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HMRC advice on New Penalty regime for incorrect tax returns.

HMRC advice on New Penalty regime for incorrect tax returns.

Date: 20 November 2008

HMRC have announced that they are introducing "a simpler and more consistent penalty system for tax errors. Under the new system if you take reasonable care to get your tax right, HMRC will not penalise you, even if you make a mistake".

In the communication that we have received relating to the new penalty regime, HMRC have said that the new penalties will apply initially to Income Tax (including Self Assessment), VAT, employers paying PAYE, National Insurance contributions, Corporation Tax, Capital Gains Tax and the Construction Industry Scheme. For these taxes they will apply for errors in tax returns or other documents, for periods starting on or after 1 April 2008, that are due to be filed on or after 1 April 2009.

Existing penalty rules will apply to the errors in tax returns that are to be filed for the year 2007 - 08. The new penalties for tax errors will be extended to most of the other taxes, levies and duties, for periods commencing from 1 April 2009, where the return is due to be filed from 1 April 2010.

HMRC New penalties for errors in tax returns and documents.

Following information has been extracted in a document released by HMRC. All references to 'We', 'Us', etc. in the statement below relates to HMRC:

Why do HMRC need penalties?

HMRC knows that most people take care to complete their tax returns and documents correctly. However there are some people who don’t do this, so HMRC have penalties to encourage them to comply with their legal obligations.

When are penalties charged?

Financial penalties can be charged if you make an error in your return or other documents and that error means that you understate your tax, misrepresent your liability or don’t tell HMRC when you’ve been under-assessed.

When do the new penalties begin?

The new penalties will apply from April 2008, but only for returns or documents due to be sent to HMRC on or after 1 April 2009.

Which taxes do the penalties apply to?

The new penalties initially apply to Income Tax, Corporation Tax, Capital Gains Tax, VAT, Construction Industry Scheme, PAYE and National Insurance contributions. They will be extended later to most of the Department’s other taxes, levies and duties.

What is new about penalties?

HMRC have always charged financial penalties for incorrect returns or documents. However the way that penalties will be calculated in the future will be linked to the behaviour that gives rise to the error.

What does behaviour mean?

If you send HMRC a document that contains a mistake HMRC will charge a penalty if:

  • The error is because you failed to take reasonable care, or
  • The error is deliberate, that is you knowingly and intentionally send HMRC an incorrect document but do not take active steps to hide the error, or
  • The error is deliberate and concealed, that is you knowingly and intentionally send HMRC an incorrect document and have taken active steps to hide the error.

HMRC will not charge a penalty if you took reasonable care to get things right but still made an error. You must tell HMRC promptly about any error you discover after you have sent the return or document to HMRC.

What is reasonable care?

'Reasonable care' varies according to the person, their particular circumstances and their abilities. Every person is expected to make and keep sufficient records for them to provide a complete and accurate return.

Someone with straightforward tax affairs may only need to keep a simple system of records, which are followed and regularly updated. A person with more complex tax affairs may need more sophisticated systems that are maintained equally carefully.

HMRC believe it is reasonable to expect a person who encounters a transaction or other event with which they are not familiar, to take care to check the correct tax treatment, or to seek suitable advice. HMRC expect people to take their tax seriously.

What are penalty suspensions?

If HMRC charge you a penalty because you failed to take reasonable care with your tax affairs, you may be able to have the penalty suspended for up to 2 years provided:

  • You meet certain conditions, and
  • You do not become liable to any other error penalties during the suspension period.

If at the end of the suspension period you have met all the suspension conditions, HMRC will cancel the penalty. Penalties charged because of deliberate errors, whether or not they were concealed, cannot be suspended.

How can you avoid a penalty?

You can avoid a penalty by:
  • Taking reasonable care to provide HMRC with correct returns and documents,
  • Keeping records that are good enough to enable you to provide HMRC with complete and accurate tax returns and documents,
  • Asking HMRC or your tax adviser for advice if you are not sure about any aspect of your tax affairs, and if you are still unsure, by
  • Flagging the entry and explaining the problem when you send the return or document to HMRC.

How is the penalty charge calculated?

The penalty is a percentage of the extra tax due. The rate depends on the behaviour that gave rise to the error. The less serious the behaviour, the smaller the penalty will be.

Behaviour Minimum penalty Maximum penalty
Reasonable care No Penalty No Penalty
Careless 0% 30%
Deliberate 20% 70%
Deliberate & Concealed 30% 100%

How can the penalty be reduced?

There can be a reduction in the level of penalty charged for disclosure of errors, and further reductions for the quality of any disclosure.
You can reduce the penalty from the maximum by:

  • Telling HMRC about any errors,
  • Helping HMRC work out what extra tax is due, and
  • Giving HMRC access to check your figures.

How will I know if I have to pay a penalty?

HMRC will send you a penalty notice, but only after HMRC have discussed your tax affairs with you and reached a decision on the correct position. You have the right to appeal against any part of our decision.

Andica provides various taxation software including:

  • HMRC accredited Payroll Software for businesses to operate their routine payroll calculation for employees salaries and wages, calculation,
  • Self Assessment tax return software for individual tax payers to prepare, calculate tax and submit the returns online. The software includes SA100 and all supplementary forms.
  • Partnership Tax returns software for businesses to prepare and submit their SA800 and supplementary forms online.

For further information please contact us on 0845 643 6500.