News
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New Penalty Regime
Background
Following the merger of the Inland Revenue with Customs & Excise there was a clear need for a new penalty regime to be introduced to align procedures for both Direct and Indirect Taxes to ensure a consistency of approach.
One of the main problems with the existing penalty regimes are that certain penalties do not necessarily fit the ‘crime’ and often someone making a genuine error would be penalised in a similar way to someone deliberately submitting incorrect returns.
HM Revenue & Customs (HMRC) reviewed procedures and set about devising a penalty regime aimed at supporting those who try to comply and punishing those who seek to gain an unfair advantage through non-compliance.
Schedule 24 of The Finance Act 2007 was the result of this review and this legislation replaces the previous separate penalty regimes for Income Tax Self Assessment (ITSA), Corporation Tax Self Assessment (CTSA), PAYE/NIC (including CIS), and VAT with a single new penalty regime.
It should be noted that this legislation relates only to penalties for incorrect returns and therefore, other fixed and tax geared penalties such as those for filing late returns still remain.
The new regime applies to all return periods commencing after 31st March 2008.
Features
The main features in the new penalty regime include:-
- A single penalty regime for incorrect returns.
- Penalties based on ‘behaviour’ with set minimum and maximum penalties being applied depending on the actions of the taxpayer concerned.
- Scope for mitigation but unlike the current situation under Self Assessment, where there is a penalty abatement for Disclosure, Co-operation and Seriousness, only the Disclosure element remains.
- The introduction of a new concept of Suspended penalties, which can reduce or cancel penalties where it can be shown that steps have been taken to prevent errors arising again.
- A right to Appeal.
The proposed penalties are split into three categories depending on the type of ‘offence’ as follows: -
30% of the tax lost for ‘careless’ behaviour (i.e. failure to take reasonable care).
70% of the tax lost for ‘deliberate understatement’ (i.e. knowingly making incorrect returns).
100% of the tax lost for ‘deliberate understatement with concealment’ (i.e. knowingly making incorrect returns and then covering up the fact).
The mitigation for disclosure in respect of these penalties is then divided into ‘prompted’ and ‘unprompted’ disclosures.
Where a disclosure has been ‘prompted’ as a result of HMRC highlighting the issue, the above penalties are halved to 15%, 35% and 50% respectively.
If an 'unprompted' disclosure is made (i.e. before HMRC become aware) then the above penalties can be reduced to 0%, 20% and 30% respectively (these are the minimum penalties in each category).
The new concept of 'Suspended' penalties is aimed at giving encouragement to those willing to fully comply with their future obligations. Any penalty imposed can be suspended, (in part or fully) for up to two years if action is taken to correct matters (e.g. new bookkeeping systems and procedures are introduced). The conditions for judging whether sufficient action has been taken will be agreed between HMRC and the taxpayer and/or adviser, as will the level of the penalty to be suspended.
It is likely that this ‘lifeline’ will only be granted to those who fall in the least serious category of ‘careless’ behaviour.
The new legislation also gives HMRC powers to seek a penalty direct from the director of a company if it can be shown that any inaccuracy in the return was due to the director’s deliberate actions.
Comment
The new penalty regime is a very good attempt by HMRC to make the penalty fit the ‘crime’ and produce a structured system that will result in penalties being applied consistently.
However, there are two main areas of concern that can result from the new regime.
Firstly, with penalty levels being set within the bands mentioned there is every possibility that the level of penalties that are likely to be imposed will be considerably higher than at present. Although it is probably true to say that this is simply correcting the existing regime where penalties are generally imposed more leniently than should be the case. Nonetheless, we are likely to see a noticeable increase in the level of penalties imposed in Tax Enquiry cases.
The second problem with the new legislation is that in an attempt to apply plain English, the wording used has left many parts of the legislation open to interpretation.
It is therefore highly likely that under the new regime initial penalties will be based on an Inspectors belief of what is ‘reasonable’ or whether the taxpayer 'should have known' something or what constitutes 'taking reasonable steps' and various other subjective decisions to be made by the Inspector.
So this has left what should have been a ‘tighter’ set of penalty rules now open for a considerable amount of argument, negotiation and therefore subsequent appeals.