ACCA Articles

Finance Act 2008 - Administration

My previous article ‘An Insight to Tax Changes by Finance Act 2008’,  introduced the changes which Finance Act 2008 has made to major areas of the taxation system in the United Kingdom.  The second article in the series was intended to consider changes to Capital Gains Tax, Inheritance Tax, Residency and Domicile and Administration.  However, because of the sheer volume of the article I have split the series into 3 articles.  I have also decided to write a separate article on tax administration as the new regime will affect students, qualified accountants and practitioners alike.

This article (series 2) considers the administration of the taxation system and the new ‘penalty regime’ which HMRC now have in-built into FA 2008.  The next article considers the remaining changes to Capital Gains Tax, Inheritance Tax and Residency and Domicile.

So how does the new ‘penalty regime’ affect taxpayers.

The main fact HMRC will take into consideration when deciding on the penalties to be levied is whether a taxpayer has ‘deliberately’ concealed or manipulated information in a tax return or whether an omission or error is ‘unintentional’ and whether steps have been taken in order to (a) disclose the error and (b) whether steps have been taken to put right the problem.

Penalties for Incorrect Returns

Legislation in Finance Act 2008 extends the provisions enacted in sch. 24 FA 2007, to create a single penalty regime for incorrect returns across all the taxes, levies and duties administered by HMRC.  The penalty will be determined by the amount of tax understated, the nature of the behaviour giving rise to the understatement and the extent of disclosure by the taxpayer.  The use of suspended penalties is also extended.

Provisions have also been made to extend and adapt sch. 24 FA 2007 to cover penalties for failing to register or notify HMRC of a new taxable activity across all the taxes, levies and duties administered by HMRC, including late VAT registration.

The new penalties apply initially to income tax (including self assessment), PAYE, NIC, VAT and Corporation Tax.  The new penalties apply to errors in tax returns for periods starting on or after 1 April 2008 that are due to be filed on or after 1 April 2009.  Other taxes and levies will be extended to the new penalty regime for periods commencing from 1 April 2009 where the return is due to be filed by 1 April 2010.

Two conditions have to be satisfied before HMRC an levy a penalty:

1.The return/document must contain an inaccuracy that leads to an understatement of the taxpayer’s tax liability, or a false or inflated loss or a false or inflated repayment claim.
2.The inaccuracy is careless, deliberate or deliberate and concealed.

The new provisions for incorrect returns will provide for penalties which are based on the amount of tax understated, the nature of the behaviour and the extent of disclosure by the taxpayer.  There will be no penalty where a taxpayer makes a genuine mistake but there will be a penalty of up to:

30% for failure to take reasonable care;
70% for a deliberate understatement; and
100% for a deliberate understatement with concealment.

The measure provides for each penalty to be substantially reduced where the taxpayer makes a disclosure or takes active steps to put right the problem.  For an unprompted disclosure of a failure to take reasonable care the penalty could be reduced to nil.  Where a taxpayer discloses fully when prompted by a challenge from HMRC each penalty could be reduced by up to half.

Where a return is incorrect because a third party has deliberately provided false information or deliberately withheld information from the taxpayer, with the intention of causing an understatement of tax due, there is a new provision allowing a penalty to be charged on the third party.  The measure also provides for reformed penalties for some specific excise duty wrongdoings i.e. misusing goods subject to reduced excise duty rates (red diesel for example) and handling goods on which excise duty should have been paid but has not.

For failure to notify a taxable activity there will be no penalty unless there is tax and/or NICs due but unpaid as a result, nor where the taxpayer has a reasonable excuse for the failure to notify.  Otherwise, there will be a penalty of:

30% of tax unpaid for non-deliberate failure to notify;
70% of tax unpaid for a deliberate failure to notify; and
100% of tax unpaid for a deliberate failure with concealment.

Each penalty will be substantially reduced where the taxpayer makes a disclosure and/or takes active steps to put right the issue. 

Where Class 2 NICs are concerned, FA 2008 replaces the fixed penalty of £100 for notification more than 3 months after starting self-employment with a ‘behaviour-based’ penalty.  The obligation to notify HMRC remains unchanged.

Compliance Checks

FA 2008 reforms the previous rules for checking businesses and individuals have paid the correct amount of taxes or claimed the correct reliefs and allowances.

There are three elements to this:

• Aligned and modernised record keeping arrangements;
• New inspection and information powers; and
• Aligned and modernised time limits for making tax assessment and claims.

Information powers and penalties for failure to comply with these obligations will have effect on and after 1 April 2009.  Time limits for making assessments and claims will need a transitional period and so will become fully operational on and after 1 April 2010.

The new package aligns previous powers and safeguards but introduces:

• A power to inspect records required under the record-keeping legislation – this restricts VAT and PAYE inspections to statutory records and introduces a new power of inspection for direct tax;
• A power to require supplementary information which is relevant to establishing the correct tax position;
• A power to require third parties to provide information which is relevant to establishing a taxpayer’s correct tax position;
• A power to visit business premises and to inspect records, assets and premises;
• Removal of VAT and PAYE powers to undertake inspections of private homes without taxpayer consent;
• Appeal rights against any penalty and against information notices which have not been pre-authorised by an appeal tribunal;
• Penalties for failure to allow an inspection and failing to comply with an information notice, including a tax-geared penalty which can be imposed by the new upper tier tribunals; and
• An updated criminal offence of destroying or concealing records requested under a notice authorised by a tribunal.

Time Limits

Time limits for changing the amount of tax due by assessment varied across all the taxes prior to Finance Act 2008.  Finance Act 2008 aligns the time limits as follows:

VAT
Mistake = 4 years
Discovery = not applicable
Failure to take reasonable care = 4 years
Deliberate failure to notify = 20 years

IHT and CGT
Mistake = not applicable
Discovery = 4 years
Failure to take reasonable care = 6 years
Deliberate failure to notify = 20 years

Corporation Tax
Mistake = not applicable
Discovery = 4 years
Failure to take reasonable care = 6 years
Deliberate failure to notify = 20 years

PAYE
Mistake = 4 years
Discovery = not applicable
Failure to take reasonable care = 6 years
Deliberate failure to notify = 20 years

Payments, Repayments and Debt

New provisions make it easier for taxpayers to pay what they owe on time, and for HMRC to tackle those who seek to avoid their obligations by paying late or not at all.  There are 3 separate changes brought about by FA 2008:

• New legislation to enable HMRC to introduce a credit card payment service;
• HMRC will be able to set the repayments it must make to individuals and businesses against the payments it is owed by them; and
• HMRC’s debt enforcement powers to collect unpaid sums by taking control of goods in England and Wales, or by taking action through the civil courts will be modernised and aligned.

Taxpayers who choose to pay their tax liabilities by credit card will be charged the transaction fee that HMRC will itself be charged.  Legislation was needed in this area because passing on this fee would otherwise be outside the functions of the Commissioners for HMRC.

Under common law, or by request, HMRC may already set-off repayments payable to taxpayers against debts they owe to HMRC.  This measure gives a specific power to HMRC to make set-off across the different taxes, duties etc. it administers though at its discretion.

Conclusion

The new penalty regime will undoubtedly have lots of ‘grey’ areas with varying degrees of interpretation as to what gives rise to an intentional and deliberate undisclosure and that which should be classed as a ‘genuine’ error.  Care must therefore be taken to ensure all tax information is completed as accurately and completely as possible in order to avoid undue costs.

Steve Collings FMAAT ACCA DipIFRS is Audit Manager at Leavitt Walmsley Associates (http://www.lwaltd.com) and a partner in AccountancyStudents.