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New tax penalties

publication date: Apr 23, 2008
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author/source: Paul Howard
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Stressed partners and directors take note: If you submit an incorrect tax return to HM Revenue and Customs and as a result your tax liability is understated, you may be charged a penalty and interest, as well as the additional tax that becomes payable when the error is corrected. Nothing new there, but what is new is that the penalty system has been entirely revamped, and a new unified regime will apply to incorrect tax returns or other documents submitted by individuals and businesses in relation to income tax, capital gains tax, corporation tax, PAYE & NIC, the Construction Industry Scheme and VAT. 

Under this new system, many penalties are likely to be higher than in the past. Some penalties will be charged where previously there would have been no penalty, and in certain circumstances directors and other company officers may become personally liable for company penalties. 

Starting dates The new penalties will apply to returns that are du e to be submitted on or after 1 April 2009, that deal with periods starting on or after 1 April 2008. So the first periods to which the new penalties will apply are as follows:

  • Individuals - the current tax year that started on 6 April 2008.
  • Companies - accounting periods beginning on or after 1 April 2008.
  • Employers – annual PAYE returns for the year commencing 6 April 2008.
  • Construction Industry Scheme contractors – monthly returns for periods commencing on or after 6 March 2009.
  • VAT-registered businesses:
  • Annual returns for the year beginning on 1 April 2008, for those that account for VAT annually.
  • Quarterly returns for quarters beginning on or after 1 January 2009, for those that account for VAT quarterly.
  • Monthly returns for months beginning on or after 1 March 2009, for those that account for VAT monthly. 

Main features 
The main features of the new regime are that no penalties will be charged where reasonable care has been taken; for careless and deliberate inaccuracies, tax-geared penalties will be charged at fixed percentage rates, which will only be reduced if the individual or business has disclosed the inaccuracy to HMRC; that there will be a minimum level for all penalties, except where a taxpayer discloses a careless inaccuracy to HMRC before they discover it; penalties for careless inaccuracies can be suspended for up to two years, after which they may be cancelled; and HMRC will be able to collect all or part of a company’s penalty for a deliberate inaccuracy from a director or other company officer who is responsible for the inaccuracy. 

Reasonable care 

No penalties will be charged where a taxpayer has taken reasonable care. HMRC states that “reasonable care” varies according to the person, the particular circumstances and their abilities, but everyone should keep records that enable their tax liability to be accurately calculated. 

If, despite taking reasonable care, an error results in tax being understated, no penalty will be charged provided the amount involved is not significant in relation to the person’s overall tax liability for the relevant tax period. 

HMRC states that this would include arithmetical errors that are not significant, and a situation where a taxpayer takes advice from a competent adviser or HMRC which later proves to be incorrect, provided that all the relevant information and facts were given to the adviser or HMRC. 

Careless and deliberate inaccuracies 

Penalties will be charged where careless and deliberate inaccuracies result in tax being understated. The applicable percentages will depend on whether the inaccuracies are concealed. (i.e. whether additional steps are taken to hide or cover up the inaccuracy). 

These fixed penalties can only be reduced if the individual or business has disclosed the inaccuracy to HMRC, and the amount of the reduction will depend on whether the disclosure was prompted or unprompted. 

HMRC states that careless inaccuracies would include those resulting from inadequate records or systems, or doing something incorrectly without asking for advice from an adviser or HMRC. ‘Deliberate’ means that the taxpayer knew what he was doing, and intended to understate his tax liability. 

Scale of penalties 

The following table outlines the penalties that will be charged, in terms of a percentage of the ‘potential lost revenue’. The potential lost revenue is normally the additional tax that is payable after correcting the inaccuracy, but there are special rules where the inaccuracy involves a loss claim, or is reversed in a later period. 

Disclosure 

To obtain a reduction for unprompted disclosure, taxpayers must inform HMRC of an inaccuracy before HMRC discover it (or are about to discover it). The maximum reduction for any disclosure will only be given if there is full co-operation with Disclosure To obtain a reduction for unprompted disclosure, taxpayers must inform HMRC of an inaccuracy before HMRC discover it (or are about to discover it). The maximum reduction for any disclosure will only be given if there is full co-operation with HMRC in quantifying and correcting the inaccuracy. A disclosure will be regarded as prompted if it was made after HMRC had contacted a person to inform them that it wished to make a compliance check of a return, or had arranged to visit their premises to make a compliance check of their records. 

Suspended penalties 

HMRC can suspend part or all of a penalty for a careless inaccuracy for up to two years, if it considers that compliance with a condition of the suspension would help the taxpayer to avoid incurring further careless inaccuracy penalties. HMRC would set conditions for the taxpayer to meet, and the penalty would be cancelled at the end of the suspension period if the taxpayer could satisfy HMRC that he had complied with the conditions. If the conditions were not met, part or all of the penalty would become payable. The suspended penalty would also become payable if the taxpayer incurred another penalty for a careless or deliberate inaccuracy during the suspension period. 

HMRC has stated that it will consider the taxpayer’s general compliance behaviour, the level of disclosure and the nature of the inaccuracy before deciding whether to suspend a penalty. If a careless inaccuracy is due to poor record keeping, one of the conditions of suspension could be that specified improvements are made to the way records are kept. This is a positive feature of the new system, and it is to be hoped that HMRC make full use of this facilty. 

Impact of the new system 

Some penalties will be higher than in the past, and some will be charged where previously there would have been no penalty. The main differences are likely to be that:

  • Penalties will probably be higher than in the past where the amount of tax involved is at the lower end of the scale in absolute terms. For example, under the new system, if a taxpayer deliberately understates a liability by £1,000 and does not disclose this, the penalty would be 70 per cent (i.e. £700) if the inaccuracy was not concealed, or 100% (i.e. £1,000), if the inaccuracy had been concealed. Under the previous system, there would probably have been some reduction by reference to how serious the inaccuracy was, and for co-operation following the discovery of the inaccuracy.
  • The new minimum penalty levels will probably also result in an overall increase in penalty amounts.
  • Penalties will probably be charged for ‘misdeclarations’ in VAT returns more often than in the past, because previously there was a high trigger level, which will no longer apply.
  • Under the new system it will only be possible to correct an inaccuracy in a VAT return in a later return without attracting a penalty where the inaccuracy was both below a certain level and not careless or deliberate. 


Personal liability of directors and other company officers HMRC will be able to collect all or part of a company’s penalty for a deliberate inaccuracy from a director or other company officer who was responsible for the inaccuracy in question. HMRC will probably consider doing so where there is evidence that the individual gained personally from the inaccuracy, or where the company is insolvent or likely to become insolvent. 

ACTION POINTS

  • Businesses may need to review the quality of their records and systems to minimise the risk of incurring penalties for careless inaccuracies, particularly if there is a history of corrections being made following the discovery of errors.
  • Individuals and businesses should disclose any inaccuracy as soon as it comes to light, and co-operate with HMRC in correcting it, in order to obtain the substantial penalty reductions for disclosure.
  • Particular care should be taken when correcting errors in VAT returns, as there will be much less scope to make informal corrections in later returns.
  • Taxpayers and their advisers should always request HMRC to suspend a penalty for a careless inaccuracy if HMRC do not offer to do so.