This month we take a serious look at the new penalty regime which will be impacting on incorrect returns from April. This is the first of the new penalty systems to commence, and will be followed by a number of other new penalties. This article is a reminder of the basics.
It is just over a month until the new penalty regime for inaccuracies on returns swings fully into play. Once the new system is with us, mistakes on returns will be assessed to penalty using a completely new system which focuses on the behaviour of the taxpayer which led to the inaccuracy. The new rules will penalise incorrect returns which result in an underpayment of tax (or a potential underpayment in some cases) according to the seriousness of the behaviour which produced the understatement.
Mistake despite reasonable care
Where the taxpayer has taken reasonable care to ensure that his return does not understate the tax due, there will be no penalty. Those responsible for returns affected by the new legislation will need to ensure that they have taken sufficient care to avoid a mistake and will not be penalised for a simple error. Much of HMRC’s new guidance material makes it clear that the authority does now understand that “people do make mistakes” but that provided everyone takes care, a simple mistake will not be punished.
Lack of reasonable care
Where the error arises through carelessness, and the taxpayer did not take sufficient care over his return he will be liable to a penalty of 30% of the tax understated. This poses a significantly larger penalty for this type of error than most have seen under the old regime, where although the maximum penalty is 100% of the tax lost, the old rules about mitigation meant that for errors which were not serious the penalty could be very low – even zero in some cases. Now the law provides no room for negotiation. The rate of penalty is set by primary legislation – this will ensure consistency of treatment for all taxpayers. However, a 30% penalty is not the end of the road. Where the taxpayer comes forward and notifies HMRC of the error it is possible to significantly reduce the rate of penalty. Depending on the exact circumstances of the disclosure the penalty for careless error can be reduced to nil in the case of an unprompted disclosure, and 15% when the disclosure was prompted.
Dishonesty
Where the taxpayer deliberately understated his liability there are significantly higher penalties, from 70% for deliberate understatements, and 100% for deliberate understatements which the taxpayer took steps to conceal. Once again there are reductions for full disclosure which again are more substantial when the taxpayer comes forward of his own accord (unprompted) rather than after a request for information (prompted).
What is reasonable when taking care?
HMRC has the whip hand in the definition of reasonable care, and have been careful to give this important definition some detailed consideration. It transpires that the tax authority believes that what is reasonable will vary from taxpayer to taxpayer, and must always be judged based on the abilities and circumstances of the individual. If you like, not a generic “man on a Clapham omnibus” but each individual taxpayer considered on the basis of what their abilities and access to information is.
All taxpayers are, however, expected to keep sufficient records on which to base their return, and sufficient to ensure that any return prepared is correct. Beyond that, taxpayers should seek advice if they are unsure about something and if they remain unsure should disclose the uncertainty on their return. Some aspects of this are more directly relevant to income and corporation tax than they are to, say VAT or PAYE returns.
Taxpayers with an agent
When a taxpayer has an agent there is in theory more scope for error as well as perhaps a more technical approach to most areas of tax. If there is a breakdown in communication (by accident or design) the agent may not have all of the information he needs to make a correct return. The possibilities are endless, and the law takes a slightly different stance when an agent prepares and submits a return. There will be no penalty for careless error when the return is dealt with by an agent if HMRC is satisfied that the taxpayer (the client) took reasonable care to avoid the inaccuracy. This means that is the client takes care he will not be penalised if the agent makes a silly mistake. This approach is new, but it is worth being clear that the burden of proof has shifted here; it is up to you and your client to satisfy the officer that reasonable care was exercised. This means not only that your client kept decent records – at least sufficient for you to prepare an accurate return for him, but that he “appointed a competent agent, gave the agent all of the relevant information and checked the return before it was submitted”. (The quote is from the HMRC guidance on this subject).
So are you ready to advise your clients about this new regime? In reality it is a little late as the careful behaviour should have commenced some months ago, but as with all things, the message is easier to deliver now that the consequences are clear. Be careful or you may face a penalty.
For the next month AccountingWEB.co.uk will be focussing on the new penalty and compliance regime, with articles from a variety of sources on the subject, in addition to our new central resource on penalties.