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Save HMRCs penalty kick

12 August 2008

With new HM Revenue and Customs (HMRC) penalties regime coming into effect in April 2008, here is a brief overview of what they are and how to avoid them.

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

The new penalties initially apply to income tax, corporation tax, capital gains tax, VAT, the Construction Industry Scheme, PAYE and National Insurance contributions. They replace the existing penalties regimes for the various taxes with a single regime for all major taxes.

The Finance Act 2008 has also included provision to extend the new regime to other taxes and duties administered by HMRC, including all excise duties, environmental taxes, inheritance tax, insurance premium tax and stamp duties.

The first penalties under the extended regime are expected to be charged with effect from 1 April 2010.

If the taxpayer sends HMRC a tax return or a document that contains a mistake, HMRC will charge a penalty if:

If HMRC charges the taxpayer a penalty because the taxpayer failed to take reasonable care (i.e. as per the first point above) with its tax affairs, the taxpayer may be able to have the penalty suspended for up to two years, provided the taxpayer meets certain conditions, and does not become liable to any other error penalties during the suspension period.

If at the end of the suspension period the taxpayer 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.

So how is the penalty charge calculated? The penalty is a percentage of the extra tax due. The easiest and clearest way of representing this information is by means of the diagram set out below.

HMRC can effect a reduction in the level of penalty charged for disclosure of errors, and a further reduction for the quality of any disclosure within the penalty bands shown above.

It will be possible to appeal against a penalty imposed by HMRC. One can appeal the imposition of the penalty, the amount of the penalty, a decision not to suspend the penalty and the conditions set in relation to the suspension of a penalty.

If the penalty relates to VAT, the appeal will be heard by the VAT Tribunal. For appeals relating to direct tax matters, the appeal will be heard by the General Commissioners or the Special Commissioners.

The legislation contained in the Finance Act 2007 (Schedule 24) also gives HMRC the power to make a director of a company jointly liable where a penalty is payable by a company for a deliberate inaccuracy attributable to the director of the company.

The Finance Act 2008 contains a provision to impose a penalty on third parties who provide deliberate inaccuracies to the taxpayer even though they may have no obligation in relation to the submitted document itself. The date that this comes into effect is yet to be appointed (but is expected to be for periods commencing on or after 1 April 2009, where the return is due to be filed on or after 1 April 2010).

The new penalties regime is one of the first pieces of legislation to result from a review carried out following the merger of the Inland Revenue and Customs & Excise.
Some commentary has suggested that this new regime would adversely affect tax planning going forward. We believe that this view is in fact a step too far. However, we envisage that the level of penalties arising under the new regime will be greater than the level of penalties arising previously.

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Stuart Hale

Associate
T: 08700 86 8822
I: +44 (0)118 965 8822
E: stuart.hale@shoosmiths.co.uk