HMRC's new penalty regime is based largely upon the taxpayer's "behaviour" in the context of how VAT errors arise. Penalties are now applicable where errors are caused by "carelessness" (defined as a failure to take reasonable care), or where errors are deliberate or concealed.

When HMRC introduced new rules for disclosing VAT errors in 2008 they were intended to enable more errors to be corrected via the VAT return process. The new rules however mean that penalties may still apply, even where errors are corrected through the VAT return, using the new disclosure rules where HMRC later discover the error and it does not believe reasonable care was exercised. The problem is that the definition of "reasonable care" is open to interpretation.

Taxpayers are now required to make a judgment on their own behaviour when deciding whether to disclose or not. If the error is deemed careless or deliberate and is not disclosed, this leaves taxpayers open to penalties if HMRC ever discover the error.

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