Reasonable care and careless mistakes

By Tolley
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The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Reasonable care and careless mistakes
  • Background
  • What is 'reasonable care'?
  • Reasonable care - underlying data and records
  • Reasonable care - VAT or tax treatment of transactions
  • Reasonable care - use of external personnel - advisers and agents
  • Reasonable care - communication of errors to HMRC
  • How does HMRC distinguish between reasonable care and careless behaviour?

Background

The concepts of 'reasonable care' and 'careless mistakes' are contained within FA 2007, Sch 24, paras 3–4. As set out in para 1 of this Schedule, these behaviour-based penalties relate to inaccuracies, contained in a document, submitted by a person to HMRC.

FA 2007, Sch 24, paras 3–4

For the sake of accuracy, the distinction between taking reasonable care and making a careless mistake is not relevant for the purpose of calculating penalties for errors within paras 1A (errors in taxpayer’s documents attributable to another person) and 2 (under-assessment by HMRC) of this Schedule.

Nor is this distinction relevant for the purposes of the main 'failure to notify a liability' penalties set out in to FA 2008, Sch 41.

Within FA 2007, Sch 24 (subscription sensitive) there are two key paragraphs of relevance to careless behaviour:

  • para 3(1) states that an inaccuracy within a document given to HMRC is 'careless' if the inaccuracy is due to a failure by a person to take reasonable care
  • para 4(1) states that the penalty payable for careless action is 30% of the potential lost revenue

In other words, if a business can demonstrate to HMRC that reasonable care has been taken, in a document or return, they should not suffer a penalty.

Should the business be unable to demonstrate and evidence reasonable care, the penalty is a maximum 30% of possible lost revenue. This assumes that the error is not deliberate; should this be the case a higher level of penalty may be due.

What is 'reasonable care'?

There are a number of sources of guidance that must be referred to in order to fully define the concept of reasonable care in practical terms. These

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