The new penalties regime - making tax taxing

Have you seen the latest adverts by HMRC for filing tax returns? Moira Stuart is the new celebrity face of HMRC and the print ads focus on a reminder to:

"Keep your tax affairs in order and you'll avoid a penalty"

The TV ads however simply contain a reminder of the new filing deadline of 31 October for paper returns. And at the end of the ads Moira repeats that old line that so annoys those of us who know something about the tax system:

"Tax doesn't have to be taxing"

It's not her fault though. By her own admission she's not a tax expert and knows precious little about the tax system beyond how to avoid penalties - presumably by fling before the deadlines.

I found a short video piece of Moira being interviewed about the ads. This video then continues with an interview with Clare Merrills who has featured in previous HMRC podcast too. I thought she came across exceptionally well. If I was writing for the general public I'd highlight some of the points she made but they aren't really relevant to his blog. You can watch it though by clicking on this link to the HMRC video.

Getting back to the print ads, these contain some important warnings that are worth stressing to all clients and taxpayers - even though they are more relevant to next year's tax returns - as the quality of records being maintained NOW will impact the care with which those returns can be completed:

"Completing your Tax Return is a lot less stressful if you keep all your records in order and check with us [HMRC or your accountant!] if there's anything you are uncertain about.
And this is more important than ever.
From April 2009, if you make a mistake on your Tax Return and can't show that you took reasonable care to get it right, you will have to pay a penalty."

If you're not yet familiar with the new penalties regime, you should be. Briefly, penalties for tax errors (related to tax returns due after 1 April 2009) will be imposed on four different scales according to the category of behaviour the taxpayer is judged to fall into. These categories are:

a) Making a mistake in spite of taking reasonable care: no penalty

b) Failing to take reasonable care: up to 30% penalty

c) Deliberate inaccuracy: 20% to 70% penalty

d) Deliberate and concealed inaccuracy: 30% to 100% penalty.

HMRC have released guidance on how they will interpret the new rules in the Compliance Handbook Manual. You may be surprised to learn what HMRC consider to be a deliberate inaccuracy in para CH 81150:

“deliberately withdrawing money for personal use from an incorporated business and not making any attempt to make sure it is treated correctly for tax purposes.”

How many of your clients are slightly slack with their paperwork and thus would fall into the ‘deliberate inaccuracy’ category, attracting a penalty of up to 70%?

The use of the company to pay personal expenses can be viewed by HMRC as a deliberate and concealed inaccuracy as demonstrated in para CH 81160:

“describing expenditure in the business records in such a way as to make it appear to be business related when it is in fact private (possibly with the supplier agreeing to change the description on the relevant invoices)”

The inference is that an incorrect entry in the prime records of the company could be enough to put your client in the worst category of behaviour potentially attracting a penalty of up to 100%.

Back in August we addressed this issue in one of our weekly tax updates for accountants in general practice. I have also addressed the point in an earlier blog post: 'Take care to avoid a penalty' in which I provided some salutary warnings and advice to accountants who were not yet familiar with the new regime.