A new approach to penalties for incorrect Tax Returns

HMRC has recently issued a consultation document about a new approach to penalties for making incorrect Returns. It is the first topic to emerge from its initiative on modernising powers, deterrents and safeguards which follows on from the merger of the former Inland Revenue and Customs & Excise departments.

Why does HMRC want to change the current regime?

The new department inherited separate penalty regimes from the former IR and C&E and it now wants a single scheme that covers both direct and indirect taxes. It wants a regime that can be applied more consistently than the old ones and one that is better understood by the wider public. Furthermore it wants something that takes more account of the reasons why a Return has been completed incorrectly and that recognises and rewards good behaviour whilst penalising bad behaviour.

What is HMRC proposing?

Broadly speaking the penalties for incorrect Returns would be determined as follows.

• Innocent errors that are made after taking reasonable care would not be penalised at all.
• Getting something wrong through a failure to take reasonable care would incur a moderate penalty.
• Deliberately getting something wrong would incur a heavier penalty.
• Deliberately getting something wrong and covering it up would incur the heaviest penalty.

In order to give taxpayers an incentive to co-operate with HMRC they envisage that the above penalties could be reduced if the taxpayer admits to irregularities and helps to quantify them. To encourage voluntary compliance the largest reductions would be given to those who make a spontaneous and unprompted disclosure whilst a smaller reduction would be given to those who make a disclosure only after being prompted. There would be no reduction at all for those who are not prepared to make a disclosure or co-operate fully with the Inspector.

HMRC is also considering the possibility of suspending a penalty for a specified period in certain circumstances. If at the end of that period the taxpayer can demonstrate that their previous error has been corrected and that the improvement had been maintained the penalty could then be reduced or cancelled altogether.

What other changes are HMRC planning?

There are a large number of changes on the horizon in the way that HMRC intends to carry out its compliance activities. Some of these will be beneficial to small businesses but others might not be. I will be monitoring the position very closely and I will keep you updated as and when changes take place by periodical updates to this news page.

I hope that you have found it interesting.