New tax year resolution: don’t be careless

The former Chancellor, Nadim Zahawi, is reported to have paid a 30% tax penalty as part of a £5 million settlement with HMRC regarding the disposal of shares in a company he had co-founded. The penalty was for a careless, but not deliberate, error, raising the question: what constitutes carelessness?

HMRC only charges a penalty if there is a lack of reasonable care. The penalty will be higher if an inaccuracy is deliberate, such as intentionally submitting incorrect information, and higher still if steps are taken to conceal the error. The penalty can be reduced, sometimes down to nil, if a taxpayer is helpful in correcting the inaccuracy. The range of penalties HMRC can charge are:

 Unprompted disclosurePrompted disclosure
Lack of reasonable care 0% to 30%15% to 30%
Deliberate20% to 70%35% to 70%
Deliberate and concealed 30% to 100%50% to 100%

Lack of reasonable care

A penalty for carelessness is charged where an error is not deliberate, but a taxpayer has failed to take reasonable care. This will differ depending on a taxpayer’s circumstances and abilities. The level of reasonable care expected from a self-employed taxpayer without an accountant is considerably less than that expected from a limited company with complex tax affairs.

HMRC expects each person to make and preserve sufficient records for them to make a correct and complete tax return.

  • A taxpayer who has to deal with a transaction with which they are not familiar should find out about the correct tax treatment or seek appropriate advice. This will generally be the case where an asset is disposed of, with capital gains tax payable as a result.
  • If still unsure, the taxpayer should draw HMRC’s attention to the entry and the uncertainty when submitting the relevant tax return.

This approach will mean reasonable care has been taken, and, even if the wrong tax treatment has been applied, it will not have been done so carelessly.

Unprompted disclosure

Unprompted disclosure can result in a large penalty reduction, but a disclosure will only be treated as unprompted if the taxpayer has no reason to believe HMRC has discovered the inaccuracy or is about to discover it. A disclosure will therefore be a prompted one if it is made after HMRC has already informed the taxpayer that they are going to carry out a compliance check into the relevant tax return.