Freelancers' Questions: What if I erred in my tax return?

Freelancer’s Question: In last month’s rush to get my self-assessment tax return filed on time, my bookkeeper has advised me that there were some inaccuracies. Given that the taxman has a penalty regime, how much should I be expecting to pay for such errors in my tax return?

Expert’s Answer: Penalties for all incorrect returns are assessed by HM Revenue & Customs according to whether the error is deemed:

  • Negligent;
  • Concealment; or
  • Mistake.

Penalties for non-compliance range from £300 for failure to comply, up to £60 a day for continuing failure; tax-geared penalties where an individual seeks to pay less tax as a result of the failure and, in the extreme cases involving concealment and/or destruction of documents, a possible prison term of up to two years.

Given your circumstances, there are two types of disclosure for you to be aware of:

Unprompted disclosure – that is when you go forward of your own accord to HMRC – carries a penalty depending on the type of error made: was it careless, deliberate but not concealed or was it deliberate and concealed?

  • If you voluntarily inform HMRC of an error that was careless you will pay between 0% and 30%: if it was genuine error you will pay nothing; but if you did not take “reasonable care” expect to pay something within that tariff.
  • If you voluntarily inform HMRC of error that was deliberate but which you had not tried to conceal, you will pay a penalty of between 20% and 70% depending on the seriousness.
  • If you voluntarily disclose an error that was both deliberate and you tried to conceal it then you may be fined from 30% to 100% of the “potential lost revenue”

Prompted disclosure – that is, when HMRC comes to you – carries penalties as detailed above, but higher, so, was it careless? Deliberate but not concealed or was it deliberate and concealed?

  • If you were simply careless you will pay between 15% and 30%; if it was genuine error you will pay nothing but if you did not take “ reasonable care” expect to pay something within that tariff.
  • If the error was deliberate but you did not try to conceal it you will pay a penalty of between 35% and 70% depending on the seriousness.
  • If your error was both deliberate and you tried to conceal it then you may be fined from 50% to 100% of the “potential lost revenue”.

All freelancers should take care because penalties from HMRC can be enforced simultaneously. For example, if your tax return is late and you pay your tax late and there is an irregularity in your return, then you could end up paying all three kinds of penalties.

The expert was Sumit Agarwal, managing director of DNS Associates, an accountancy firm serving freelance professionals.

 

19th February 2013

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