New Penalties for Errors in Returns and Documents

New Penalties for Errors in Returns and Documents
Formal announcement from HMRC on the new penalty regime now in place for returns or other documents for tax periods starting on or after 1 April 2008 that are now due to be filed on or after 1 April 2009. The new regime applies to VAT, PAYE, National Insurance, Capital Gains Tax and the construction Industry Scheme.


Conditions For Penalty


As outlined by the ‘In Focus’ article in the January/February 2008 edition of VAT Voice, two conditions must be satisfied before a penalty can be levied by HMRC:


The document given to HMRC must contain an inaccuracy that leads to :
An understatement of the person’s liability to tax
A false or inflated statement of a loss buy the person
A false or inflated claim to repayment of tax

The inaccuracy must be careless, deliberate or deliberate and concealed

HMRC say a penalty can also be charged where, in the absence of a return, they issue an assessment which is too low and the person does not take reasonable steps to tell us of the under-assessment within 30 days of the date of the assessment.


Penalty Amounts


HMRC say the penalty percentages will be applied to the additional tax due as a result of correcting the error (known as the ‘potential lost revenue’ or ‘PLR’). There is a different measure of PLR where the error results in an overstated loss:


The penalty is up to 30 per cent of the PLR if the error is ‘careless’
The penalty is up to 70 per cent of the PLR if the error is ‘deliberate’
The penalty is up to 100 per cent of the PLR if the error is ‘deliberate and concealed’

There is also a penalty of 30 per cent of the PLR where tax has been under-assessed because of a failure to submit a return.



To calculate the reduction for disclosure we will consider three elements of disclosure. To what extent is the customer?


Telling HMRC about the error
Helping HMRC work out the tax due
Giving HMRC access to records to check the figures

HMRC say the reductions are made because they want to encourage people to come forward when they think there is a problem with their tax affairs, or that they have not met a particular requirement.




A new concept of ‘suspended penalties’ will apply, although only a penalty for ‘failing to take reasonable care’ can be considered for suspension. HMRC will agree and set suspension conditions, and if met, the penalty will be cancelled. If not, the penalty becomes payable. HMRC say the period of suspension can be for up to two years.


HMRC give the example of a careless inaccuracy due to poor record-keeping, where one of the conditions of suspension might be that specified improvements are made to the way records are kept.


Andrew Needham