This central resource provides links to articles, questions and other information on the new penalty system commencing in 2009. The information is relevant to ALL businesses, and is intended to help you avoid penalties for mistakes on returns.
The legislation
The new penalty legislation appears in Schedule 24 to the Finance Act 2007. It is clear, modern legislation which in case of difficulty with a technical point is easy to read and understand for all but the layman.
The legislation imposes a penalty where there is an inaccuracy on a return or other document submitted to HMRC which leads to an understatement of tax.
Penalties are charged on the potential lost revenue - a new term - at an increasing rate according to the severity of the behaviour which gave rise to the inaccuracy. For unintentional errors there are two categories of behaviour :
- Mistakes made despite taking reasonable care - no penalty is charged, and
- Mistakes where there has been a lack of reasonable care - the penalty is 30% of the potential lost revenue
If there is evidence that the inaccuracy was deliberate, the rate of penalty rise significantly, with two further rates of penalty.
- For deliberate mis-statements - the penalty is 70% of the potential lost revenue, and
- For deliberate mis-statements which are then concealed - the penalty is 100% of the potential lost revenue.
A brief new article summarising the key points of the regime is here.
Reasonable Care
The legislation does not define careless or reasonable care, so this is lft to the tax authority to deal with. An understanding of reasonable care is essential to the new penalty regime. It has been dealt with in the following articles :
- Take care now! by Rebecca Benneyworth; written in 2008, this article summarises the guidance on reasonable care in general, and explains the difference when an adviser is acting.
- Zero penalties - a thing of the future by Rebecca Benneyworth; this article from 2008 explains that there are three ways in which zero penalties can apply - taking care, disclosure and as a result of a suspended penalty.
The examples on mistakes despite reasonable care in the Compliance Handbook manual are helpful, but brief - see here. By way of contrast, the examples of errors which would be penalised for lack of reasonable care also give penalty of information about the limits of "careful" in HMRC's view.
The official line on reasonable care in large organisations with many transactions is here - the bottom half of the page.
Disclosure
Disclosure is an essential component of the new regime, allowing penalties for inaccuracies to be significantly reduced where a full disclsore is made. Disclosure of a careless error before HMRC start investigating it can reduce the penalty to zero. Disclosure is dealt with in the following articles :
- Zero penalties - a thing of the future by Rebecca Benneyworth; this article, written in 2008 explains the impact disclsure can make on a penalty outcome.
- When is a disclosure not a disclosure? by Rebecca Benneyworth; this article, written in 2008 explains how to make a disclosure and the impact of the new regime for penalties on correcting errors on VAT returns.
- New article dated February 2009 on prompted versus unprompted disclosure by Rebecca Benneyworth
HMRC's guidance on disclosure and its impact on the calculated penalty is somewhat buried in the Compliance Handbook Manual. The index page to guidance on disclosure is .here.
There is a useful page of examples which distinguish prompted and unprompted disclosure.
Calculating penalties
Calculating the penalty is no easy feat! It involves assessing the behaviour and then calculating the potential lost revenue. Nichola Ross Martin produced a 5 minute guide to calculating penalties in 2008.
Guidance and help from HMRC
HMRC's short online training session on the main issues in the penalty legislation
Review of the training session by Nichola Ross Martin
The Compliance Handbook Manual was first launched in April 2008 at the commencement of the new penalty regime. The Chapter on penalties starts here.
The adviser's role
The adviser is in a difficult position. He will probably want to make the new penalty regime clear to his clients, and may wish to implement some changes to his processes as a result of the new rules. But burdening clients with additional expense in the current economic climate will not be welcome. This article explains some of the simple steps the agent might consider to help his client.
There is also a short presentation on new penalties for agents to present to their clients, should they wish. HMRC has provided a downloadable PowerPoint presentation to help you.
You can also order a supply of a leaflet which explains the new rules to send to your clients. There is an email link at the foot of this page to allow you to speciy how many your would like and a delivery address.
