While much of the current attention on HM Revenue & Customs focuses on its "New Disclosure Opportunity" for Britons with offshore earnings, the tax authority has also introduced its new penalty regime.
Now up and running, the beefed-up penalty regime could have serious consequences for self-employed individuals with errors on their returns or on other documents they send to the tax authority.
The regime will initially apply to PAYE, NICs, capital gains tax, corporation tax, VAT and the Construction Industry Scheme for tax periods starting on or after 1 April 2008 that are due to be filed on or after 1 April 2009.
Penalties will be based on a percentage of the potential revenue lost. So up to 30% of the potential revenue lost (i.e. the extra tax or NICs due as a result of correcting the error) if the error is careless; up to 70% of the potential revenue lost if the error is deliberate, and up to 100% of the potential revenue lost if the error is deliberate and the person conceals it.
For a penalty to be charged, two conditions must be satisfied.
Firstly, the return or document must contain an inaccuracy that leads to an understatement of the person's liability to tax, a false or inflated statement of a loss by the person or a false or inflated claim to repayment of tax.
Secondly, the inaccuracy must be careless, deliberate or 'deliberate and concealed'. Careless is defined as a failure to take 'reasonable care'.
HMRC can also charge a penalty of up to 30% of the potential revenue lost if it issues an assessment and the recipient fails to take ‘reasonable steps’ to notify an under assessment within 30 days of the date of issue.
There may be a substantial reduction in the penalty charged for the unprompted disclosure of errors - and further reductions depending on the quality of the disclosure. HMRC may also suspend the penalty for a careless error. If it is then satisfied that the conditions of the suspension have been met, for example, improved record keeping, the penalty will be cancelled. Otherwise, it becomes payable.
Comment based on guidance from Paul Spindler, a partner within the technology group at chartered accountants Kingston Smith.
Aug 3, 2009
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