Inaccuracies: Is an error always careless?
The simple answer is no. An error in a taxpayer’s document is not, by default, a careless one. However, that does not prevent HMRC inspectors from arguing that an inaccuracy arose because the taxpayer, or someone acting on their behalf, failed to take reasonable care. It is therefore essential to understand the rules surrounding this when facing HMRC scrutiny.
How does HMRC assess behaviour when deciding penalties?
The question of penalties always arises at the end of an enquiry if adjustments are necessary. HMRC inspectors often try to paint a picture of a careless taxpayer to attempt to justify a penalty. It is not enough for HMRC to characterise the taxpayer as a generally disorganised person – for example, having a relaxed approach to paperwork. Any finding of carelessness must be specifically linked to the tax return itself, and the only behaviour that is relevant is that which took place before or upon submission of that return. This might include, for example, carelessly omitting a source of income or failing to review the return properly before submitting it.
Lack of care during the enquiry is sometimes, incorrectly, used by HMRC as justification that the behaviour that led to the inaccuracy was careless, for example, submitting a reply to an information request with incomplete or inaccurate data. This should have no bearing on the determination of the behaviour. However, if there are other factors that indicate the mistake was careless, the taxpayer’s behaviour during the enquiry would be scrutinised when it comes to consideration of penalty mitigation, as reductions to penalties are judged by the quality of disclosure and ‘telling, helping and giving’.
Who must prove carelessness — the taxpayer or HMRC?
It is important to remember that the burden of demonstrating carelessness (or worse still, deliberate behaviour) rests with HMRC, and they must do so on the balance of probabilities. Nevertheless, HMRC frequently shifts the focus by asking the taxpayer to justify why they were not careless. Inspectors who overlook this point should be reminded of what the rules say.
The intricacies surrounding the subject of behaviour and how it impacts HMRC assessments and penalties can be complex. Specialist advice should therefore be sought, so please contact Crowe’s Tax Disputes and Investigations team if you require assistance.