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Tax return mistakes get new penalty system

HM Revenue and Customs (HMRC) has reminded taxpayers that a new penalty regime for tax errors is due to come into effect soon.

HMRC said that the new system, which applies as of 1 April, is simpler and more consistent.

Under the new regime, errors on tax returns will be judged on the behaviour of the taxpayer which gave rise to the mistake.

Anyone who takes reasonable care to get their tax return right will not be penalised, even if they make a mistake, HMRC has confirmed.

Reasonable care is defined by HMRC as: keeping accurate records to make sure tax returns are correct; checking what the correct position is when a taxpayer doesn’t understand something; and telling HMRC promptly about any error that is discovered in a tax return or document after it has been submitted.

If reasonable care isn’t taken, and this results in a tax underpayment, then the errors will be penalised.

In cases of lack of care, the penalty is set at 30 per cent of the understated tax, although the figure can be reduced, depending on the circumstances in which the disclosure is made, if the taxpayer notifies HMRC of the error.

In cases where taxpayers deliberately understate the amount of tax they owe, the penalty is 70 per cent of the understated tax and 100 per cent where the taxpayer takes steps to hide the error.

HMRC has said that the new penalties apply initially to income tax (including self assessment), VAT, PAYE, National Insurance contributions, corporation tax, capital gains tax and the Construction Industry Scheme, and to errors in tax returns or other documents for periods starting on or after 1 April 2008 and that are due to be filed on or after 1 April 2009.

However, any returns that are about to be completed for the 2007-08 year, like self assessment returns, are subject to the old penalties.

The new penalties for tax errors will be extended to most other taxes, levies and duties, for periods commencing from 1 April 2009, where the return is due to be filed from 1 April 2010.