February 13, 2009

The interaction between the “Error Correction Procedure” and the new Penalty Regime

Since 01 July 2008 we have had in place the new rules for what was the ‘Voluntary Disclosure of Errors’ regime now renamed as the ‘Error Correction Procedure’ (ECP).

The term ‘Voluntary’ has been removed because there is in fact an obligation for tax payers to correct errors and this term was thought to be confusing.

The ECP rules seemed merely to increase the deminimis limits from £2,000 to £10,000 or 1% of the VAT returns Box 6 figure up to a £50,000 limit and this seemed to relieve businesses of some of the paperwork involved in correcting errors.

However, when we link the ECP rules to the new Penalty Regime the picture looks entirely different.

As we already know the new penalty system will try to take into account the behaviour of the tax payer that led to the error being made and HMRC state that no penalty will be due where a mistake is made taking reasonable care. However, those who have made an error through careless or deliberate behaviour will now be liable for a penalty.

If we look at how the penalty is calculated there is no penalty if the tax payer has taken reasonable care to get their tax right but a penalty of 30% is charged for careless mistakes and 70% for deliberate but not concealed and finally 100% for deliberate AND concealed mistakes.

The definition of a careless mistake is one that is not disclosed. There are 3 elements of disclosure, telling HMRC by phone or letter, helping them work out the tax liability and giving them access to the records.

So it would appear that if a taxpayer makes an error that is below the deminimis limits for disclosure, it may be necessary to make a disclosure to HMRC in order to mitigate a penalty or in fact to avoid a penalty altogether.

Elysian Associates

February 2009


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