As well as charging interest on tax paid late, HMRC may also levy a penalty where there is an error in a tax return. These penalties may be judged as careless or deliberate and the level of penalty will also depend upon whether or not:
- the taxpayer has been upfront, making unprompted disclosures to correct the error;
- the error was deliberate; and
- the error was concealed from HMRC.
This matter is topical following the recent sacking of the former Chancellor of the Exchequer and Chairman of the Conservative Party Nadeem Zahawi who was adjudged to have been careless in connection with the reporting of capital gains and allegedly received a 30% penalty.
The amount of the penalty is based on the Potential Lost Revenue (PLR) and the range of penalties is set out in the table below:
| Behaviour | Disclosure by taxpayer | Penalty range |
| Careless | Unprompted | 0% to 30% |
| Careless | Prompted | 15% to 30% |
| Deliberate but not concealed | Unprompted | 20% to 70% |
| Deliberate but not concealed | Prompted | 35% to 70% |
| Deliberate and concealed | Unprompted | 30% to 100% |
| Deliberate and concealed | Prompted | 50% to 100% |
Higher maximum penalties may apply when offshore matters are involved.
Where HMRC issues the taxpayer with a “nudge” letter that would be regarded as a prompt from the department and thus potentially increases the level of penalty that might be imposed.
The law defines ‘careless’ as a failure to take reasonable care and needs to have consideration of the taxpayer’s abilities and circumstances. In HMRC’s view, it is reasonable to expect a person who encounters a transaction or other event with which they are not familiar to take care to find out about the correct tax treatment or to seek appropriate advice. A taxpayer who can demonstrate that they acted on professional advice from a person with the appropriate expertise, will normally be able to demonstrate they take reasonable care.
HMRC may reduce, or mitigate, the penalty depending on the quality of the disclosure, but any such reduction will not take the penalty percentage below the bottom of the stated range. The quality of disclosure is based on three factors – ‘telling’, ‘helping’, and ‘allowing access to records’.
HMRC may also suspend a penalty if it can be demonstrated that controls can and will be put in place to prevent the matter from occurring again in future.
You might also want to consider increasing your pension savings before 5 April 2023, if you have available ‘pension annual allowance’ to obtain tax relief for any additional contributions. The pension annual allowance includes any unused elements from the last three tax years as well.
Under the current rules, the government adds to your pension contributions at the 20% basic rate. For instance, if you save £4,000 in a personal pension the government tops this up to £5,000. Then, if you are a higher rate (40%) taxpayer, there is a further £1,000 tax relief given when your tax liability is calculated, reducing the net cost to £3,000. This can be even more effective if your income is between £100,000 and £125,140 where the effective tax rate is 60% due to the restriction of your personal allowance.
You might also want to consider making capital disposals and accelerating capital gains into 2022/23 if you haven’t yet used your £12,300 capital gains tax annual exempt amount. This annual exemption will reduce to just £6,000 for gains made in 2023/24.
There are other useful tax planning points we can discuss as well, including in relation to profit extraction from owner managed businesses and in gifting inheritances. Please do get in touch if you’d like to discuss the best strategies for your circumstances. Contact your usual Beavis Morgan Partner or email info@beavismorgan.com.