21 January 2023
The response to an RSM freedom of information (FOI) request has confirmed that HMRC issued over 100,000 financial penalty notices to taxpayers for submitting inaccurate tax returns in the year to 31 March 2022. Over 11,000 of these penalties were issued because HMRC decided that taxpayers had deliberately submitted inaccurate returns.
HMRC’s investigators carry out a wide range of compliance activities to ensure that taxpayers submit accurate and complete tax returns. When an investigator finds an inaccuracy in a tax return, they must consider whether financial penalties should be imposed on the taxpayer.
HMRC penalty policy
Decisions on whether to impose a financial penalty and, if so, the level of the penalty, are determined by the nature of the taxpayer behaviour the HMRC investigator considers led to the inaccuracy. If the inaccuracy occurred because a taxpayer was careless, HMRC can impose a penalty ranging from 0-30% of the potential lost revenue (PLR), being the tax ultimately at stake. If the inaccuracy is a result of deliberate behaviour without concealment, the penalty imposed can be 15-70% of the PLR. If the inaccuracy is a result of deliberate behaviour with concealment, the penalty imposed can be 30-100% of the PLR. The financial penalties can be more severe if the inaccuracy is connected to offshore tax matters, with the initial penalty range potentially increasing to 70-200% of the PLR in the most serious cases involving high risk jurisdictions.
Statistics released to RSM in response to the FOI request show that during the year to 31 March 2022, HMRC issued 30,189 actual financial penalty charges to 29,568 taxpayers, of which 11,728 were issued for deliberate conduct. In total, 101,045 penalty notices were issued by HMRC, 89,317 of which were issued to taxpayers who had failed to take reasonable care, 70,856 of which HMRC agreed to suspend.
In cases in which an inaccuracy is brought about by the careless behaviour of a taxpayer, HMRC will usually agree to suspend the imposition of a financial penalty if the taxpayer meets SMART (specific, measurable, achievable, realistic, time-bound) conditions agreed for a period of up to two years. HMRC hopes by setting these conditions the taxpayer’s behaviour will improve and careless inaccuracies will be less likely to reoccur. However, financial penalties will be imposed if the taxpayer fails to meet the conditions set.
HMRC resource levels
During the coronavirus pandemic, HMRC reduced its compliance activities as it reassigned 12% of its investigators to help deliver government coronavirus support schemes. The investigators started to return to their normal compliance activities during the year ended 31 March 2022. HMRC has recently announced that it intends to add 2,500 staff to its compliance workforce during 2023. We can therefore expect to see the number of taxpayer enquiries increase to at least pre-pandemic levels, and a rise in the number of penalties imposed on taxpayers.
Dealing with errors and inaccuracies
If a taxpayer realises there is an inaccuracy in their tax return, it will be in their best interest to seek professional tax advice and make a full disclosure to HMRC to mitigate the financial penalty. If HMRC finds the inaccuracy before the taxpayer tells them, the penalty for a careless inaccuracy will range from 15-30% of the PLR. In the case of a deliberate inaccuracy, the penalty range will be 35-100% of the PLR. There is the added jeopardy, in the case of deliberate inaccuracies, of HMRC naming and shaming taxpayers or using their criminal investigation powers to pursue a prosecution.
For more information, please get in touch with Matt Taylor or your usual RSM contact.