How does careless differ from deliberate?

A key issue in a recent high profile tax dispute centred around a penalty issued by HMRC for an error that was described as 'careless and not deliberate'. This phrase has caused many to ask questions about how HMRC categorises mistakes on tax returns and when penalties and interest payments might apply. Here we explain some of the terms used and take a look at the self assessment process.

Reasonable care

A plain English reading of the phrase 'careless and not deliberate' implies a simple error was made. However, UK tax law is more complicated, and the phrase is more likely a designation settled on by HMRC if it concludes it cannot prove deliberate behaviour.

A more thorough explanation was later given by HMRC's Chief Executive Jim Harra, who appeared before MPs on the Public Accounts Committee (PAC) in Parliament.

Mr Harra said: 'There are no penalties for innocent errors in your tax affairs. If you take reasonable care, but nevertheless make a mistake, whilst you will be liable for the tax, and for interest . . . you would not be liable for a penalty.

'But if your error was as a result of carelessness, then legislation says that a penalty could apply in those circumstances.

'Carelessness is a concept in tax law. It can be relevant to how many back years that we can assess, can be relevant to whether someone is liable to a penalty and if so, what penalty they will be liable to for an error in their tax affairs.'

While these words will come as a relief to many, it is still vital that care is taken to file tax returns in a timely and accurate manner.

Tax returns

Tax returns are issued shortly after the end of the fiscal year. Tax returns are issued to all those whom HMRC are aware need a return including all those who are self-employed or company directors.

This year saw a record 11.7 million self assessment taxpayers submitted their returns by the 31 January deadline.

Those individuals who complete returns online are sent a notice advising them that a tax return is due. If a taxpayer is not issued with a tax return but has tax due, they should notify HMRC, and it may then issue a return.

If you are not asked to complete a tax return, it remains your responsibility to advise HMRC if there is a new source of untaxed income, a capital profit that could lead to a tax liability, or your savings or dividend income is significant enough to result in tax being payable at the basic, higher or additional rates of tax.

Self assessment timetable

• Income tax and capital gains tax are both assessed for a tax year which runs from 6 April to the following 5 April.
• Shortly after 5 April - SA returns or a notice to complete a return are issued by HMRC.
• 31 October following - non-electronic returns need to be submitted to HMRC by this date.
• 31 January following - final date for submission of the return and all outstanding tax to be paid.

Penalties

Late filing penalties apply for personal tax returns as follows:

£100* penalty immediately after the due date for filing (even if there is no tax to pay or the tax due has already been paid)

*The full penalty of £100 will always be due if your return is filed late even if there is no tax outstanding.

Additional penalties can be charged as follows:

• over three months late - a £10 daily penalty up to a maximum of £900
• over six months late - an additional £300 or 5% of the tax due if higher
• over 12 months late - a further £300 or a further 5% of the tax due if higher. In particularly serious cases there is a penalty of up to 100% of the tax due.

Interest rates

HMRC will charge interest on late payments.

The current late payment and repayment interest rates applied to the main taxes and duties that HMRC currently charges and pays interest on are:

• late payment interest rate - 6% from 6 January 2023
• repayment interest rate - 2.50% from 6 January 2023.

Correcting the tax return

HMRC may correct a self assessment in order to correct any obvious errors or mistakes in the return.

An individual can usually, by notice to HMRC, amend their self assessment at any time within 12 months of the filing date.

HMRC may enquire into any return by giving written notice. In most cases the time limit for HMRC is within 12 months following the date of submission.

If HMRC does not enquire into a return, it will be final and conclusive unless the taxpayer makes an overpayment relief claim or HMRC makes a discovery.

It should be emphasised that HMRC cannot query any entry on a tax return without starting an enquiry. The main purpose of an enquiry is to identify any errors on, or omissions from, a tax return which result in an understatement of tax due. Please note however that the opening of an enquiry does not mean that a return is incorrect.

Keeping records

HMRC wants to ensure that underlying records to the return exist if they decide to enquire into the return.

Records are required of income, expenditure and reliefs claimed. For most types of income this means keeping the documentation given to the taxpayer by the person making the payment. If expenses are claimed records are required to support the claim.