Andrea Sofield explains the detail of the new penalty regime being introduced by HMRC for tax errors next year.

Over the last 20 years a myriad of different penalties have been introduced across the taxes. There were different time limits, the levels of penalty varied among the taxes, as did the grounds  for mitigation, and they were spread within the different tax legislations.

Following the merger of HM Inland Revenue and HM Customs & Excise,  an overhaul of the penalty regime has taken place. Its aim has been to bring more transparency and consistency, with a focus on compliance and openness with the tax authority. The changes to the penalty regime are to be introduced in two phases, one already in effect from  1 April 2009, and the other from 1 April 2010. The first phase of penalties applies to returns or documents for tax periods starting on or after 1 April 2008 with a filing date on or after 1 April 2009.

The level of penalty is a percentage  of the extra tax you are due to pay. It  will be calculated by reference to the behaviour that has led to the error or  to your action where a tax assessment was too low. It will take into account whether the taxpayer brought the error to the attention of HM Revenue & Customs (HMRC) by making an unprompted disclosure, or whether it was discovered by HMRC during a routine audit or from other information sources.

As you can see from the table  below, the behaviour falls into four categories with a different level of penalty and possible mitigation applied to each. The terminology categorising the penalties is new and there is no specific guidance which demonstrates how each will be applied. However, in terms of the overall approach to tax compliance, HMRC will have higher expectations from larger organisations with more sophisticated systems and  an in-house tax resource, than smaller businesses with fewer resources.

Where there is a genuine mistake  and you have taken reasonable care,  in theory, a penalty would not be applied. However, once discovered,  if the error is not drawn to the attention of HMRC, it could trigger a significant penalty. Put simply, if you choose to do nothing or ignore the error, the resulting penalty could be punitive and little mitigation would be available to you. Again, the underlying behaviour determines the ultimate outcome.

As before, it is possible to mitigate  the penalty, ie by disclosing the error  to HMRC and working with it to quantify and correct the error. The more you co-operate and assist HMRC, the greater the reduction. So how will you know the level of penalty to be applied? In theory this will not be discussed with you at the time the error is discovered. The officer is not allowed to indicate  the severity of the error as he must first gain approval from an authorising officer as to: