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This is a freeview 'At a glance' guide to penalties for errors in returns and documents.

What penalties apply for Errors in returns and documents? How are they calculated? When can they be reduced or suspended?

Subscribers click here for your version of this note which additionally summarises case law and provides guidance on how to appeal suspension conditions. There is also a VAT Penalty note for subscribers.

At a glance

A tax-geared penalty will apply in one of three circumstances that result in a potential loss of tax:

  1. When a taxpayer makes a careless error or mistake in a tax return or document.
  2. When a third party supplies false information, or deliberately withholds information in connection with another person’s return or document.
  3. When HMRC raises an assessment for tax and the taxpayer fails to notify HMRC that the assessment is too low.

The measures are set out in S97 and Sch 24 FA 2007.

Further amendments have followed:

When a taxpayer makes an error in a tax return or document i.e. an inaccuracy, and this amounts to, or leads to:

a penalty is charged per error.

Penalties are tax-geared. From 1 April 2011 there are different penalty rates depending on whether the error relates to domestic or offshore income and gains.

The rate of penalty that will apply is determined according to the taxpayer’s underlying behaviour, as appraised at various stages between the time of the discovery of the error and its disclosure to HMRC. This may take several steps to calculate and will often require a detailed appraisal of the individual facts of each case combined with judgement as follows:

Overview

A tax penalty regime applies when a taxpayer makes an error or mistake in a tax return or document and this affects their tax charge.

When?

These rules were introduced in the Finance Act 2007. They affect periods from 1 April 2008 for Income Tax, Corporation Tax (CT), Capital Gains Tax (CGT), PAYE, the Construction Industry Scheme (CIS), and VAT.

Transitional rules mean that new penalties will apply to return periods/documents filed and due on or after 1 April 2009. See Penalties: Errors in Returns and Documents (subscriber version)

How does this work?

A penalty is payable by a person where they give HMRC a specified document and it contains an inaccuracy which is careless or deliberate and which amounts to, or leads to:

Where a document contains more than one inaccuracy, a penalty is payable for each inaccuracy.

Which documents are covered by these rules?

Documents include:

Use of the wrong form or return

Use of the wrong form, provided that it was accurately completed will not automatically give rise to a penalty for error provided that it does not contain a false or inflated claim. This kind of error could lead to a late filing penalty. 

Rate of penalties

Penalties are set by law as a percentage of lost revenue, according to taxpayer behaviour and degree of culpability or guilt. They are negotiable and the penalties which apply will depend on the facts of each case. They are set as follows:

Culpability

Maximum

Unprompted (minimum)

Prompted (minimum)

Genuine mistake: despite taking reasonable care

0% 0% 0%

Careless error:
if the inaccuracy is due to failure to take reasonable care

30%

0%

15%

Deliberate error but not concealed: the inaccuracy is deliberate but no arrangements made to conceal it

70%

20%

35%

Deliberate error and concealed

100%

30%

50%

 

A further penalty of 30% is triggered if a person fails to notify HMRC of an under assessment of tax, in relation to an assessment made by HMRC.

An inaccuracy in a document given to HMRC, which was neither careless nor deliberate when the document was given, is to be treated as careless if the taxpayer:

(a) discovered the inaccuracy at some later time, and

(b) did not take reasonable steps to inform HMRC.

Potential lost revenue: normal rule

The additional amount due or payable in respect of tax as a result of correcting the inaccuracy or assessment. Ignoring:

Potential lost revenue: multiple errors

If a penalty is due in respect of more than one inaccuracy, and the calculation of potential lost revenue depends on the order in which they are corrected:

Potential lost revenue: losses

If loss is overstated, lost revenue equals extra amount of tax relief received. Where the loss has not been wholly used, lost revenue is increased by 10% of the balance of the loss.

Potential lost revenue: delay

Where tax has been delayed, the lost revenue is 5% of the tax for each year of the delay. This does not apply to losses.

Disclosure

Disclosure can be made to HMRC as follows:

Disclosure: 'unprompted'

Unprompted means made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the inaccuracy or under-assessment.

Otherwise, disclosure is 'prompted'.

Discount for quality of disclosure

HMRC updated a number of compliance check factsheets in December 2017, and included new wording on how the timing of a disclosure will affect the reductions HMRC gives to taxpayers. This is not in accordance with HMRCs manuals and would represent a change in policy. There is some confusion as to whether this is what HMRC actually intends. See New penalty calculation creates confusion.

Special reduction: special circumstances

HMRC may reduce a penalty if there are 'special circumstances'. These do not include:

See Grounds for appeal: HMRC error or flaw for guidance on what constitutes special circumstances and case law.

Assessment

HMRC will:

Suspension

HMRC may suspend all or part of a penalty for a careless inaccuracy. Notification is in writing and must specify:

HMRC may suspend all or part of a penalty only if compliance with a condition of suspension would help the taxpayer avoid becoming liable to further penalties for careless inaccuracy.

Conditions for suspension

HMRC current practice is that penalties for inaccuracies may only be suspended if the suspension condition is SMART, that is 'Specific, Measurable, Achievable, Realistic and Time' bound. 

Taxpayers may be asked to sign a Specific Measurable Achievable Realistic Time Bond.

A taxpayer may appeal against a decision of HMRC setting out suspension conditions. If for example, the conditions attaching to your SMART Bond are unreasonable or over onerous.  

Cases on suspension:

Can we appeal against penalties?

The taxpayer may appeal against a decision of HMRC:

See How to Appeal a Tax Penalty.

see Penalties: errors in returns and documents (subscriber version) for recent developments and guidance on how to appeal against a lack of suspension or suspension conditions.

An appeal may be brought to the First-tier Tribunal (FTT):

Error involving tax agents

Companies: officer's liability

Where a penalty is payable by a company for a deliberate inaccuracy which was attributable to an officer of the company:

'Officer' includes:

(a) a director including a shadow director within the meaning of section 251 of the Companies Act 2006 (c. 46), or

(b) a secretary.

It is essential that a director knows what is expected of them, so that they can prove that they have taken Reasonable care.

Double jeopardy

A taxpayer is not liable to a penalty in respect of an inaccuracy or failure in respect of which they have been convicted of an offence.

Carelessness

Carelessness = failure to take reasonable care

HMRC links this to “negligence”. It uses a quote as follows:

In the 1856 case of Blyth v Birmingham Waterworks Co, Baron Alderman said
“Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do. The defendants might be liable for negligence, if, unintentionally, they omitted to do that which a prudent and reasonable person would have done, or did that which a person taking reasonable care would not have done.”

HMRC's guidance (abridged from the Compliance Handbook)

How to work out if someone is careless

It is simply a question of examining what the person did or failed to do and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances.

Repeated inaccuracies may form part of a pattern of behaviour which suggests a lack of care. Keep a sense of proportion; repetition will not always indicate a failure to take reasonable care. People do make mistakes. Perfection is not expected.

See Penalties: errors in returns and documents (subscriber version) for HMRC provided examples

Taxpayers and reasonable care

What is reasonable depends on the individual and the nature of the issue at stake.

See Reasonable care and tax penalties.

Time limits

Normal Enquiry window

For Individual and partnership returns 2007/08 on, and company accounting periods ending after 31 March 2008.

Amendment window

Individual and partnership returns: 12 months from 31 January following the year of assessment, and company returns: 12 months after the filing due date.

Amendments and the new tax penalty regime

An amendment to correct an error or mistake in a return within the amendment window will not be subject to tax penalties if the taxpayer makes it without prompting from HMRC.

Discovery assessments

HMRC will go back 4 years if on finding an error there is the presumption of continuity. This will extend to 6 if there is suspected negligence or dishonesty, 12 if it involves an offshore matter from April 2019, and up to 20 years in cases of fraud.

 


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