HMRC have recently introduced a new penalty regime that applies to tax returns that under declare the amount of tax payable.  It applies to all tax return documents filed on or after 1st April 2009.  The penalties all centre around the care applied when producing and submitting the return.  In this article, we’ll look at why a penalty might be charged, the amounts of the penalty and what you can do to avoid getting charged.

Why might you get charged a HMRC penalty

The penalty regime is focused on both the accuracy of submitted information and the care that was taken in preparing the information.  HMRC state that there are four differant types of inacuracy:

• An inacuracy made, despite the taxpayer taking reasonable care (in which case there will be no penalty)
• A careless inacuracy
• A deliberate, but not concealed error
• A deliberate and concealed error

Penalties for inacuracies will impact across VAT, CIS, Income tax, Corporation Tax, Capital Gains Tax, PAYE and National insurance.

The penalty regime is designed to address the behaviours that led to the inacuracy.  As a result, the penalties for deliberate and concealed errors are substantially higher.

How much will you be charged

The penalties determined will depend upon how the error occured in the first place.  The regime has been put in place to encourage “correct compliance”.  An inacurate document must satisfy two conditions before the penalty can be charged:

1. It must have led to an underpayment of tax, or a false reclaim of tax, and
2. It must have been careless, deliberate or deliberate and concealed

If those two conditions are met, then a penalty can be applied.

The maximum levels of penalty range from 30% of the understatement of tax for a careless error, right through to 100% of tax due for a deliberate and concealed error.  A deliberate, but not concealed error, will lead to a maximum penalty of 70% of the tax due.

How to avoid being charged a penalty

The most obvious way of avoiding a penalty is not to make any mistakes on your tax returns!

However, occassionally mistakes do occur, so how can you reduce your penalties should you find yourself in thsi situation?

Quality of disclosure

Reductions of penalties can be made, dependant upon the quality of the disclosure following the discovery of the error:

1. You can tell HMRC of the error, explaining how the error arose and making full disclosure of the inacuracies
2. You can help HMRC in quantifying the under assessment
3. You respond positively to requests for information and documents from HMRC

(These responses are taken from HMRC website)

The final way to avoid receiving penalties in the first place is to use your accountant to undertake as much of the work as possible in the first place.  Yes, it may cost you a few pounds more than you are currently paying, but could be well worth it in the long run to avoid being caught up in the penalty regime process.