An alarming example of HMRC’s apparent intention to use the new penalty legislation at every opportunity is their recent VAT tribunal case against Russell Francis Interiors.

The company misunderstood the tax point for a land transaction, resulting in a premature claim for input tax - a one off ‘technical’ error with no likelihood of a tax loss. HMRC charged a 15% penalty - the ‘standard’ minimum of 30% for being careless but mitigated to 15% for a prompt disclosure. This was reduced under appeal to 7.5% on the basis that the 15% was not reasonable. The final penalty amounted to £2,531 - a significant charge for a ‘careless’ error where there was no loss of tax.

Chris Mattos of Randall & Payne Tax explains: “The major changes to the UK’s penalty regime are a ‘win, win’ situation for the Government. There is no bad press as would be the case in increasing tax rates and a hike in penalties for those ‘who have done wrong’ carries little sympathy from the public and immediately increases the Treasury’s take significantly using administration already in place.”

HMRC recently introduced a new range of penalties, removing the anomalies between VAT and other taxes, at the same time as introducing significantly increased benchmarks for the minimum penalties, depending on the nature of the offence. The penalties affect VAT, Income Tax, Corporation Tax, National Insurance Contributions, PAYE and the Construction Industry Scheme. The least offence is for ‘carelessness’ , now carrying a minimum 30% penalty, but of course penalties increase in line with, as HMRC see it, the seriousness of the offence, up to 100% of the tax at issue. A new penalty regime for late filing and late payment of Income Tax through Self-Assessment starts in April 2011. HMRC is getting tough on taxpayers who file and pay late.

The new penalties for Self-Assessment returns start at £100 but increase depending on the length of the delay up to £1,600, or in worst cases, 100% of the tax, if greater. In addition, penalties of 5% will be levied at intervals on the tax outstanding and of course HMRC will charge interest on all outstanding liabilities (including the penalties) – currently interest is charged at 3%. For years, before 6 April 2011, the penalty was £100 for late filing but that could be remitted in full by paying all the tax on time or reduced in line with the tax due if that was less than £100.

“Businesses just cannot afford to be late in making PAYE/CIS return, payments or make any errors in completing the monthly returns without feeling the full force of HMRC penalties. The message is ‘don’t be late in filing the tax return or in paying the tax’. Contact your accountant early in the tax year to avoid these draconian measures.” says Chris Mattos.

If you would like to discuss any tax related issues, please call Chris Mattos on 01453 763471.