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HM Revenue & Customs has announced in HM Revenue & Customs Brief 15/11 that it will be taking a more lenient approach when dealing with 'timing difference errors' - i.e., where there's a difference on one return that has, or will be, offset by an opposite adjustment in a later return.

Typical examples will be

• differences on closing stock figures, because if the closing stock valuation is low by £10,000 in one year, it will only mean that the opening stock valuation in the next year is too low, and so profits over the two years will be the same overall; or
• reclaiming Input Tax too early on a VAT Return - perhaps because the current Quarter's receipts have 'crept in' to calculations for the previous Quarter.

In the past, HM Revenue & Customs has taken the effect of timing differences into effect to charge reduced penalties, but only if the compensating return had already been filed by the time of the penalty assessment.

The new approach, announced today (6 April 2011) means that HMRC will apply this more lenient approach even when the later compensating return has not yet been filed, provided they are satisfied that the inaccuracy would have been reversed automatically in a later return.

Furthermore, this decision has retroactive effect - taxpayers who have suffered unfairly in light of this Brief are asked to contact HMRC to ask for their penalty to be reconsidered. Taxpayers should refer to the brief - HM Revenue & Customs Brief 15/11 - when contacting HMRC.

There have been complaints (I know, because I have come across them through Working Together) about HMRC being so 'quick off the mark' in checking returns and instigating penalty proceedings, that there's been no opportunity to file the next return that would have balanced out the initial difference in the normal course of events.

Bearing in mind that the new regime for interventions, pre-return checks, etc., doesn't depend on HM Inspector having to wait for a return to be filed, prompt checks of recent returns or even 'live' records are becoming increasingly prevalent and the implication is that these timing difference error penalty situations will have become far more common, and are likely to continue to be so. Such a move on HMRC's part is therefore most welcome.

However, I think it is no coincidence that HMRC's change of heart follows (relatively) closely on the heels of the Chartered Institute of Taxation's Changes to Naming and Shaming Guidance - reading through the article, it does say,

"There are further issues regarding the partnerships and the penalty legislation in respect of timing differences which are still being looked at."

So perhaps the catalyst for change was not recognition of the inherent unfairness of 'pre-emptive' penalties, but a desire to protect a shiny new weapon in HMRC's arsenal?