The new penalties will apply from April 2008, but only for returns or documents due to be sent to HMRC on or after 1 April 2009.

If HMRC receive a document that contains a mistake we will charge a penalty if:

• the error is because the taxpayer failed to take reasonable care, or

• the error is deliberate, that is the taxpayer knowingly and intentionally sent HMRC an incorrect document but did not take active steps to hide the error, or

• the error is deliberate and concealed, that is the taxpayer knowingly and intentionally sent HMRC an incorrect document and took active steps to hide the error.

They will not charge a penalty if the taxpayer took reasonable care to get things right but still made an error or if they are told promptly about any error you discover after you have sent the return or document to us.

‘Reasonable care’ varies according to the person, their particular circumstances and their abilities. Every person is expected to make and keep sufficient records for them to provide a complete and accurate return.

Someone with straightforward tax affairs may only need to keep a simple system of records, which are followed and regularly updated. A person with more complex tax affairs may need more sophisticated

systems that are maintained equally carefully.

If HMRC charge a penalty because you failed to take reasonable care with your tax affairs, you may be able to have the penalty suspended for up to 2 years provided:

• you meet certain conditions, and

• you do not become liable to any other error penalties during the suspension period.

If at the end of the suspension period you have met all the suspension conditions, they will cancel the penalty.

Penalties charged because of deliberate errors, whether or not they were concealed, cannot be suspended.

You can avoid a penalty by:

• taking reasonable care to provide HMRC with correct returns and documents,

• keeping records that are good enough to enable you to provide HMRC with complete and accurate tax returns and documents,

The penalty is a percentage of the extra tax due. The rate depends on the behavior that gave rise to the error. The less serious the behavior, the smaller the penalty will be.

There can be a reduction in the level of penalty charged for disclosure of errors, and further reductions for the quality of any disclosure if certain conditions are met.

Reasonable Care – No penalty

Careless – min 0%, Max 30%

Deliberate – min 20%, max 70%

Deliberate & Concealed – min 30% max 100%

(The penalty is a percentage of any extra tax due)