When there's no penalty for an incorrect tax return

An error in a tax return doesn’t automatically lead to a penalty, writes David Whiscombe, senior tax partner at accountancy firm Berg Karpow Lewis. The law does not require perfection – just that you always take "reasonable care" to get your tax right. If you make a mistake despite taking "reasonable care", no penalty is due.

Despite their own impressive record in getting things wrong, HM Revenue & Customs are sometimes reluctant to accept that the rest of us make honest mistakes. Their instinctive reaction tends to be that if a tax return is wrong, it must be because someone was careless. A couple of recent Tribunal cases are helpful in remedying that perception.

In the first, David Jones (2013 UKFTT 249 TC), a taxpayer who had been abroad for ten years and was filing his first online return made a mistake about his Capital Gains Tax. He failed to appreciate that he had inadvertently claimed tax relief for the same capital loss both against capital gains of the year and against income. It gave rise to a repayment of some £8,000. That didn’t immediately strike him as odd or exceptional: he had paid tax under PAYE of the better part of £120,000 and figured that his employer may have used the wrong code and over-deducted tax. HMRC themselves said that they could understand how the mistake had come to be made. But it didn’t stop the taxman asking for a penalty of 15% of the tax. The Tribunal disagreed – Mr Jones had made a mistake, but had not been careless.

In Carter (2013 UKFTT 247 TC) the taxpayer ran a garden centre but also had some property income. In relation to the garden centre the record-keeping wasn’t good: the records showed a deficiency of recorded cash takings over recorded cash expenditure for which no very convincing explanation was forthcoming. Inevitably, the conclusion was that profits had been understated and that the taxpayer had been careless in filing his returns. But he also had some property income. He had claimed tax relief not only for interest but also for capital repayments. That was wrong, of course: but, "He plainly thought it was correct to deduct capital repayments and even if he had checked the figures he would not have understood they were wrong because he was mistaken about the principles involved." So in that regard the Tribunal agreed that he had made an innocent error and not a careless one.

In any case in which HMRC raise the question of a penalty for an incorrect return it is worth asking yourself (and HMRC, come to that): What exactly did I fail to do that I could reasonably have been expected to do and which would have prevented the mistake from happening? If there is no answer to that question, there is no penalty.

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Written by David Whiscombe

David Whiscombe is a consultant to North London accountants BKL, where he was formerly Senior Tax Partner.  He now combines technical tax writing with an active practice in the resolution of tax disputes and work as an expert witness.   

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