BN79 : HMRC Review of Powers, Deterrents and Safeguards : Penalties for Incorrect Returns

Who is likely to be affected?

  1. Individuals and businesses who understate their tax liability because of failing to take reasonable care in completing returns for Income Tax, Corporation Tax, Pay As You Earn (PAYE), National Insurance Contributions (NIC) and Value Added Tax (VAT) and those who deliberately understate their liability to any of these taxes.

General description of the measure

  1. Legislation will be introduced in Finance Bill 2007 to provide a single new penalty regime for incorrect returns for income tax, corporation tax, PAYE, NIC and VAT where the penalty will be determined by the amount of tax understated, the nature of the behaviour giving rise to the understatement and the extent of disclosure by the taxpayer. It introduces a new concept of suspended penalties.

Operative date

  1. The new provisions will apply from an appointed day to be set by a Treasury Order laid before the House of Commons and this is expected to be for return periods commencing after 31 March 2008 where the return is filed after 31 March 2009.

Current law and proposed revisions

  1. The measure will repeal penalty provisions for incorrect returns for Income Tax Self Assessment (section 95 Taxes Management Act 1970, Corporation Tax Self Assessment (paras 20(1) and 89(1), Schedule 18 to Finance Act 1998), PAYE and NIC (section 98A (4) Taxes Management Act 1970) and for VAT (sections 60, 61 and 63 Value Added Tax Act 1994).
  2. It will replace these different provisions with a single penalty regime to apply to inaccurate returns, claims, accounts and other documents for each of the taxes. The new provisions will provide for penalties based on the amount of tax understated and the behaviour that gives rise to the understatement. There will be:
  • no penalty where a taxpayer makes a mistake;
    And
  • moderate penalties for failures to take reasonable care;
    • higher penalties for deliberate action;
  • still higher penalties for deliberate action with concealment.
  1. The measure will provide for each penalty to be substantially reduced where the taxpayer makes a disclosure (takes active steps to put right the problem), more so if this is unprompted. So, for an unprompted disclosure of a failure to take reasonable care the penalty could be reduced to nil. Where a taxpayer discloses fully when prompted (by a challenge from HMRC) each penalty could be reduced by up to a half.
  2. The clauses will also provide for the measure of tax lost to be calculated before setting off group relief for companies.
  3. There will be provisions for calculating the tax lost in special circumstances, such as where there is an overstated loss or the inaccuracy in the return results in tax being declared late rather than not at all.
  4. Provisions from the predecessor regimes will be carried forward and applied across the taxes for penalties where the taxpayer accepts an inadequate assessment or uncovers a mistake but fails to take reasonable steps to tell HMRC.
  5. The measure will include full and explicit provisions for the right of appeal against all penalty decisions.
  6. There will be at least 20 months between Royal Assent of Finance Bill 2007 and the implementation of the changes, during which HMRC will be continuing to consult on guidance on the operation of these penalty provisions. It is intended that guidance will be published well ahead of implementation.

Further advice

  1. This measure was the subject of a consultation paper published on 19 December 2007 – Penalties for Incorrect Returns: Publication of draft clauses and explanatory notes. A summary of responses to that consultation and a Regulatory Impact Assessment including an explanation of changes made as a result will be published shortly.
  2. If you have any questions about this change, please contact Rachel Button by e-mail or by telephone on 0207 147 2341.