Tax penalties for mis-declaration
What to expect if your Tax Return is wrong.
Key points
- Personal liability for Company Directors
- Penalty system very judgemental
- Possibility of Suspended Penalties
- Applies to all types of taxation
The penalty regime applies to returns submitted after 1st April 2009. For Companies, it applies to returns of profits. It applies to PAYE Returns, and for contractors using the Construction Industry Scheme. As regards VAT returns, it applies to all returns.
No penalties will be charged where the taxpayer has taken reasonable care. HMRC states that reasonable care varies according to the person, the circumstances, and their abilities. If, after examining all the facts, no penalty will be charged if the understatement is insignificant when compared with the taxpayer’s overall liability for the period. All other penalties are geared to a scale according to whether the error was careless, deliberate but not concealed, or deliberate and concealed.
Offshore penalties
From 6th April 2011, HMRC can charge an increased penalty where an inaccuracy penalty, or a failure to notify penalty arises, and the income or asset that gives rise to the penalty is held outside of the UK. The penalty for failing to submit a return for 12 months can also be increased where offshore assets or income are involved. The level of the penalty depends on how readily the foreign jurisdiction shares information with the UK and only applies to Income Tax and Capital Gains Tax.
The table below shows the range of penalties:
Disclosure is the key to obtaining the maximum discount
You must tell HMRC about the error or omission before HMRC discovers it. The full reduction in penalty will only be given where there is maximum cooperation with HMRC in calculating and correcting the inaccuracy. If you do not tell HMRC about the error or omission until after they have contacted you to arrange a compliance check, your disclosure will not qualify to be treated as unprompted.
HMRC may suspend a penalty if they believe that doing so would improve the chances of the taxpayer not offending in future. HMRC will normally impose conditions to any suspension, and they may cancel the penalty if they are satisfied that all the conditions have been met.
Some penalties will be higher than in the past, particularly at the lower end of the scale. The minimum penalties will increase the overall level of penalties. The penalty regime applies equally to all taxes including VAT.
Directors may also be held to be personally liable for deliberate inaccuracy. This is more likely to be applied where an individual gained from the inaccuracy.
Action points
- Always try to persuade HMRC to suspend a penalty.
- Disclose immediately.
- Business owners should review their systems to minimise the possibility of errors or omissions.
