In last week’s weekly tax brief, we highlighted an increase in penalties for those found to have deliberately understated their income. The figures also show that HMRC are seeking more penalties for ‘careless’ errors, which could suggest that innocent people are being unfairly punished. However, an increase in suspended penalties highlights HMRC’s ‘yellow card’ warning system in an attempt to change behaviour – but shouldn’t this approach apply to the majority of ‘careless’ mistakes?
New figures obtained by RSM under a freedom of information request reveal that the number of penalties imposed on taxpayers for making ‘careless’ errors in their tax returns have risen by two thirds (66 per cent) in the last year.
In 2015/16, HMRC imposed 142,775 penalties for inaccuracies resulting from a failure to take reasonable care, up from 85,583 in 2014/15.
This rise in penalties reflects an increasing willingness within HMRC to challenge taxpayers who file inaccurate returns.
However, it is possible for taxpayers who incur such penalties to ask for conditions to be set which will demonstrate to HMRC a likely change of behaviour to ensure future returns are accurate. In such circumstances, the penalty can be suspended for a period of up to two years.
HMRC’s figures show that an increasing proportion of these ‘careless’ penalties are indeed being given a yellow rather than a red card. In 2015/16 more than half of careless penalties were suspended, up from a third in the previous year.
This increased use of suspended penalties is almost certainly a response to criticism levelled at HMRC by the First tier Tribunal. Recent judgments have directed HMRC to offer suspension more readily to errant taxpayers. Assuming that HMRC follows the Tribunal’s line of thought, we should see even more penalties being suspended over the coming year.
However, we believe this doesn’t go far enough. In our view, all ‘careless’ penalties should be suspended unless there is a genuine reason to think that the taxpayer is either unwilling or incapable or changing their behaviour.
If you would like any more information on this issue please get in touch with Mike Down or your usual RSM contact.