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Schedule 41 of the Finance Act. By Simon Sweetman

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11th Dec 2008
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A glimpse into the future today (and no, it's not Buck Rogers, Tax Inspector). Schedule 41 of the Finance Act (Schedule 41! burden reduction?) deals inter alia with what we know as 'failure to notify'. It was in the past anomalous that making an incorrect return had been treated as more heinous than not making one at all: since 1995/6, s.7 TMA 1970 brought the penalties more into line. Now this section brings it into line with the new penalty structure in Schedule 24 FA 2007.

This is a bit strange for us old direct tax hands, because most of Schedule 41 is about indirect taxes, but that's the way things are with HMRC. I am dealing only with direct tax here, because that's what I know about. What the Schedule says is:

1 A penalty is payable by a person (P) where P fails to comply with an obligation specified in the Table below (a 'relevant obligation').

  • Income tax and capital gains tax: Obligation under section 7 of TMA 1970 (obligation to give notice of liability to income tax or capital gains tax)
  • Corporation tax: Obligation under paragraph 2 of Schedule 18 to FA 1998 (obligation to give notice of chargeability to Corporation Tax

5 (1) A failure by P to comply with a relevant obligation is—

  • (a) 'deliberate and concealed' if the failure is deliberate and P makes arrangements to conceal the situation giving rise to the obligation, and
  • (b) 'deliberate but not concealed' if the failure is deliberate but P does not make arrangements to conceal the situation giving rise to the obligation.
  • 6 (1) The penalty payable under any of paragraphs 1, 2, 3(1) and 4 is—

  • (a) for a deliberate and concealed act or failure, 100% of the potential lost revenue,
  • (b) for a deliberate but not concealed act or failure, 70% of the potential lost revenue, and
  • (c) for any other case, 30% of the potential lost revenue.
  • These rules will come in when the Treasury says so, but are likely to come in for failures from 1 April 2010 – the date a failure takes place being the day after the final date for compliance.

    Note that this is a failure to notify within six months of the end of the first accounting period, not a failure to register as self-employed which is strictly an NIC requirement. Note too that for income tax there is an annual obligation so the penalty will apply for each and every year.

    If the failure is not deliberate, there is no penalty if the taxpayer (or actually the non-taxpayer) has a reasonable excuse. I don't think 'the dog ate my accounts' (or the cybernetic equivalent) is quite going to do the business here. And what is a reasonable excuse at the time may well cease to be a reasonable excuse if the failure continues.

    When it comes to the real thing, we will also need to look at paragraphs 12-14, because they put into statute the kind of reductions for disclosure that in the past have been for HMRC to decide (though now it is only described as 'disclosure'). The Act tells us that:

    (2) P discloses a relevant act or failure by—

  • (a) telling HMRC about it,
  • (b) giving HMRC reasonable help in quantifying the tax unpaid by reason of it, and
  • (c) allowing HMRC access to records for the purpose of checking how much tax is so unpaid.
  • And then tells us what reductions are available. Assuming we have someone who has worked in the informal economy for some time and who makes a voluntary disclosure, there is the possibility of a penalty loading as low as 20%. The intention is clear – to make joining the club less painful for those who have lived outside the law. At the same time, though, the fact that the reductions are written into the statute should make negotiation of enquiry settlements easier.

    It seems to me that this is clearer than the law it replaces: not all changes are for the worse.

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