Sometimes people make mistakes on their tax return, which can end up in them paying less (or more) tax than they need to.
These mistakes can be purely accidental – we’re all human after all. But sometimes people (or businesses) make errors on their tax return on purpose, with the aim of getting away with paying less tax than they need to.
HMRC is used to people making errors on their return, either by accident or on purpose. So they have a pretty robust way of dealing with them. This spans from charging no penalty at all, through to a potentially hefty fine that must be paid by law.
If major, deliberate tax fraud is detected, there’s also a chance the culprit could be prosecuted and even sent to jail. Ouch.
Don’t panic though – HMRC is fully aware that mistakes can happen by accident. In this case, you wouldn’t face any kind of legal action. And as long as you were upfront about the mistake, and helped HMRC to put it right, you wouldn’t have to pay a penalty either.
In this article we’ll look at how HMRC assesses tax return mistakes, how it decides whether or not to issue a penalty, and how it decides how much this should be.
Let’s get started.
To understand how HMRC views and deals with tax return errors, it’s useful to look at how it categorises different types of error.
Here’s a breakdown of the terminology HMRC uses to describe these:
Reasonable care: ‘Reasonable care’ is the term HMRC uses to describe how everyone should file their return. In other words, anyone who submits a tax return should do everything they can to make sure it’s accurate .
Sure, mistakes can still happen – even if someone takes ‘reasonable care’ to make sure they don’t. But if HMRC can see that you did take care to avoid mistakes, they won’t hit you with a penalty.
HMRC says some of the ways you can take reasonable care over your taxes include:
Careless mistakes: If you don’t take reasonable care to keep your taxes accurate, and a mistake happens on your return because of this, HMRC will class this as a ‘careless’ mistake.
Unlike if you took reasonable care over your return, you can get a penalty for making a careless mistake.
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Deliberate inaccuracies: If you deliberately make errors on your tax return and submit it knowingly, HMRC will class this as filing a return with ‘deliberate’ inaccuracies.
Deliberate errors could be things like:
You can get a penalty for submitting a tax return that you know is inaccurate (so, one with deliberate inaccuracies).
Deliberate and concealed inaccuracies: If you make deliberate errors on your tax return and actively try to hide these errors from HMRC, then HMRC will class this as filing a return with ‘deliberate and concealed’ inaccuracies.
Steps taken to hide these errors might include things like creating false invoices as evidence for business purchases that, in reality, didn’t happen.
Of course, you can get a penalty for making deliberate and concealed errors on your tax return.
If HMRC decides that a penalty is appropriate, it goes through a multiple-step process to figure out how much the penalty should be.
This involves looking at how much tax the person in question still owes but hasn’t yet paid. So, say they paid £4000 for their tax bill. Then, when the errors on their tax return were corrected, it came to light that the bill should have actually been £7000. In this case, they’d still owe £3000.
The person would then need to pay this £3000, as well as a penalty. This penalty would be a percentage of £3000 (the value of the money left owing). also called the Potential Lost Revenue, or ‘PLR’).
When HMRC decides whether or not to give a penalty for tax return errors (and how much it’ll be), it looks at a number of factors.
One of these is whether or not the person told them about the error, or if HMRC was the one to discover it. These two situations are referred to by HMRC as:
HMRC is less likely to give a penalty, or the penalty will usually be less , if the person tells them about the error/s (an unprompted disclosure).
We cover how this percentage is worked out below. But there’s some useful stuff to know before we get to that.
One more thing – HMRC also often takes reductions off penalties based on how the person in question behaves once the tax error’s been discovered. The more helpful they are in putting the error right, the more money gets taken off their penalty. More on that below, too. But first:
Now we’ve looked at the way HMRC assesses different types of tax return errors, we can translate this across to how big of a penalty (if any) they might give for each one.
Don’t forget, the penalty HMRC assigns has to be paid on top of the money you still owe on your tax bill (Potential Lost Revenue).
The below table shows how HMRC works what percent of your Potential Lost Revenue you need to pay, in addition to the Potential Lost Revenue itself.
This is the table HMRC uses to show this:
| Type of behaviour | Unprompted disclosure | Prompted disclosure |
|---|---|---|
| Reasonable care | No penalty | No penalty |
| Careless | 0% to 30% | 15% to 30% |
| Deliberate | 20% to 70% | 35% to 70% |
| Deliberate and concealed | 30% to 100% | 50% to 100% |