Clare McColl: Taxing times are here with HMRC's tougher regime

The idea of introducing the changes was to improve the way firms dealt with tax all year round and not just at the point of declaration. In theory, penalties apply where HMRC considers that taxpayers have failed to take reasonable care. As a consequence, taxpayers' behaviour is reviewed for each inaccuracy.

Previously, if taxpayers identified a tax error and approached HMRC with the details, many would simply be required to repay the tax amount together with any applicable interest. Times have changed! Whilst it is still possible to avoid a penalty for a straightforward mistake, a voluntary (unprompted) disclosure could now result in a penalty of up to 30 per cent.

The onus now lies with taxpayers to demonstrate that they have taken reasonable care over their tax affairs. Reasonable care has yet to be fully tested but typically would involve identifying areas of risk, adopting and implementing control systems, retaining evidence of how these are used as well as monitoring and management the tax process on an ongoing basis.

Even if the blame lies with a third party, that's not a defence in itself and companies will be expected to have examined the risks involved and taken steps to minimise them.

The new rules also introduce the concept of suspended penalties whereby some defaulters could have penalties suspended for up to two years if they meet certain conditions and improve their future compliance. Any other tax default within the suspension period will probably result in the suspended penalty being enforced as well any additional penalty payable. It is clear that the option of a suspended penalty is better than having to pay a penalty up front, but companies should think twice. Why accept a suspended penalty to hang over the company for up to two years if it could be challenged and withdrawn altogether? Accepting suspended penalties is not always the best outcome as it can leave the company exposed to greater risk.

The application of penalties can also increase companies' risk rating with HMRC, which can result in greater interaction with the department. There is also a reputational risk for individuals as well as the company itself.

A number of Scottish businesses have already fallen foul of the new penalty regime, with some having paid the price and others having accepted suspended penalties. Precise data to measure the financial impact of the new regime is not readily available; however it is widely believed that a greater number and value of penalties have been imposed over the course of the past year.Penalties can be applied to tax returns with filing dates after 1 April 2009.

Although the new regime is not restricted to VAT, VAT is an obvious area of focus as many companies submit monthly or quarterly VAT returns and the volume of returns may increase the chance of inaccuracy. Examples of VAT errors penalised in the past year include a one-off error where non-UK VAT was incorrectly recovered through a UK VAT return and even though the amount was quickly disclosed to HMRC, a penalty was still imposed. HMRC is looking for taxpayers to demonstrate reasonable care over their tax affairs. Mistakes can happen and it is important to establish the facts, quantify the error, identify how to prevent a recurrence, implement preventative measures and inform HMRC as early as possible in order to mitigate the risk and value of a penalty.

Clearly, being able to demonstrate reasonable care is of paramount importance. Aside from taking compliance seriously and having the routine controls and processes in place to prevent an error occurring, there are other actions that can be taken. In the worst case scenario, if you are faced with the prospect of a penalty, it is worth discussing the situation with your tax adviser to establish whether there is scope to challenge to mitigate or remove the penalty. Ask yourself the question - can you afford not to?

• Clare McColl is an indirect tax partner at KPMG Scotland.