Understanding tax return errors and potential penalties

Written by India Johnson

Sometimes people make mistakes on their tax return, which can end up in them paying less (or more) tax than they need to. 

These mistakes can be purely accidental – we’re all human after all. But sometimes people (or businesses) make errors on their tax return on purpose, with the aim of getting away with paying less tax than they need to. 

Accidental vs deliberate mistakes

HMRC is used to people making errors on their return, either by accident or on purpose. So they have a pretty robust way of dealing with them. This spans from charging no penalty at all, through to a potentially hefty fine that must be paid by law. 

If major, deliberate tax fraud is detected, there’s also a chance the culprit could be prosecuted and even sent to jail. Ouch. 

Don’t panic though – HMRC is fully aware that mistakes can happen by accident. In this case, you wouldn’t face any kind of legal action. And as long as you were upfront about the mistake, and helped HMRC to put it right, you wouldn’t have to pay a penalty either. 

In this article we’ll look at how HMRC assesses tax return mistakes, how it decides whether or not to issue a penalty, and how it decides how much this should be. 

Let’s get started.

HMRC puts tax return errors into one of four groups

To understand how HMRC views and deals with tax return errors, it’s useful to look at how it categorises different types of error. 

Here’s a breakdown of the terminology HMRC uses to describe these:

Reasonable care: ‘Reasonable care’ is the term HMRC uses to describe how everyone should file their return. In other words, anyone who submits a tax return should do everything they can to make sure it’s accurate

Sure, mistakes can still happen – even if someone takes ‘reasonable care’ to make sure they don’t. But if HMRC can see that you did take care to avoid mistakes, they won’t hit you with a penalty. 

HMRC says some of the ways you can take reasonable care over your taxes include:

  • keeping enough records to make sure your tax return is accurate 
  • keeping those records safe
  • checking with a tax adviser or with HMRC if you’re not sure about anything

Careless mistakes: If you don’t take reasonable care to keep your taxes accurate, and a mistake happens on your return because of this, HMRC will class this as a ‘careless’ mistake. 

Unlike if you took reasonable care over your return, you can get a penalty for making a careless mistake.

Top tip: By using an intelligent tool like Finmo to track your income and expenses, you significantly lower your risk of making a mistake on your tax return. Finmo lets you link your bank account to our app so you can get a full view of your income and outgoings. Our software also means you can automate income and expense tracking, so you never miss a trick. 

Plus, if you decide to file your tax return with one of our Self Assessment plans, you’ll have a dedicated tax expert and accountant to help you with every step of the process (for a fraction of the cost of a high-street accountant).  

Deliberate inaccuracies: If you deliberately make errors on your tax return and submit it knowingly, HMRC will class this as filing a return with ‘deliberate’ inaccuracies. 

Deliberate errors could be things like:

  • saying your business expenses were more than they actually were
  • saying you earned less than you actually did

You can get a penalty for submitting a tax return that you know is inaccurate (so, one with deliberate inaccuracies). 

Deliberate and concealed inaccuracies: If you make deliberate errors on your tax return and actively try to hide these errors from HMRC, then HMRC will class this as filing a return with ‘deliberate and concealed’ inaccuracies. 

Steps taken to hide these errors might include things like creating false invoices as evidence for business purchases that, in reality, didn’t happen.

Of course, you can get a penalty for making deliberate and concealed errors on your tax return.

How does HMRC work out how much a tax error penalty should be?

If HMRC decides that a penalty is appropriate, it goes through a multiple-step process to figure out how much the penalty should be. 

This involves looking at how much tax the person in question still owes but hasn’t yet paid. So, say they paid £4000 for their tax bill. Then, when the errors on their tax return were corrected, it came to light that the bill should have actually been £7000. In this case, they’d still owe £3000. 

The person would then need to pay this £3000, as well as a penalty. This penalty would be a percentage of £3000 (the value of the money left owing).  also called the Potential Lost Revenue, or ‘PLR’). 

Whether or not you tell HMRC about the errors on your tax return makes a big difference

When HMRC decides whether or not to give a penalty for tax return errors (and how much it’ll be), it looks at a number of factors. 

One of these is whether or not the person told them about the error, or if HMRC was the one to discover it. These two situations are referred to by HMRC as:

  • unprompted disclosures: where the person tells HMRC about the error/s
  • prompted disclosures: where HMRC discovers the error/s

HMRC is less likely to give a penalty, or the penalty will usually be less, if the person tells them about the error/s (an unprompted disclosure). 

We cover how this percentage is worked out below. But there’s some useful stuff to know before we get to that.

One more thing – HMRC also often takes reductions off penalties based on how the person in question behaves once the tax error’s been discovered. The more helpful they are in putting the error right, the more money gets taken off their penalty. More on that below, too. But first:

This table shows how HMRC works out penalty percentage rates 

Now we’ve looked at the way HMRC assesses different types of tax return errors, we can translate this across to how big of a penalty (if any) they might give for each one. 

Don’t forget, the penalty HMRC assigns has to be paid on top of the money you still owe on your tax bill (Potential Lost Revenue). 

The below table shows how HMRC works what percent of your Potential Lost Revenue you need to pay, in addition to the Potential Lost Revenue itself.

This is the table HMRC uses to show this: 

Type of behaviour Unprompted disclosure Prompted disclosure
Reasonable care No penalty No penalty
Careless 0% to 30% 15% to 30%
Deliberate 20% to 70% 35% to 70%
Deliberate and concealed 30% to 100% 50% to 100%

But there are other factors that can affect the amount of the penalty too. Which brings us onto:

HMRC gives reductions on penalties for helpful behaviour

After HMRC has worked out the tax penalty percentage rate, it then looks at how the person behaved after the error came to light. If the person was helpful, they reduce the penalty. 

HMRC assesses how ‘helpful’ a person was by looking at three different areas, which they call:

Telling: 

  • Whether or not the person told them about the error/s or HMRC found out on its own (that’s the ‘unprompted disclosure’ vs ‘promoted disclosure’ we looked at earlier).

Say, for example, you filed your tax return, then shortly after realised it contained a mistake. If you then went on to fix the mistake and re-file your return, this would be considered ‘telling’ HMRC about the mistake. If you did this before the following 31st January, HMRC wouldn’t need to take any action against you or issue a penalty.

If you realised the mistake more than a year later, you’d need to write to HMRC. In this case, they’d probably still let you rectify the mistake without a penalty.

  • Whether or not the person told them everything they could, and how willing they were to answer HMRC’s questions about the error/s.

Helping:

  • How helpful the person was with things like answering letters quickly, attending meetings and checking their own records for inaccuracies

Giving:

  • Whether or not the person was willing to give access to relevant documents (both those that HMRC knows about, and hose they might not) without unnecessary delay

HMRC gives these percentage reductions for the three types of helpful behaviour:

  • Telling: up to 30% penalty reduction
  • Helping: up to 40% penalty reduction
  • Giving: up to 30% penalty reduction

These reductions get taken into account when HMRC works out its final penalty. 

Here’s an example of how a tax error penalty might be worked out

HMRC found a careless inaccuracy that a tax filer hadn’t told them about before HMRC started its check. 

The penalty range for a careless inaccuracy with a prompted disclosure is 15% to 30% of the potential lost revenue (PLR) – as per the table above. 

Next, HMRC looked at how the person behaved after the error came to light. The person did tick all the boxes of the ‘helping’ side of things), and they did tick all of the boxes for the ‘giving’ side of things too.

So HMRC decided to reduce their penalty by a total of 70%. As the tax filer didn’t tell them about the mistake, they missed out on that further 30% reduction for ‘telling’. 

So, to work out the penalty percentage rate, HMRC first worked out the difference between the minimum and maximum penalty percentages:

30% – 15% = 15 

Then it took off the percentage reduction from the maximum penalty percentage it could charge:

15 x 70% = 10.5% 

This then led to the final penalty percentage rate:

30% – 10.5% = 19.5%

What to do if you don’t agree with HMRC’s penalty

If HMRC highlights a careless error on your tax return that you don’t agree is actually a careless error, you have rights.

It might be that you have health or personal circumstances that mean it’s unfair of HMRC to call your mistake ‘careless’. Or it might be that you can’t afford to pay for a tax advisor, and have done the best you can with your return, but have still accidentally made a mistake.

In this case, you can appeal HMRC’s decision to fine you. 

To do that, it would be best to send them a letter clearly explaining why your mistake wasn’t careless. This could include highlighting things like (if relevant):

  • Your age if your elderly
  • Any disabilities you have
  • The fact that you did double and triple check your return, but didn’t see or understand that there was mistake
  • The fact you can’t afford a tax advisor
  • The fact that you do keep all of your records accurate and safe (provide examples of how you do this)

You’d then want to sign off by politely asking if HMRC would take into account your unique circumstances and reduce its penalty 0%. 

Finmo is here to help

Making mistakes on tax returns is common, especially for first-time filers. If you’re worried about making an error on yours, don’t forget our finance tracking app is designed to keep your records accurate. And with a Finmo plan, you’ll get ongoing support from a dedicated tax expert, and your return reviewed by a licensed accountant. 

Find out more here >