Penalties can be harsh
Tax legislation is complex—and mistakes happen.
However, a recent tribunal case highlights an important and often overlooked point:
Even genuine, unintentional errors can still result in penalties, interest, and additional tax.
Understanding how HMRC views “careless” errors is crucial for anyone submitting tax returns.
The case: When a small change caused a big problem
The case involved a married couple who were:
- Directors of a financial advisory company
- Each holding just over 5% of the shares
They planned to sell their shares and were advised that they qualified for Entrepreneurs’ Relief (now Business Asset Disposal Relief)—which reduces CGT on qualifying disposals.
At the time, they met the key condition:
- Holding at least 5% of the company
The critical mistake
Before the sale, the couple decided to:
- Gift some of their shares to other shareholders
- Adjust ownership to better reflect contributions
This reduced their shareholding to around 4.14% each.
At this point:
- They no longer met the 5% threshold for relief
However:
- They did not seek updated tax advice
- They proceeded to sell their remaining shares
- They claimed relief on their tax returns
HMRC challenge and penalties
Following an enquiry:
- The couple accepted they were not entitled to relief
- HMRC imposed a 15% penalty on the underpaid tax
The reason?
HMRC considered the error to be careless, not innocent.
Why the Tribunal agreed with HMRC
The couple argued that:
- They had relied on professional advice
- The mistake was unintentional
- Penalties should not apply (or should be suspended)
However, the Tribunal disagreed.
It concluded that:
- The original advice was based on different facts
- The couple changed their shareholding but did not seek updated advice
- The error was not a simple oversight—it was careless behaviour
Can penalties be suspended?
In some cases, HMRC can suspend penalties for careless errors.
However, this only applies if:
- Suspension would help prevent future errors of the same kind
In this case:
- The error was a one-off transaction
- There was no ongoing behaviour to correct
So, penalty suspension was not allowed.
Key takeaway: Advice must match your current situation
This case highlights a critical principle:
Tax advice is only valid for the facts it was based on.
If your circumstances change—even slightly—you must:
- Revisit previous advice
- Confirm the tax position again
Failing to do so can lead to:
- Unexpected tax bills
- Penalties
- HMRC enquiries
Why this matters for business owners
This is particularly relevant for:
- Shareholders planning a sale
- Business owners restructuring ownership
- Anyone relying on reliefs such as BADR
Even small changes—like transferring shares—can have significant tax consequences.
Practical steps to avoid penalties
To reduce your risk:
- Always seek advice before making changes
- Don’t rely on old advice if circumstances have changed
- Document decisions and rationale
- Review complex transactions carefully before filing returns
Final thoughts
HMRC takes a strict view of errors in tax returns.
Even where mistakes are genuine:
If reasonable care hasn’t been taken, penalties can still apply.
The safest approach is to ensure your tax position is reviewed and updated whenever your circumstances change.
Need help reviewing your tax position?
At Merranti Accounting, we help clients:
- Review transactions before they happen
- Ensure claims (such as BADR) are valid
- Avoid costly HMRC penalties
If you’re planning a share disposal or have concerns about a previous return, get in touch with our team today.
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