Tax & Accounting News

New penalties on the way?

12/03/2007

In December 2006, HM Revenue & Customs issued a consultation document containing details of their proposals for a revised penalty structure for incorrect tax returns. They believe that the existing structure is inadequate, particularly for more serious offences. The new structure will probably be introduced in the Finance Act 2007, and will probably result in generally higher penalties than at present.

It is proposed that a single structure will apply for income tax, corporation tax, PAYE & NIC and VAT.

Essentially, the penalties will be on a more formal percentage basis than at present, increasing in line with the seriousness of the offence. So no penalty would be charged where a taxpayer took reasonable care in preparing their tax return, but made an error which understated their tax liability.

A moderate amount (perhaps 15% - 30% of the tax in question) would be charged where a taxpayer fails to take reasonable care, whilst a higher penalty (perhaps 35% - 70%)would apply for deliberate understatement of a liability. The highest penalties (perhaps 50% - 100%) would apply for concealment of a deliberate understatement.

As at present, there would, however, be reductions for early disclosure of irregularities and co-operation in dealing with assessment and payment of tax arrears. Nevertheless, it is likely that a significantly higher level of penalty will apply across the board.

One new proposal is that penalties could be suspended where a taxpayer had failed to take reasonable care, but could show that the cause of the understatement (for example a defective accounting system) had been corrected. If the improvement had been sustained during the penalty suspension period, the penalty would be cancelled.

Directors of companies may also become jointly and severally liable for penalties arising in relation to a company's affairs.

Please contact us for assistance if you wish to disclose any tax irregularity before the new penalties come into force, as this will probably result in a lower penalty. Please also check our Budget report immediately after the Budget for details of any announcement in relation to the new penalties.

 

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