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Cost of avoiding tax rises in HMRC clampdown

14 May 2008

Try to avoid paying tax this year and you could end up paying twice as much under new rules introduced by Revenue & Customs (HMRC), writes Paul Howard, Associate Director of Chiltern Tax Support for Professionals.

The changes entirely revamp the penalty system applying to income tax, capital gains tax, corporation tax, PAYE and National Insurance Contributions, the Construction Industry Scheme and VAT.

Under the new system many penalties will be higher. Some will be charged where previously there would have been none. And directors and other company officers will become personally liable for company penalties, so it\'s no good liquidating.

The new penalties apply to returns due to be submitted on or after 1 April next year - ie that deal with periods that started on or after 1 April this year.

The good news is that no penalties will be charged where reasonable care has been taken and you have made a genuine mistake. This includes arithmetical errors that are not significant and covers you if you have taken advice from a competent adviser or HMRC itself that later proves to be incorrect, provided you gave them all the relevant information.

An inaccuracy will be considered to be careless if you don\'t keep adequate records or have appropriate systems in place to keep track of what you owe - so keep records in order and you should be all right. If you make a return incorrectly without having sought advice, either from your own advisor or HMRC, that will also be considered careless.

For careless and deliberate inaccuracies the penalties can be reduced if you disclose the inaccuracy to HMRC, although if the disclosure is only made after a compliance check approach by HMRC it will be considered a prompted disclosure and the reduction will be less.

If additional attempts are made to cover up the inaccuracies the penalty increases.

Penalties for careless inaccuracies can be suspended for up to two years with conditions imposed by HMRC. For example, if a careless inaccuracy is due to poor record keeping you could be required to keep better records. If such conditions are complied with the penalty might be dropped.

The table above outlines the penalties that will be charged, in terms of a percentage of the potential lost revenue to HMRC. The potential lost revenue is normally the additional tax that is payable after correcting the inaccuracy, but there are special rules where the inaccuracy involves a loss claim or is reversed in a later period. Don\'t forget, this is on top of the tax you owe.

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