ECH21050 - Penalties: Fraud, Neglect and 'Innocent Error'

An employer is liable to a penalty for submitting an incorrect return where the error is due to fraud or neglect.

Fraud involves falsification with an intention to deceive. It is deliberate.

ECOs should

• See EM5105 on the meaning of fraud and
• See ECH23010 where fraud is suspected

Neglect does not involve any deliberate intention to deceive or to pay less tax or NICs.

ECOs should

• See EM5125 on the meaning of neglect
• Proceed on the basis that a good working definition of neglect is simply “a lack of reasonable care”. Plain carelessness can well be negligence
• Approach the question of establishing neglect on the basis of "Would a reasonable employer taking reasonable care have made this error in his return?” If the answer is no, the return is negligently incorrect.

"Innocent error" does not appear in the legislation and has often caused confusion. ECOs should

• always remember that neglect does not require any deliberate intention. "I didn't mean to do it" is not a defence against negligence or any subsequent penalty
• Approach the phrase "innocent error" on the basis of "was this error innocent even of negligence?"

In any Review, ECOs must examine the evidence and question the employer to establish the facts surrounding the making of the incorrect return. For example

• Did the employer take the trouble to read and follow the guidance literature issued by the Revenue. A reasonable employer taking reasonable care would do so.
• Similarly a reasonable employer would take reasonable care to check the accuracy of all entries. "A simple slip” such as leaving a nought off the end of a figure, or “an oversight” such as omitting an employee who has left from the return, are precisely the sorts of thing reasonable care would prevent.
• If an employee or an agent prepared the return, what steps did the employer take to ensure the entries were correct and complete before he signed it? It is his return and he remains responsible for it.
• It may happen, as for example with a complex legal avoidance scheme, that the employer (probably through his agents) has a reasonably arguable case for what he returned. A reasonable employer might be advised by leading professionals that, in the given circumstances, no liability to tax or NICs would arise. He might follow that advice to the letter and arrange his affairs on that basis. The Revenue might believe that a liability does arise. It might require litigation resulting in a 3-to-2 majority in the House of Lords to establish that the scheme did not work, then the return will be incorrect. But there would be no question of its having been submitted negligently incorrect.