Penalties Reform
Penalties for incorrect returns and failure to notify a taxable activity
For return periods ending on or after 1 April 2009, where the filing date is after 1 April 2010, the new penalty regime for incorrect returns introduced in 2007 for ITAX, CTAX, CGT, VAT, PAYE and NICs has been extended across all other taxes and duties. From 1 April 2009, the penalty regime for failure to notify HMRC of a new charge is aligned across all taxes and duties.
The new provisions for incorrect returns provide for penalties in line with Schedule 24 to FA 2007, which are based on the amount of tax understated, the nature of the behaviour and the extent of disclosure by the taxpayer. There is no penalty where a taxpayer makes a mistake, having taken reasonable care, but there is a penalty of up to:
- 30% for failure to take reasonable care
- 70% for a deliberate understatement
- 100% for a deliberate understatement with concealment.
Each penalty is substantially reduced where the taxpayer makes a disclosure (takes active steps to put right the problem), more so if this is unprompted.
More vigorous penalties for late filing of returns and late payment of tax
Legislation will be introduced in the Finance Bill 2009 to reform penalty regimes for late filing of tax returns and late payment of tax. The measure will repeal a number of existing provisions which are specific to each tax and replace these with a more aligned penalty regime
The measure will include, for the first time, penalties for monthly PAYE and NIC payments and companies paying CTAX late.
Changes to the existing penalty regime
Late filing
The immediate £100 late filing penalty will no longer be avoided by paying the tax liability in full before the due date.
Penalties of £10 per day (annual returns only) will be imposed for returns more than 3 months late (running for maximum 90 days), without having to be imposed by the Special Commissioners.
Late payment
Previously a 5% late payment surcharge applied to any tax unpaid 1 month after the due date and a further 5% on any tax still unpaid at 6 months. In addition, legislation will be introduced so that a further 5% will apply on any tax unpaid after 12 months. These surcharges will now extend to CTAX and PAYE.
A substantially higher penalty of 70% of the tax due will also apply where the failure exceeds 12 months and the individual has deliberately withheld information needed for HMRC to assess the tax due (this can be increased to 100% if the failure is deliberate with concealment).
Where the taxpayer has agreed a “time to pay” arrangement with HMRC, there will be a statutory basis for removing late payment penalties and there will also be a right of appeal against all penalties.
Effective date
The new provisions will be brought into effect by Treasury Orders which will specify the dates from which they have effect. Implementation will be staged over a number of years to enable the relevant changes to be made to HMRC computer systems, starting with penalties for the late payment of current year PAYE, using a risk based approach from April 2010.
