Penalties for Error Returns & Late Registrations

As part of the review of HMRC’s “powers, deterrents and safeguards”, a major recast has taken place of the penalties that will apply to errors made in tax returns and for late registration and similar defaults. The aim is to have a single regime that applies, as far as possible, across all the taxes that HMRC administers.

The penalties under the new regime are all set as percentages of the “potential lost revenue” (PLR). In general terms, the PLR is the under-assessed or under-declared tax as a result of the error. For errors resulting in a payment of tax in a later period, the PLR is calculated at the rate of 5% p.a. of the tax delayed; there are also rules for losses and multiple errors.

Return form mistakes

The first phase applies the penalty regime to errors in returns for income tax, CGT, VAT, CT, NI and the construction industry scheme. Post-31 March 2008 events that are the subject of post-31 March 2009 returns are caught.

The return error penalties are extended to IHT, IPT, environmental taxes, excise duties, PRT, stamp duties and pension schemes for events post-31 March 2009 that are the subject of post-31 March 2010 returns.

The framework of penalties is governed by the cause of the error:

  • mistake: no penalty
  • failure to take reasonable care: penalty up to 30%
  • deliberate understatement: penalty up to 70%
  • deliberate understatement with concealment: penalty up to 100%.

The penalties can be reduced for:

  • prompted disclosure: to minima of 15%/35%/50% respectively
  • unprompted disclosure: to minima of 0%/20%/30% respectively.

A disclosure would be unprompted if it was, in essence, made before HMRC pointed the issue out during a compliance check.

Penalties for failure to take reasonable care can also be suspended for up to two years.

This would normally be for the taxpayer to improve systems and keep a “clean” record.

Failure to notify

The penalty regime applies to most taxes including income tax, Class 4 NI, capital gains tax, corporation tax, VAT, insurance premium tax, excise duty, environmental taxes, betting and gaming duties.

The penalty would apply where there has been a failure to notify HMRC about:

  • any change in circumstances that makes a liability to tax arise
  • turnover that has increased to the point where VAT is due
  • the starting of a business liable to excise duty
  • offshore income or an asset that gives rise to a tax liability (from 6 April 2011 HMRC can charge an increased penalty for failures under this heading)..

The penalty framework is as for that regarding “return form mistakes”, i.e.:

  • the penalty is a percentage of the “potential lost revenue”
  • behaviour determines the penalty range.

Although not a tax, there is machinery for charging a penalty for late notification of liability for Class 2 NI due. The deadline for notification is the 31 January following the end of the tax year in which there was liability to pay Class 2 NI. The penalty (since 6 April 2009) is calculated in a similar way as tax (as above) but is referred to as “lost contributions”.

We have created several posts surrounding Tax Penalties for further reading here.

For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.

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