Millions warned of new ‘stealth tax’ as new HMRC rule brings in fines | Personal Finance | Finance

Millions of self-employed workers and landlords could face hefty fines for “innocent tax return mistakes” under new HMRC proposals that critics have branded a “stealth tax” on paperwork errors.

The tax authority is consulting on plans to expand its powers so that taxpayers who fail to correct mistakes on their returns after being notified by HMRC could have those errors treated as “deliberate” – potentially exposing them to significantly higher penalties.

Under the current rules, HMRC generally considers an error to be deliberate only if a taxpayer knowingly submits incorrect information.

However, under the proposed changes, someone who makes a careless mistake and fails to correct it within a specified period after receiving a formal notice from HMRC could have the error reclassified as deliberate.

That could dramatically increase the financial consequences.

A careless mistake can currently attract a penalty of up to 30% of the tax owed, while deliberate errors can result in fines of up to 100% of the tax lost.

Under the proposals, HMRC would first issue a formal notice asking the taxpayer to correct their return. Those who have not received a similar notice within the previous six years and correct the mistake within the required timeframe would avoid a penalty.

But taxpayers who fail to amend the error could see it treated as deliberate, allowing HMRC to issue much larger penalties and potentially investigate tax affairs dating back as far as 20 years.

Currently, HMRC can generally only look back six years where mistakes are deemed careless.

The proposals form part of a consultation that runs until early September, with no date yet confirmed for when any changes could come into force.

HMRC says the plans are intended to improve compliance while allowing officials to focus resources on tackling more serious tax avoidance.

But tax experts have warned the changes could unfairly penalise ordinary taxpayers who make genuine mistakes.

Nimesh Shah, of accountancy firm Blick Rothenberg, told The Telegraph: “Most people are not represented by a tax adviser – and so taxpayers may genuinely not know when they have made an error and could find themselves exposed to higher penalties.”

He warned that the UK’s increasingly complex tax system makes it easier for honest taxpayers to submit inaccurate returns without realising it.

“A taxpayer may make an innocent mistake because they don’t understand the rules,” he said.

An HMRC spokesperson defended the proposals, saying: “We know most of our customers act in good faith and want to get their tax right.

“These proposals are designed to help minimise penalties for those who swiftly correct mistakes when we flag them and make the process of doing so quicker and easier.”

The consultation remains open until early September, with taxpayers, accountants and industry groups invited to submit their views before any legislation is drafted.