Penalty appeal for careless behaviour

Penalty appeal for careless behaviour

Didn't find your answer?

Our client who is now 70 years old has just had a discovery assessment into his 2010/11 ITR where HMRC have found some undisclosed interest from the maturity of a bond. The tax at stake was approx. £2.5k and so HMRC have now applied a 15% penalty (approx. £400) for 'careless' behaviour. Our client admits that the certificate for this was simply misfiled and so was missed off the ITR in genuine error but I'd like to get the opinion about whether a 'careless' penalty is fair or what the chances of a successful appeal would be. For the sake of £400, we obviously don't want to spend a lot of time working on this one and I'm not sure whether HMRC would accept that the return was wrong despite the taxpayer taking 'reasonable care'...?

Replies (38)

Please login or register to join the discussion.

Stepurhan
By stepurhan
18th Nov 2013 11:44

Not exactly poor

If the tax at stake was £2,5k, then we are not talking a small receipt here. Is your client so rich they didn't notice this amount coming in? If so, they can afford to pay the additional £400. If not, then I can't help thinking that the client not noticing this amount missing from their return was indeed careless. About the only grounds I could think of for appeal would be hardship if this additional £400 would leave them bereft of resources. This seems unlikey if they have had a bond mature with this sort of interest. Claiming they were not careless is a non-starter. There is such a thing as genuinely careless error.

Thanks (0)
avatar
By Dorsettax
18th Nov 2013 11:54

Suspension of penalty?

Could you not ask for a suspension of the penalty as it was a careless, one off omission? If it was indeed a careless error then the penalty is unlikely to become chargeable as the careless error would not be repeated

CH83100 gives more details if you wish to read.

Thanks (1)
avatar
By mattrobbo
18th Nov 2013 17:20

Thanks for the comments. I suspected limited scope for appeal but thought it was worth asking to see if anyone else has had luck with this sort of thing in the past.

Thanks (0)
avatar
By DMGbus
18th Nov 2013 18:12

Suspension of penalty

As stated by Dorsettax there is a chance of getting the penalty suspended.

To achieve this suspension of penalty write to HMRC stating how the error arose (eg. illness or other inadvertant circumstances) and measures taken to avoid a repetition in the future, for example advisor and/or taxpayer to maintain a log or register of all savings accounts with details as to source of funds (when opened), destination of funds (when closed) and interest terms.

Thanks (0)
Stepurhan
By stepurhan
18th Nov 2013 19:25

How the error arose

Be careful in stating how the error arose. Do not be tempted to make something up just to try to get the penalty suspended. Also be careful that any measures to avoid repetition are fully carried out. This might not be as simple as it sounds. How do you propose ensuring you are aware of all new accounts being opened? Given he has failed so spectacularly this time, are HMRC likely to accept a log from the taxpayer himself?

Also, without wishing to belabor the point, are you sure that your client has simply been careless? At basic rate we are talking about £12.5k of untaxed income here. That is a lot of money to just accidentally leave off. Surely someone who has that sort of money coming is going to expect a tax bill on it and should notice when it doesn't arise.

I would point out that, at the moment, the penalty is assessed at the mid-range of careless behaviour so you're not even being hit for top whack for carelessness. Does your client really want to push their luck on this?

Thanks (0)
avatar
By mattrobbo
19th Nov 2013 14:44

As per the last comment, we have been told by HMRC that suspension of the penalty is not possible in this situation as it is a one-off event. With regards to the client's affairs, he is a very wealthy individual and so whilst it appears a significant sum to us, it is actually quite a 'small' policy for the client, therefore I agree that we cannot appeal on hardship. Personally, knowing the client I am sure this is an innocent error (which may not have been helped by the clients' age) but I also appreciate these are the only things in his favour on this one and so I suspect we will just "bite the bullet". Thanks to all for the comments.

Thanks (0)
n/a
By Trish Baillie
19th Nov 2013 15:38

Suspension of penalty

It is possible to get the penalty suspended in a situation like this where it is a one-off event.  You need to convince HMRC that steps have been taken to prevent such a situation arising again - such as that mentioned by DMGbus - we have just had a case where we did the same thing - the penalties amounted to £24,000 and the tax paid was £198,000.  HMRC did argue but eventually agreed that the measures we proposed were acceptable and the suspension agreed.

If it were not possible to suspend the penalty in a one-off situation that would be grossly unfair to clients who may never have such an event happen again.

Thanks (0)
avatar
By dangart
22nd Nov 2013 11:23

Suspension of Penalty

For a one off careless error see Testa [2013] TC 02549. Also has your client been careless? Just because HMRC and others have said your client must have been careless does not mean that they are correct, your client is 70 after all. HMRC default position is that everything is careless, have they given any subjective reasoning for their stance?

Thanks (0)
avatar
By David Gordon FCCA
22nd Nov 2013 12:28

Unfair

 

Yes it is unfair- but whoever said that the current penalty regime is fair?

 Interest included on maturity of bonds is a complicated issue. Did you get a chargeable event certificate from the insurance company?

 This interest has normally suffered tax at source.

 I would certainly appeal.

 This is a subject regarding which the tax payer cannot be expected to have much knowledge.

 If the proper docs were not received timeously from the ins co, the taxpayer has good grounds for saying this was not careless. The tribunal does take account of the fact that a taxpayer is not normally clairvoyant.

It is not uncommon for taxpayers to sincerely believe that funds received on maturity are "Tax free". Even clients' insurance agents get this wrong, so advising clients that there was not tax payable.

 Sometimes as a matter of professional pride we have do to do something without counting the fee, or do we let HMRC walk all over our clients,as the ICAEW and ACCA do.

 

 

 

 

 

Thanks (0)
avatar
By keithas
22nd Nov 2013 12:51

"your client is 70 after all"

As a 64 year old, I find the inference, throughout this thread, that you are completely gaga by 70 a trifle worrying.

Thanks (3)
avatar
By User deleted
22nd Nov 2013 13:00

@ Keithas

You'd better rush out and get your pipe and slippers before you lose your marbles - else you might be stuck at the shop unable to remember where you live and how to get back to your comfy armchair that you'll be spending your last few days on this earth in :)

Thanks (1)
avatar
By keithas
22nd Nov 2013 13:15

@ Flash Gordon

My children bought me a pipe and slippers for a joke Xmas present when I was in my early fifties - that is the view from youth.

I guess it's time to find where I put them.

Thanks (1)
Replying to ireallyshouldknowthisbut:
Stepurhan
By stepurhan
22nd Nov 2013 14:13

Illustrative points

keithas wrote:
I guess it's time to find where I put them.
Not remembering where you put stuff is the first sign. :-)

trecar wrote:
I have clients who are in the younger age group who have difficulties understanding some investment vehicles.
If we were talking about a chargeable event gain on a life insurance policy I would agree with you. But the opening post describes the omitted income as "interest from the maturity of a bond". That is not a complex financial instrument. That is receiving a big chunk of money that is larger than the big chunk of money you originally deposited. Unless the client is actually suffering from dementia, and the OP has given no indication that is the case, that's a pretty unforgettable event.
Thanks (1)
Replying to SteveRA:
Euan's picture
By Euan MacLennan
22nd Nov 2013 14:42

Not that simple

stepurhan wrote:

But the opening post describes the omitted income as "interest from the maturity of a bond". That is not a complex financial instrument. That is receiving a big chunk of money that is larger than the big chunk of money you originally deposited.

Not a defence in this case, but bonds do have a complication.  Is the interest credited monthly/annually or on maturity?  We have a client with a 3 year fixed interest bond who assumed that it was the latter, not least because the bank had not sent any annual interest certificates, and only found out to the contrary when HMRC launched an enquiry into his tax returns for the first two years.

Thanks (1)
Replying to SteveRA:
By trecar
23rd Nov 2013 17:18

I deliberately did not use the description complex as the point I was trying to get across is that to some even the simplest can be difficult to understand. It was not that long ago that research formulated the proposition that to complete a tax return required degree level understanding. For those familiar with financial instruments, and remember a deposit account can be a financial instrument depending on circumstance, it can seem blindingly obvious but for the unsophisticated, e.g. the Chair of the Co-op Bank, it is not. Sometimes recognising that on maturity a bond contains income after having perhaps been told that on maturity you are getting your capital back and there is no tax to pay can cause confusion. That's one of the reasons why accountants exist to explain and assist in compliance.

Thanks (0)
avatar
By justsotax
22nd Nov 2013 13:16

I guess missing an

account/fixed rate bond that has 1/2 million quid in it is easy to do ?!?!?...as for the penalty....presumably he has side stepped the 10% surcharge for late payment so the charge in reality for the late payment is 5%....wonder what else he has 'misfiled'!?

Thanks (1)
By trecar
22nd Nov 2013 13:37

I have clients who are in the younger age group who have difficulties understanding some investment vehicles. In fact my wife who worked for a bank said some of the investment advisors had problems understanding some of the products they sold. So to dismiss failure as careless seems a little harsh.

But then according to HMRC our tax system is so simple that anyone can do it online. So all those out there who get it wrong must have done so through either deceitful or careless behaviour. The fact that a taxpayer had tried to comply by appointing a professional and had missed income attached to a capital instrument must surely be defined as unforgivable. A tax system that seeks to profit from error is not serving our country well and it is to the shame of our legislators that they permitted this to happen. I would look very hard at the surrounding circumstances to make sure that there are no mitigating factors. If there are, then look to get the penalty set aside as it may well reflect carelessness (or dare one say profiteering) on the part of HMRC.

Thanks (0)
By Marion Hayes
24th Nov 2013 12:22

Bank policy

Capital investment bonds may have interest credited at the end but taxable within each individual tax year, it may not betaxable till the end. Payment of the interest is restricted until maturity, or not.

Endless combinations - and then what happens. I have seen banks admit to not having sent paperwork to anyone whose bond wasn't live on 6th April, or only the final bit of interest, or....

I have even seen a big bank write to an old address for reinvestment instructions and when none were received just put the money into a new current account, and a building society which automatically reinvests, unless you tell them not to, into a mirror product. Neither sent new account information and were only found on HMRC enquiry as Euan suggests. It is easy to see monthly income not coming in but when there is no activity to miss I wouldn't be so sure there was any carelessness except on the part of the investment holder.

Thanks (0)
avatar
By David Gordon FCCA
25th Nov 2013 10:25

Human error

 

 I note from the correspondence that others agree with me on the complexity of these things.

 We are being put into a position where accountants appear to be entering into the minefield of "Human Rights".

 A few years ago, a previous incumbent of the post of overseer of HMRC, I think Dawn Primarola, (forgive me if I named the wrong panjandrum) publicly stated that "she refuses to accept the concept of innocent error".

 Thus implying that all taxpayers had God-like ability to deal with tax legislation rather more extensive than the Babylonian Talmud, which took more than one thousand years to write.

Perhaps we should insist on applying this to the HMRC of call centre fame, code number [***]-ups, and CIS repayment delays, thus enabling us to apply for penalties against HMRC.

 Second, the concept that one may not appeal against a penalty if the error was only a "One-off"   is so outrageous, and ethically mind blowing that it beggars belief. My old headmistress, Gawd bless'er, who administered the cane to eleven year old me would have loved that one. (yes I am that old, and it was deserved)

But again it is our own fault. Our professional representatives, starting with ACCA and ICAEW refuse to take substantive action on these matters because it might "spoil" their relationship with HMRC. A relationship which appears increasingly similar to that of a pet poodle to its master.

 

 

 

Thanks (0)
Stepurhan
By stepurhan
25th Nov 2013 11:07

Generalities v Specifics

There is a lot of talk about how bonds can be complex and that clients cannot be expected to understand the entire tax system. I would be grateful if the OP could confirm whether the bond in question was a complex one, or whether it was a simple case of interest on maturity. I am reading this as the latter from the wording of the original post, but I may be wrong.

If it is the latter then I maintain my position that the client in this specific case has been careless. I agree with David Gordon only insofar as it is possible for these things to be complex, not that they will always be so. If the situation were a more complex one, then I would also be seeking to reduce the penalty. This would be on the basis the client could not reasonably be expected to understand the tax implications of a complex transaction, such as the chargeable event gain on life insurance I mentioned earlier.

I would actually be in favour of a reverse penalty system where it can be demonstrated HMRC are in error. Similarly, I do not understand why different rates of interest apply to late payments to HMRC and late refunds from them. Perhaps parity on this would make HMRC prompter in handing money back, if they had a more pecuniary financial incentive for doing so. I would also be interested in a reference for that quote about "innocent error" because that is an appalling thing for a person in a government post to say.

Thanks (0)
By Marion Hayes
26th Nov 2013 10:46

Disagree with Stepurhan

in so far as I would want to know what paperwork was actually issued at the end of the relevant tax year, or on maturity, . Complexity is not the issue here, but the ability to make the relevant disclosures on information available at the time of the event.

Thanks (1)
Stepurhan
By stepurhan
26th Nov 2013 11:01

Client had the information

The client in this specific scenario had paperwork, but admitted misfiling it. Nevertheless they have received a big chunk of cash, and should have at least said to themselves, "I must have some paperwork for that". Instead they apparently just ignored it.

So the client had the paperwork (had the information available) and knew that they had received something (unlike a chargeable gain event, where they would not).

So, this is not a case of a client not understanding a complex rule. This is a client receiving a thumping great wedge of cash (the return of capital as well as the interest) and then not reporting it because they mislaid the paperwork. To not even ask "Why is the big wedge of cash I received not mentioned in my return" is careless. Unless the OP can provide information that this specific situation is more complex than that, I stand by my views.

Thanks (1)
avatar
By Alan Ferris
27th Nov 2013 08:00

Another side of the coin

When I do not know something or find it beyond my skills I seek the answer or try to obtain help from those that do understand.  Is it really not my fault if I deliberately ignore it?  Clearly if I do not seek to find the right answer I have not been reasonable in my approach.  Most people do not choose to remain in ignorance and will often seek the right answer.  It seems however that here people are supporting the fact that it is right to remain in ignorance if you find the answer complex.

Tax is complex and confusing.  Many other things are as well.  I know nothing about health issues, that is even more confusing and complex to me.  But I do not ignore a lump and seek specialist advice.  So when a person receives a large sum of money are they truly acting reasonably if they ignore it?

 

Thanks (1)
avatar
By justsotax
27th Nov 2013 10:38

complex it might be...

but the only thing that makes this careless is if the client didn't get issued with a statement detailing the income he had earned....i presume he didn't spend the £12k as it seems he wasn't aware of it?!

Thanks (0)
Stepurhan
By stepurhan
27th Nov 2013 11:00

Did receive the statement

I'm not sure how not receiving the statement is the only way this could be considered careless. Not receiving the statement could actually be considered more of an excuse to forget to report, though I still assert that the big chunk of money coming in is a bit of a hint. Unless you are asserting that, having received the statement, omitting the income was more than just careless. Whilst I have suggested this may be the case, even I think it is a bit harsh to consider it automatically so.

Regardless, the client in this case DID receive the statement. They just didn't do anything with it with regards to the tax return, the stated reason being they misfiled it.

There is nothing in the information provided to date to indicate the client was unaware he had received the income though.

Thanks (0)
avatar
By David Gordon FCCA
27th Nov 2013 13:53

The ey of the beholder

 

 My client Gawd bless'im skilled in his trade, was unable to sign his name on a cheque, but he was able to buy with legitimate earnings, for cash down, a nice Rolls-Royce.

 My client Gawd Bless'im, ran a very profitable international creative electronics company, and was a skilled electronic controls engineer. But, he was totally incapable of understanding or working out rates of interest.

 Complexity is in the eye of the victim. Why do my cynical colleagues underestimate the capacity of ordinary people to not understand? I once had an intelligent director take six attempts to correctly fill in a form P46.

 Let he who is without sin cast the first stone, as some fellow once said.

 

 

 

 

 

 

 

 

 

 

 

 

Thanks (0)
Replying to fawltybasil2575:
Stepurhan
By stepurhan
27th Nov 2013 14:27

Handling complexity

David Gordon FCCA wrote:
My client Gawd Bless'im, ran a very profitable international creative electronics company, and was a skilled electronic controls engineer. But, he was totally incapable of understanding or working out rates of interest.
Presumably your client Gawd Bless'im was capable enough to handle the "complex" task of asking someone to deal with this for him.

At the risk of sounding like a broken record, this was not a complex transaction. To extend that further, even if there was some complication to the transaction, he had employed an accountant. All he had to do was either hand over the paperwork or, not being able to locate it due to misfiling, ask his accountant whether there should be any tax due on a large amount of money he had received. Are you really saying that doing one of these two things is going to be "too complex" for someone to cope with? If so, then may I suggest a tax return fine is the least of their worries.

Since you seem determined to run with your "complex" argument, let me ask you exactly what you would count as careless? If you are saying that even signing a cheque can be considered "complex" for some individuals, is that an argument for excusing late payment? ("I would have paid on time, but I found signing the cheque for payment too complex") For that matter, would finding signing a tax return too "complex" be an excuse not to file one (since most accountants require signature as showing a client has approved teh figures).

Thanks (0)
By trecar
27th Nov 2013 16:01

Complexity not the issue

I wonder whether the discussion is wandering off point a little. I thought the issue was whether the act was careless and that means defining carelessness not what was complex. Surely what should be discussed is at what stage HMRC are entitled to label an act of omission as careless. The judgement is subjective when evidence to support it is absent. I have seen no report that HMRC attempted to find out the facts of the case before coming to a decision.

It seems to me that to identify an act of forgetfulness as careless is wrong as that is part of a mental process that cannot be regulated without some form of systemic reminder. However to misfile something could be defined as careless unless the act of filing relied on a defective indexing system or other mechanism. To me this is what is wrong about the present system. That an individual full of prejudices of one sort or another should be in a position to make a judgement without being aware of the facts seems wrong and potentially dangerous. To have created that situation through legislation inclines me to believe that it is a classic example of poor legislation seeking to profit at the expense of the taxpayer. Which is back to where I came in!

Thanks (0)
Replying to fawltybasil2575:
Stepurhan
By stepurhan
27th Nov 2013 21:38

Then define please

trecar wrote:
Surely what should be discussed is at what stage HMRC are entitled to label an act of omission as careless.
The client has made at least two errors, based on the facts presented. They have misfiled a document showing taxable income. They have received an amount of money and not asked their accountant if there is likely to be tax due on that income. So that is at least two acts of forgetfulness, forgetting the original receipt and forgetting getting the certificate. How many does it take to make an act careless? What if a client has a single act of forgetfulness about selling a valuable asset? Where do we draw the line? Do you think HMRC should not be entitled to label an act careless at all? I can't help feeling that would be opening the door to HMRC asserting deliberate action in situations like this and forcing the taxpayer to try to prove otherwise. All in all, I think I prefer having the lower penalty buffer zone of "careless" when a client has undoubtedly omitted reporting taxable income.

I am going to assume the person you are thinking is making "a judgement without being aware of the facts" is the HMRC inspector in this case. If that is the case, then it would seem to be you making the judgement, as the lack of report of HMRC attempting to find out the facts, does not mean they did not. Indeed, if the facts are as they appear in this thread, then I clearly agree with these findings. As far as not knowing the full facts myself, I have repeatedly asked for any indication that the situation is other than "client received large chunk of money and didn't even ask his accountant if that needed reporting". To date nothing has come forward so I can only go be the facts available.

Thanks (0)
Replying to chicken farmer:
avatar
By Alan Ferris
28th Nov 2013 08:15

Careless?

I receive notification from the garage my wheel is failing, I missfile it.

I see my wheel is loose, I ignore it.

If my wheel then detaches and hits somebody, do you think they will consider me careless or innocent?

 

It does appear this client has not acted reasonably in ensuring he consulted his accountant which is there for these instances.  If he did not have an accountant and had honestly held view that it had already been taxed then that is different.  But that is not the case.

 

Thanks (0)
avatar
By justsotax
27th Nov 2013 16:58

trecar...I wonder

if you would see it as 'careless' if someone misfiled your fee note for 10k...and failed to pay you...?

 

 

Thanks (0)
avatar
By ACDWebb
27th Nov 2013 20:45

Perhaps compare & contrast

Channa v Revenue & Customs [2013] UKFTT 499

and

Jones v Revenue & Customs [2013] UKFTT 249

Para 1 of the conclusion of the former says " Schedule 3(1)(a) of Schedule 24 defines “carelessness” to mean a failure to take reasonable care.  There is an obligation on taxpayers to exercise a standard of care required of a reasonable person.  It is accepted that an omission by a taxpayer may be innocent but may nevertheless be treated as a failure to take reasonable care.  This is because a careless inaccuracy may be innocent inaccuracy."

Channa failed. Jones succeeded.

Channa used an agent and got it wrong re a termination payment.

Jones did it himself and had discussed issues around the return & refund due to an error in claiming CGT losses against income with HMRC.

Misfiling the statement re a substantial sum would seem to tend towards the former rather than the latter, and it was a prompted rather than unprompted correction so it would seem likely you are stuck with a maximum mitigation to 15% unless a way can be found to obtain suspension

Thanks (0)
avatar
By bauer_hilts
28th Nov 2013 11:28

Appeal

I have to be honest I find it hard to believe that anyone who was to act for this client wouldnt appeal the penalty. The problem with the system is that it is very subjective, I can see the argument for that it was careless, I can certainly see an argument that it wasnt careless.  Genuine errors do happen, we are all only human at the end of the day, just because someone made an error it doesnt make it a careless one. Your right thought that in this analogy HMRC are between a rock & a hard place as they cant let all mistakes go without any penalties but sometimes I do fear they are somewhat draconian and a tad unreasonable.

I'm sure we all have come across a client or two were we could probably make an educated guess for ourselves whether it was a genuine error or not.  I dont know enough about this situation to decide for sure whether it should be construed as careless or not.  If the client has lots of information on their return to report then I can see how people who do not work in our profession can make genuine mistakes and omit something, I dont feel personally a penalty is then fair. 

Anyway like I say it may be careless or it may not, but I find it odd that some wouldnt at least appeal the penalty initially. 

 

 

Thanks (0)
Stepurhan
By stepurhan
28th Nov 2013 13:43

Appeal in advance

I have always tried to get my appeal in in advance. By making your mitigation comments in your final letter for an enquiry, you stand a better chance of getting a lower, or nil, penalty in the first place.

Once a penalty is in place, I assess whether I think it is reasonable based on what happened. If I think the client is getting off lightly, I will get that enquiry closed as soon as possible. Bear in mind that an appeal keeps the enquiry alive until it is resolved and you may not necessarily want that.

Thanks (0)
avatar
By bauer_hilts
28th Nov 2013 13:56

Agreed

I would agree I do try to mitigate any penalties in advance, but if you are at the stage whereby penalties have been levied then effectively the enquiry has been settled it is only the penalties to be agreed. Why would one worry about the enquiry being alive that bit longer simply by arguing over the penalties? I am intrigued to know as I may be missing something I am not aware of. Thanks.

 

Thanks (0)
Stepurhan
By stepurhan
28th Nov 2013 14:15

Time and revision

My first reason would usually be one of the client's peace of mind. Many clients feel stressed by enquiries, and the additional waiting for an appeal is something they would prefer to avoid. If I don't think the chances are good, I will advise the client of this and they will often prefer to get closure. If a client is insistent I would probably still appeal. It is just that, in my view, there is no basis for an appeal in this case, so it is a pointless time-wasting exercise for all concerned.

My other reason, though I will grant I have never come across it in practice, is related to you asking the inspector to reconsider the level of penalty. The penalty currently assessed is mid-range for a careless error. Since the penalties aren't settled until both sides agree, is it not open to the inspector to reconsider the penalties to a higher level?

Thanks (0)
By Marion Hayes
02nd Dec 2013 09:39

@stephurhan

apologies for my earlier comment - I had not registered the misfiling of the paperwork. ~I agree that if the paperwork was received, and monies knowingly reinvested there were at least 2 points in time where information needed to be recorded. Not only at the end but also at the beginning of the investment.

At best I would have been trying to reduce the penalty to the lowest due to misfiling as opposed to cancellation.

Thanks (0)