Understanding HMRC's approach to careless and deliberate tax behaviours

  • Describe HMRC’s approach to characterisations of taxpayer behaviour
  • Understand the consequences if HMRC allege erroneous behaviours
  • Identify the key protection provided by advisers
Understanding HMRC's approach to careless and deliberate tax behaviours
Nadhim Zahawi's tax investigation by HMRC has been material to him losing his job as minister. (Tolga Akmen/EPA-EFE/Shutterstock)

The revelations about Nadhim Zahawi and the widely reported suggestion that he paid a tax penalty for a “careless but not deliberate” error has made front pages regarding this distinction, which is traditionally the preserve of tax professionals.

This article provides an overview of HMRC’s approach to these terms, the consequences if HMRC allege such behaviour, and the key protection provided by advisers.  

Zahawi has yet to comment specifically on his penalty, but if the reports are correct, he paid a penalty of 30 per cent of the disputed tax. 

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It has been suggested that this is the maximum penalty but, in fact, it is likely to be a reduction from what appears to be a maximum penalty of 45 per cent (which we explain further below).

This has been material to him losing his job as a minister. This controversy is therefore a salutary lesson in the importance of understanding the principles of “careless” and “deliberate” behaviour, and how damaging accusations of either can be for any taxpayer’s finances and reputation.

Mistakes happen

The growth of the UK tax code has been dizzying.

Legislation that once sat neatly within one volume spans a minimum of seven books and added to that is thousands of pages of HMRC guidance along with numerous technical briefings and tax cases that can all impact on how you complete a tax return. 

It is therefore unsurprising that taxpayers (and their advisers) get things wrong.

This matters because under self-assessment all the emphasis is on taxpayers to get things right and suffer the consequences if HMRC later discovers an error.

If an error has led to an underpayment of tax, interest must be paid (currently 6 per cent and rising) and HMRC will inevitably scrutinise the taxpayer’s behaviour to decide whether to characterise it as innocent, careless or deliberate.  

That characterisation impacts on the penalties that could be imposed, HMRC’s deadlines to collect additional tax, whether a taxpayer is 'named and shamed' and, in the more extreme cases, if any criminal charges need to be considered. 

It can then have an impact outside the tax world where certain appointments (not limited to chancellor) may call for such penalties to be disclosed.

Careless until proven innocent

It is worth noting that “innocent”, “careless” and “deliberate” have undergone their own rebranding exercise, notionally to make things simpler for ordinary taxpayers. 

Until the late 2000s, HMRC categorised taxpayer behaviour as innocent, negligent or fraudulent and these terms are still instructive as to how the terminology is intended to operate.  

The current chief executive of HMRC Jim Harra explained the distinction between innocent and careless errors in a recent Public Accounts Committee meeting.

He said: “There are no penalties for innocent errors in tax affairs, so, if you take reasonable care but nevertheless make a mistake, you will be liable for the tax, and for interest, if it is paid late.