Wednesday, 11 May 2011

About Tax Penalties

The regime
New tax penalties rules were introduced by FA 2007 and apply to incorrect Returns and documents for all taxes (direct and indirect). The difference with the previous regime is that, the percentage of tax penalties on tax lost depends on taxpayer's behaviour:

Were they careless - did people exercise "reasonable care" before making the error? Although "reasonable care" depends on the circumstances and the capabilities if each person, HMRC thinks that reasonable care has been exercised when people keep records. If they made an error after taking reasonable care, no penalty is levied. Or, were they careless (if so, penalty is up to 30%).

Did they do it on purpose-and if yes, did they try to hide it? If they didn't attempt to hide it, then 70% penalty applies, but if they manufacture evidence to conceal the evasion, the penalty can reach 100% of tax lost.

Taxman's generosity
The taxman can be quite generous and reduce the penalties when people come out clean - normally the reduction is higher if they come out clean before the taxman discovers it (e.g. before a taxman notice to enquire is served). In addition, if the taxpayer has just been careless, the penalty can be suspended if the taxman thinks that doing so will help the taxpayer to improve his record keeping.

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