Penalties for tax errors are changing so you need to be sure that your records are in order.
It is an important part of HMRCs work to ensure that the tax system operates as Parliament intends. From the 1st April 2009, HMRC implemented a new penalty regime covering errors/inaccuracies made in tax returns and other related records for tax periods April 1st 2008 onwards.
The new Compliance Checks Framework was introduced by the Finance Act 2008 and has changed the way that HMRC carry out enquiries, visits and inspections on taxpayers and businesses.
The new powers afforded to HMRC should reduce the burden on compliant taxpayers whilst enabling HMRC to effectively tackling those who avoid payment and more effectively manage the penalties associated with such checks.
When a penalty is charged
HRMC can charge a penalty if your return or other tax document is inaccurate and as a result you do not pay enough tax or where you fail to inform HMRC that your tax assessment is too low.
In these cases, you could be faced with an additional tax payment, together with any interest that is due, as well as a penalty.
Any penalty that HMRC may charge you will be a percentage of the additional tax owed based on the type of inaccuracy. Accordingly, ‘the more serious the reason for the inaccuracy the higher the penalty can be’.
A penalty will be charged if the inaccuracy is:
- Because you failed to take reasonable care – in that you were careless;
- As a result of you intentionally submitting an incorrect document;
- Deliberate and concealed.
Avoiding a penalty
If you take reasonable care with your tax returns to ensure that you file correct returns in time, HMRC will not impose a penalty charge even if you still make an error.
If you receive a penalty for failure to take reasonable care, this can be suspended by the HMRC for up to 2 years for you to make the required amendments to your documents. Once you have completed the required changes, HMRC may exercise its discretion and cancel the penalty.
How do you take reasonable care?
“Reasonable care” will include:
- Keeping accurate records, which you regularly update, to make sure your tax returns are correct;
- Saving your records in case you need them later;
- Checking the correct position when you do not understand something, or seeking advice from a competent adviser;
- Informing HMRC promptly about any error you may discover.
A Compliance Check
A Compliance Check is any activity where HMRC enquires whether a tax payer has complied with their tax obligations.
This may include checking that records are kept up to date or that a return has been filed accurately and on time. In the event that you do not take reasonable care with your tax affairs you could face one of the significant penalties which HMRC uses to prevent people from gaining an unfair advantage over others who comply with their tax obligations.
How will I know if I am subjected to a “Compliance Check”?
Since April 2009, it has been more difficult for you to be able to tell if you are subject to a Compliance Check from HMRC.
Previously, HMRC would write to you informing you of the area which they are investigating. If HMRC wanted to investigate another area of tax compliance, they opened a new investigation and informed you of this.
Since April 2009, HMRC are no longer required to inform you of the alleged tax breach you are being investigated for. HMRC can investigate various areas of tax compliance without the need to open an investigation for each or even inform you of this fact.
You may receive a letter from HMRC requesting some information that may not seem untoward. Such information may inadvertently trigger an unwelcomed investigation into your tax affairs.
Failing to comply with a Compliance check
HMRC has far reaching powers at their disposal. We strongly recommend that you speak to Brookson Limited as soon as you receive any communications from HMRC to enable us to work with you in the best possible way and to provide you with both accurate and practical advice.
What Brookson can do for you
All Brookson customers receive FREE IR35 Assessments and advice as part of our all-inclusive service. This includes a review of the contract for services in place with the agency or client, as well as a review of your working practices, by completing an Employment Status Assessment Form. Having an Assignment Review as soon as your assignment starts enables you to be confident that monies you take from your company are appropriately taxed.
When considering whether you are caught by IR35 on an assignment, it is essential that both your contract and your day-to-day working practices be reviewed to ensure they are consistent with an Independent Contractor's method of working. This is why Brookson help you to assess your working practices by asking you to complete the Employment Status Assessment Form for each assignment to ensure that the contract and working practices mirror one another.
IR35 is about the ‘ongoing management’ of your employment position. Accordingly, it is important whenever your assignment changes that you complete a new review to ensure that you continue to pay the appropriate tax (Dragonfly (HC) 2008). By carrying out the review, our Legal Team can provide you with advice to ensure you remain compliant. At the same time you have the peace of mind that you are minimising any potential risks associated with an HMRC investigation by taking ‘reasonable care’ to ensure that you are paying the appropriate tax.
Our legal team carries out an independent legal review of your assignment to ensure that you comply with the IR35 legislation. Regardless of whether you fall inside/outside of IR35 our legal team will make detailed notes of every conversation that takes place during each Assignment Review. Together with all other documents submitted by you, these will be stored on file and can be easily accessed for future reference. Nothing is passed directly to HMRC, however, HMRC can obtain copies of these notes should you ever be investigated.
If you are able to prove that you have taken steps to mitigate any potential losses by way of, for example, an Assignment Review any penalties imposed by the HMRC may not only be greatly reduced but cancelled out altogether.
What this means for you
The implementation of such rules will undoubtedly increase the penalties imposed on persons who have not taken enough care to get these things right. It is therefore more important than ever that you do all that is reasonable to show that you do not fall foul of IR35. The best way to do this is to have your paperwork in place before or at least during the assignment, as opposed to trying to put it all together months or even years after the assignment has ended in the event you are faced with an HMRC Compliance Check.
The new penalty regime will unquestionably bring concern amongst what is already a volatile industry, but please be rest assured that any affiliation with Brookson Limited will bring with it peace of mind.
As a contractor, a vital element of your assignment(s) is ensuring that the client considers you to be an independent contractor. Therefore it is crucial that you manage your IR35 status in order for you to mitigate any risks connected with your chosen way of working.
To ensure you are taking the appropriate steps, and demonstrating ‘reasonable care’ in order to prevent HMRC from imposing penalties on you, it is important that you keep on top of your working practices and that all contracts, extensions and reviews are supported by documentary evidence.
If your way of working is challenged by HMRC, then in the absences of detailed, contemporaneous notes this may lead you to being faced with a huge tax bill, coupled with HMRC penalties as they may view you as not having taken ‘reasonable care’ in order to get your tax status right.