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9 March 2023

HMRC Penalties – What Does Taking “Reasonable Care” Actually Mean?

It’s been a topic of conversation recently as to what sort of action or indeed lack of, would trigger HMRC to add a penalty percentage charge to underdeclared tax. 

Here’s some thoughts from Liz Maher at the Centurion VAT team on where taxpayers need to recognise what’s seen as “reasonable care” if they are to protect themselves from exposure to a similar level of penalty for VAT errors that may arise.

“As the HMRC Chairman, Jim Harra, commented recently to the Public Accounts Committee:

“If you take reasonable care but nevertheless make a mistake, you would be liable for the tax and interest if it‘s paid late. You would not be liable for a penalty. But if your error was as a result of carelessness then legislation says that a penalty applies in those circumstances.”

Whilst timescales for Direct Tax Assessments vary from the four years normally covered by a VAT assessment the basis of any penalty charged apply across all taxes in the same way.

The percentage of the penalty will be influenced by:

  • Whether the error disclosure was “Prompted“ by HMRC calling to arrange a visit or raise a query or
  • “Unprompted” – where the taxpayer notifies HMRC of its own volition

Mr Harra is then correct when he also says that an innocent mistake shouldn’t attract a penalty. This is where the phrase “reasonable care” appears.  Proving you have taken reasonable care is also a factor that can assist in reducing the level of the penalty charged by HMRC

What would HMRC see as evidence of reasonable care by a taxpayer with their VAT management?

In the day-to-day management of VAT reasonable care would be evidenced through:

  • Having written VAT procedures for staff to follow
  • Undertaking relevant VAT training for staff on induction or periodically, to pick on VAT changes – post Brexit, new internal systems changes, VAT liability changes from HMRC, would all be good examples of triggers.
  • Taking advice on new or complex situations that might arise
  • Retaining evidence of that advice
  • Ensure a clear audit trail to the VAT return compilation
  • Retaining good records – of property assets subject to options to tax; capital goods scheme and partial exemption calculations and annual adjustments

As we have seen in recent media reports the level of the penalty charged can range up to 30% of the tax liability where the error is deemed to be “careless”. Penalties where the error was regarded as deliberate or where it was concealed can then rise to 100% of the tax due. Plus interest, of course.

Any taxpayer, including a business, public sector body or charity can find themselves facing a penalty for a tax error, as we've seen.

Getting good VAT management processes in place will protect you but it's an ongoing monitoring not a “one off” action, Liz suggests.

“It’s a challenge for any business to manage VAT compliance when there are huge economic challenges to face, we recognise,” she says   “that’s one of the reasons we’ve created our online VAT risk evaluation tool as a cost effective option for any VAT registered entity to access, to be able to demonstrate it shows true “reasonable care” in its approach to VAT. We’ve worked hard over the years at Centurion to bring a more proactive VAT approach to clients, to protect them from errors arising in the first instance, as well as to reduce the risk of large penalty rates being triggered.”

“This recent media spotlight is a reminder of the extent of financial costs an organisation or individual can face when issues arise with HMRC and how important a defence of “reasonable care” can be.”


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