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George Bull
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The future of online filing and the new penalty regime

‘Tax doesn’t have to be taxing.’ It’s a reassuring message, delivered by a raft of public information adverts in newspapers and on TV and it hammers home the message that online filing makes it easier for the taxpayer to get their returns in on time. The ads are aimed primarily at individual taxpayers ahead of the 31 January self-assessment deadline, and they point to the fact that online filing is fast becoming the norm rather than the exception. More importantly, HMRC is moving towards mandatory online filing of all corporation tax, PAYE and VAT returns.

PAYE


Larger employers – those with more than 50 employees on their books – are already required to submit both their end-of-year and in-year forms online. Smaller companies have been given slightly more time to prepare, although mandatory online filing of end-of-year forms begins in April 2010. From April 2011, the rules will be extended to cover in-year returns as well. There used to be an incentive in the form of small tax-free payments for early adopters, but these are now history.

Corporation tax and VAT


Electronic filing of corporation tax returns will be required from April 2011. Meanwhile, taxpayers with a turnover of more than £100,000 will have to submit their VAT online for accounting periods starting on or after 1 April 2010. All businesses and organisations that register for VAT after this date will have to use the new online system.

Self assessment


There is no requirement yet for private individuals to file their self-assessment returns online. However, those who do so can wait until 31 January to hit the send button. Those who send in paper returns must do so by 31 October or face a penalty.

The penalty regime


Following the merger of the Inland Revenue and Customs and Excise to form the catch-all HMRC, the taxman has been given greater powers to enforce a new penalty regime. In theory, online filing will make it easier for HMRC to identify problems with returns and to take appropriate action.

The new system of penalties applies across the board, covering corporation tax, VAT, PAYE, self-assessment returns, environmental taxes, stamp duty and excise duty. If a return contains an inaccuracy that results in an underpayment, HMRC has the power to charge interest and impose a penalty.

There is a graduated scale of wrongdoing. At the less serious end, inaccuracies may not incur a penalty provided the taxpayer has taken ‘reasonable care’. Careless errors may generate a penalty valued at up to 30% of the discrepancy between that which is actually due and the figure returned by the taxpayer. However, if the taxpayer contacts HMRC to flag the error without any prompting, the penalty should be capped at 15% and may even be waived.

However, deliberate inaccuracies are punished with a penalty of anything between 20% and 100%.

The new system makes it more likely that penalties will be imposed. In the past, an error in a return may have resulted in nothing more than a warning for a first offence. From now on, the likelihood is that penalties will be invoked more frequently, because HMRC wants to be more consistent. It’s therefore vital that taxpayers take more care than ever in documenting the information they use to arrive at the figures returned to HMRC. Failure to do so will make it harder to defend an accusation that an error (deliberate or otherwise) has been made.

It’s also worth remembering that the penalty system will cover not only the current year but also previous returns. If errors are made over time, discovery at a later date could mean the taxpayer facing not one, but several punitive fines coupled with interest charges.

For instance, if you look at the incoming requirement to file in-year PAYE returns online, there is scope for businesses to store up trouble for the future. As things stand, online filing will alert HMRC instantly if a form has been submitted late, yet systems are not in place to check the accuracy of this information. Over time, systems to check accuracy will be introduced and companies that habitually provide inaccurate PAYE returns could face multiple penalties based on a digital history of misleading information.

It’s therefore vital that businesses view the arrival of compulsory online filing as a prompt to ensure that the information fed into their returns is watertight and acted on punctually.