A clearer view on tax penalties
A new way of charging penalties for incorrect tax returns is designed to encourage taxpayers to take care with their tax affairs and comply with all their obligations.
HM Revenue & Customs (HMRC) can impose a financial penalty if an error in a tax return or other tax document results in you paying less tax than you should or means you pay the tax in a later period. What is new is that taxpayers will no longer be liable to a financial penalty if they have taken ‘reasonable care’ to get their tax right, but have nevertheless made a mistake.
The penalties apply to errors in income tax, capital gains tax, corporation tax, VAT, PAYE, national insurance contributions and construction industry returns. The new rules cover periods starting after 31 March 2008, where the return is due to be filed after 31 March 2009.
HMRC calculates the level of penalty as a percentage of the potential lost revenue and this will be based on taxpayer behaviour: up to 30% for failing to take reasonable care; 20–70% for a deliberate error where no active steps have been taken to conceal it; and 30–100% for a deliberate and concealed error. Disclosing errors early, completely and voluntarily will place the penalty at the lower end of the range.
What counts as ‘reasonable care’ depends largely on the circumstances and the taxpayer’s abilities. HMRC expects a higher degree of care to be taken over complex matters, including finding out about the correct tax treatment. No penalty will be charged if a taxpayer takes an arguable view of a situation that is eventually not upheld. HMRC would also not impose a penalty if good accounting systems are in place but processing errors occur, provided the errors are relatively small compared with the overall tax liability.
Simply leaving everything to your adviser is not enough. Taxpayers taking reasonable care must make sure they give their adviser all the necessary information, implement any professional advice received and check the adviser’s work to the best of their ability. HMRC recognises that an ordinary person cannot be expected to challenge specialist professional advice on a complex legal point, but they ought, for example, to be able to recognise the complete absence of a major transaction.
Taxpayers also have a duty to choose an adviser who is competent for the task. Please get in touch for advice on how you can ensure you give us all the required information.