Experts have warned that HMRC plans to crack down on dishonest taxpayers could see people penalised for 'innocent mistakes'. The proposals would introduce a new criminal offence for 'reckless' errors on self-assessment tax returns.
Currently, the rules allow HMRC to charge penalties on mistakes deemed to be 'deliberate', for example, purposefully sending documents that misrepresent how much tax you owe. However, the new change would see more 'careless' mistakes also potentially penalised, like not properly checking if you are eligible for a tax relief before claiming it.
Penalties under current rules
HMRC can currently charge a penalty if the mistake is deemed to be: due to a lack of reasonable care, deliberate, or deliberate and concealed. Each of these mistakes has a different penalty associated with it.
Errors due to lack of reasonable care can reach up to 30% of the tax due. Deliberate mistakes can have a penalty of 20% to 70% of the extra tax due. However, if the mistake is deliberate and concealed, as in the taxpayer took steps to hide the mistake, this penalty can be charged at 100% of the extra tax due.
Concerns over the new offence
The new rules could mean even 'innocent' mistakes that aren't done deliberately could receive a letter from HMRC and be fined. Deliberate mistakes would see fines worth up to 100% on the tax lost while innocent mistakes could be charged up to 30%.
HMRC has assured taxpayers that people who make genuine mistakes would not meet the legal threshold to be considered 'reckless' under the new plans. But experts from the Chartered Institute of Taxation (CIOT) warned honest taxpayers may be facing 'prosecution for mistakes', according to the Telegraph.
Ellen Milner, of the CIOT, told the Telegraph: "We are concerned that the proposed offence will not create a clear enough distinction between carelessness, recklessness and deliberate conduct. Without that certainty, there is a real risk that compliant taxpayers and advisers could face the threat of criminal investigation for conduct that falls short of dishonesty."
History and correction of mistakes
The new system will consider a taxpayer's history as well. If a person fixes their mistake after being made aware by HMRC and they haven't received other formal notices in the last six years, they won't be issued a fine.
However, if a taxpayer doesn't take action to correct their error, it will then be treated as deliberate. HMRC may also then look back at past tax assessments up to 20 years ago.
The new rules are still just proposed changes and the consultation will be ongoing until September. No date has been set for when the rules could come into effect. An HMRC spokesman said previously: "We know most of our customers act in good faith and want to get their tax right. These proposals are designed to help minimise penalties for those who swiftly correct mistakes when we flag them and make the process of doing so quicker and easier."
