The new rules will be based on both the amount of tax understated and the behaviour that gives rise to the understatement, with no penalties being applied for ‘mistakes'. However, at the other end of the scale, there will be higher penalties for ‘deliberate action with concealment,' There is also a new concept of ‘suspended' penalties.

Legislation was introduced in the Finance Bill 2007 and received Royal Assent on 19 July 2007, to provide for a single new penalty regime for incorrect returns. The penalty is based on the following three criteria:

• amount of tax understated/that would have been lost
• the nature and behaviour giving rise to the understatement,
• the extent of disclosure by the taxpayer

• No penalty where the taxpayer makes a mistake;
• Moderate penalties for failures to take reasonable care;
• Higher penalties for deliberate action; and
• Still higher penalties for deliberate action with concealment

Each penalty can be substantially reduced where the taxpayer makes a disclosure, more so where it is unprompted, and there will be the right of appeal against penalty decisions. A new concept of suspended penalties will also be introduced. HMRC will be able to impose a penalty which will not be enforced for a period of time, and if the taxpayer makes no further errors, the penalty will lapse. This will, no doubt, encourage business to be compliant.

It would be advisable for business to show any visiting VAT Officer that every care has been taken in getting the returns correct, so if an error is discovered, no penalty is imposed. In many cases, a VAT Officer fails to understand the details of a business, and so assesses incorrectly or may impose a penalty because he thinks reasonable care has not been taken. Some large businesses have decided to put together a ‘pack' explaining what the business does and how the accounting system operates, to help VAT Officers understand the business and see that they have taken reasonable care in preparing the returns.