New penalties for Tax Return errors

6 April 2009

There is a new penalty system from 1 April.

Under the new regime, errors on tax returns will be judged on the behavior of the taxpayer which gave rise to the mistake.

Anyone who takes reasonable care to get their tax return right will not be penalized, even if they make a mistake, HMRC has confirmed.

Reasonable care is defined by HMRC as: keeping accurate records to make sure tax returns are correct; checking what the correct position is when a taxpayer doesn't understand something; and telling HMRC promptly about any error that is discovered in a tax return or document after it has been submitted.

If reasonable care isn't taken, and this results in a tax underpayment, then the errors will be penalized.

In cases of lack of care, the penalty is set at 30 per cent of the understated tax, although the figure can be reduced, depending on the circumstances in which the disclosure is made, if the taxpayer notifies HMRC of the error.

In cases where taxpayers deliberately understate the amount of the tax they owe, the penalty is 70 per cent of the understated tax and 100 per cent where the taxpayer steps to hide the error.

The new penalties for tax errors will be extended to most other taxes, levies and duties, for periods commencing from 1 April 2009, where the returns is due to be filed from 1 April 2010.

Barry Fine FCA, partner at Alexander Bursk says "the new regime is simpler and more consistent but likely to result in much higher fines for errors with less scope to obtain mitigation through negotiation.