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