by Mathew Forshaw of Finton Doyle Accountants
Last year HMRC levied 31,500 of the highest penalties at its disposal on taxpayers, more than double the amount imposed five years ago (14,400).
So why is this happening and what can taxpayers do about it?
Penalties are generally charged when HMRC make an enquiry into a tax return and finds something wrong. For example: Mr S is an employee with some investment income. He completes a tax return but forgets to include his company car details. To him, it’s all dealt with by his employer through the payroll system so HMRC know about it anyway.
Unfortunately for Mr S, because he didn’t include his company car on the return, the software calculated a tax refund which HMRC then paid out. Several months later he receives a letter informing him that HMRC are opening an enquiry into his return.
Once the error is rectified, and the tax paid (with interest) HMRC will then look at penalties. They will look at a range of charges based on the tax that was underpaid, ranging from 0% if the taxpayer took ‘reasonable care’ to 100% if the error was ‘deliberate and concealed’.
In Mr S’s view he took reasonable care, he just made a mistake. In HMRC’s view, he was careless, because his employer head told him to put the information on a tax return (in reality his employer may have told him though an emailed document that was never picked up).
This type of error would generally come in at the lower end, up to 30%.
But what about a situation where there’s a difference of opinion? What if Mr S was self employed and he genuinely though he was allowed to claim taking clients out to lunch as a business expense? After all taking clients out is how he wins his business, so it should be allowable in his view.
However, although it’s widely known that entertaining of this nature isn’t allowable, many people make this mistake. Because it’s widely known, in HMRC’s eyes this could be seen as a ‘deliberate’ over-statement of expenses. Deliberate errors can cost up to 100% of the tax owed.
This will be in addition to late payment interest that HMRC will inevitably charge.
And not only that, taxpayers who receive ‘deliberate’ penalties may end up being closely monitored by HMRC in the future, thereby increasing the chance of mistakes being picked up, leading to further penalties.
There are many grey areas when I t comes to what is allowable and what is disallowable as a tax deduction. HMRC will always argue for a very tight interpretation of the rules, even though the reality might be a legitimate case for making a claim. It is therefore crucial that taxpayers take care when filing their returns and seek advice if they are unsure of anything.
With the information now available to HMRC from a wide variety of sources, the likelihood of errors being picked up is only likely to increase.