Tax: When carelessness is seen as negligence

Whilst watching the second test match at the Oval, my friends and I got onto the subject of tax. But before you switch off, were you aware of this tax rule….because I wasn’t:

HMRC defines “carelessness” as a failure to take reasonable care when managing your tax affairs. If a careless error causes you to underpay tax, you will owe the lost revenue plus interest, and you may face penalties ranging from 0% to 30% of the unpaid tax.

I know that most of us are pretty on the ball it when it comes to tax. But it may be tempting to think ‘oh that’ll do’ or ‘that’s close enough’. But a laissez faire attitude could cost you dearly. Similarly, if you have an accountant or bookkeeper taking care of your tax for you, you would be wise to keep a close eye on exactly what they are submitting. If they make any mistakes, it won’t be them that will be paying the price. It will be you.

So, what is ‘Carelessness’?

Understanding exactly how HMRC classifies carelessness is critical to navigating this tax penalty system and avoiding further scrutiny.

HMRC likens carelessness to negligence. It is judged by the standard of a prudent and reasonable taxpayer. You can be deemed careless if: 

• You fail to do something a prudent person would do.
• You submit tax returns with inadequate record-keeping (for example, poor expense tracking or incorrect dividend reporting).
• You blindly rely on others without checking things were reported correctly.
• You omit to seek independent tax advice when handling complex tax planning.

If you are found to have made an error due to carelessness as defined above, then penalities will apply. As I mentioned already, penalties for carelessness range between 0% to 30% of the extra tax due, depending on how long it takes to correct the error:

• Unprompted Disclosure: If you identify the mistake and report it to HMRC yourself, penalties can be reduced.
• Prompted Disclosure: If HMRC discovers the error and questions you first, penalties are usually higher.

Now, of course if you took reasonable care and made an innocent mistake, they will understand. But you will still have to pay the tax AND the interest. You will simply not have to pay any penalties.

Been careless? Look-back period will be extended

If HMRC classifies an error as careless, they then also have an extended window to assess your tax returns. Instead of the standard four year limit, HMRC can demand tax for up to the last six years. If you have taken your eye off the ball for a long time – maybe got a little complacent – the tax, interest and potential penalties could really start to ramp up.

So, perhaps see this article as a gentle reminder to keep your eye on the ball and make sure your tax affairs really are in order.