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Tax Memo 2007-2008 Newsletter Issue 2

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BUDGET 2008 NEWS

 

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Penalties, powers and administration

Penalties for incorrect returns

Schedule 24 FA 2007 enacted a common system of penalties for income tax, capital gains tax, corporation tax, PAYE and VAT.  It has been announced that Finance Bill 2008 will include provisions to extend the common system to:

 

· Environmental taxes (aggregates levy, climate change levy and landfill tax);

· Excise duties, including air passenger duty;

· Accounting for recovery of student loans by employers;

· Inheritance tax;

· Insurance premium tax;

· Pension schemes; and

· Petroleum revenue tax.

 

In summary, the penalties, which are based on the amount of tax understated, will be:

 

· 30% for failure to take reasonable care;

· 70% for deliberate understatement; or

· 100% for a deliberate understatement with concealment.

 

It will be possible to mitigate the penalty if a disclosure is made by the taxpayer, with greater mitigation for an unprompted disclosure.

 

The proposals also include provisions for penalties to be applied to third parties if they have deliberately provided false information, or withheld information from the taxpayer, leading to an under-declaration of tax.  It is assumed that this provision will apply to taxes covered by Schedule 24 FA 2007 as well as the taxes which will be covered by Finance Bill 2008.

 

It is expected that the earliest the above will have effect is for returns for periods commencing on or after 1 April 2009, and which are due to be submitted after 1 April 2010.

 

Penalties for failure to notify

Further to the above, it is intended that Schedule 24 FA 2007 will be extended to cover penalties for failing to register, or failing to notify a new taxable activity.  This will include VAT registration and late notification of self-employment.  This is an important point to note as the new penalties could be significantly higher than the existing regime.

 

There is to be further consultation on this issue.

 

Compliance checks

Legislation will be introduced in Finance Bill 2008 to reform the rules for checking that taxpayers have paid the correct amount of income tax, corporate tax, CGT, VAT and PAYE.

 

It is proposed that the above regimes will be aligned as follows:

 

- a power to inspect records required under the record-keeping legislation – this restricts the existing 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 at 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.

 

The proposals also include a model of the aligned time limits for assessments, as follows:

 

Tax	Mistake	Discovery	Failure to take reasonable care	Deliberate understatement or failure to notify liability
VAT	4 years	N/A	4 years	20 years
IT & CGT	N/A	4 years	6 years	20 years
Corporation tax	N/A	4 years	6 years	20 years
PAYE	4 years	N/A	6 years	20 years

 

Taxpayers’ time limits for making claims will also be aligned at 4 years.

 

Payments and repayments

From Autumn 2008 HMRC will accept payment of tax by credit card.  Any transaction fee that HMRC incurs will also be charged to the taxpayer.

 

The Finance Bill 2008 will formalise HMRC’s ability to offset a repayment for one tax against another.  This is already informally done for income tax and CGT and will be extended to cover other taxes.

 

Indirect tax returns: correction of errors

It has been announced that the limit for correcting errors on subsequent returns is to be increased for VAT, Insurance premium tax (IPT), Air passenger duty (APD), Landfill tax (LFT) and other indirect taxes.

 

The de minimis limit is to be increased to the greater of £10,000 or 1% of turnover up to £50,000.

 

For VAT and LFT “turnover” is defined as the net VAT turnover for the return period in which the amendment is made (the box 6 figure on the VAT return).  For IPT it is the box 10 figure on the IPT return for the period in which the amendment is made.

 

If a business is not VAT registered, the maximum amendment for early returns is £10,000.

 

There is an interesting comment in the response to consultation document which states that HMRC find it “difficult to see that corrections on a later return would meet full unprompted disclosure [requirement of the new penalties for errors system]”. It remains to be seen whether this point is taken further but would seem to remove certainly from the process.

 

Codifying concessions

Following the decision in the case of R (oao John Wilkinson) v HMRC, HMRC can only apply discretion on collection and management issues. It has been announced that HMRC has reviewed its extra-statutory concessions and is considering whether it needs to draft legislation for any concessions that may be outside their discretion.

 

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