Tax returns: Be accurate, be on time and avoid a row with the Revenue

Thousands of taxpayers have discovered to their cost over the last year or so that HM Revenue & Customs (HMRC) now takes a zero-tolerance approach to tax returns that are not to its satisfaction. Under pressure from the government to swell its coffers, HMRC is letting very few people off the hook when they have made errors on their tax returns, even where the mistake has evidently been innocent.

And a penalty system introduced two years ago means inaccurate tax returns can now result in heavy fines. HMRC is levying penalties wherever it believes errors on tax returns are due to carelessness or because the taxpayer failed to take reasonable care with the return.

More bad news for taxpayers is that technological advances have made it far easier for HMRC to pick up any errors, deliberate or not.

It now subjects all of the nine million tax returns filed every year - mostly online - to a series of tests and compares them to previous returns to check for mistakes or apparent anomalies. The result is that any omissions or mistakes are considerably more likely to be spotted than previously.

Malcolm Rust, partner at Shepherd & Wedderburn in Edinburgh, said: "HMRC can query tax returns for a wide variety of reasons, such as an aspect of a tax return, like asking for gift aid certificates or certificates verifying bank interest; an aspect of an account; or a full-blown investigation into a return or account where it feels there are issues."

Those filing inaccurate returns because of what HMRC considers carelessness face fines of up to 30 per cent of any tax due. The penalty climbs to 70 per cent if the inaccuracy is judged by HMRC as deliberate.

HMRC has said it expects the revised penalty system, introduced in 2009, to double its penalty fines revenue. It yielded some 8.5 billion from civil tax investigations in 2009/10, an increase of 49 per cent from the 2007/08 tax year, according to figures published late last year, with an average penalty in fraud investigations of 21 per cent of the tax due.

Mike McCusker, head of private client business at PricewaterhouseCoopers in Scotland, said the new regime differed significantly to the previous approach, catching many taxpayers off-balance.

"There was a well-known method before in how HMRC looked at errors, looking at the nature of the error, the level of disclosure, the degree of co- operation and previous form.

"But now there is more subjectivity on the part of HMRC's inspectors, who have been told to seek maximum penalties wherever possible," said McCusker.HMRC typically seeks to levy penalties of up to 30 per cent of the tax due even where it agrees the non-disclosure was not deliberate. Where it does find some deliberate attempt at concealing information, the penalty is 100 per cent of the sum due.

This puts the pressure on taxpayers not only to ensure that all tax returns are accurate, but to take any subsequent correspondence from HMRC seriously.

So what should you do if you find yourself under HMRC investigation? Here's a few tips:

1 Get professional help

Your accountant, if you have one, should be your first port of call if you receive a letter from HMRC raising questions about your tax situation. If not, it is worth investing in the help of an accountant or a tax adviser to help you handle the query, given the potentially costly consequences of failing to provide a satisfactory response.

With your adviser or accountant, check the factual accuracy of HMRC's statement and talk through what you submitted and the nature of the error. Then come up with a strategy for resolving the issue as quickly as possible.

2 Take the issue seriously

"The biggest mistake that many people make is not taking seriously exactly what the issue is," said McCusker. "Underestimating it and not co-operating can create a more adversarial approach from HMRC in dealing with the issue."

He advised working with HMRC to establish what it is looking for, identifying the key areas of the investigation and finding out what kind of information is needed.

"Just saying HMRC is wrong is not enough. You don't have to agree with everything but you have to think about where it is coming from and try to agree some kind of settlement."

3 Don't underestimate HMRC's resources

If the tax office believes the problems with your tax information are more than simple errors, it may spend considerable time delving into your financial and personal affairs as part of its investigation.

McCusker said: "It is amazing the amount of information that HMRC has on cases at the top level.It can spend months reviewing someone's affairs and will often have good inside knowledge, perhaps from a disgruntled ex-colleague."

In-depth investigations can be intrusive and usually require the taxpayer to provide documents such as bank statements and invoices.

Rust said: "Normally where a separate business account is held it is sufficient to provide statements for this, but HMRC is becoming more enquiring in also requesting statements for personal accounts."

Where an investigation delves deeply it's worth getting help from a specialist with experience of dealing with HMRC.

4 Take more time next time you file a tax form

The best way to avoid being subjected to an investigation is, of course, to ensure your tax returns are correct. That means taking advice, knowing when the key deadlines are (and adhering to them) and making sure you've got all the information with which HMRC can assess your tax situation correctly.

Even the most innocuous missing detail is now being viewed by HMRC as potential neglect, and even deliberate deception.

People are being fined a quarter of their tax amount even where they have made nothing more than a simple, honest mistake, according to McCusker.

"It is difficult to prove a mistake isn't the result of neglect and to prove you did everything possible."

Even late returns can prove costly - self-assessment taxpayers not filing their returns by the Monday deadline risk fines of 100.