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Penalties for incorrect returns

A unified penalty regime for both direct and indirect taxes will be introduced in this year’s Finance Bill to address incorrect returns. The changes follow a formal consultation document in December 2006 and will affect tax returns filed after 31 March 2009.

Penalties will be charged where individuals or businesses understate their tax liabilities as a result either of a failure to take reasonable care, or of deliberate understatement. The penalty (which can be up to 100% of the tax) will be linked to the behaviour which gave rise to the error so there will be no penalty where a taxpayer simply makes a mistake. There will be moderate penalties for failures to take reasonable care but higher penalties for deliberate understatement particularly where concealment is involved. Early disclosure of an error will be rewarded so that penalties are either reduced or not imposed at all.

New provisions include:

• the introduction of ‘suspended penalties'

• for groups of companies, penalties will be calculated before the setting off of group relief; and

• penalties for overstated losses where no actual tax is due.