Experts have warned that HMRC's latest proposals to clamp down on dishonest taxpayers could see individuals penalised for 'innocent mistakes'. The plans, if approved, would introduce a new criminal offence targeting "reckless" errors on self-assessment tax returns.
Current rules and proposed changes
Under current rules, HMRC can only levy penalties on mistakes considered to be "deliberate" — for instance, knowingly submitting documents that misrepresent the amount of tax owed. The proposed changes, however, would mean more "careless" errors could also face penalties, such as failing to properly verify eligibility for a tax relief before making a claim.
HMRC has sought to reassure taxpayers that genuine mistakes would not meet the legal threshold to be classed as "reckless" under the new plans. However, experts from the Chartered Institute of Taxation have cautioned that honest taxpayers could find themselves facing "prosecution for mistakes", according to the Telegraph.
Expert concerns and penalty framework
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."
HMRC can currently charge a penalty if the mistake is deemed to be deliberate, deliberate and concealed or due to a lack of reasonable care. Each category carries a different penalty. Errors from a lack of reasonable care can be charged up to 30% of the tax owed. Deliberate mistakes can result in a penalty of between 20% and 70% of the additional tax due while a deliberate and concealed error can go as high as 100%.
New proposals and consultation
In the new proposals, deliberate errors could get fined up to 100% while accidental mistakes could reach a 30% charge. The new framework will also take a taxpayer's track record into account. Those who correct their mistakes upon being notified by HMRC, and who haven't received any other formal notices within the last six years, will not be handed a fine.
However, should a taxpayer fail to address their error, it will subsequently be treated as deliberate. HMRC may also cast its eye back over previous tax assessments going back as far as 20 years. It's worth noting the new rules remain proposals at this stage, with the consultation period running until September. No date has yet been confirmed for when the changes could come into force.
An HMRC spokesperson previously said: "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."
