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Penalties for understating your income: know the consequences

The penalties for understating your income can be significant.

If you understate your income on your self-assessment tax return you may leave yourself vulnerable to prosecution – so make sure you understand the consequences.

Penalties for understating your income

What are the consequences?

When you file your return, you’ll be telling the taxman just how much taxable income you’ve generated during the year.

If you quote a lower amount than has actually flowed into your coffers, you’re seen as guilty of tax evasion – and that isn’t going to go down well.

In fact, research conducted by The Telegraph Money suggests that the government is getting tougher. The number of penalties for deliberate actions, such as understating income, has risen from over 5,000 taxpayers in 2012-13 to just under 15,000 in 2013-14.

The penalties for understating your income will depend upon the reason you made the error in the first place.

You’ll need to pay back the money that would have been owed if the tax return had been accurate, but you could also be hit with a penalty charge. This will be calculated as a percentage of the amount you avoided paying.

Penalties for understating your income: did you take reasonable care?

The first thing to understand is how wrongdoing is categorised. HMRC can still charge penalties if errors have been made, but the percentage owed will be lower and you won’t face prosecution.

Whether you are to blame is determined by gauging whether you took ‘reasonable care’, and the precise meaning of that phrase will depend on your own circumstances.

For example, the owner of a large company that failed to implement a sophisticated, well-managed accountancy system might reasonably be judged to have failed to take reasonable care.

A sole trader earning £20,000 per annum would not be expected to create such a complex system, but may be judged harshly if no recordkeeping was conducted at all.

Should you incur a penalty due to a lack of reasonable care, that penalty will be set between 0 and 30% of the tax due.

Penalties for understating your income: was it deliberate?

Alternatively, you may have deliberately understated your income. If you know this to be the case, the best thing to do is contact an accountant immediately. They will disclose your failure and help you work through the situation.

Though it might be unnerving to take this step, it’s far better than risking having your wrongdoing discovered without coming forward.

HMRC will rarely prosecute if you voluntarily admitted your wrongdoing. If the error is deliberate but you voluntarily admit to it, the penalty will be between 20 and 70% of the extra tax due.

You can be charged the same penalty if HMRC understates your tax liability and you deliberately conceal the error.

Penalties for understating your income: concealing the inaccuracy

Finally, you may deliberately understate your income and then attempt to conceal your misdeed. Penalties for understating your income and then concealing it are usually tough.

To start with, the penalty will be between 30 and 100% of the extra tax due, but this could be the least of your worries.

As stated above, HMRC is becoming increasingly willing to pursue criminal convictions when it comes to deliberately understating your income.

If you’d like to know more about the penalties for understating your income, get in touch with us today.

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