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Anyone who has seen details of the new penalty regime will appreciate that cases like this are more likely to become a permanent fixture in the future.  This is because HMRC is seeking to make the new regime ‘behaviour driven’ and not simply tax geared.

Taxpayers will be penalised on the basis of the nature of the error, the behaviour that led to the error and how the matter was subsequently dealt with by the taxpayer, i.e. there is plenty of scope for subjectivity and taxpayers may need to brace themselves for long expensive arguments.

Although the new regime gives HMRC the authority to suspend penalties (for careless inaccuracies only) in return for the taxpayer changing their affairs to avoid the same mistake occurring in the future, it will bring with it stiffer penalties for non-compliance.  Undoubtedly, the more heinous ‘crimes’ will have much higher penalties imposed than is currently the case, but what remains to be seen is at the other end of the scale, how readily HMRC will accept that an inaccuracy arose – despite the taxpayer taking reasonable care - in which case no penalty will be due.

Just how officiously HMRC may enforce the letter of the law under the new penalty regime has become clear from two ongoing enquiries, which would not yet be covered by the new regime.  In the first, a business required building work to be undertaken valued at over £1m which for tax purposes therefore fell under the Construction Industry Scheme (CIS).  The successful contractor was not registered under CIS and so any payments to it should have been made net of an 18% tax deduction on the total value of the contract.  However, the contractor subcontracted an element of the work to a third party with half the subcontracted value including materials (which are not subject to the CIS deductions).  In order to assist the main contractor with its cashflow position, the business agreed to only deduct 18% tax from the contractor for the net labour element of the work.  HMRC accepted that there was no overall loss of tax and as such also accepted that no interest could be charged.  However, HMRC contended that there still had been a contravention of the CIS rules and sought to impose a tax geared penalty of about £25,000.

This example may seem crazy, but it is not an isolated incident.  In another case, a taxpayer submitted his own return, but forgot to account for the tax due on his P11D in respect of his company car and other benefits. This indicated that a refund of £10K would be due, but HMRC knew otherwise because they had already seen the P11D and did not issue the refund to the taxpayer. Instead they immediately started an enquiry. Once the error was pointed out, the taxpayer instantly acknowledged his mistake and corrected his return.

Yet despite the fact that there was no loss of tax, HMRC is seeking a penalty for negligence, again at 25% of the tax due and again arguing that they have generously mitigated the penalty (technically it could have been 100% of the tax “lost”).  According to HMRC, the new penalty regime is about changing customer behaviour and encouraging better compliance in the future and aims to drive up and encourage voluntary compliance, encourage and influence positive customer behaviour.

Penalties for inaccuracies will impact across VAT, CIS, Income Tax, CT, CGT, PAYE and NICs with effect from 1 April 2009.  The first penalties shall be charged in respect of inaccuracies in returns or documents for return periods starting on or after 1 April 2008 or where the due date for filing is on or after 1 April 2009.  However, it may have started already!