Don't know Risk of Ignoring Tax Errors? Read this...
Finding mistakes in your tax return can be stressful. You might be tempted to cross your fingers and hope HMRC doesn't notice. But this approach is incredibly risky. HMRC has sophisticated systems designed to spot inconsistencies in your tax affairs.
They compare information from employers, banks, and other sources to identify discrepancies. The longer an error goes uncorrected, the more serious the consequences become.
Our tax experts at Pie tax can help you navigate error correction with minimal stress. Or if you're just here to get to grips with it all, let's break it down!
What Happens If You Don't Correct Tax Errors?
HMRC takes a dim view of uncorrected tax errors. The penalties can be severe – up to 100% of the tax you owe in cases of deliberate non-disclosure.
How HMRC responds depends largely on whether they believe your error was careless or deliberate. Careless mistakes attract lower penalties than deliberate ones.
For honest mistakes, HMRC can typically investigate up to 4 years back. For careless errors, it's 6 years. But for deliberate errors, they can look back up to 20 years.
In the most serious cases, HMRC can even pursue criminal prosecution. I once worked with a client who ignored a £5,000 error for three years and ended up paying nearly £12,000 in tax, penalties and interest.
When You Must Tell HMRC About Mistakes
You have a legal obligation to notify HMRC if you discover an error in your tax affairs. For Self Assessment, you should correct errors within 12 months of the filing deadline. For errors discovered later, you'll need to make a formal disclosure. The process varies depending on the type and size of the error.
The rules are especially strict for offshore matters under the "requirement to correct" legislation. Penalties for failing to disclose offshore tax issues can reach 200% of the tax due.
Remember that "I didn't know" rarely counts as a reasonable excuse. HMRC expects taxpayers to take reasonable care with their affairs.
Common Tax Errors That Need Correction
Many tax errors involve simple omissions – forgetting to include all sources of income. This might be a small freelance job or rental income from a property.
Expense claims are another common problem area. Claiming personal expenses as business costs can lead to serious trouble with HMRC.
Capital gains often cause confusion. Selling property, shares or other assets without properly reporting the gain is a frequent error HMRC looks for.
Inheritance tax issues, particularly around gifts made within seven years of death, are complex and frequently misunderstood. These can create significant liabilities for estates.
VAT errors can quickly add up for business owners. Issues with reclaiming input tax or charging the correct rate are particularly common.
Penalties for Ignoring Tax Errors
The penalty system is designed to encourage disclosure. If you come forward voluntarily, penalties start from 0-30% for careless errors. If HMRC discovers the error first, penalties start at 15% for careless errors.
These can reach 100% for deliberate and concealed errors. Offshore non-compliance carries enhanced penalties. These can potentially reach 200% of the tax owed in the most serious cases. HMRC can publicly name and shame tax evaders where the tax exceeds £25,000.
This presents a significant reputational risk for individuals and businesses. Interest is always charged on top of the tax and penalties. This runs from when the tax should have been paid originally.
How to Properly Disclose Tax Errors
If you find an error, don't panic. HMRC appreciates taxpayers who come forward voluntarily and rewards this with reduced penalties.
For most errors, you can use HMRC's Digital Disclosure Service. This lets you notify HMRC of your intention to disclose and gives you 90 days to calculate the correct tax.
For more serious cases, the Contractual Disclosure Facility provides protection from criminal prosecution. This is offered in exchange for a full disclosure.
Getting professional advice before making a disclosure is highly recommended. A tax professional can help navigate the process and potentially reduce penalties.
Be thorough in your disclosure. Partial disclosures can lead to further investigations and higher penalties down the line.
Understanding Tax Errors vs Avoidance vs Evasion
HMRC distinguishes between genuine errors, tax avoidance, and tax evasion. Genuine errors are honest mistakes made despite taking reasonable care.
Tax avoidance involves using artificial arrangements to reduce tax liability. While technically legal, many schemes are later challenged by HMRC.
Tax evasion is the deliberate non-disclosure or misrepresentation of your tax affairs. This is a criminal offence that can lead to prosecution.
The difference between "careless" and "deliberate" is crucial in determining penalties. Carelessness might mean not checking figures properly, while deliberate errors show intent to deceive.
Final Thoughts
Finding a tax error can be worrying, but ignoring it is never the answer. The sooner you address mistakes, the less they're likely to cost you.
HMRC's approach is designed to encourage honesty. Coming forward voluntarily about errors will always lead to better outcomes than waiting to be caught.
Professional advice is invaluable when addressing tax errors. It can save you money by ensuring your disclosure is handled correctly from the start.
Pie tax: Simplifying Tax Error Resolution
Getting your taxes right shouldn't feel like navigating a minefield of potential errors and penalties. Pie tax helps prevent mistakes before they happen.
The UK's first personal tax app provides real-time tax calculations that show exactly what you owe. Our intelligent system flags potential issues as you go.
This helps you avoid the common mistakes that lead to HMRC inquiries and penalties. We've designed the experience to be clear and straightforward.
If you've already discovered errors in previous submissions, our tax experts can guide you through the correction process. We'll help you minimise penalties and resolve issues efficiently. Curious about how we can make your tax life simpler? Explore the Pie.tax app to see how it works.
