HMRC may charge a penalty if they are sent a return or other document that contains an inaccuracy which resulted in tax that was unpaid, understated or over-claimed.
HMRC determine the level of the penalty based on the behaviour that caused the inaccuracy to occur. They define the type of behaviour into 4 categories; reasonable care, careless, deliberate or deliberate and concealed.
Everyone has a responsibility to take reasonable care over their tax affairs. What ‘reasonable care’ is depends on each individual’s abilities and circumstances. If anything about your health or personal circumstances made it difficult for you to take reasonable care this should be communicated to HMRC, so that they can take this into account.
Some of the ways you can take reasonable care include:
- Keeping enough records to make accurate tax returns
- Asking an accountant to help you and follow any advice given
If you took reasonable care but your return or document still contained an inaccuracy HMRC will not charge a penalty.
This is where you failed to take reasonable care to get things right.
This is where you knew that a return or document was inaccurate when submitted to HMRC.
Examples of deliberate inaccuracies include deliberately:
- overstating your business expenses
- understating your income
- paying wages without accounting for Pay As You Earn and National Insurance contributions
Deliberate and concealed inaccuracies
This is where you knew that a return or document was inaccurate and you took active steps to hide the inaccuracy from HMRC, either before or after you sent it to us.
An example of taking active steps to conceal an inaccuracy is where you create a false invoice to cover a non-existent stock purchase.
Levels of Penalties
The level of penalty will depend on the type of behaviour that caused the inaccuracy and whether you told HMRC (unprompted disclosure) or HMRC discovered this themselves (prompted disclosure).
The penalty levels are outlined in the below table.
|Type of behaviour||Unprompted disclosure||Prompted disclosure|
|Reasonable care||No penalty||No penalty|
|Careless||0% to 30%||15% to 30%|
|Deliberate||20% to 70%||35% to 70%|
|Deliberate and concealed||30% to 100%||50% to 100%|
To help to ensure that any penalties are minimised you should be open, honest or cooperative with HMRC. The quality of your disclosure (telling, helping and giving), determines where the penalty will fall within the penalty range. The reduction HMRC will give depends on how much assistance you give them during their investigation. For:
- telling we give up to 30%
- helping we give up to 40%
- giving access to records we give up to 30%
Green Accountancy has a great record reducing the level penalties with HMRC and promotes behaviour around taking reasonable care. If you are a client any fee in connection with a HMRC investigation is often covered by our Tax Investigation Service. If you would like to discuss this further or currently have an investigation with HMRC please book a chat about your business here.