you as careless – the following wording is included as an illustration only.]

I prepare my tax returns myself as I cannot afford a tax adviser; however, my affairs are straightforward – mainly a state pension and some bank interest - so I do not consider this to be ‘careless’. I do my very best to complete them accurately and fully, which I think is demonstrated by the fact that there have not been any problems before. I make sure I keep all official correspondence and my bank statements for the year somewhere safe to help me arrive at the correct figures to enter, and I always cross-check my tax return with previous years to ensure that I have completed the right boxes.

Notwithstanding all of the above, I made a mistake when entering my yearly state pension figure, for which I apologise. Although I did double check my tax return to make sure it looked right before I sent it in, I am afraid I just did not spot that I had mixed up those couple of digits. Easily done – especially when you are 73! (And in any case, a situation that HMRC seem to accept as not deserving of a penalty as per the Compliance Handbook Manual at CH81130!)]

It really was just a genuine mistake and, as such, I would be grateful if you could take all the above points into account and reduce my penalty to 0%. 

I look forward to hearing from you.

Kind regards

(Your name)

Useful links

LITRG article on Penalties for errors in tax returns with useful links 
Factsheet on inaccuracy penalties

There is more information on the LITRG website on the following topics:

Suspension of penalties
Tax appeals

More detailed information on suspended penalties and the appeals process, courtesy of HMRC can be obtained on the GOV.uk website, as follows:

Leaflet HMRC1: HM Revenue & Customs – what to do if you disagree
HMRC’s compliance checks factsheet CC/FS10 - Suspending penalties for careless inaccuracies in returns or documents