Call it what you will – a ‘mistake’, an ‘error’ or an ‘oversight’ – but, as a result of new powers granted to HMRC by the Finance Act 2007 (FA2007), from April 2009 onwards, these inaccuracies could come with a hefty price tag if they are made on tax returns.
This, in itself, is nothing new. HMRC has always had provision to seek penalties for incorrect tax returns, although, in most cases, the burden of proof has been with the Revenue to demonstrate that understatements were down to either a deliberate act or negligence.
However, under these new rules, any business that understates its tax, misrepresents a liability, or fails to inform HMRC of an under assessment will face the threat of significant sanctions, with the severity being determined by the circumstances which gave rise to the discrepancy.
From April 2009, the new legislation will 'address the behaviour that led to the inaccuracy, with penalties for deliberate inaccuracies being higher than those for careless inaccuracies.'
These inaccuracies fall into four categories and range from those made despite reasonable care being taken through to those deemed to be a deliberate inaccuracy that has been concealed – with a penalty of 100 per cent of lost revenue for the worst offenders.
More concerning for corporates is that for an inaccuracy which is deemed to have been deliberate or deliberate and concealed, the penalty can be levied personally against the relevant officer of the company - a secretary, manager, director, or any one else managing or purporting to manage any of a company's financial affairs - with the tax being recovered from the company and the penalty recovered from the individual.
Given the severity of these penalties, which are significantly higher than those in place at the moment, the onus now sits squarely with corporates to ensure the robustness of their systems and identify any weaknesses in processes and controls.
Taking steps to demonstrate to HMRC that reasonable care is exercised when dealing with tax affairs could prove to be invaluable when the Revenue is categorising the ‘offence’.
Ed Dwan is a tax partner at BDO in Manchester.