Tax errors and penalties: five points to consider

1. Tax errors almost always lead to penalties

Your tax department probably files dozens of returns and claims every year. Will they always be 100% accurate?

If there is an error in a tax filing - or you should have filed a return, but didn't - HMRC will always consider imposing a penalty. An "error" means anything from a typo in a form to claiming a relief HMRC doesn't think you are entitled to.

To impose a penalty, HMRC needs to decide that your conduct was "careless", which means little more than that someone, somewhere, made an error that they should not have made. That opens the door to a tax assessment, penalties, and interest - often for a four-year lookback period, or more.

We are seeing HMRC levying more and higher penalties and, as pressures on the UK budget remain tight, we expect to see many more.

2. Allegations of dishonesty could be a problem

HMRC is able to impose much higher penalties on taxpayers whose conduct is perceived to be "dishonest" or whose errors are "deliberate".

Bad enough as these penalties are on their own terms, they can have a significant effect across the business. For example, this kind of penalty can be disclosable, or even disqualifying, as part of tendering or procurement exercises.

We are noticing a real increase in the number of businesses faced with this sort of accusation. HMRC's position tends to be that if anyone in the organisation had the requisite intention, regardless of their seniority, that will be enough to impose the higher penalty. Even more concerningly, we have seen penalties imposed on the theory that a taxpayer 'should have known' not to make the error in question.

3. Penalties will depend on your conduct and tax at stake

HMRC will calculate a penalty based upon:

• The amount of tax at stake

• How the error was made

• How helpful you have been to HMRC

Taxpayers can reduce their tax penalties significantly if they make a disclosure to HMRC in advance of a tax audit, and provide HMRC with upfront, detailed information about the error and how it happened.

In our experience, these can be delicate conversations that need to be handled carefully. Building a strong rapport with HMRC can help to resolve the problem early; but if it goes wrong, you could be looking at the start of a protracted dispute. It is important to consider who will engage with HMRC (tax, legal, or external advisors), and to do so with a thorough understanding of the potential ramifications.

4. Stop and check before you disclose

Prompt unprompted disclosure can help to minimise penalty exposure. However, we have seen cases where a taxpayer has been incorrectly advised to make a disclosure to HMRC when they did not need to. Thorough investigation can reveal whether perceived liabilities are correct, whether historic rulings might exist or where previous liability views have been taken. So if you think you have an error, it's worth pausing to assess the situation rigorously.

5. HMRC can, and will, 'name and shame'

"Deliberate" or "dishonest" errors are, in HMRC's view, tax evasion. HMRC will therefore use its power to disclose details of taxpayers who have made such errors. The information is posted on an internet site, and we are aware that journalists regularly check for updates. Businesses seeing this sort of penalty should expect the information to make its way into the public domain.

Engaging early with HMRC can help you minimise risks and reputational damage.