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.
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 calculating penalties for inaccuracies we’ll take into account how long it’s taken for you to tell us about the inaccuracy. If you’ve taken a significant period (normally 3 years) to correct or disclose the inaccuracy we’ll normally restrict the amount of reduction given for disclosure. We’ll restrict the penalty range by 10 percentage points above the minimum to reflect the time taken before working out the reductions for telling, helping and giving.’
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 careless error that the person would never have had reason to reconsider (CH82465).
