Tax Return Errors

Tax return errors happen even when care is taken to do things properly. HMRC will then seek to claim penalties. If the tax return error means you have underpaid tax, HMRC will ask whether the error was careless or deliberate. An error is careless if there is a failure to take reasonable care but no penalty can be charged if the error arose despite reasonable care having been taken.
Unfortunately, there is no statutory definition of ‘reasonable care’ so we have to rely on case law to try to make the distinction between reasonable care and careless or negligent behaviour. A commonly quoted example is in Collis v Revenue & Customs (2011) where the tribunal stated ‘We consider that the standard by which (reasonable care) falls to be judged is that of a prudent and reasonable taxpayer in the position of the taxpayer in question.’ Fine, but far from conclusive.

What if you take professional tax advice, and that advice results in a tax return error, you might think you have obviously taken reasonble care. But that’s not necessarily so. For example, in Gedir v Revenue & Customs (2016), the First-tier Tribunal held that the taxpayer took reasonable care despite a tax return error. They considered the following ‘essential elements’ for that to be so:

• the taxpayer consulted an adviser they reasonably believed to be competent
• they provided the adviser with the relevant information and documents
• they checked the adviser’s work to the extent that they able to do so
• they implemented the advice

So there may be carelessness on the part of the taxpayer’s advisers, but, the taxpayer may still have taken reasonable care to avoid the error. In the circumstances above, the taxpayer was entitled to rely on his accountants’ advice without the consulting the legislation or any HMRC guidance themselves.

Of course, taking a different view from HMRC on a technical point is not necessarily careless behaviour, even if your adviser’s view turns out to be considered incorrect. Provided that the view is reasonable, the adviser is entitled to advise the taxpayer on that basis and so a penalty is not neccessrily imposed.

We have had cases where the inspector involved disagreed with our view but also accepted that is was a perfectly reasonable view to take. It may even have been the case that the taxpayer would have won their case if they had the resources to appeal to higher courts. And it does, sadly, sometimes come down to how much money you want to spend to challenge the HMRC view.

So the moral is, take care. Put all the information togther carefully and check the tax return that has been prepared. You won’t always achieve perfection but you will be able to claim that you took reasonable care to avoid tax return errors.