HMRC has published new reasonable care guidance, which assumes a taxpayer won’t have taken reasonable care with compiling their tax return if they used a failed tax avoidance scheme. Tom Herbert and Rebecca Cave report.
The document, ‘reasonable care: tax returns and other documents’, summarises how taxpayers can make sure they take reasonable care with their tax returns and what happens if they do not (including details of penalties).
Previously, the guidance on reasonable care guidance had been spread across various HMRC compliance manuals, and this new document is the first attempt to bring together the advice in one centralised location on gov.uk.
The new page describes reasonable care as “doing everything you can to make sure the tax returns and other documents you send to [HMRC] are accurate.”
According to the guidance, the tax authority takes individual circumstances into account when considering whether a taxpayer has taken reasonable care.
“If you aren’t sure about anything,” the document states, “you should ask HMRC or a tax adviser”.
However, the taxpayer is cautioned that even if they use a tax adviser it is still the taxpayer’s responsibility to pass on accurate and complete information, or they could find themselves subject to penalties.
If the taxpayer has used a tax adviser with the appropriate expertise, the guidance states that HMRC would normally consider this as having taken reasonable care, unless it’s classed as disqualified advice.
Penalties for errors
If a taxpayer is shown to have taken reasonable care to get things right, but their return is still inaccurate, HMRC will not charge a penalty.
However, if a return or other document is sent to HMRC with an inaccuracy that was either as a result of not taking reasonable care (behaviour was careless) or the action which prompted the error was deliberate, it will result in one of the following penalties:
- an understatement of a person’s liability to tax
- a false or inflated statement of a loss
- a false or inflated claim to repayment of tax
“The penalty amount will depend on the reasons for the inaccuracy,” states the document, “and the amount of tax due (or payable) as a result of correcting the inaccuracy.
“If HMRC finds you’ve deliberately sent inaccurate returns or other documents, you could be charged a higher penalty or be taken to court.”
There are higher penalties for inaccuracies that are:
- deliberate but not concealed – up to 70% of tax
- deliberate and concealed – up to 100% of tax
In a change from previously published guidance, the new document makes it clear that HMRC will regard a taxpayer as not have taken reasonable care if that taxpayer has used tax avoidance arrangements which HMRC later defeat.
Tax avoidance arrangements are classed as defeated if:
- the taxpayer reaches an agreement with HMRC - so the expected tax advantage of using the arrangements isn’t available
- HMRC sends a tax assessment, or adjusts the taxpayer’s tax position, to counter the tax advantage - and the taxpayer does not appeal
- The taxpayer appeals to a tribunal or court against HMRC’s assessment and loses
- The taxpayer takes corrective action after receiving a follower notice
Why new guidance?
Robert Maas, consultant at CBW, commented that the revised guidance has been prompted by the introduction of a new law introduced by F(No 2)A 2017, s 64.
This says that from 16 November 2017, a person who enters into a tax avoidance scheme cannot rely on advice from a third party (including a barrister) unless it meets certain criteria. This broadly means that the adviser must be chosen by the taxpayer and not the tax scheme promoter.
The guidance confirms that this applies where the return or document relates to a tax period that began on or after 6 April 2017 and ended after 15 November 2017 and was sent to HMRC on or after 16 November 2017.
If the taxpayer feels they did take reasonable care, they will need to demonstrate this to HMRC. Maas notes that the taxpayer has no obligation to talk to HMRC at all. If the taxpayer is pressured to talk to HMRC they may unwittingly volunteer information to the tax department to which it has no legal right.
Jolyon Maugham QC welcomed the new guidance, which he said he has been pushing HMRC for years. Maugham commented; “Up until now, tax dodging was often win/win for the taxpayer. Assume your tax bill was £100 and you tried to dodge £70. If it worked, your tax bill was £30. If it didn't, you still only paid £100. But now, if it doesn't work, you could pay £170.”
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