Tax penalties

Penalties

New rules for penalties apply for inaccuracies in returns or other documents

1. for return periods starting on or after 1 April 2008, and
2. where the due date for filing is on or after 1 April 2009

(nb the word “due” is important here. It does not matter when the return was actually filed)

Although there is new penalty legislation, there are still instances when a penalty may be charged under the old system, and there is some information on that here.

• There are different levels of tax-geared penalty (a) for incorrect returns, (b) for failure to notify HMRC that you are chargeable to tax. The new percentage reductions will be related to the behaviour of the taxpayer. The penalties imposed can be for failures in the previous tax year – e.g. if in 2011 or 2012 you file an inaccurate return for the tax year 2010/11, your penalty will be assessed under the new rules.
• If you submit an inaccurate return because you have not taken reasonable care to get it right, you can be charged up to 30% of the tax that would have been paid, but that can be reduced to 15% if you tell HMRC about your mistake after they have started to investigate you (a prompted disclosure), or to zero if you tell them voluntarily and without any pressure from them (unprompted disclosure). Similar principles are applied where tax is lost because of deliberate inaccuracy, but the penalties are higher, and the reductions are less generous. There is even less mitigation where the taxpayer's conduct is not only deliberate, but steps are taken to conceal it.
• For an inaccurate return, you should never be charged a penalty if your mistake was innocent – i.e. you took reasonable care to get it right, but were just genuinely mistaken.
• There is also a new penalties regime for failure to tell HMRC that you are chargeable to tax, including where you have a new source of income and fail to notify them. It applies if you fail to notify something for which the proper notification date falls on or after 1 April 2010. It applies for 2010/11 and later years. The penalties follow a similar pattern to penalties for inaccuracy. For non-deliberate failure, the percentage of tax lost that may be charged as a penalty is, again, 30%; but to secure a reduction to nil, you have to tell HMRC about it within 12 months, otherwise you will still face at least a 10% penalty.
• For deliberate failure to notify, again the penalties are much higher and the scope for mitigation considerably less.
• A penalty for failure to notify can be reduced because of special circumstances, or vacated entirely if you can show reasonable excuse for the failure. There is no concept of innocent mistake as there is in the thinking behind the penalties for inaccurate returns.
• As will be seen, the scope for negotiation is much narrower with the behaviour-driven penalties, and the categories of mitigation leave little room for exercise of an inspector's discretion.
• In a tax credit enquiry settlement the amount of penalty would be higher if you had previously made an incorrect claim, given incorrect information or failed to provide information.
• You can discuss your payment timetable for any settlement. Sometimes a separate meeting is held to cover this point and provide a final opportunity for you to state your reasons as to why you think the figure of penalty should be reduced.
• Again, you do not have to attend this meeting. You may have already stated your reasons why you think the penalties should be reduced in an earlier meeting (when profit amendments were agreed, for example) or you could make them, at this stage, in a letter.
• After you have made the points you wish, the Revenue, after considering these, will give you a figure of the amount which they think it appropriate that you should pay to settle the enquiry.
• This figure should clearly be within your means to pay, and the Revenue should consider what you have shown on a signed statement of assets and liabilities (basically what you own and what you owe) which you will have been asked to complete when negotiating profit adjustments in self assessment enquiries. It is important that you take time to read the notes on the statement of assets and ensure that it is correct and complete.
• It is sometimes possible to negotiate the payment of outstanding liabilities by instalments, particularly where it can be demonstrated that necessary funds are not available and cannot be borrowed from elsewhere.
• Again, you should not be asked to enter into any arrangement which is beyond what you are able to pay taking into account your present, and any known future, income and expenditure, expenditure including, of course, that for living.
• However, an instalment offer will be calculated by the Revenue in a slightly higher amount payable to compensate for additional costs and added risk in allowing the extra time for payment. See TaxAid’s website for more detailed advice on how to handle tax debt.
• For self assessment enquiries concluded with a contract offer, no notice of completion is required.
• It follows, therefore, that if there is no contract settlement it is important that a completion notice is issued - this then ensures that there can normally be no further enquiry for the period which the enquiry covered.

Old penalty system

At the top of the page we gave the dates for the new penalty legislation. However, if you are subject to a check of any kind and errors are found in earlier years, then you may still have a penalty charged under the previous system.

It could be the case that both old and new penalties will apply. There are a couple of examples of what would happen in these circumstances here.

Detailed guidance on the calculation of the old penalties can be found in HMRC’s manual here.

Human Rights Act 1998

• The Human Rights Act 1998 incorporated the European Convention on Human Rights (the Convention) into domestic UK law.
• Under Article 6 of the Convention, everyone charged with a criminal offence has the right to a fair trial by an independent and impartial tribunal.
• You have the right to be presumed innocent until proved guilty; and various minimum rights including the right to free legal assistance where you have not sufficient means to pay for your own representation, and where the interests of justice demand it.
• A criminal offence under European human rights law is wider than under domestic UK law.
• It can include penalties which, because of their size or because the underlying offence involves an element of dishonesty, are criminal in nature, whether or not they are deemed to be so under any particular legal system of a contracting state.
• In the UK, the courts have held this to include certain civil penalties charged under the tax and VAT codes.
• Therefore, if you are charged a penalty appropriate for dishonesty or recklessness rather than simply innocent error or delay, you may be entitled to legal aid, or public funding, and the other fundamental rights under Article 6 associated with criminal charges.
• In such cases the Revenue should give you a leaflet about public funding, or legal aid.

• Under Article 8 your right to privacy must not be interfered with beyond the law and any interference must be in proportion to the nature of the enquiry which the Revenue is conducting on your affairs.
• Revenue enquiry officers are told of this and of the need to have regard to the cost of what they are asking you to provide during the enquiry.

Useful links

HMRC website and reference books on penalties

Tax Aid - a charity providing free tax advice to people who cannot afford to pay a professional adviser. The service is independent and confidential.

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