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New penalties: Take care now! By Rebecca Benneyworth

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4th Jun 2008
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HMRC formsRebecca Benneyworth reviews the new regime from the advisor's perspective.

The new penalty regime for errors and omissions on returns and documents has been in force for over a month now, but taxpayers will not see penalties levied under the new regime for some time yet, as the transitional period is working its way through.

However, advisers cannot be complacent about the new regime. There is no doubt whatsoever that this new regime intends to bring about the most significant cultural change in tax compliance we have ever seen. And warning your client about it, and helping him to understand his obligations, is going to be a key role for the adviser over the coming year.

The new regime replaces all penalties for incorrect returns which result in an underpayment of tax in relation to income tax, corporation tax, PAYE and NIC and VAT. Finance Bill 2008 extends the remit of the regime to errors in relation to pretty much every tax and duty you have ever heard of, and probably a few you haven't. At the same time, we shall see the same structure implemented for 'failure to notify' offences, including late VAT registration.

The big cultural change (for both taxpayers, and I suspect even more so HMRC compliance staff) is the concept that when taxpayers take 'reasonable care', they will never be liable to a penalty in relation to errors and omissions which result in an underpayment of tax. This is a completely new idea, and is designed to encourage compliance, and gradually to support and enhance voluntary compliance by taxpayers. Provided everyone takes reasonable care over their tax affairs, they will never be liable to a penalty.

So the definition of reasonable care will be crucial, and understanding what is required of him will enable every taxpayer to minimise exposure to penalties. Everyone makes mistakes, but this way no penalty will be added when the mistake comes to light.

HMRC has published technical guidance on their understanding of reasonable care as part of the new Compliance Handbook Manual, published on 1 April 2008, the day that the new legislation came into effect. The manual recognises that reasonable care will be different for every taxpayer, and depend on their abilities and circumstances. What is reasonable care for an unrepresented taxpayer will differ from that for a large international company. All they both have to do is take care, within the limits of their competence. Even for one taxpayer, what is reasonable care in relation to a simple transaction will differ when the taxpayer is involved in a complex transaction which he has never encountered before. HMRC expects those in unfamiliar territory to take extra care to ensure that they apply the right tax treatment.

There are excellent examples of reasonable care, and errors made despite taking reasonable care, including a taxpayer transposing the figures of his car benefit when transferring them from P11D to his tax return. Provided the error is not of such significance as to 'look wrong' he has taken reasonable care. In the example, he writes the benefit of £5,910 as £5,190. The error is £720, which at over 10% is clearly material, but the guidance states that this is not an error of such magnitude as to fail the reasonable care test. I must say that I find this particular example very reassuring, and conclude that provided he started his entry with a 5, it is likely that any subsequent combination of the digits 9,1,0 would be acceptable.

There is a slightly more complex situation when an adviser is acting. The legislation states that the taxpayer shall not be liable to a penalty in relation to an act or omission by his appointed agent provided the taxpayer took reasonable care to ensure there were no errors. So the onus is still on the taxpayer to take care, even when he has appointed an agent, who may have failed to take care! This of course could be a matter for a negligence claim, but still the taxpayer can protect himself from a penalty.

The guidance (CH84540) indicates that several issues will be considered when deciding whether the taxpayer took reasonable care to avoid the inaccuracy. HMRC will seek evidence that the taxpayer too care to avoid the inaccuracy as follows:

"This will include;

  • making sure that they give the agent all relevant information with which to work. No agent, for example, can produce correct accounts and returns from grossly deficient records, or give accurate advice if they do not have all the facts
  • implementing the professional advice received, and not neglecting some vital step
  • checking the agent's work to the extent that the person is able to do so. For example, an ordinary person cannot be expected to challenge specialist professional advice on a complex legal point. But they ought to be able to recognise the complete absence of a major transaction.

"The benchmark is a person who goes to an apparently competent professional adviser and;

  • gives the adviser a full and accurate set of facts
  • checks the adviser's work or advice to the best of their ability and competence and
  • adopts it.

The person will then have taken reasonable care to avoid inaccuracies on the part of themselves and their agent."

What should the agent do to support the client in evidencing that reasonable care has been taken? There are some clear indicators here, to which I shall return in subsequent articles, but clearly making sure that your clients' records are up to scratch, that they are submitted in a timely fashion, and that your client properly considers his return before approving it are elements of the approach by agents. How far you go in making this easier for him, and what additional evidence you put in place to record it will be a difficult call, but on which the professional bodies will no doubt advise on.

I shall be returning to this topic with a few suggestions about what you might consider over the coming months.

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By AnonymousUser
13th Jun 2008 16:10

The wrong reason to move in the right direction
I look forward to reading the suggestions of what accountants can do. However, it's disappointing that it's seems it's going to be legislation not service standards that will drive the initiative of improving client records.

We've been banging this drum for years about offering free bookkeeping software, training and support as part of a fixed fee. We've started to recommend that firms get their clients to sign a declaration to say they've been advised on this and offdered help.

Is it reasonable for the tax office to expect a typical small business to keep records to Self Assessment standards? If it is then it means all clients will need to keep at least a Cashbook with the bank and cash reconciled!!!

This is a great opportunity for accountants to bundle in "tax protection" into their proposition.

Bob
www.moresoftware.biz

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