Penalties can be levied for errors in tax returns and other documents in addition to any additional tax(es) and interest on the late payment of the tax(es). There is no equivalent negative penalties to any overpaid tax in another tax year, for example.
The current penalty regime was introduced in April 2009 and is based on the taxpayer’s behaviour. Where a Settlement includes tax years that pre dates April 2009, a different penalty regime applied.
A taxpayer’s behaviour
Any tax geared penalty is based on a taxpayer’s behaviour both when the irregularities occurred right up until when the irregularities were put right. It is therefore important that a taxpayer endeavours to assist HMRC even if the taxpayer is unable to supply the documentation, for example.
HMRC can charge a penalty if the error is:
- because of a lack of reasonable care; or
- deliberate – such as intentionally sending incorrect information; or
- deliberate and concealed – for example, intentionally sending incorrect information and taking steps to hide the error.
The level of the penalty is linked to the reason why the error occurred. The more serious the reason, the higher the maximum penalty can be. HMRC can reduce the penalty if the taxpayer(s) helps them to put things right.
How are penalties calculated?
HMRC will consider the whole matter when looking at the level of penalties due. It may be that some of the irregularities are considered to be more heinous then others and therefore penalised more.
Penalties can be up to 100% of the additional tax due. HMRC will start at 100% and mitigate the penalty down rather than start at zero and work upwards.
What range of penalties may apply?
Penalties are based on the “potential lost revenue” (PLR), i.e. the extra tax due if:
- a penalty arises because of a lack of reasonable care, the penalty will be between 0% and 30% of the extra tax due.
- the error is deliberate, the penalty will be between 20 and 70% of the extra tax due.
- the error is deliberate and concealed, the penalty will be between 30 and 100% of the extra tax due.
Can penalties be reduced?
Yes. Penalties can be reduced by:
- telling HMRC about the errors;
- helping HMRC work out what extra tax is due;
- giving HMRC access to check the figures.
For offshore matters or offshore transfers, penalties have also been increased. HMRC can charge penalties where offshore matters or offshore transfers are involved. This follows HMRC’s Requirement to Correct (RTC) programme that closed on 30 September 2018.
Penalties for failing to make a disclosure under RTC legislation are called Failure to Correct (FTC) penalties and can be up to 200% of the additional tax involved.
They do not vary according to:
- the original behaviour associated with the non-compliance – for example, it does not matter if the behaviour was ‘careless’ or ‘deliberate’
- the location of the income gains or assets – territorial categories do not apply
- However, non-compliance which results in a FTC penalty may also result in Asset Moves penalties and Asset-Based penalties being charged.
Are there any other penalties due?
An asset-based penalty will apply if all of the following apply:
- you have been charged an underlying penalty for a deliberate inaccuracy, failure to notify or for deliberately withholding information, or an FTC penalty
- the inaccuracy or failure relates to an offshore matter or offshore transfer
- the income, gain or transfer of value that relates to the inaccuracy has a clear link to the underlying asset
- the potential amount of tax at stake relating to the offshore matter exceeds £25,000 in a single year and
- the underlying penalty relates to Capital Gains Tax, Inheritance Tax or ‘asset-based Income Tax’.
The amount of the Asset Based penalty is the lower of
- 10% of the value of the asset; or
- 10 x the offshore tax at stake.
Will a single penalty apply to all matters?
Not necessarily. It all depends primarily on the facts.
Taxpayers and their advisers should consider what penalties may be applied at the outset. Behaviours do not just start and finish and will continue to be monitored throughout any dialogue with HMRC until the matter has been resolved.
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