How does HMRC calculate the level of penalties to be charged to your client?


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There are two types of penalties – those that are fixed and those that are tax geared. Fixed penalties can apply for each of the tax years where the irregularity occurred. Whereas the level of tax geared penalties is a calculation being a percentage of the tax again depending upon the severity of the irregularity rather than the frequency of the irregularity. Fixed penalties either apply or not whereas tax geared penalties that apply are “negotiable”.

Penalties start at the maximum level and mitigate downwards as opposed starting at 0% and increasing upwards.

To calculate the level of penalties, HMRC will work out the Potential Lost Revenue (the PLR).

What is the PLR?

This is the net amount of any tax that is as a brought about by a taxpayer’s deliberate or careless behaviour.

Reductions to the overall tax due on any matter can reduce the overall amount but you cannot have “negative penalties”.

Penalties for UK vs Offshore matters

Offshore matters carry a higher level of penalties and are based on the category of territory as determined by HMRC.  For UK matters, penalties can be up to 100% of the tax again as it falls within a category 1 territory.  By contrast, a matter involving a category 3 territory results in a penalty up to 200% of the tax again. HMRC has defined category 1 and category 3 territories.  Any territory not listed as category q or 3 falls into category 2.  Category 2 territories can result in a penalty of up to 150% of the tax again.  These can be found at Territory categorisation for offshore penalties: from 24 July 2013

So how do you negotiate penalties?

You don’t.

Instead, the taxpayer’s behaviour is considered. Firstly, an unprompted disclosure of an irregularity will lower the level of penalties from the outset. By contrast, a prompted disclosure (having received a letter from HMRC for example) start at a higher level. HMRC look for a change in bad/non-compliant behaviour to good/compliant behaviour. There are a number of different types of behaviour that fall within different ranges that in turn leads to the calculation.

The calculation of a tax geared penalty is itself based on several factors. If the starting point is wrong, then it follows that the calculation is wrong. The more cooperative a taxpayer is, the lower the penalties might be. The more unhelpful a taxpayer is, the more likely HMRC is going to “throw the book at them”. How will your client react to tax geared penalties as it is down to how your client behaves in the final stage of a tax investigation?

Type of behaviourUnprompted disclosurePrompted disclosure
Reasonable careNo penaltyNo penalty
Careless0% to 30%15% to 30%
Deliberate20% to 70%35% to70%
Deliberate and concealed30% to 100%50% to 100%

How to reduce a penalty

HMRC can reduce the amount of any penalty they charge a taxpayer depending on HMRC’s view of how much assistance the taxpayer gave HMRC when you make a disclosure.  HMRC refer to this assistance as the ‘quality of disclosure’ or as ‘telling, helping and giving’.

According to HMRC, examples of telling, helping and giving include:

  • telling us about or agreeing that there’s a failure and how and why it happened.
  • telling us everything you can about the extent of the failure as soon as you know about it.
  • telling and helping us by answering our questions in full.
  • helping us to understand your accounts or records.
  • helping us by replying to our letters quickly.
  • helping us by agreeing to attend any meetings, or visits, at a mutually convenient time.
  • helping us by checking your own records to identify the extent of the failure.
  • giving us access to documents we’ve asked for without unnecessary delay.
  • giving us access to documents we may not know about, as well as those that we ask to see.

A taxpayer’s behaviour sets the range of penalties that may apply

We can all behave differently and at different times. In simple terms, the level of tax penalties depends upon “helping, telling and giving”. If HMRC is helped to understand and clearly told the answers to their questions and provided evince to back it up, then the level of penalties should be comparatively low.

Does your client want to be said to be careless?

Probably not. But it is better than have a behaviour that is either deliberate or worse still, deliberate and concealed. The latter is the worst type of behaviour your client can be accused of – for example deliberately understating their income or gains by perhaps hiding the money in an undeclared bank account. This can increase the risk of being prosecuted as well.

At the other end of the scale, accepting that your client has been no worse than careless may open up other avenues to reduce the overall cost of the tax investigation.

Can a penalty be suspended?


Where the behaviour is determined to be no more than careless and where SMART conditions can be applied for the duration of the suspension period.

So the final cost can become just the tax plus interest. Result!

If you need my assistance, please contact me on 07979 313 010 or

Anyone seeking help can call me on 07979 313 010 or…

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