New tax year resolution: don’t be careless

The former Chancellor, Nadim Zahawi, is reported to have paid a 30% tax penalty as part of a £5 million settlement with HMRC. The penalty was for a careless, but not deliberate, error, raising the question: what constitutes carelessness?

HMRC only charges a penalty if there is a lack of reasonable care. The penalty will be higher if an inaccuracy is deliberate, but can be reduced, sometimes down to nil, if a taxpayer is helpful in correcting the inaccuracy.

Lack of reasonable care

A penalty for carelessness is charged where an error is not deliberate, but a taxpayer has failed to take reasonable care. This will differ depending on a taxpayer’s circumstances and abilities. HMRC expects each person to make and preserve sufficient records for them to make a correct and complete tax return.

• A taxpayer who has to deal with a transaction with which they are not familiar should find out about the correct tax treatment or seek appropriate advice. This will generally be the case where an asset is disposed of, with capital gains tax payable as a result.
• If still unsure, the taxpayer should draw HMRC’s attention to the entry and the uncertainty when submitting the relevant tax return.

This approach will mean reasonable care has been taken, and, even if the wrong tax treatment has been applied, it will not have been done so carelessly.

Unprompted disclosure

Unprompted disclosure can result in a large penalty reduction, but a disclosure will only be treated as unprompted if the taxpayer has no reason to believe HMRC has discovered the inaccuracy or is about to.

A disclosure will therefore be a prompted one if it is made after HMRC has already informed the taxpayer that they are going to carry out a compliance check into the relevant tax return.