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HMRC have announced details of new legislation introducing revised penalties for errors on tax returns and documents.

Following a period of consultation, HMRC are introducing one of the first pieces of cross cutting tax legislation designed to make the tax system simpler and more consistent. It establishes new penalties, which aim to help those who try to comply, and come down hard on those who don’t.

HMRC have always charged financial penalties for incorrect returns or documents. However the way that
penalties will be calculated in the future will be linked to the behaviour that gives rise to the error. According to HMRC, the new penalties have been designed so that people who take reasonable care when completing their returns will not be penalised. If they do not take reasonable care, errors will be penalised, and the penalties will be higher if the error is deliberate. Disclosing errors to HMRC early will substantially reduce any penalty due.

‘Reasonable care’ varies according to the person, the particular circumstances and their abilities. Every person is
expected to make and keep sufficient records for them to provide a complete and accurate return. A person with simple, straightforward tax affairs needs only keep a simple system of records, which are regularly and carefully updated. A person with larger and more complex financial tax affairs will need to put in place more sophisticated systems and maintain them equally carefully. HMRC believe it is reasonable to expect a person who encounters a transaction or other event with which he is not familiar, to take care to check the correct tax treatment, or to seek suitable advice. HMRC expect people to take their tax seriously.

The new penalties, which will apply for errors made during 2008-09 and later years, are initially for errors on returns and documents for VAT, PAYE, national insurance, capital gains tax, income tax, corporation tax and the construction industry scheme (CIS).

For these taxes, the penalties apply to returns or other documents for return periods starting on or after 1 April 2008 that are due to be filed on or after 1 April 2009.

The penalty charged will be a percentage of the extra tax due. The rate depends on the behaviour that gave rise to the error. The less serious the behaviour, the smaller the penalty will be. The charges are as follows:

• Reasonable care: no penalty
• Careless: minimum penalty 0% up to maximum of 30%
• Deliberate: minimum penalty 20% up to maximum 70%
• Deliberate and concealed: minimum penalty 30% up to maximum 100%

The 2008 Finance Bill will extend the new penalties for incorrect returns across most taxes, levies and duties, for incorrect returns for periods commencing from 1 April 2009 where the return is due to be filed from 1 April 2010.

You can find more information on penalties for errors at www.hmrc.gov.uk/about/newpenalties