No room for error: HMRC gets tough with self-assessed tax mistakes

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In September last year, HMRC changed the way it calculates penalties. Since then, anyone who has made a mistake in their tax return, or failed to submit one altogether, could be in for quite a shock with penalties of up to 100 per cent of tax owed. If you file your own accounts here are steps to help you make sense of the new changes and what they mean for you.

The penalty scheme introduced in 2008/09 remains in place with the penalty for being careless levied between 0 per cent and 30 per cent of the amount of tax owed. If they suspect a taxpayer is deliberately underestimating their tax, however, the penalty could be between 20 per cent and 70 per cent. Evidence of a taxpayer not only underestimating their tax but attempting to conceal the fact, can see a penalty of 30 per cent to 100 per cent of tax owed.

The final penalty depends on the quality of the disclosure or, in layman’s terms, how “co-operative” HMRC believe the taxpayer has been. This is split into three categories:

Level of co-operationReduction of penalty
Telling HMRC of the issue(s)30% reduction
Helping HMRC determine the inaccuracy40% reduction
Giving access to your records30% reduction

Here’s where things become a little more complicated. Timing is key when disclosing errors as it is often the main factor in determining the quality of disclosure. Notifying HMRC of any errors within the first twelve months of spotting your error works in your favour as HMRC deem these disclosures to be of a higher quality. This could see you achieve a significantly smaller penalty.

In an ideal world, twelve months would be all you need to sort out any mistake. But what about those of you with more complex errors that could take more than a year to disclose or correct? Whereas previously you could take 3, 5 or 10 years to disclose with no additional penalty, HMRC now deem 3 years to be the significant period where a reduction in penalties could be applied.

Those who surpass the 3 year period could see their penalties increased by an additional 10 per cent, minimum. For example, a careless error reported after three years with no prompting will now carry a minimum penalty of 10 per cent. A prompted disclosure of an error delayed for over three years carries a minimum penalty of 25 per cent.

To add to the confusion, it is not currently clear from the guidance what HMRC will count as the start of the three-year significant period. This could be:

  • The date that the error occurred;
  • The end of the tax year or accounting period in which the error or failure occurred; or
  • The date when the error was discovered.

These changes will have the most impact on taxpayers who want to make a voluntary disclosure of careless errors, or of mistakes made while they took due care. Previously, you could disclose such errors penalty-free as it encouraged co-operation and saved time and money for HMRC.

Joseph Robinson, managing director at Robinsons, a London accounting firm says: “People understandably hate paying penalty fines but sometimes navigating the HMRC rules can be daunting. It’s increasingly more difficult to understand the rules and how to adhere to them. If people are unsure they should always take advice from an accountant as it will not only save them money and time in the long run, but guard against any issues occurring in the first place.

This is our understanding as at February 2018. HMRC are constantly updating their advice and the above should not be taken as definitive guidance. Robinsons Consulting Limited have considerable experience in settling enquiry cases with HM Revenue. For this reason, we advise you speak with your usual contact before taking any action or making any disclosure to HM Revenue.”

During the last financial year, over 200,000 penalties were issued by HMRC — an increase of 11,588 on the previous year.

 

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