New Penalty Regime for Errors - What do Businesses Need to do? 
Added : 8th July 2008
"All businesses need to think about protecting themselves from the new penalty regime."
Steve Taylor, VAT Senior Manager at Business Advisers Cooper Parry says that new businesses need to be aware of how the new penalty regime rules for inaccuracies in documents and returns will apply to all the taxes.
With effect from 1 July 2008 the limit for being able to adjust errors on returns will be raised from £2,000 to £10,000 or 1% of turnover subject to a maximum of £50,000. Above these limits a separate voluntary disclosure must be submitted.
Under the current rules an error disclosed by making a voluntary disclosure will not be liable to a misdeclaration penalty. However when the new penalty regime is introduced anyone making a voluntary disclosure could still be liable to a penalty.
Also businesses could still be required to make a voluntary disclosure even if the amount is under the revised limits.
Steve says "The problem is that the new regime will mainly focus on the behaviour of the business that gave rise to the error whereas under the current rules the test is purely mathematical."
HMRC have made it clear that in their view if a business makes an error that has been caused by them failing to take "reasonable care" they will still be liable for a penalty and should make a voluntary disclosure whatever the amount of the error."
When a business makes a voluntary disclosure interest has to be paid unless there is no loss of tax.
Under the new regime a business may consider making a voluntary disclosure whether it needs to or not to avoid problems from HMRC but this will result in interest being paid uneccessarily in cases where it had taken reasonable care and the amount was below the limits for adjusting on a return.
HMRC will have to demonstrate that a business had failed to take reasonable care regarding the management of its taxes or reasonable steps to inform them of any errors when required to do so.
However there are major concerns regarding what HMRC views will be regarding what constitutes reasonable care and it is anticipated that there will be many disputes leading to Court cases and further costs for businesses. HMRC state that the new regime is not intended primarily to raise revenue from penalties and that it is intended to incentivise businesses to get them to pay the right tax at the right time.
Steve says "In the meantime all businesses should be considering what they need to do to protect themselves from the new penalty regime that will consist of reviewing procedures for the preparation of returns, ensuring that they understand the VAT implications of their business activities particularly where one off transactions are involved and checking that the person or persons who are responsible for making decisions regarding VAT and preparing returns are properly trained."
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