Careless Not Deliberate Error On A Tax Return

Overview Careless Not Deliberate Error On A Tax Return

The case of Dolan v Revenue & Customs [2020] UKFTT 448 (TC) showed how a careless error on a tax return led to an HMRC Penalty.

This case will see HMRC Penalties For Careless Or Deliberate Errors working in practice.

HMRC said the error on a return was deliberate and justified a higher HMRC tax penalty.

The taxpayer, Mr Dolan, disagreed and appealed.

What Is The Careless Error Test In A Tax Return?

The careless error test in a tax return was summarised by the case of Collis v Revenue & Customs [2011] UKFTT 588 (TC):

… penalty applies if the inaccuracy in the relevant document is due to a failure on the part of the taxpayer (or other person giving the document) to take reasonable care.  We consider that the standard by which this falls to be judged is that of a prudent and reasonable taxpayer in the position of the taxpayer in question.

Tax Return Error

The taxpayer, Mr Dolan, challenged HMRC’s penalty position following the error in his tax return for the year ended 5 April 2014.

HMRC levied a penalty on the basis tat the inaccuracy was “deliberate but not concealed” as set out in paragraph 3(1) of Schedule 24 of the Finance Act 2007.

The Tax Tribunal on appeal reduced the penalty from £46,199.63 to £19,799.84.

The matter in question related to the residency rules. The rules had changed and Mr Dolan had not correctly completed his return. As a result, HMRC said Mr Dolan was subject to UK income tax on his dividend income.

HMRC’s Position On Deliberate Error On The Tax Return

HMRC said the inaccuracy was ‘deliberate but not concealed’ and its discovery had been prompted due to an HMRC investigation into the taxpayer’s 2014 return. This led HMRC to consider the penalty percentage should be 47.25% given Mr Dolan was forthcoming with information and helpful. 

The taxpayer did not dispute the inaccuracy but the question was whether this was deliberate or careless. A deliberate error would have resulted in a higher HMRC tax penalty to a careless one.

HMRC said the taxpayer had not taken advice whilst aware residency law was complicated. It said Mr Dolan should have taken steps to ascertain the correct tax position and he could not rely on ignorance to escape liability. The Tribunal set out HMRC’s position on this as follows:

A person cannot simply escape liability by claiming complete ignorance where the person clearly knew that he should have taken steps to ascertain the position (see Clynes v HMRC [2016] UKFTT 369 (TC) at [86]). Mr Dolan made a conscious choice not to take such steps and the resulting inaccuracy was therefore a deliberate one.

The Clynes v HMRC case at paragraph 86 said:

… we consider that the term “deliberate inaccuracy on a person’s part” can extend beyond this. Our view is that, depending on the precise circumstances, an inaccuracy may also be held to be deliberate where it is found that the person consciously or intentionally chose not to find out the correct position, in particular, where the circumstances are such that the person knew that he should do so. A person cannot simply escape liability by claiming complete ignorance where the person clearly knew that he should have taken steps to ascertain the position. We view the case where a person makes such a conscious choice not to take such steps with the result that an inaccuracy occurs, as no less of a “deliberate inaccuracy” on that person’s part than making the inaccuracy with full knowledge of the inaccuracy.

Alternatively, HMRC said the taxpayer had been careless if it had not met the deliberate threshold.

Mr Dolan’s Position On The Return Error

Mr Dolan said he had proceeded on the basis of the old residency rules and he had not chosen to avoid getting advice. He immediately accepted his error when it was explained to him. 

Tax Tribunal’s Assessment Of Deliberate Error Suggestion

The Tax Tribunal rejected the suggestion that the error was deliberate. It assessed what ‘deliberate’ constituted:

The word “deliberate” is not defined within the statute. However, we agree with the view set out in Auxilium Project Management Limited v HMRC [2016] UKFTT 249 (TC) at [63]:

“In our view, a deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document.  This is a subjective test.  The question is not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate.  It is a question of the knowledge and intention of the particular taxpayer at the time.”

Mr Dolan said his knowledge gave him the wrong position and it was not enough to get to the right one.

The Tribunal accepted his position but said he was careless:

We consider that the standard by which this falls to be judged is that of a prudent and reasonable taxpayer in the position of the taxpayer in question (see Collis v HMRC [2011] UKFTT 588 (TC) at [29]).

We do not consider Mr Dolan to have knowingly provided HMRC with an inaccurate document and therefore we do not find the inaccuracy in the return to have been a deliberate inaccuracy.

…

We have found as facts that Mr Dolan did not accurately complete the boxes on the tax return because he did not know the non-resident rules had changed. He did not check the return as he expected his advisors would do that and it “went in last minute”. He did not seek up to date professional tax advice before submitting the return.

We do not consider this meets the standard of a prudent and reasonable taxpayer in the position of the taxpayer in question and we agree with the parties that the inaccuracy was careless.

…

We consider Mr Dolan’s conduct which resulted in the error to have been careless.