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The document contains a new approach for the key area of penalties for incorrect returns and follows on from an earlier consultation paper in March 2006. It involves:
- a single penalty structure to apply for incorrect returns for income tax, corporation tax, PAYE, National insurance contributions, and VAT;
- no penalties where a taxpayer has taken reasonable care to complete the return correctly but makes a mistake that understates their tax liability;
- a moderate penalty if a taxpayer understates their liability by failing to take reasonable care;
- higher penalties if a taxpayer deliberately understates their liability;
- higher penalties still, if a taxpayer covers up any deliberate understatement;
- substantial reductions, or even complete waiver, of penalties if a taxpayer voluntarily discloses irregularities and gives HMRC all the help they need to quantify the tax lost;
- smaller reductions of penalties if a taxpayer discloses an irregularity at a time when they had reason to believe HMRC suspected it;
- suspended penalties for taxpayers who fail to take reasonable care when completing their return but agree to take steps to ensure that the problem will not recur.
Comments on the new approach and the accompanying illustrative draft clauses should be sent by 13 March 2007 to: HMRC powers review, Room 1C/03, 1st Floor, 100 Parliament Street, London SW1A 2BQ, e-mail: powers.review-of-hmrc@hmrc.gsi.gov.uk.
Further consultations on modernising its powers, deterrents and safeguards will be published by HMRC early in 2007 to cover criminal investigation powers, compliance assurance interventions, debt management, and the overall framework of safeguards.
Penalties for incorrect tax returns go to the heart of the work carried out for clients by countless practitioners so it is important that any new regime is workable. Grant Thornton's Francesca Lagerberg says that it is great that HMRC is consulting on the proposed measures before they become legislation. While the measures look reasonable, and appear to introduce consistency, where before there has been lack of clarity, she wonders if the trade off will be reduced negotiation. Francesca says that the 'new terminology' will have to be considered carefully. For instance, while it is good that someone who makes an innocent error in his return, will not be charged a penalty, the words 'reasonable care' are crucial and mean that taxpayers will have to take even more care to ensure that they get the right information in their returns at the right time and in the right way. She urges all practitioners who deal with self assessment tax returns, to take this opportunity to read the document and send comments on what will or will not work to HMRC, 'no matter how small the point'. This is effectively the one chance practitioners will have to influence the new self assessment penalty regime.
HMRC press release dated 19 December 2006
