A new, less flexible tax penalty system will come into play next year as the government believes that the existing system provides an insufficient distinction in behaviour and attitudes of the company directors who break the rules.

The detailed legislation will mean that tax inspectors will not be able to use their traditional discretion, as it will include a set menu of infringements and a sliding scale of penalties that respond to the seriousness of the situation and how it came to light.

There are three categories: ‘Careless’ action involves a standard penalty of 30 per cent of the lost revenue, while ‘deliberate but not concealed’ activities result in a penalty of 70 per cent of unpaid liabilities, and ‘deliberate and concealed’ behaviour brings a penalty representing the total amount of unpaid tax. In addition the system takes account of whether a disclosure to the taxman was ‘prompted’, or ‘unprompted’ in a bid to make companies more honest.

“This means that a business that voluntarily comes forward, following a careless inaccuracy will typically be treated with the greatest leniency, while a company that has been caught deliberately breaking the rules and attempting to cover up will be dealt with most severely,” explains Alan McCann, a tax director at accountants and business advisers DTE.

“The system will not effectively kick in until 2009, when tax returns and other documents dating from 2008 will be open to inspection by HMRC,” adds McCann. “However, it is important in the meantime for companies to ensure that their affairs are in order because the incoming penalty system will no doubt prove harsher and harder to manage from a compliance point of view.”

The new penalty system covers inaccuracies in a range of areas including income tax, VAT, capital gains tax, company tax, PAYE, and the new construction industry scheme.