The Budget 2008 - Compliance and Powers

Power to give statutory effect to Extra Statutory Concessions

Extra Statutory Concessions (ESCs) made by HM Revenue & Customs (HMRC) allow a reduction in liability or some other concession for which there is no legal entitlement. Most ESCs fall within HMRC's "collection and management" discretion, but some ESCs which fall outside that discretion could be invalid. Accordingly, from Royal Assent to the Finance Bill, a new power will be provided whereby ESCs existing before Royal Assent can be made statutory by Treasury Order. Details of which ESCs are affected will be available later in 2008.

Power to give statutory effect to Extra Statutory Concessions - budget notice

Single penalty regime extended

The single penalty regime introduced in Finance Act 2007 is to be extended to cover a range of other taxes, including:

• stamp duty, stamp duty land tax and stamp duty reserve tax;
• inheritance tax;
• excise duties; and
• environmental taxes

as well as other more specialist taxes. The regime will also cover accounting for recovery of student loans by employers. Failure to notify HMRC of a new taxable activity will also be subject to the regime, where income tax and/or National Insurance Contributions are unpaid as a result.

The single penalty regime is intended to apply to incorrect returns across all the taxes, levies and duties administered by HMRC. Finance Act 2007 introduced the regime for incorrect returns relating to income tax, corporation tax, PAYE, NICs and VAT with effect from 1 April 2008 (brought into force by statutory instrument just last week). The extension announced in today's Budget will take effect from 1 April 2009.

The single penalty regime replaces the multitude of different penalty provisions which are specific to each of the taxes, levies and duties, replacing them with a single regime for penalties for incorrect returns. The penalties will be up to:

• 30% for careless errors;
• 70% for deliberate understatement (not dishonesty); and
• 100% for concealed deliberate understatement

Simple mistakes will not, apparently, carry a penalty – although HMRC has not yet given detailed guidance as to how it proposes to distinguish a mistake from a careless error. Penalties will be reduced substantially where the errors are disclosed by the taxpayer, particularly where that disclosure is unprompted.

The regime has been further extended by introducing a penalty for third parties who deliberately provide false information or deliberately withhold information from the taxpayer with the intention of causing an understatement of tax due.

These proposals, together with those in Finance Act 2007, could be viewed as attempting to extend the disclosure regime for tax schemes to cover individual planning: where someone completes a tax return on the basis that a piece of tax planning is effective and, for some reason, the planning does not succeed then arguably that individual has made a deliberate understatement on the return. It is not a careless error, nor a mistake. HMRC has said in consultation that 'mistakes or misinterpretations of fact or law where reasonable care has been taken would not be subject to a penalty' but this reassurance is not repeated in the legislation nor is it mentioned in this latest extension of the regime. It may become advisable, therefore, to disclose all planning in tax returns – even where no disclosable scheme has been used – to mitigate any potential penalties if the planning fails.

Finally, note that the Finance Act 2007 provisions include joint liability for company directors in respect of deliberate inaccuracy penalties where the penalty is 'attributable' to the director; this Budget Note does not mention that joint liability but there is no reason to believe it will not be included in this legislation as well. HMRC have still not provided any clear guidance on what behaviour will cause penalties to be 'attributable' to a director, so it may yet be that approval of tax planning at a board meeting could (as above) lead to a penalty for the director as well as the company.

Single penalty regime extended - budget notice

Compliance checks

Following on from the single penalty regime (see note on BN97), HMRC are also proposing to align various other aspects of tax compliance, including:

• record keeping requirements
• access to taxpayers' records and information
• introduces a new power of inspection for direct tax
• restricts VAT and PAYE inspections to statutory records
• removes VAT and PAYE powers to inspect at private homes without taxpayer consent
• introduces powers to require third parties to provide relevant information to a taxpayer's position
• introduces powers to visit business premises and inspect records, assets and premises
• introduces a tax-geared penalty for failure to allow inspection or comply with an information notice
• updates criminal offence of destroying or concealing records requested under an authorised notice
• taxpayer appeal rights against any penalty and information notices not authorised by an appeal tribunal
• time limits for assessments, to be consistent across taxes

Compliance checks - budget notice