Tax Return Estimates – Careless Or Deliberate?

Mark McLaughlin warns about the use of estimated figures in tax returns. 

The use of an estimated figure may sometimes be necessary when preparing a tax return. For example, records of a particular source of income may have been lost, and it might not be possible to obtain the relevant information from third parties.

HM Revenue and Customs (HMRC) acknowledge that taxpayers will occasionally use estimates in their tax returns. For example, there is a box on an individual’s tax return to indicate if an estimated (or provisional) figure has been used and the individual intends replacing it with a final figure.

However, it is not necessary to tick this box if the taxpayer (or agent) wishes the estimate to be accepted as the final figure because it is not possible to provide the actual figure (see HMRC’s Self-Assessment manual at SAM121190). Nevertheless, it is generally good practice to disclose the use of estimates in the additional information (or ‘white space’) section of the tax return, in order to reduce the possibility of HMRC making a ‘discovery’ outside the normal twelve-month time limit for opening a tax return enquiry.

If a tax return estimate results in (say) an insufficiency of tax, HMRC may seek a penalty in respect of the inaccurate estimate. For example, a penalty can be imposed if a tax return error resulting in a loss of tax has arisen due to the person not taking ‘reasonable care’. HMRC may consider that an estimated figure was unreasonable, and charge a penalty on the basis that the inaccuracy was careless.

Worse still, in some cases, HMRC may contend that the taxpayer’s behaviour giving rise to the penalties was deliberate rather than careless. A deliberate error can result in HMRC seeking higher penalties, and possibly imposing other sanctions (e.g. ‘naming and shaming’) in some cases.

In Chadburn v Revenue and Customs [2016] UKFTT 755 (TC) the taxpayer (a self-employed heating and plumbing engineer) submitted his tax return for 2009/10 showing estimated business turnover of £20,000, and estimated net profits of £20,000. HMRC opened an enquiry into his tax return for 2010/11. At that time, the taxpayer’s return for 2006/07 showed business turnover of £15,000 and net profits of £15,000; his 2007/08 return showed business turnover of £16,000 and net profits of £16,000 (his tax return for 2008/09 had not then been submitted).

The taxpayer’s accountants subsequently prepared accounts for the tax year 2009/10, showing turnover of £85,669 and net profits of £50,592 (and additional turnover of £8,119 was later identified from his building society accounts). HMRC raised assessments of additional profits for the tax years 2006/07 to 2011/12. In addition, HMRC raised penalty assessments for 2006/07 to 2009/10. The taxpayer appealed against the penalties. 

The First-tier Tribunal found that the taxpayer’s behaviour for 2006/07 and 2007/08 was ‘negligent’ (i.e. the relevant test for those years). Submitting the same round sum figure for turnover and profit in a business that clearly involved expenses indicated that the taxpayer had not attempted to establish accurate figures for those returns (N.B. the penalty for 2008/09 was based on the failure to submit a return).

In addition, the tribunal concluded that the taxpayer could not have considered that his return for 2009/10 was accurate, as he knew that he had business expenses, which meant that turnover and profit could not be the same. Furthermore, the disparity between the figures in the return and the eventually established figures was substantial. Such a disparity meant that the taxpayer's behaviour in submitting the return was regarded as more than a failure to take reasonable care and poor record-keeping. The taxpayer’s behaviour was deliberate and not careless, and his appeal was dismissed.

It is important to keep accurate records, instead of relying on estimates. Poor record keeping may be regarded by HMRC as careless or possibly even deliberate behaviour if (say) a tax return error arises (unfortunately, the taxpayer’s approach in Chadburn was not considered to be reasonable or even careless), with potentially adverse implications in terms of additional tax (perhaps for a number of tax years), penalties and (in the case of deliberate errors) other HMRC measures being imposed.