Don’t get technical with me, inspector!
If the Taxman discovers a purely technical mistake in your return, can he charge you a penalty? Is it up to you to prove him wrong or can you tell him to put up or shut up?
Technically a mistake
Taxman’s own guidance. The Taxman’s Enquiry Manual (EM) tells his inspectors that although penalties will be more obvious where business receipts have been understated, they should still consider culpability whenever tax return adjustments lead to additional tax (EM 5140). Inspectors are tending to seek penalties on technical points more frequently than ever before.
Negligence. The legislation provides for penalties in respect of incorrect returns submitted fraudulently or negligently. What is negligence? It is the omission to do something which a prudent or reasonable man would do. The Taxman would also suggest that it means a lack of proper care and attention.
In practice
For example. What would be the penalty situation if a balancing charge had been deducted instead of added? The Taxman might suggest that such an obvious blunder indicates negligence. However, if you had no professional help in preparing your return, the mistake was a one-off and did not distort the results to make it obvious that something was wrong, it could be argued that the error was innocent.
Only human. We all make occasional errors so the important thing is to consider why it is made. A genuine mistake made by a taxpayer in good faith must be regarded as an innocent error (EM 5181).
Not the first time. The position may be different, however, if you have made a similar mistake before or there is a history of silly errors. Even if the error itself was not negligent, penalties can still be levied if you become aware of it and don’t correct it without reasonable delay.
Blame your agent. It’s interesting to note that “agent error” is a defence. Tax can be charged by a discovery assessment due to the negligence of a taxpayer or a person acting on his behalf, but this does not apply to penalties. The negligence must be that of the taxpayer. If the incorrect return is completely the fault of your agent and you could not reasonably be expected to be aware of the error when checking and signing the return, you will not be liable for penalties (EM 5140).
Ineffective tax planning
Additional tax now due. Another “technically a mistake” situation involves tax planning which proves ineffective and additional tax becomes due. The Taxman would struggle to show negligence provided you can demonstrate that competent professional advice was taken, which indicated that the planning was within the law and the return made a full disclosure of the facts.
Tip. If penalties are agreed in principle, point out to the Taxman that the ultimate loss to the Exchequer is much less than the tax in the year of the error and the penalty should therefore be minimal.
Conclusion
It’s his problem. If you are faced with an inspector seeking penalties on technical points, do not concede easily. Remember that the burden of proof is on him to show that you have been negligent, and this could be difficult to achieve. Most errors in returns are innocent and there will be no question of penalties raised sticking.
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