New Penalty Regime
13th April 2009
A new penalty regime applies to tax periods starting on or after 1 April 2008, where documents are due to be filed on or after 1 April 2009. The regime applies to income tax, capital gains tax and corporation tax ('direct taxes'), and also to VAT. FA 2008 Sch 40 has extended the new regime to cover essentially all taxes.
The new rules are set out in FA 2007 Sch 24.
Under the new regime a person can be penalised for:
(A) Carelessly or deliberately giving HMRC inaccurate information; and/or
(B) Failing to take reasonable steps to inform HMRC that a tax assessment understates a person's tax liability.
HMRC can suspend penalties in some circumstances.
(A) Giving inaccurate information to HMRC
There is a penalty for 'giving an inaccurate document'. This includes communicating information to HMRC in any form and by any method (whether by post, fax, email, telephone or otherwise). Online filing of tax returns, for example, is clearly covered.
A person ('P') may be subject to a penalty if P gives inaccurate information to HMRC and the inaccuracy which amounts to, or leads to:
- An understatement of P's liability to tax;
- A false or inflated statement of a loss by P; or
- A false or inflated claim to repayment of tax.
No penalty is due unless the error is careless or deliberate.
There is a detailed list of relevant 'documents' for this purpose. They include tax returns. They also include (inter alia):
- Accounts in connection with ascertaining liability to tax; and
-
Any
document on which HMRC are likely to rely to determine certain questions
without further enquiry. These are
questions about:
- P's liability to tax,
- payments by P by way of or in connection with tax,
- any other payment by P (including penalties),
- repayments, or any other kind of payment or credit, to P
Agents
Where information supplied to HMRC on behalf of P contains a careless inaccuracy, P may be liable to a penalty. P is not liable, however, if P satisfies HMRC that P took reasonable care to avoid inaccuracy.
Inaccuracy discovered later: extended meaning of 'careless'
An inaccuracy in information given by a person to HMRC, which was not careless or deliberate when the information was given, is still treated as careless if the person discovers the error later and does not take reasonable steps to inform HMRC. There is therefore an ongoing obligation to tell HMRC if an error becomes apparent at any later stage.
Deliberate inaccuracy by a company director etc
A special rule applies where a company is liable to a penalty because of a deliberate inaccuracy, which is attributable to an officer of the company. In that case the officer, as well as the company, is liable to pay the penalty.
Partnership tax returns
There are special rules applying to partnership tax returns, which are not discussed in detail here.
Suspension of penalties
HMRC may suspend all or part of a penalty for a careless inaccuracy for up to two years. HMRC may do this only if compliance with a condition of suspension would help the taxpayer avoid liability for such penalties in future. A condition of suspension may specify action to be taken and a period in which it must be taken.
If the conditions are complied with, the penalty is cancelled at the end of the period of suspension; otherwise it then becomes payable. The penalty is also payable if, while it is suspended, the taxpayer incurs another penalty for a careless inaccuracy.
(B) Failure to notify HMRC of underassessment
There can be a penalty if HMRC send a taxpayer an assessment that understates the taxpayer's liability to tax. A penalty may be due if the taxpayer fails to take reasonable steps, within 30 days starting with the date of the assessment, to inform HMRC that the assessment is too low.
In deciding what steps (if any) were reasonable, HMRC must consider whether the taxpayer knew or should have known that the assessment was too low.
Agents
Where a taxpayer has an agent in relation to tax, the taxpayer may also be liable if the agent fails to take reasonable steps to notify HMRC of the error within 30 days of the assessment. In deciding what steps (if any) were reasonable, HMRC must take into account what the agent knew or should have known, as well as what the taxpayer knew or should have known.
The taxpayer is not, however, liable to a penalty if the taxpayer satisfies HMRC that the taxpayer took reasonable care to avoid unreasonable failure.
(C) How big are the potential penalties?
|
Error |
Percentage of potential lost revenue' |
|
Careless inaccuracy |
30% |
|
Deliberate but not concealed inaccuracy |
70% |
|
Deliberate and concealed inaccuracy |
100% |
|
Failure to notify HMRC of underassessment |
30% |
Reductions for disclosure
Penalties are reduced as follows where errors are disclosed to HMRC. The size of the reduction depends partly on whether a disclosure is prompted by HMRC or is unprompted.
|
Full penalty |
Minimum penalty if unprompted disclosure |
Minimum penalty if prompted disclosure |
|
30% |
0% |
15% |
|
70% |
20% |
35% |
|
100% |
30% |
50% |
HMRC also have power to reduce a penalty 'if they think it is right because of special circumstances'. These circumstances do not, however, include:
- Inability to pay; or
- The fact that a potential loss of revenue from one taxpayer is balanced by a potential overpayment by another.
'Disclosure', 'prompted' and 'unprompted'
A person discloses an inaccuracy or a failure to disclose an underassessment by:
- Telling HMRC about it,
- Giving HMRC reasonable help in quantifying the error; and
- Allowing HMRC access to records for the purpose of ensuring that the error is fully corrected.
Disclosure is 'unprompted' if made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the error. Otherwise it is 'prompted'.
The meaning of 'potential lost revenue'
'Potential lost revenue' normally means the additional amount due or payable in respect of tax as a result of correcting the error. 'Tax', in this context, includes National Insurance (social security) contributions.
There are also several rather complex special rules on potential lost revenue. One such rule is that the impact of errors on other taxpayers must be disregarded. Specifically, in calculating potential lost revenue in respect of information given by or on behalf of one person, no account may be taken of the fact that a potential loss of revenue from that person is or may be balanced by a potential overpayment by another person.
- This will apply where, for example, one trader undercharges VAT but as a result another trader reclaims less VAT from HMRC. The first trader is liable to a penalty on the whole amount undercharged even though HMRC's loss is actually less than that.
There is an exception where an enactment requires or permits another person's liability to be adjusted by reference to the first person's liability.
Other special rules relate to multiple errors, losses, delayed tax, loans to participators in close companies, and groups of companies.
(D) Error in taxpayer's document attributable to another person
There is a new penalty under FA 2008 Sch 40 where:
- A person gives HMRC inaccurate information; and
- The inaccuracy is attributable to a third party deliberately supplying false information to the taxpayer (whether directly or indirectly); or to the third party deliberately withholding information from the taxpayer, with the intention of the document containing the inaccuracy.
The third party will be liable to the penalty, which will be due whether or not the taxpayer is also liable to a penalty in respect of the same inaccuracy. The penalty will be 100% of the potential lost revenue.
See also details of our services relating to tax disputes and investigations.