How HMRC deals with a careless or deliberate tax error

By HarperLees

It would probably be fair to say that 2023 didn’t get off to the best start for ex-chancellor Nadhim Zahawi. According to Sky News, Mr Zahawi – who was chancellor between 5 July 2022 and 6 September 2022 –  failed to disclose that he was being investigated by HM Revenue & Customs (HMRC) over his tax affairs while in senior government.

It revealed that the former chancellor had claimed that his actions were “careless, not deliberate”, and paid an estimated £4.8 million to HMRC that included a penalty. As you can see, being careless with your tax returns could be expensive, and could carry even more severe consequences if HMRC decides you were deliberately misleading them.

Read on to find out what happens when an error is made when paying taxes, and how HMRC typically approaches careless and deliberate actions by taxpayers. Before you do, we need to look at what “tax avoidance” and “tax evasion” are, and why it’s so important.

You’re legally allowed to reduce your tax liability

While you may think that HMRC is always looking for ways to take more of your hard-earned money, it does provide you with several legitimate ways to reduce your tax liability. When you use these legitimate and legal methods to reduce your tax liability, it’s known as “tax avoidance”.

As a client of HarperLees Financial Planning, we will have discussed ways you may be able to use tax avoidance. This could include using the tax relief offered by your pensions, maximising the use of tax breaks, placing money into tax-efficient investments or gifting to reduce an Inheritance Tax liability.

Tax avoidance is complicated, and this is not an exhaustive list of ways you might be able to use it, so you may also want to consider talking to an accountant or tax specialist to see if other options exist.

Tax avoidance is completely different to “tax evasion”. The latter is when you deliberately attempt to mislead HMRC to reduce or negate your exposure to tax. This is not legal and could result in HMRC taking action against you, something we will look at in more detail in a moment.

A tax error could result in a hefty penalty and an HMRC investigation

If you make an error that results in an underpayment, HMRC will typically charge you “late payment interest” on the outstanding amount. This is usually charged at the Bank of England’s interest rate plus 2.5%, meaning that in March 2023, it stood at 6.5%.

Furthermore, HMRC will scrutinise your tax record and returns to decide whether the error was the result of:

  • An innocent mistake
  • Carelessness
  • A deliberate attempt to evade a tax charge.

Let’s look at how each outcome could be dealt with next.

Care was taken but a mistake was made

According to FTAdviser in February 2023, if HMRC decides that you took reasonable care and made an innocent mistake, you will typically need to pay the outstanding tax owed and late payment interest.

The error was due to carelessness

If HMRC deems that the error was because of a lack of “reasonable care”, a penalty of up to 30% of the outstanding amount could be charged. Reasonable care refers to HMRC’s expectation that every individual or business will keep records so that they can provide a complete and accurate tax return.

Reasonable care depends on your circumstances and abilities. So, for example, if your tax affairs are straightforward, HMRC will not expect you to have a record-keeping system that’s as complex and sophisticated as a large business.

The error was deliberate

If HMRC decides that you deliberately attempted to reduce your tax charge by falsifying your tax return, the penalty increases to:

  • Between 20% and 70% of underpayment if the error is deliberate
  • Between 30% and 100% of the underpayment if the error is deliberate and attempts are made to conceal it.

It’s also worth remembering that misleading HMRC in a deliberate attempt to reduce your tax charge could also result in a prison sentence as well as a penalty.

Always remember that if you have a tax adviser, HMRC sees it as your responsibility to prove that you provided all the relevant information that the adviser needed in a timely manner. If an error is made and a penalty imposed, it will be your responsibility to settle it.

HMRC may reduce any penalties if you help them

If you do make an error, telling HMRC about it before it is likely to be discovered could result in the penalty it charges being reduced. Similarly, if you assist HMRC and help them calculate how much you actually owe, the penalty you face could be lowered.

The level of the reduction will depend on the quality of information you provide and how open and helpful you are.

Get in touch

As clients of HarperLees Financial Planning, you have peace of mind knowing that we are always here to ensure that you’re as tax-efficient as possible. Furthermore, it will be in line with HMRC’s tax regulations.

We are always here to discuss how your investments, pensions or gifting strategy affects your tax liability and can help with your self-assessment returns. That said, as we have explained earlier in this blog, we are not accountants or tax specialists, so you should consider speaking with one if your tax situation or self-assessment needs are more complex.

If you know someone who could benefit from talking to us about how they could maximise their tax efficiency using investments, pensions, tax allowances or gifting, we would be happy to help. Please email or call 01277 350560.

Please note

This blog is for general information only and does not constitute advice. It should not be seen as a substitute for financial advice as everyone’s situation will be different.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change. The information is aimed at retail clients only.