Once a tax error has been identified, HMRC always asks why it happened. This will have a significant impact on both the potential penalty position and the number of years back over which the error can be corrected.
In general terms, where a taxpayer can show they have taken “reasonable care” but still made a mistake, HMRC will not charge a penalty and the time limits for correcting earlier years will not be extended beyond the standard four years.
Unfortunately, the concept of reasonable care is very subjective and can be difficult to prove. The responsibility for the submission of an accurate tax return lies with the taxpayer. If a taxpayer can show they took appropriate tax advice or appointed a professional tax agent to assist in filing their tax return, this certainly helps prove that they took reasonable care. But what about people who do not wish to appoint an agent and prefer instead to deal with their own tax affairs?
We are seeing worrying signs that, increasingly, HMRC appear to take the view that those who have decided not to appoint an agent and yet make a mistake have been careless. This would appear to apply even to taxpayers with relatively simple affairs, perhaps with an offshore element, who have misunderstood the guidance involving foreign tax credits. This cannot be right and we believe that HMRC are adopting an unreasonable interpretation of their own guidance.
Undoubtedly, some areas of tax legislation are very complex so at times it will be necessary to engage an experienced advisor. But that is a long way removed from HMRC’s contention that an ordinary taxpayer who has chosen not to appoint a professional adviser and makes an honest error despite their best efforts to understand the tax rules should be treated as failing to take reasonable care. The UK tax system may be complex, but it should not be so complex that everyone is required to incur the costs of appointing a professional adviser.
We also see HMRC contending that the unrepresented taxpayer could have asked HMRC for assistance. However, assuming you are able to get through and speak to somebody, the various HMRC helplines are more focused on administrative matters and are often unable to provide technical guidance or advice.
Earlier this year, HMRC began a “charm offensive” to repair damage done to relations with taxpayers by the adoption of an excessively combative approach. Recognising that innocent errors can happen would be a healthy step forward in that initiative.