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Jim Harra’s statement to parliament last week that there ‘are no penalties for innocent errors’ led to some interesting conversations in the Taxation office. What he said was obviously correct and in accordance with the law. Errors in a return do not automatically lead to penalties – there must be a failure to take reasonable care. What we discussed was how this works in practice and, in particular, whether HMRC ever accepts that there has been an innocent error which doesn’t attract penalties. There is considerable scepticism about this in the profession, although I have certainly seen examples of innocent error explanations being accepted.
The issue for me is the process behind penalty determinations. HMRC’s instructions are that where the return understates a liability, the facts must be determined before any comments are made to the taxpayer about whether a penalty will be due. Logically this makes sense, but it does immediately change the dynamic: the taxpayer is put on the back foot and has to show they have taken reasonable care. It does feel like guilty until proven innocent.
I was quite close to some of the discussions when the new penalty regime was being introduced and, looking back, it is fair to say that I, and probably others, did not fully think through the implications of exactly how you would need to go about establishing reasonable care. The structure of the regime – with four different penalty rates depending on the seriousness of the behaviour – still seems well designed, but perhaps there is a case for looking again at the process for determining how behaviour fits into those categories.
If you do one thing...
See the revised HMRC guidance on how it will deal with requests for information about the bona fides of pension schemes where a transfer of funds is contemplated (tinyurl.com/hmrctferpsgui).
