This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Compliance Operational Guidance

Supporting Guidance: employer compliance: guidance by subject: penalties: fraud, neglect and ‘innocent error’ - pre April 2009

This terminology applies to returns due up to 31/3/2009. With effect from 1/4/2009 when the new penalty regime commences you will have to familiarise yourself with the new terminology. See CH81110.

An employer is liable to a penalty for submitting an incorrect return where the error is due to serious evasion or neglect. However you should not get drawn into any discussions with the employer/contractor or agent on the level of culpability until all the facts leading to why the ‘error’ occurred have been established.

This is to prevent compromising any action Cross Tax Evasion teams may wish to take where VAT has been evaded because of the dishonest conduct of the taxpayer/employer.

Serious evasion involves falsification with an intention to deceive. It is deliberate.

You should

  • See EM5105 on the meaning of serious evasion and
  • See COG904570 where serious evasion is suspected.

Neglect does not involve any deliberate intention to deceive or to pay less tax or NICs.

You should

  • See EM5125 on the meaning of neglect.
  • Proceed on the basis that a good working definition of neglect is simply ‘a lack of reasonable care’. Plain carelessness can well be negligence.
  • Approach the question of establishing neglect on the basis of ‘Would a reasonable employer taking reasonable care have made this error in his return?’ If the answer is no, the return is negligently incorrect.

‘Innocent error’ does not appear in the legislation and has often caused confusion.

You should

  • always remember that neglect does not require any deliberate intention. ‘I didn’t mean to do it’ is not a defence against negligence or any subsequent penalty
  • approach the phrase ‘innocent error’ on the basis of ‘was this error innocent even of negligence?’

In any compliance check, you must examine the evidence and question the employer to establish the facts surrounding the making of the incorrect return. For example:

  • Did the employer take the trouble to read and follow the guidance literature issued by us or available on our website? A reasonable employer taking reasonable care would do so.
  • Similarly a reasonable employer would take reasonable care to check the accuracy of all entries. ‘A simple slip’ such as leaving a nought off the end of a figure, or ‘an oversight’ such as omitting an employee who has left from the return, are precisely the sorts of thing reasonable care would prevent.
  • If an employee or an agent prepared the return, what steps did the employer take to make sure the entries were correct and complete before he signed it? It is his return and he remains responsible for it.
  • It may happen, as for example with a complex legal avoidance scheme, that the employer (probably through his agents) has a reasonably arguable case for what he returned. A reasonable employer might be advised by leading professionals that, in the given circumstances, no liability to tax or NICs would arise. He might follow that advice to the letter and arrange his affairs on that basis. We might believe that a liability does arise. It might require litigation resulting in a 3-to-2 majority in the House of Lords to establish that the scheme did not work, then the return will be incorrect. But there would be no question of its having been submitted negligently incorrect.
  • Similarly, where entitlement to earnings exists but the employer was not aware of it until after the return was due, and made payment after the return was made. It would be reasonable to accept that there was no neglect in submitting the return incorrectly - COG905185.