The New Penalty Regime and Reasonable Care
Schedule 24 of the Finance Act 2007 introduced the tax penalty regime and brought with it a change of emphasis in the way in which penalties are charged on tax transgressions. The new penalty regime is very much a behaviour-based system under which the level of penalties is determined based on three behavioural concepts. These are reasonable care, whether the misdemeanour was deliberate and, thirdly, whether the parties then try to conceal it.
Establishing the deliberate and concealment motives is more of a problem for HMRC but establishing whether somebody has taken reasonable care is far more subjective. However, both taxpayers and agents alike are expected to take "reasonable care" when dealing with their tax affairs.
What is Reasonable Care?
Exactly how to define reasonable care is subjective but HMRC have issued their own view on this and this is contained in their Compliance Manual Handbook at CH81120. There is a different level of care required from taxpayers and agents and guidance is given on this also.
HMRC realise that there may be some variance on the definition of reasonable care where there is uncertainty about a certain transaction and have released the following guidance on this:
"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 take appropriate advice.
If, after that, the person is still unsure, they should draw attention to the entry and the uncertainty when they send the return or document to us. In these circumstances, the person will have taken reasonable care to draw our attention to the point and if they are wrong, they will not have been carelessly so.
Thus, disclosure which is normally considered in the context of discovery, now will extend to the issue of penalties where it is found that a transaction and the uncertainty relating to it will achieve the "reasonable care" required to in order for the taxpayer to avoid a penalty should the treatment prove incorrect.
The guidance gives some specific examples:
- a reasonably argued view of situations that is not upheld
- an arithmetical or transposition inaccuracy that is not so large either in absolute terms or relative to the overall liability, as to produce an odd result or be picked up by the quality check.
- following advice from HMRC that later proves to be wrong provided that all the details and circumstances were given when the advice was sought
- acting on advice from a competent adviser which proved to be wrong, despite the fact that the adviser was given a full set of accurate facts.
For further advice on this issue or for any other technical query, please phone the Advisory Services helpline on 020 7059 5920.