How to persuade HMRC a mistake wasn’t deliberate
HMRC claimed that a taxpayer had deliberately made errors on his tax return. The taxpayer disputed this and took his argument to the First-tier Tribunal (FTT). Why did he think this was worth the effort and what did the FTT decide?
Making mistakes
HMRC categorizes mistakes in tax returns and other documents as innocent, careless or deliberate. If in the deliberate category and they result in too little tax being paid, the rules allow HMRC to hike the penalties. The level of extra penalties and the chance to reduce them persuaded Mr Issa (I) to challenge HMRC’s view at a First-tier Tribunal (FTT).
The case
There were errors made on his tax return. This resulted in him underpaying tax by more than £60,000. He hadn’t included pay from his employer when made redundant, and he didn’t mention that a loan from his employer had been written off. His argument was that he’d followed HMRC guidance because he had used figures from his P45 and P60 on his tax return. Plus, he didn’t know the loan write off counted as taxable income. When he completed his tax return he hadn’t realized that his employer had failed to send him a P60 or P11D covering all the earnings and the benefit in kind (the written-off loan). HMRC decided these errors were deliberate errors so in addition to the tax it demanded a penalty of nearly £25,000. Tip. You’re not expected to be a tax expert but you should realize if a matter is complex or unusual, such as redundancy or property sales. You must take “reasonable care” in deciding what figures to put on your tax return. If you’re not sure, take extra steps to get it right, e.g. consult HMRC’s guidance or a tax advisor.
That this time he should have known the additional amounts needed to go on his tax return or at least investigated the matter further.
Deliberate errors
There’s a lot at stake if HMRC alleges deliberate behavior; remember the burden of proof is on it to show it and not you to disprove it. A deliberate error is when someone knowingly provides a document containing an error, intending HMRC to rely on it as accurate, or they consciously choose not to find out the proper tax treatment.
Trap. HMRC can go back up to 20 years to collect tax (plus interest and penalties) if an error was deliberate. If the error is careless, it can only go back six years. Plus, for deliberate errors, penalties start at 35% of the underpaid tax and can be up to 70%. Where the error is concealed from HMRC, the minimum penalty is 50% and the maximum is 100%.
Persuading HMRC
The FTT decided in favour of the tax payer as it wasn’t satisfied that HMRC had shown he intended to mislead or that it was reasonable that he should have taken additional advice. His past errors did not prejudice the more recent ones.
Tip. It’s always a good idea to consider how your behavior might look to HMRC. Check that the information you use to complete your tax return is reliable, and it’s the sort HMRC would expect you to use. Make sure you can show a genuine attempt to follow HMRC guidance. As a minimum, read basic HMRC guidance on filing in tax returns. If you follow these steps HMRC will find it hard to argue any mistake you make is deliberate.
The FTT ruled for the tax payer so HMRC must reduce the penalties. If HMRC argues you’ve made a deliberate mistake, set out the steps you have taken to get things right. Show how many errors are accidental and that there was no intention to hide anything.