Helpsheet 2018/19
Penalties
You will have to pay interest on anything you owe and have not paid, including any unpaid penalties, until HMRC receives your payment. If you do not pay the tax you owe for the previous tax year on time, you will have to pay a penalty after 30 days and the longer you delay, the more you will have to pay. So it is important to pay the tax as soon as you can: *The penalties do not apply to any payments on account that you pay late. You may think you have a reasonable excuse for paying your tax late; if you believe this to be applicable to your circumstances please contact us for further action and or advice.
SELF ASSESSMENT ENQUIRIES
‘Process now, check later’ is one of the fundamental principles of Self Assessment. Processing involves getting the Return details logged onto the computer either direct by us as agent online or if filed by post by HM Revenue & Customs staff as quickly as possible, so that liabilities, as calculated by the taxpayer, are recorded, whilst the enquiry procedure forms the ‘check later’ part of the equation.
The Revenue have the right to issue an enquiry at any time during a fixed period after submission of the Return, known as the enquiry window, and must give the taxpayer written notice where they intend to make an enquiry. Section 96 of Finance Act 2007 introduces a significant change in amending the enquiry window in respect of Income Tax, Partnership and Corporation Tax Returns to close twelve months after the date the return was delivered which is designed to encourage an even flow of work for advisers and HMRC alike during the year rather than the heavy workload of submissions towards the 31 January filing deadline. This rule applies provided Tax Returns are received on or before the statutory deadline.
There is no change to the enquiry window for large groups of companies, or to the deadline for enquiries into Returns issued late. Such enquiries may relate to specific aspects of your return or may result from random selection and you are obliged by law under the Self Assessment rules to keep all documents relating to preparation and completion of your Tax Return for five years after the 31 January following the end of the tax year in order that they are available to deal with any enquiries. If any enquiries are raised, the records should be kept until the conclusion of those enquiries and you should note that penalties of up to £3,000 may be imposed for failing to keep records for the required period.
Penalties can be charged if there are errors on returns or other documents which:
• understate the tax
• misrepresent the tax liability
Penalties may also apply if you don’t’ tell HMRC if an assessment is too low. This type of penalty is known as an ‘inaccuracy penalty’ and applies to the following taxes and duties:
• Betting and Gaming duties
• Capital Gains Tax
• the Construction Industry Scheme
• Corporation Tax
• Environmental taxes
• Excise Duties
• Income Tax
• Inheritance Tax
• Insurance Premium Tax
• National Insurance contributions
• PAYE
• Petroleum Revenue Tax
• Stamp Duties
• VAT
If you send in a document that contains a mistake, HMRC will charge a penalty if the error is:
• because of a lack of ‘reasonable care’
• deliberate - such as intentionally sending incorrect information
• deliberate and concealed - for example, intentionally sending incorrect information and taking steps to hide the error The level of the penalty is linked to the reason why the error occurred.
The more serious the reason, the higher the maximum penalty can be. HMRC can reduce the penalty if you help them to put things right. What ‘reasonable care’ means Every individual or business is expected to keep records that allow them to provide a complete and accurate return. HMRC also expects them to check with your agent, or HMRC, to confirm the correct position, if they are not sure.
However, ‘reasonable care’ is different according to each client’s circumstances and abilities. For example, a client with relatively straightforward tax affairs may only need a simple system of record keeping that is regularly updated. A large business with complex tax affairs is expected to have a more sophisticated system that is well-managed.
Penalties under Making Tax Digital (MTD)
HMRC has issued a further document setting out its proposed options for the new penalties under the MTD regime. The consultation covers penalties for late submission and late payment. It outlines three options for a new penalty for non-deliberate failures to meet filing deadlines.
HMRC says that the aim is for these to operate for all taxes with regular filing obligations.
The three possibilities are:-
• A points-based model to apply for each tax separately. A taxpayer would receive a point each time he fails to provide a submission on time. When the points reach a certain threshold a penalty would be charged. The points are reset after a period of good compliance;
• HMRC would carry out an automated regular review of compliance with submission obligations over a set period. There would be no penalty for the first failure but for further defaults a penalty would be charged at the time of the review, based on the number of failures;
• HMRC would not charge a penalty immediately on the first failure. Instead it would suspend the penalty on condition that the taxpayer provides the outstanding submission within a specified time. Suspension could be applied on more than one occasion but this would be limited.
HMRC is also considering charging penalty interest on all taxes and duties. This would apply to taxpayers who do not pay their tax by the due date and have not adhered to time-to-pay arrangements, it would be charged in addition to late payment interest.
DAA TAX CONSULTING - REQUIREMENT TO CORRECT (RTC) / THE WORLDWIDE DISCLOSURE FACILITY (WDF)
From 30 September 2018, the new Requirement To Correct (RTC) penalty regime comes into force inclusive of a new tax geared minimum 100% penalty charge. Any individual with underpaid UK tax relating to overseas assets will be within the scope of the new penalties. The regime will therefore apply to UK resident and domiciled individuals and non-UK domiciled individuals who are UK resident as well as potentially to offshore trustees.
The introduction of the RTC penalty will coincide with the first full automatic exchange of information between the countries signed up to the Common Reporting Standard (CRS) which is an automatic exchange of financial information between over 100 countries and represents a significant step change in the information available to HMRC on individuals with offshore assets or who undertake activity outside of the UK.
HMRC has a number of penalties available to it under RTC, which include:
• A tax geared penalty of 200% of the tax not corrected - penalties will be reduced within this range to reflect the taxpayer’s cooperation with HMRC, including whether they came forward unprompted to tell HMRC of their failure, with a potential reduction to a minimum penalty of 100%
• An asset based penalty of up to 10% of the value of the relevant asset would apply in the most serious cases, involving £25,000 or more in underpaid tax in a tax year
• HMRC will also be able to use naming and shaming provisions in serious cases, and where over £25,000 of underpaid tax is involved
• A further enhanced penalty of 50% of the amount of the standard penalty (i.e. penalty of up to 300%), will apply if records show the individual had moved the overseas asset in an attempt to avoid the requirement to correct, eg. moving the asset to a non-CRS participating country.
The new RTC regime will apply to personal income tax, capital gains tax and inheritance tax.
To avoid the 100% penalty a taxpayer would need to have a ‘reasonable excuse’ but in Finance Bill (No.1) 2017, the RTC legislation attempts to limit when this defence can be used. Schedule 29 paragraph 22(2) states that “reliance on advice is to be taken automatically not to be a reasonable excuse if it is disqualified”. The Chartered Institute of Taxation is currently trying to ascertain when advice taken by individuals will be considered ‘disqualified’. A presenter on a recent HMRC webinar presenter suggested that if an individual has relied on the same advisor to setup an offshore structure and to provide them with the ongoing advice, then the advice may be disqualified on the basis that the advisor has a vested interest due to having set up the structure originally. This surely cannot be the intention, and it is possible a significant number of cases will be taken to tribunal should HMRC adopt the stance suggested by its webinar presenter.
As well as a new stricter penalty regime, the RTC provisions introduced an extension to the enquiry window for HMRC to look into individuals with overseas affairs which effectively allows HMRC to bring into assessment any tax that would be assessable at 6 April 2017 and allow it to remain within assessment until 5 April 2021. HMRC will be then be able to potentially enquire into an individual’s affairs where there is an overseas connection for up to 24 years as opposed to the usual 20 year limit.
The introduction of RTC to coincide with the information coming into HMRC’s hands from the CRS is no coincidence and HMRC’s intention is to charge RTC penalties in instances where individuals are found to have underpaid UK tax as a result of information HMRC has gleaned from the CRS.
To avoid the ramifications of the new RTC regime individuals need to act now.
The Worldwide Disclosure Facility (WDF) is the latest, and if HMRC is to be believed, the last, disclosure opportunity for individuals with undeclared overseas affairs. The WDF will run up to 30 September 2018 and individuals who take advantage of it will be able to benefit from more favourable penalty rates, potentially as low as 10% compared to the RTC minimum of 100%.
There is a significant number of ‘grey areas’ in dealing with overseas affairs and the technical points relied on as to whether a UK tax implication exists which is of particular concern with regard to the limitation of the reasonable excuse defence and without clarification individuals could find themselves exposed to a 100% + penalty simply because an advisor’s technical view is no longer a justifiable defence.
General opinion is that the only way for individuals and advisors relying on a technical argument to guarantee they will not be caught by the new RTC provisions, is to make a voluntary disclosure ahead of 30 September 2018, even though this may be a ‘nil tax’ disclosure.