Conservative Party Chairman Nadhim Zahawi

Conservative Party chairman Nadhim Zahawi is widely reported as having settled a historic tax liability with HMRC inclusive of a penalty charge.

Whilst he allegedly appears to have brushed this off as being accepted by HMRC as him being merely careless and not one HMRC have deemed to be deliberate, this does not mean a serious tax error did not occur.

In Revenue speak ‘Careless’ is still understating your true liability by for example submitting an inaccurate tax return, something which gives rise to a penalty charge but at a lower potential level.

He would not of been charged a penalty at all if he had been able to prove that he took ‘reasonable care’ in the submission of his return so what does this mean.

If, and only if, you took reasonable care to get things right, but your return or document was still wrong, HMRC will not charge you a penalty for an inaccuracy if you took reasonable care to get things right.

Some of the ways you can show that you took reasonable
care include:

• keeping accurate records
• checking with a tax adviser or with us if you’re not sure about anything

One would have expected a minister to have both accurate records and a good adviser.

So HMRC will charge a penalty if the error is:

• because of a lack of ‘reasonable care’ (or careless)
• deliberate — such as intentionally sending incorrect information
• deliberate and concealed — for example, intentionally sending incorrect information and taking steps to hide the error

The level of the penalty is linked to the reason why the error occurred. The more serious the reason, the higher the maximum penalty can be.

HMRC can reduce the penalty if you help them to put things right.

HMRC show in their fact sheets that what ‘reasonable care’ means i.e.

Every individual or business is expected to keep records that allow them to give a complete and accurate return. HMRC also expects them to check with their agent, or HMRC, to confirm the correct position, if they are not sure.

How the inaccuracy penalty is calculated

If a penalty arises because of a lack of reasonable care, the level of the penalty will depend on the reasons for the error and the potential lost revenue. The potential lost revenue is an additional amount of tax which is due or payable as a result of correcting the inaccuracy.

For example, if:

• a penalty arises because of a lack of reasonable care, the penalty will be between 0% and 30% of the extra tax due
• the error is deliberate, the penalty will be between 20 and 70% of the extra tax due
• the error is deliberate and concealed, the penalty will be between 30 and 100% of the extra tax due

The penalty can be reduced if you or your client tells HMRC about the error. HMRC may make further reductions depending on the quality of the disclosure. Penalties can be reduced by:

• telling HMRC about the errors
• helping HMRC work out what extra tax is due
• giving HMRC access to check the figures

Offshore penalties – From 6 April 2011, HMRC can charge an increased penalty where an inaccuracy penalty, or a failure to notify penalty, arises and the income or asset that gives rise to the penalty is held outside of the UK. These penalties can be up to 200% of the potential loss of tax.

An offshore matter is where the potential loss of tax is charged on or relates to:

• income arising from a source in a territory outside the United Kingdom (UK)
• assets situated or held in a territory outside the UK
• activities carried on wholly or mainly in a territory outside the UK
• anything having effect as if it were income, assets or such activities