New Regime for Tax Penalties

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Recent changes have now aligned the penalty regime for corporation tax, income tax, capital gains tax, VAT, national insurance, PAYE and CIS deductions. These changes have also widened the scope of the penalty regime and limited the scope of taxpayer’s defences to being charged penalties.

Behavioural regime

The following statutory penalty bandings have been introduced based on the behaviour of the taxpayer:

  • Careless error – up to 30% of lost tax
  • Deliberate error – up to 70% of lost tax
  • Deliberate error with concealment – up to 100% of lost tax

It is important to note that no penalty will be charged where the taxpayer has taken “reasonable care”.

The 30% penalty relating to carelessness (which will be the most common category arising from normal enquiries) is a significant increase when compared with the penalties currently sought where “negligence” is alleged by HMRC.

Reductions from the maximum penalties are allowed where the taxpayer provides disclosure. The amount of reduction depends upon whether the disclosure is “prompted” or “unprompted”. Unprompted disclosure is where HMRC are notified about an error when there was no expectation that they would discover it. The legislation sets out the following maximum percentage reductions. Any decision on the reduction will depend upon the “quality” of the disclosure, which will take into account of the “timing, nature and extent” of the disclosure:

Type of Error   Maximum penalty 
(of lost tax)
  Maximum reduction for disclosure 
  Maximum reduction for disclosure 
Careless 30%
30% 15%
Deliberate 70%
50% 35%
Deliberate with concealment 100% 70% 50%

HMRC are allowed to reduce a penalty further where there are special circumstances. Special circumstances do not include an inability to pay, or that lost revenue in respect of one taxpayer is balance by an overpayment by another taxpayer.

HMRC can also suspend penalties to encourage positive behaviour and to support those who try to meet their obligations. Suspended penalties can only apply to avoid penalties for a careless (not a deliberate) inaccuracy.

Matters giving rise to penalties

The basic rule is that a penalty is charged where a person gives a defined document to HMRC and the document contains an inaccuracy leading to a loss of tax, an inflated loss or an inflated claim to repayment and the inaccuracy is careless or deliberate. This will typically involve the filing of an incorrect tax return relating to any of the above mentioned taxes.

There are also a number of specific situations that can give rise to penalties, these include:

  • adjustments to losses where there is no additional tax payable (penalties apply to 10% of the adjustment);
  • timing adjustments with penalties applied to 5% of the “delayed tax” for each year of delay;
  • failure to notify HMRC within 30 days from the date of an assessment if it understates a tax liability with penalties of 30% applied to the amount understated; and
  • failure to notify chargeability, resulting in a loss of tax, with penalties calculated on the amount unpaid 12 months after the end of the accounting period.

It should be noted that group relief is ignored in calculating the amount liable to penalties. Groups of companies will no longer be able to make “consequential” group relief claims to avoid a penalty.

The persons liable for penalties

Where a penalty is payable for a deliberate (not careless) inaccuracy attributable to an officer of a company, HMRC may pursue both the individual officer and company for the penalty. In these circumstances, HMRC can apportion all or part of the penalty against the officer at their discretion.

Reasonable care

No penalties will be due where there is an inaccuracy in a document or a return but reasonable care has been taken. Reasonable care is considered by reference to a person’s capabilities and circumstances. Examples of reasonable care include taking a reasonable view of the law and acting on advice from a competent advisor.

Practical examples of failing to take reasonable care provided in HMRC’s guidance at include:

  • failing to keep appropriate records;
  • failing to take appropriate advice in respect of the treatment of particular items where these are in doubt;
  • failing to adopt appropriate tax reporting processes and procedures; and
  • failing to obtain appropriate information to make a correct return.

HMRC’s guidance includes considerable comment on the adequacy of internal systems and processes in the context of a taxpayer’s attitude to tax compliance. It is evident from this that a particular focus of the new penalty regime will be the appropriateness of tax reporting systems including whether appropriate controls and quality checks are in place.
15 April 2009
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About Throgmorton:
Throgmorton is one of the leading companies specialising in the provision of financial and administrative outsourcing in the UK SME financial services sector.

The information in this notice is intended for general guidance only. Throgmorton does not accept any responsibility for losses incurred to any person acting or refraining to act as a result of the information in this notice. Advice should be taken in the context of specific circumstances.