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New penalty system for incorrect tax returns

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A new single penalty regime for inaccurate returns now applies for tax returns or other documents due to be sent to HM Revenue & Customs on or after 1 April 2009. The legislation applies to income tax, VAT, PAYE, national insurance contributions, corporation tax, capital gains tax and the Construction Industry Scheme returns due on or after 1 April 2009, and was extended on 1 April 2021 to cover returns for other taxes and levies due on or after 1 April 2010.

Under the regime, taxpayers who take 'reasonable care' with their tax affairs but still make an error will not be charged a penalty. However, taxpayers who are deemed not to have exercised reasonable care are subject to a penalty charge, calculated as a percentage of the extra tax due. The exact rate is subject to HMRC's assessment of the behaviour that gave rise to the error. The criteria are classified as follows:

 


Nature of the error

Penalty charge
(% of extra tax due)

Minimum

Maximum

Careless: an individual failed to take reasonable care
to provide accurate documents

0

30

Deliberate: an individual knowingly and intentionally
sent an incorrect document but did not attempt to conceal the error

20

70

Deliberate and concealed: an individual knowingly
and intentionally sent an incorrect document and took active steps to hide the error

30

100

HMRC is approaching the issue of 'reasonable care' on a case by case basis. Guidelines suggest that the definition will vary according to an individual's circumstances and abilities. Every taxpayer is expected to make and keep sufficient records to enable them to provide a complete and accurate return, and to seek further advice if they are unsure about any aspect of their tax affairs. Taxpayers who discover a mistake after submitting a return or document must inform HMRC promptly about their discovery, and disclosing errors to HMRC early could reduce any penalty due.

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