We will start by looking first at the area which has caused most accountants problems. The new penalty regime has been in effect for documents and returns due for filing on or after 1st April 2009 and HMRC is now being strict in its interpretation of the legislation and severe in its application. The table below shows the range of penalties that HMRC is legally able to impose in relation to the amount of tax that has been under-assessed. It can be seen that the penalty for each inaccuracy is determined by whether there has been behaviour that is:
- Deliberate; or
- Deliberate and concealed.
Clearly, those who deliberately choose to submit incorrect returns are penalised most heavily. However, for the purposes of this article we look at what comprises ‘careless’ behaviour, leading to a penalty of up to 30% as it is in this area that most accountants will have to be aware when enquiries/visits arise.
Careless is defined in law as ‘a failure to take reasonable care’ and is therefore a very subjective test. HMRC has provided guidance that reasonable care will include:
- Taking care with records and systems.
- Acting on advice from a competent adviser.
- Seeking advice when dealing with something new or unfamiliar.
However, from our experience so far, it can be very difficult to prove to HMRC’s satisfaction that an inaccuracy in a return is not careless. Even if reasonable care has been taken, it can take considerable time and full disclosure of documentation to convince HMRC of this.
If an inaccuracy is deemed to be careless, then how that inaccuracy is disclosed also influences the possible penalty, defined as ‘prompted’ and ‘unprompted’ disclosure. This means that if a client notifies HMRC about an inaccuracy once they have discovered it and, critically, they have no reason to believe that HMRC is about to discover it, the penalty for careless behaviour can be reduced to nil (maximum 30%). However, if reasonable care has not been taken and HMRC has to prompt a client about an inaccuracy, perhaps by way of enquiry into their affairs, or more commonly in recent times by an ‘informal approach’ for information, then the minimum penalty is increased to 15% of the tax under-assessed.
Most clients will be familiar with the concept that if an inaccuracy in a return is discovered by themselves or their agent, then an amendment can be made within a year of the 31st January filing deadline. This could happen due to the relevant information being discovered when the taxpayer was gathering together the papers for the following year’s return.
Under the old regime, such an amendment to a tax return was seen as a trivial matter. The amendment would rarely be scrutinised by HMRC and certainly it was unusual for a penalty to be considered. Under the new regime, an amendment to a tax return is immediately within the scope for penalties. Although the amendment may be unprompted, there may still be some debate with HMRC to show that reasonable care was taken or that, if considered to be careless, the maximum penalty should be reduced or not due at all.
The costs of dealing with HMRC’s questions following disclosure of an inaccuracy may be significant (and possibly disproportionate to the tax at stake) and may require the disclosure of detailed documentation as evidence. This is a particular cause of concern for both clients and agents and emphasises the importance of ensuring a return is accurate and complete before submission to HMRC, as well as the need to keep relevant records. It is in this area that Tax Enquiry Fee Protection becomes important to protect both the client and the accountant.
For those considering delaying the submission of their return beyond the normal due date so as to ensure that they have enough time to be able to demonstrate that reasonable care has been taken — beware. The penalties for late filing of returns have also changed. If a 2010/11 tax return was not filed by 31st January 2012 then HMRC will have imposed a £100 penalty, regardless of whether the tax due has been settled by the due date, or even in cases where a repayment is due. Furthermore, if the return is more than three months late a daily penalty of £10 will be charged and at six months and 12 months, penalties of 5% of the tax due (with a £300 minimum each time) will be levied.
With regards to PAYE the late payment penalties apply to all employers and contractors - whether you employ one or several hundred employees or subcontractors. They apply to monthly, quarterly and annual periods of PAYE starting on or after 6th April 2010. HMRC charges late payment penalties on PAYE amounts due that are not paid in full on time.
HMRC state the aim of the new regime is to discourage those who are either habitual late-payers or who take six months or more to settle their liabilities. So, whereas one slip in a tax year will incur no penalty, two, three or four late payments will result in a penalty of 1% of the late paid sum and employers who are late 11 months out of 12 will be charged 4% of the amount overdue. Additionally, any one payment made more than six months late will incur a 5% penalty, with a further 5% being charged if the payment is still outstanding after twelve months. Under the new system, penalty notices will not be handed out automatically by a computer but dealt with individually on a risk basis. Nevertheless, the tariff concept that they are proposing to use shows little sign of flexibility.
The only cases where it seems that the penalty regime will not be used are where a time to pay arrangement is already in place with HMRC or where there is a "reasonable excuse". The idea of a reasonable excuse is already familiar from the VAT penalty regime and it is clear that something fairly drastic has to have happened in order for it to cover a late payment. Reasonable excuses are likely to be "unusual, unforeseeable and unpreventable", therefore lack of funds will not be a reasonable excuse.
With regards to interest Sections 101 to 105 of the Finance Act 2009, together with Schedules 53 and 54 of the Act set out a completely new and harmonised regime for paying interest on overpaid tax and charging interest on tax paid late.
One of the new rules changes was the way that interest rates on tax are calculated - bringing them closer to the published Bank of England rates. The Regulations also provide for a minimum rate on repayments of 0.5% irrespective of the bank rate. Rates are now to be calculated at Bank of England rate + 2.5% for underpayments, and Bank of England rate - 1%. Changed rates will come into effect after any Monetary Policy Committee meeting which makes a change to the Bank of England rate.
For any further information on any of the issues outlined in this piece, please call the Advice Service on 01455 852555.