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Where Taxpayers and Advisers Meet
Penalties: Don’t take too long!
11/08/2020, by Mark McLaughlin CTA (Fellow) ATT TEP, Tax Articles - HMRC Administration, Practice & Methods
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Mark McLaughlin warns that penalties for tax return errors may be increased if they are not disclosed to HM Revenue and Customs within a certain timeframe.

Introduction

The penalty regime for errors in tax returns etc. (FA 2007, Sch 24) provides an escape from penalties if an error has arisen despite ‘reasonable care’ having been taken.

Otherwise, the maximum penalty (i.e. 30% to 100% of ‘potential lost revenue’; or possibly higher if the error involves an offshore matter) depends on the type of error and the taxpayer’s behaviour (i.e. careless, deliberate but not concealed, or deliberate and concealed).

Quality Counts 

Those maximum penalties are subject to potential reduction, depending on the ‘quality’ of the taxpayer’s disclosure of the error to HM Revenue and Customs (HMRC). Any reduction is subject to a minimum penalty.

For example, the ‘standard’ minimum in respect of a 30% maximum penalty is 15% for a prompted disclosure, or 0% for an unprompted disclosure; for a 70% maximum penalty, the minimum is 35% (prompted disclosure) or 20% (unprompted); for a 100% maximum penalty, the minimum is 50% or 30% respectively.

The ‘quality’ of the taxpayer’s disclosure of a tax return error involves three elements:

  • ‘Telling’ – Informing HMRC about the error;
  • ‘Helping’ – Including giving HMRC ‘reasonable help’ and ‘positive assistance’; and
  • ‘Giving access’ – Allowing HMRC access to relevant records and documents.

HMRC will potentially give a penalty reduction of up to 30% for telling, up to 40% for helping, and up to 30% for giving access. HMRC assesses the quality of these three elements of disclosure by reference to ‘timing’, ‘nature’ and ‘extent’.

For guidance on the penalty calculation and examples, see HMRC’s Compliance Handbook manual at CH82510-CH82512.

Moving the Goalposts

Prior to a change in HMRC’s published approach, disclosing an error within a certain timeframe from when it occurred was not a recognised factor when determining a penalty reduction for disclosure.

However, the wording of HMRC’s factsheet on penalties for errors in tax returns etc. (tinyurl.com/HMRC-Factsheet-Penalty-Errors) changed in December 2017. HMRC’s guidance now states:  

‘When we work out the quality of disclosure, we’ll also consider how long it’s taken you to tell us about the inaccuracy. If it’s taken you a long time, (such as 3 years or more), to correct or disclose what is wrong, we’ll usually restrict the maximum reduction we give for the quality of disclosure to 10 percentage points above the minimum of the penalty range. This means you will not benefit from the lowest penalty percentage that’s normally available.’

According to HMRC, it is now necessary to consider whether three years have passed between the date when an error occurred and the date of its disclosure. Taxpayers risk a 10% restriction in the penalty reduction for disclosing the error late. This is hardly likely to encourage taxpayers to ‘come clean’ and disclose errors found after the three-year period.  

Escape Routes?

However, HMRC’s three-year time limit for disclosing a tax return error is non-statutory, and therefore open to challenge.

Furthermore, HMRC states that there may be circumstances where it is not appropriate for the 10% penalty restriction to be applied, including a one-off error that the person would never have had reason to reconsider (CH82465).   

The above article was first published in Business Tax Insider (www.taxinsider.co.uk).

About The Author

Mark McLaughlin is a Fellow of the Chartered Institute of Taxation, a Fellow of the Association of Taxation Technicians, and a member of the Society of Trust and Estate Practitioners. From January 1998 until December 2018, Mark was a consultant in his own tax practice, Mark McLaughlin Associates, which provided tax consultancy and support services to professional firms throughout the UK.

Mark  is a consultant with The TACS Partnership LLP (www.tacs.co.uk). He is also editor and a co-author of HMRC Investigations Handbook (Bloomsbury Professional).

He is a member of the Chartered Institute of Taxation’s Capital Gains Tax & Investment Income and Succession Taxes Sub-Committees.

Mark is Chief Contributor to McLaughlin’s Tax Case Review, a monthly journal published by Tax Insider.

Mark is the Editor of the Core Tax Annuals (Bloomsbury Professional), and is a co-author of the ‘Inheritance Tax’ Annuals (Bloomsbury Professional).

Mark is Editor and a co-author of ‘Tax Planning’ (Bloomsbury Professional).

He is a co-author of ‘Ray & McLaughlin’s Practical IHT Planning’ (Bloomsbury Professional) 

Mark is a Consultant Editor with Bloomsbury Professional, and co-author of ‘Incorporating and Disincorporating a Business’. This content is available as part of a number of Bloomsbury Professional's online modules.

He is Editor and co-author of ‘HMRC Investigations Handbook‘ (Bloomsbury Professional).

Mark has also written numerous articles for professional publications, including ‘Taxation’, ‘Tax Adviser’, ‘Tolley’s Practical Tax Newsletter’ and ‘Tax Journal’, which provides free information and resources on UK taxes to taxpayers and professionals, and TaxationWeb’s sister site TaxBookShop.

Mark is a Director of Tax Insider, and Editor of Tax Insider, Property Tax Insider and Business Tax Insider, which are monthly publications aimed at providing tax tips and tax saving ideas for taxpayers and professional advisers. He is also Editor of Tax Insider Professional, a monthly publication for professional practitioners.

Mark is also a tax lecturer, and has featured in online tax lectures for Tolley Seminars Online.

Mark co-founded TaxationWeb (www.taxationweb.co.uk) in 2002.

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