If the check establishes that something is wrong it may be the result of an innocent error or the taxpayer may have been culpable.
If the error n a return arose out of an innocent error and despite the taxpayer having taken reasonable care, the officer will take steps to collect the tax but no penalty will be charged. Interest will be charged automatically from the due date until the date the tax is actually paid.
If the check shows that tax has been lost payments on account will be requested during the course of the check. These will help to spread the burden of the settlement and reduce the interest charge. Payments on account can also be pointed to as a measure of the taxpayer’s co-operation.
Where appropriate, the check will be extended to establish whether tax has been lost in earlier periods.
The tax lost will be established using a method that is fair, with both the officer and the taxpayer taking account of the fact that this may have to go to the Tribunal for a final decision. The officer will then seek to establish culpability by reference to the taxpayer’s behaviour either:-
Having established the behaviours that led to the loss of tax, the officer will then go on to discuss the level of penalty.
HMRC adopt a flexible approach to completing a compliance check. If they consider that their arguments are weak they will not pursue them but if they have a strong case they will not compromise.