Tax return penalty? What you should know and how you can respond

Taxpayers who filed by the Self-Assessment deadline of January 31st but who made a mistake in their submission could be facing a demand from HMRC for an ‘inaccuracy penalty1’ typically amounting to 15% of the tax understated. The Low Incomes Tax Reform Group (LITRG) is seeking to inform taxpayers when HMRC may charge the penalty, potential defences and how to appeal2.

An inaccuracy penalty is chargeable if you submit an inaccurate return to the Revenue which results in you understating your liability to tax or claiming too much by way of loss relief or repayment of tax. The mistake must be ‘careless’ or ‘deliberate’. ‘Careless’ indicates that you have failed to take reasonable care; what constitutes ‘reasonable’ depends on your particular circumstances and abilities.

If your mistake is not careless, but a genuine error made while exercising reasonable care, HMRC are not entitled to charge any penalty at all. This is the case even if your tax liability is understated as a result of the error. If you believe your mistake was not careless, then you should appeal against the penalty notice3.

Anthony Thomas, Chairman of the LITRG, commented:

“This year some have already received inaccuracy penalty notices for mistakes in their return and whilst nobody enjoys receiving them, it is important they when they do, taxpayers are aware of their rights and duties.”

Q & A Guide from LITRG

How should HMRC decide whether I have been careless?

Your capacity to file a tax return may be dependent on your personal circumstances and abilities. For example, as their own official guidance states, they would not expect the same level of knowledge or expertise from a self-employed or unrepresented individual as from a large multinational company. If HMRC have not contacted you to discuss things like your personal circumstances, background, experience with tax matters or how you prepared and checked your tax return, you will need to discuss with them how the error arose and might even need to formally ‘appeal’ the notice if HMRC do not seem to be considering fully your own ‘abilities and circumstances’.

In what circumstances could HMRC reduce my penalty?

Even if you admit to having been careless, the penalty can be reduced if you tell HMRC that you have made a mistake, give them reasonable help in quantifying it and allow them access to records so that they can make sure it is fully corrected. If you tell HMRC about your mistake before they know about it, they can reduce the penalty to zero. If HMRC point it out to you, the minimum penalty they can charge you is 15%.

When and how can I formally appeal against a penalty?

You can choose whether to ask HMRC for an internal review, which means that your case will be looked at again impartially by an officer or go directly to the First-tier tribunal. The Revenue usually deals with review requests within 45 days. Taxpayers typically have 30 days from the date of the decision to lodge an appeal against it.

Anthony Thomas, LITRG Chairman, added:

“If you believe that you are being unfairly penalised for having made a genuine mistake it is crucial to remain aware of your rights and confident in exercising them. After all, anyone can make a genuine mistake – HMRC have been known to make mistakes too.”

Notes for editors

1.         More detailed information on inaccuracy penalties, courtesy of HM Revenue & Customs can be obtained, here.

2.        Further information can be found on LITRG’s website, here.

3.        Further information on the appeals process can be found, here.

4.        The Low Incomes Tax Reform Group (LITRG)

LITRG is an initiative of the Chartered Institute of Taxation to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.

5.        The Chartered Institute of Taxation (CIOT)

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 17,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.