Tax penalties and your business

If you submit an incorrect tax return to HM Revenue and Customs (HMRC) and as a result your tax liability is understated, you may be charged a penalty and interest, as well as the additional tax that becomes payable when the error is corrected.

Nothing new there, but what is new is that the penalty system has been entirely revamped, and a new unified regime will apply to incorrect tax returns or other documents submitted by individuals and businesses in relation to income tax, capital gains tax, corporation tax, PAYE, National Insurance contributions and VAT. 

Paul Howard, associate director of Chiltern Tax Support for Professionals, looks at what these new penalties could mean to you and your business.

Starting dates

The new penalties will apply to returns that are due to be submitted on or after 1 April 2009, that deal with periods starting on or after 1 April 2008.

So the first periods to which the new penalties will apply are as follows:

• Individuals - the current tax year that started on 6 April 2008
• Companies - accounting periods beginning on or after 1 April 2008
• Employers - annual PAYE returns for the year commencing 6 April 2008.

VAT-registered businesses

• Annual returns for the year beginning 1 April 2008, for those that account for VAT annually
• Quarterly returns for quarters beginning on or after 1 January 2009, for those that account for VAT quarterly
• Monthly returns for months beginning on or after 1 March 2009, for those that account for VAT monthly.

Main features

• The main features of the new regime are that no penalties will be charged where reasonable care has been taken.



• For careless and deliberate inaccuracies, tax-geared penalties will be charged at fixed percentage rates, which will only be reduced if the individual or business has disclosed the inaccuracy to HMRC.



• There will be a minimum level for all penalties, except where a taxpayer discloses a careless inaccuracy to HMRC before they discover it.



• Penalties for careless inaccuracies can be suspended for up to two years, after which they may be cancelled.



• HMRC will be able to collect all or part of a company's penalty for a deliberate inaccuracy from a director or other company officer who is responsible for the inaccuracy.

Scale of penalties

The potential lost revenue is normally the additional tax that is payable after correcting the inaccuracy, but there are special rules where the inaccuracy involves a loss claim, or is reversed in a later period.

Disclosure

To obtain a reduction for unprompted disclosure, taxpayers must inform HMRC of an inaccuracy before HMRC discovers it.

The maximum reduction for any disclosure will only be given if there is full co-operation with HMRC in quantifying and correcting the inaccuracy.

A disclosure will be regarded as prompted if it was made after HMRC had contacted a person to inform them that it wished to make a compliance check of a return, or had arranged to visit their premises to make a compliance check of their records.

Suspended penalties

HMRC can suspend part or all of a penalty for a careless inaccuracy for up to two years, if it considers that compliance with a condition of the suspension would help the taxpayer to avoid incurring further careless inaccuracy penalties.

HMRC would set conditions for the taxpayer to meet, and the penalty would be cancelled at the end of the suspension period if the taxpayer could satisfy HMRC that he had complied with the conditions.

If the conditions were not met, part or all of the penalty would become payable. The suspended penalty would also become payable if the taxpayer incurred another penalty for a careless or deliberate inaccuracy during the suspension period.

Personal liability of directors and other officers

HMRC will be able to collect all or part of a company's penalty for a deliberate inaccuracy from a director or other company officer who was responsible for the inaccuracy in question.

HMRC will probably consider doing so where there is evidence that the individual gained personally from the inaccuracy, or where the company is insolvent or likely to become insolvent.