HMRC may send a legal letter in case it observes any suspicious activity in a person’s tax return. For instance, if you have not made a declaration in your tax return.
The person may then be asked to give reasons for making an incorrect declaration.
To make sense of the letter, it is usually a good idea to understand the meaning of certain terms.
What is reasonable care?
Reasonable care depends on each person’s abilities and circumstances.
For instance, if there is anything about a person’s health or personal situation that prevented them from taking reasonable care, the officer carrying out the check needs to be informed.
This will help them in deciding whether you took reasonable care.
Please bear in mind that the HMRC won’t charge a penalty if the person took reasonable care to get things right but the return or document contained an inaccuracy.
Some ways you can take reasonable care include:
- Keeping your records safe
- Keeping enough records to make accurate tax returns
- Asking HMRC or a tax adviser if there is any confusion following any advice given
How do you define careless?
Careless is when a person fails to take reasonable care to get things right.
What does deliberate mean?
This is when a person had knowledge that a return or a document was inaccurate when sending to HMRC.
Examples include intentionally:
- Understating your income
- Overstating your business expenses
- Paying wages without accounting for Pay As You Earn and National Insurance contributions
What is meant by deliberate and concealed inaccuracies?
This is when a person knows that a return or document was inaccurate and took active steps to hide the inaccuracy from HMRC – either before or after sending the documents.
For example, when a person creates a false invoice to cover a non-existent stock purchase.
What is the difference between unprompted and prompted disclosure?
An unprompted disclosure occurs when a person goes to HMRC before they have any inclination about underpayment of tax and makes a complete and honest disclosure of what they did to hide tax from HMRC, how they did it and the reason for doing it.
Only after answering the above can the person expect a reduced penalty as HMRC encourages such disclosures.
It is important to note an unprompted disclosure will only be treated as such if the declaration is made before HMRC has ANY IDEA that there might have been underpayment of tax.
On the other hand, a prompted disclosure is anything other than an unprompted disclosure.
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