Mind your manners! Why your behaviour matters to HMRC

When you make a tax mistake, your behaviour is a key consideration for HM Revenue & Customs (HMRC).

Not really manners exactly, but rather how you acted when you made a tax error on your return, or failed to tell HMRC about something you should have.

Behaviours impact both HMRC penalties and assessing time limits.

We’ve written about these subjects separately in the past, but we’ll bring these concepts together here in the context of various types of disclosure and HMRC enquiry or investigation.

Behaviours

In relation to errors or inaccuracies on your tax return, HMRC considers whether taxpayers have ‘taken reasonable care’, been ‘careless’, or acted ‘deliberately’.

• Deliberate means you knew something was wrong at the time you submitted a tax return.
• Careless means you should have done more to check things were right but did not.
• Reasonable care means you took reasonable steps to get things right, but you still made a mistake in your tax return.

Careless and reasonable care must be considered in the context of a person’s own knowledge and ability.

Your accountant would be held to a higher standard of ‘reasonable care’ than a self-employed IT consultant, for example.

Impact of behaviours – HMRC penalties

The HMRC penalty regime imposes no penalty if a tax mistake was made despite taking reasonable care.

On the other hand, careless and deliberate errors have increasing levels of penalty.

The highest level of penalty can be imposed for a ‘deliberate and concealed’ tax error.

For example, you knowingly added false expenses to your accounts to reduce profit, and you also created false invoices to try and hide that – the creating of the false invoices invokes the ‘concealed’ element in relation to penalties.

Impact of behaviours – HMRC time limits

Behaviours impact HMRC time limits also.

For direct tax (Income Tax and Corporation Tax, for example), HMRC can assess up to four, six and 20 years after the end of a period if the error was despite taking reasonable care, careless or deliberate, respectively.

The time limits are extended for matters involving an offshore element, which we cover below.

For VAT assessments, HMRC has four years for errors in tax returns made despite taking reasonable care or being careless, and up to 20 years for deliberate tax errors.

How does this impact on HMRC enquiries or investigations?

Most HMRC enquiries will start with a focus on one tax year or one accounting period.

When HMRC discovers an inaccuracy in a tax return, they will usually consider whether the same or similar inaccuracies occurred in other years.

The behaviour leading to the tax error can determine how many years HMRC will look at.

For example, if HMRC believes the tax error was caused by careless behaviour, they might ask for information and documents covering the last six years.

However, if HMRC believes you have made deliberate errors or committed tax fraud, they might expand their enquiry to cover the last 20 years.

As HMRC starts to look at more years, the potential tax liabilities increase, as do penalties and interest.

It can be incredibly stressful as the HMRC enquiry begins to expand into other years, and more information and documents are being requested.

Explaining how and why tax errors occurred in a crucial part of any HMRC investigation, and it’s worth taking professional advice if you need help with this.

COP9

If HMRC believes you have made deliberate errors, they might open an investigation under Code of Practice 9 (COP9).

COP9 or the Contractual Disclosure Facility (CDF) is only used by HMRC in cases of suspected fraud.

Making a full disclosure under the CDF provides protection from a HMRC criminal investigation and prosecution.

Individuals can ask for COP9 if they have committed tax fraud and want this protection.

You can learn more about this process here.

Offshore income and gains

For offshore related tax problems, HMRC’s four- and six-year time limits to make assessments for tax mistakes made despite taking reasonable care or being careless increase to 12 years.

The 20-year limit for deliberate behaviour and failure to notify remains the same.

HMRC penalties relating to offshore matters are complicated. Penalties can be charged at a rate of up to 200 per cent.

The level of offshore penalty charged might depend on:

• The behaviour leading to the tax error or inaccuracy
• The year the error occurred – Failure To Correct Penalties apply to the years 2015/16 and earlier years
• The country involved – HMRC categorises countries into Categories 1, 2 and 3, depending on how transparent they are.
• Your behaviour throughout the enquiry or disclosure process.
• Whether any disclosure was prompted or unprompted

If you need to disclose tax errors relating to offshore income or gains, you can do this using the Worldwide Disclosure Facility (WDF).

More information on HMRC’s WDF process can be found here.

Promoted vs Unprompted disclosures

In brief, a prompted disclosure will be one made after HMRC has approached you, either by opening an enquiry or by sending you a nudge letter.

An unprompted disclosure will be one where you contact HMRC to tell them about a tax mistake you’ve made before they contact you.

This can impact the penalty you will be charged – penalties are lower for unprompted disclosures.

Quite a lot of property disclosures we make for clients are ‘unprompted’.

If you realise that you have been careless and did not include property income on your tax return and proactively disclose that to HMRC, the penalty range will be between 0 per cent and 30 per cent.

If, however, you wait to be contacted by HMRC in order to put things right, the penalty range will be between 15 per cent and 30 per cent.

Where income from property has been missed or incorrectly calculated, HMRC’s Let Property Campaign can be used to make an unprompted tax disclosure.

More details on this facility can be found here.

If you know you have made a tax mistake, the costs of fixing it will be lower if you take the issue to HMRC, rather than waiting for HMRC to come to you.

Your behaviour matters to us.

When helping clients with enquiries and disclosures, we pay very close attention to the analysis of each tax mistake, gather evidence as to why it happened and argue carefully as to the right ‘behaviour’ to be attributed to it.

This can substantially reduce the final tax and penalty payable.

If you’ve made a tax mistake and you need advice, please get in touch with our team.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email jeremy.johnson@intaxltd.com.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. However, we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients.