What are the tax penalties for errors in self-assessment tax returns?

My experience is that HMRC is steadily getting more aggressive in demanding penalties from taxpayers who are found to have inaccuracies in their tax and VAT returns or who have by mistake claimed a tax relief to which they were not entitled and from users of defeated UK tax avoidance schemes. HMRC investigators also seem to have informal targets to apply more penalties for “deliberate” behaviour (the most serious civil tax penalty) compared with penalties for ‘careless” behaviour.

According to the ICAEW, data recently published by a fee protection insurance firm suggests that over the last three years, there has been a 64% increase in the number of people penalised for “deliberate” errors in tax returns while in the same period, there has been a fall in the number of penalties charged for carelessness.

The basic civil tax penalties in the UK are:

  • No penalty if you took reasonable care – which includes telling HMRC if you discover a mistake.
  • Up to 30% if you have been careless or failed to send in a return.
  • Up to 70% if the error was deliberate.
  • Up to 100% if the error was deliberate and you tried to conceal it.

Penalties for criminal behaviour are different and you can read about them here.

If HMRC are considering charging you a tax penalty

My advice is to take any suggestion of penalties by HMRC very seriously. Generally the situation will be that you have conceded that there was an error in your tax return and the remaining issue is whether a tax penalty will be charged and if so, what the amount of that penalty will be.

Increasingly, if HMRC are looking at charging a penalty they will seek a meeting with you to do what they call “a fact find” and ask you to confirm that you have read and understood their Human Rights fact-sheet. Do not treat this meeting casually! The tax investigator will be using a crib sheet in order to decide whether your error should be classed as innocent, careless or deliberate.

I have accompanied clients using the Public Access Scheme to a number of these meetings recently and the nature and tone of these meetings differs depending on whether you get an “old school” inspector trying to arrive at a fair settlement or one of the younger more aggressive breed of investigators who seem to be out to obtain evidence supporting the charging of a “deliberate” penalty or worse, evidence that might enable them to say that they suspect tax fraud leading to the issue of COP 9 or worse a criminal investigation.

How to appeal a tax penalty?

After this penalty process is completed and a penalty is assessed you need to give the investigator a notice of appeal if you wish to challenge the penalty or a decision not to suspend it.

This appeal is done in the normal way and there will them normally be a review by HMRC which may amend the amount of the penalty. But if you still feel that the penalty is unfair then you will need to notify your appeal to the tax tribunal as you would for a self-assessment tax appeal.

You will need to give your detailed reasons for appealing the penalty. It is sensible to seek legal advice when putting your reasons for appealing to the tax tribunal to maximise the chances of your appeal succeeding.

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