HMRC Reasonable Care

Imagine paying £1.6 million in tax, only to find yourself facing a potential penalty of almost £460,000 because HMRC believes you failed to take reasonable care after your accountant submitted the wrong figures. 

It sounds extraordinary, but situations like this are becoming increasingly common as HM Revenue & Customs (HMRC) strengthens its compliance activity and places greater emphasis on taxpayer behaviour rather than simply identifying errors.

It’s Easy to Assume

Most people assume that once they’ve appointed a qualified accountant, responsibility for preparing an accurate tax return rests entirely with that adviser. It’s an understandable assumption because that’s precisely why professionals are engaged. 

The law, though, takes a slightly different view. While accountants prepare returns and provide advice, taxpayers remain responsible for the declarations they sign.

That doesn’t mean every professional mistake automatically becomes the taxpayer’s fault, but it does mean HMRC will often ask a different question when inaccuracies are discovered: did the taxpayer take reasonable care?

The answer can determine whether an enquiry ends with a straightforward correction to a tax return or a substantial financial penalty.

Understanding the HMRC Reasonable Care Standard

The phrase HMRC reasonable care appears regularly in tax legislation and HMRC guidance, yet it is often misunderstood.

Reasonable care does not require taxpayers to become tax experts or guarantee that every figure on a return is correct. Instead, it asks a much simpler question: what would a prudent and reasonable person have done in the same circumstances?

The answer will rarely be identical for every taxpayer. Someone completing a straightforward Self Assessment return will not be judged in exactly the same way as the owner of a group of companies or an individual with complex investment or overseas income. 

HMRC recognises that people have different levels of knowledge and that many will rely on professional advice.

Schedule 24 Finance Act 2007 focuses on behaviour rather than simply identifying mistakes. Broadly speaking, inaccuracies fall into three categories:

• reasonable care has been taken
• careless behaviour
• deliberate, or deliberate and concealed, behaviour

The financial consequences increase significantly as behaviour becomes more serious.

This distinction matters because two taxpayers could submit almost identical incorrect tax returns and receive completely different outcomes. One may simply be asked to correct the position, while the other could face an HMRC penalty for an inaccurate tax return. 

The difference often comes down to the steps they took before submitting the return.

Can You Rely on Professional Advice?

This is where many taxpayers become uncertain. If an accountant makes a mistake, surely the accountant should be responsible?

In practice, the answer isn’t always as straightforward as people expect.

Signing a tax return is more than an administrative exercise. It is a formal declaration that, to the best of your knowledge, the information is complete and accurate. At the same time, the law recognises that tax legislation has become increasingly complex and that taxpayers are entitled to seek advice from suitably qualified professionals.

HMRC’s own guidance recognises that seeking appropriate professional advice can form part of demonstrating reasonable care, provided the taxpayer also supplies complete and accurate information. 

That doesn’t mean taxpayers can simply hand over paperwork and forget about it. Reasonable reliance on professional advice is very different from blind reliance. If an adviser requests information that is never provided, or if figures on a return are clearly inconsistent and no questions are asked, HMRC may conclude that the taxpayer has failed to meet their obligations.

On the other hand, appointing an experienced Chartered Accountant, answering questions honestly, supplying all relevant information and raising concerns where something appears incorrect are all factors that support a reasonable care defence.

It’s a subtle distinction, but an important one. Taxpayers are not expected to know every detail of UK tax legislation, but they are expected to behave reasonably throughout the process.

When a Genuine Mistake Became a Serious HMRC Enquiry

A recent Wilkins Southworth case illustrates how these principles work in practice.

The story began when a client approached us after their previous accountant had submitted an incorrect tax return. The client did exactly what most people would do. They reviewed the return, spotted errors and asked their accountant to correct them. Unfortunately, the amended return also contained significant inaccuracies.

Although the client had already paid approximately £1.6 million in tax, the amended return incorrectly showed a liability of just over £65,000.

From HMRC’s perspective, this was far more than a minor discrepancy. Had the amended return been accepted without question, it could have resulted in a repayment of approximately £1.55 million, together with interest. Unsurprisingly, HMRC opened an enquiry and argued that the taxpayer had behaved carelessly.

Under Schedule 24 of the Finance Act 2007, the proposed penalty approached £460,000.

At first glance, HMRC’s position was understandable, given that the figures were plainly wrong. The real issue, however, wasn’t the existence of an inaccurate tax return but whether those inaccuracies resulted from careless behaviour by the taxpayer.

Our defence focused almost entirely on that question.

The client had appointed a Chartered Accountant, supplied the necessary information, and, when they identified errors in the original return, immediately raised those concerns with their adviser and asked for them to be corrected. In other words, they had behaved exactly as a prudent taxpayer might reasonably be expected to behave.

Applying the principles behind HMRC reasonable care, we argued that our client had taken appropriate steps to meet their obligations and could not reasonably be expected to identify every technical error made by a professional adviser.

Following detailed representations, HMRC accepted that our client had taken reasonable care and withdrew the proposed penalty. 

Why More Taxpayers Could Face This Situation

This case is far from unique. It reflects a broader shift in the way HMRC approaches compliance.

Digital reporting, improved data matching and greater access to financial information mean discrepancies are identified much more quickly than they were a decade ago. Initiatives such as Making Tax Digital are also changing the relationship between taxpayers and HMRC, allowing compliance checks to become more targeted and efficient.

As a result, enquiries increasingly focus on behaviour as well as the figures themselves.

We regularly meet clients who assume that engaging an accountant transfers all responsibility to the adviser. That’s understandable, but it isn’t how the legislation works. Professional advice helps taxpayers meet their obligations; it doesn’t replace those obligations altogether.

Reviewing returns before signing them, keeping accurate records and asking questions when something doesn’t look right are more than sensible habits. If HMRC later opens a compliance check, they may also become valuable evidence that you exercised reasonable care.

Demonstrating Reasonable Care

No accountant can promise that mistakes will never happen. Tax legislation changes regularly, HMRC guidance evolves, and even experienced professionals sometimes disagree on how complex rules should be interpreted.

What taxpayers can control is how they approach their own responsibilities.

Choosing an appropriately qualified adviser is the obvious starting point. Beyond that, providing complete information, retaining supporting records, reading tax returns before signing them and questioning figures that appear inconsistent all help demonstrate responsible behaviour.

These aren’t onerous requirements. They’re simply the practical steps that any prudent taxpayer would normally be expected to take.

Final Thoughts

Mistakes happen, particularly in an area as complex as UK tax legislation. The purpose of the penalty regime isn’t to punish every inaccuracy; it’s to distinguish between taxpayers who have acted responsibly and those who have failed to meet the standards expected of them.

The difference between reasonable care and careless behaviour isn’t always measured by what went wrong. More often, it’s measured by what the taxpayer did before anything went wrong.

The recent Wilkins Southworth case demonstrates that these principles are far more than legal theory. They can have significant financial consequences when HMRC opens an enquiry or considers penalties for inaccuracies in tax returns.

Understanding HMRC reasonable care isn’t simply a technical issue for accountants. It affects every taxpayer who signs a tax return and expects professional advice to protect their interests. As this case demonstrates, the difference between reasonable care and careless behaviour can have significant financial consequences. 

If HMRC has opened an enquiry into your tax affairs or you’re concerned about a potential Schedule 24 penalty, contact the team at Wilkins Southworth for clear, practical advice tailored to your circumstances.