Nichola Ross Martin's Tax Consultancy

At a glance

A new system of penalties applies to failures occurring on or after 1 April 2010. The new penalties will apply for the following taxes and accounting periods:

• Income Tax, Capital Gains Tax and Class 4 National Insurance contributions for the 2009-10 tax period
• Corporation Tax: accounting periods ending on or after 1 April 2009
• VAT: failures to notify liability to register which arises on or after 1 April 2010
• Other taxes and duties (not IHT and SDLT): failures where the obligation arises on or after 1 April 2010.
• Excluded from these provisions (they do not apply to):
  Inheritance tax
  Stamp Duty Land Tax
  PAYE

There are also new rules for Class 2 National Insurance (for the self-employed).

These penalties are calculated along similar lines to penalties for errors.

Taxes & time limits

Time limits

Tax	Event	Time limit
Self-employment and Class 4 NICS	Starting in business	31 January following the end of the tax year
Capital gains tax	Obligation to give notice of liability	31 January following the end of the tax year
Corporation tax	Notifying chargeability	12 months from the end of the accounting period
VAT	Exceed VAT registration threshold over the past 12 months, or expects to turnover the whole VAT threshold in the next 30 days	30 days

Penalties

• No penalty is given as a result of failing to notify if no tax is due.
• If a person makes a full and unprompted disclosure within 12 months of first becoming liable for a failure to notify penalty, the penalty may be reduced to zero.
• There is no longer a fixed penalty for failure to notify for Class 2 NICS, see Penalties, Class 2 NICS, below.

Maximum penalties
The size of penalty depends on the amount of tax unpaid at the normal due date discounted according to the taxpayer's behaviour:

Motivation governing failure to notify	Unprompted	Prompted
Not deliberate	0% to 30%	50% to 100%
Deliberate, but without concealment	20% to 70%	35% to 70%
Deliberate with concealment	30% to 100%	50% to 100%

There is a minimum penalty of £300.

Reductions

• There is no penalty if the taxpayer has a reasonable excuse for the failure.
• No penalty is due unless there is tax or duty unpaid because of the failure.
• A penalty will be reduced if the offence has also attracted a late payment surcharge.
  There are different rules for some Excise Duty registrations where the business is required to obtain approval before they can commence trading.

If HMRC is told about the taxable activity or liability, it will allow a reduction to a 30% penalty for disclosure. The reduction depends on whether the disclosure was prompted or unprompted.

Penalties can be reduced on the same basis as penalties for errors, according to the amount of effort that the taxpayer puts into cooperating with HMRC, for:

• Telling HMRC about it;
• Giving HMRC help and assistance in quantifying the loss;
• Allowing HMRC access to records.

Class 2 NICs

Penalties: Class 2 NICs -failing to register as self-employed

Before 6 April 2009 - Regulation 87 of the Social Security (Contributions) Regulations 2001 (SI 2001 No 1004)

Anyone starting self-employment on or after 30^{t h} April 2001 but before 6 April 2009 must register with HMRC within three months from the end of the calendar month in which they start self employment. Failure to register within the time limits will result in the individual being liable to a penalty of £100 unless

• they satisfy the conditions for Small Earnings Exception
• they are able to provide a reasonable excuse for the delay in registering, or
• HMRC allows extra time to register.

Position from 6 April 2009 -

The penalty is geared to the amount of Class 2 NICs due and there are provisions to reduce the amount of the penalty for disclosing a failure to comply with the requirement to notify.

Small print

Tax
The tax rules are contained in Schedule 41 of the 2008 Finance Act.

Class 2 NICs:

Rules up to 6/4/09: Regulation 87 of the Social Security (Contributions) Regulations 2001 (SI 2001 No 1004)

Rules from 6/4/09: Regulations 87A to 87G of the Social Security (Contributions) Regulations 2001 (SI 2001 No 1004).