HMRC Provides New Guidelines On Tax Penalties

by Jason Gorringe, Tax-News.com, London

15 April 2008

HM Revenue and Customs (HMRC) has this week published guidelines relating to a new penalty regime recently introduced for failure to complete tax returns and documents correctly.

According to the document, financial penalties can be charged if individuals make an error in their return or other documents which mean that they understate their tax, misrepresent their liability or don’t inform HMRC when they've been under-assessed.

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

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.

HMRC explained that it has always charged financial penalties for incorrect returns or documents, but the way that penalties are to be calculated will be linked to the behaviour that gives rise to the error.

This means that if a taxpayer sends HMRC a document that contains a mistake, the tax authority will charge a penalty if:

• The error is because they failed to take reasonable care, or
• The error is deliberate, and the taxpayer has knowingly and intentionally sent HMRC an incorrect document but did not take active steps to hide the error; or
• The error is deliberate and concealed, and the taxpayer has taken active steps to hide the error.

HMRC will not charge a penalty if an individual took reasonable care to get things right, but still made an error.

In such a case, it is the responsibility of the individual in question to report promptly to HMRC about any error they discover after they have sent the return or document to it.

‘Reasonable care’ varies according to the person, their particular circumstances and their abilities, the tax authority explained. Every person is expected to make and keep sufficient records, 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.

According to HMRC, 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.

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

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

If at the end of the suspension period the individual has 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.

HMRC went on to explain that penalties can be avoided by:

• Taking reasonable care to provide HMRC with correct returns and documents,
• Keeping records that are good enough to enable an indvidual to provide HMRC with complete and accurate tax returns and documents,
• Asking HMRC or a tax adviser for advice if doubt is cast over any aspect of an individul's tax affairs, and if they are still unsure, by
• Flagging the entry and explaining the problem when the return document is sent to HMRC.

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, HMRC concluded.

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