Tax errors
Do you read questions posted on tax forums by confused taxpayers? Sometimes the mistakes made by the unrepresented can be quite amusing, and educational.
One taxpayer was under the impression that he is “self-employed” as he is the sole shareholder and director of his own company. It’s an understandable mistake.
Unfortunately he completed the self-employed pages of his tax return instead of the employed pages, and including his P60 earnings as his self-employed income. Not surprisingly HMRC want to know why he hadn’t paid class 4 NIC!
That taxpayer was lucky as he hasn’t received an inaccuracy penalty for his mistake, but that may be on its way. HMRC are now issuing inaccuracy penalties for errors made in the 2013/14 tax returns, typically at the rate of 15% of the understated tax, although the penalty can be up to 100% of the underpaid tax. Strangely they don’t provide the taxpayer with a bonus for making a mistake in HMRC’s favour.
If your new client has received an inaccuracy penalty as a result of an error on a tax return they completed, the first thing to do is appeal the penalty. This should be done within 30 days of the appeal notice, but HMRC will normally accept a late appeal, especially if you explain that you have just been appointed as the tax agent.
The key to removing an inaccuracy penalty is to show the taxpayer took reasonable care when he completed the tax return, in which case the penalty should be reduced to nil. HMRC take into account the background, experience and personal circumstances of the taxpayer when deciding whether he took reasonable care.
For example a qualified accountant or a person who works in the finance industry, such as a banker, will be expect get everything right and to ask for missing information where the employer has failed to supply it. On the other hand an elderly person, who may be easily confused, may be forgiven for putting income in the wrong box. HMRC won’t know the circumstances under which the taxpayer completed their return until you tell them.
You can also ask HMRC to consider a “special reduction” for the special circumstances of the taxpayer outside the formal appeals process. Do this by asking for an internal review, and give as much detail about the taxpayer’s sorry story as possible.
Do ask one of our personal tax experts for guidance on claiming a special reduction for inaccuracy penalties if this is the first time you have encountered such a penalty.
This is an extract from our tax tips newsletter dated 26 February 2015. The newsletter itself contained links to related source material for this story and the other two topical, timely and commercial tax tips. It's clearly written and extremely good value for accountants in general practice. Try it for free by registering here>>>
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