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).
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.
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 in May 2019 (www.taxinsider.co.uk).