HMRC internal manual

Compliance Handbook

CH81145 - Penalties for Inaccuracies: Types of inaccuracy: Examples of careless inaccuracy

You must check the date from which these rules apply for the tax or duty you are dealing with. See CH81011 for full details.

Example 1

Paul, a self employed plumber, does not pay much attention to his record-keeping responsibilities and has no structured system for making sure that his records are accurate.

When Paul completes his SA tax return he cannot be certain that his figures are correct and is unable to check them. This attitude towards record-keeping indicates a lack of reasonable care.

Example 2

Chandra, a shopkeeper decides to replace his old van with a new vehicle. He buys an estate car so that he can use it for business trips to his local cash and carry, and also uses the vehicle for personal use in the evenings and weekends.

Chandra is not sure about what input tax he can claim for his vehicle, but he doesn’t contact his accountant or HMRC for advice. He wrongly claims all the input tax he paid on the car. This indicates at least a lack of reasonable care.

Example 3

A&B Ltd, a large company with a substantial advertising budget, does not have procedures to identify the entertaining element of advertising costs. So any expenditure on advertising is included in full in the advertising account, with no way of cross-checking how much of the expense relates to disallowable entertaining.

This would at least indicate failure to take reasonable care and could be shown to be deliberate. A&B Ltd’s basic systems and procedures are inadequate to give appropriate levels of assurance.

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Example 4

During an Employer Compliance review the compliance officer advises Able Ltd that reimbursement of private phone bills should be dealt with through the payroll and that PAYE and Class 1 NICs must be deducted accordingly.

When Able Ltd sends you its next end of year return you carry out a review and discover that the company has not followed the advice given by the compliance officer and the end of year return is wrong as a result.

This indicates that Able Ltd has at least failed to take reasonable care because it has ignored the advice given by HMRC.

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Example 5

On several consecutive VAT return periods Whizz Ltd tells you after the end of the return period that the return was wrong and gives you the correct figures.

All these errors occurred because Whizz Ltd’s systems are not adequate enough to produce correct figures for the return by the end of the return period and this repeated inaccuracy may, depending on the specific systems’ failures, be seen as at least a lack of reasonable care.

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Example 6

Susan is the personal representative of a deceased relative’s estate. He had a number of bank accounts but did not keep any recent bank statements. When she is completing the IHT account Susan makes no attempt to check the balances on the accounts held by some of the banks at the date of death. Instead she just estimates the amounts because she thinks the amounts should be relatively small. This shows a lack of reasonable care.

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Example 7

Rainyday Insurance Ltd uses the cash receipt method to account for its Insurance Premium Tax (IPT). The tax is due when payment of a premium is received by the insurer or someone acting on their behalf. Rainyday’s IPT returns are due at the end of each calendar quarter - March, June, September and December.

Insurance premium payments totalling £84,000 (inclusive of £4,000 IPT) are received from customers paying by instalments on 1 March. The IPT should be declared on the March return. However, the company’s bank statements for March are mislaid and no-one follows this up to determine whether the IPT return would be inaccurate as a result of not having the information contained in the bank statements. The accounting staff fails to include the £4,000 tax in the IPT return. Although the senior bookkeeper was aware they had not received the anticipated statements, they failed to follow this up to determine whether the IPT return would be inaccurate because of not having the information contained in the bank statements.

The mislaid bank statements are found in August and the payments totalling £84,000 are entered into the records in that month. This is the only error discovered in the period and Rainyday adjusts its September return under the error correction regime to include the extra IPT due (£84,000 x 1/21 = £4,000).

Rainyday are fully aware that the inaccuracy in the March return was because of a failure to take reasonable care by the bookkeeper. Adjusting the error on the later return is a disclosure of the inaccuracy for the purposes of the penalty regime because the IPT return shows the under-declaration in a separate box, see CH81141.

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Example 8

Dave is a sub contractor. He answered an advert advertisement placed by a tax agent, who would claim a repayment for him in return for 5 per cent of the repayment. Dave provided his basic details and was presented with a complete return, which he signed.

You take the return up for a check and find that the return is inaccurate in many respects. Dave admits that he did not ask for explanations of the figures and how they arose, or check the returns himself, which you accept.

Dave has been at least careless, as he has certainly failed to take reasonable care. We may feel sympathy for Dave as he has already paid a 5 per cent fee to an agent, but this should not affect the penalty decision.